Thursday, September 24, 2009

Public option? What about the removal of employer-based health insurance?

There has been a lot of debate recently about health insurance in the US, especially about the "public option", a government plan to compete with existing private ones. Personally, I'd rather see health insurance shifted from employer-based to individual-based than see a public option. I think employer-based health insurance has some important problems today that will only continue to get more important over time.

First, the assumptions I'm taking going in. Currently our health insurance system as a whole is performing poorly. Many people are uncovered, people that are covered are denied coverage without finding out until after the fact, and a hell of a lot of the total money put into health care goes to people that don't have a hell of a lot to do with getting people better. We don't get great value for our health care dollar compared to other countries, although there are factors beyond health insurance involved there. Malpractice lawsuits and insurance covering them are one, and another is the greater share of medical research and drug development costs that Americans pay. I'm not going to talk about those things here, although I think they're important.

Next, my outlook. I don't think private companies are fundamentally incapable of providing good health insurance. However, I think that under the current system there aren't a lot of incentives for them to. Bumper stickers say, "Freedom isn't free," and that's true of markets, too. Markets often need to be maintained and cultivated to remain free and competitive, and when they are, when competition is directed at solving problems with the right incentives, the market can yield more effective results than politicians.

My first big problem with employer-based health coverage is that it dulls competitive pressure. The current tax and benefit-structure situation (for most people) so favors employer-based coverage that your employer's plan has to be amazingly bad for you to be better off jumping to an individual insurer. You can only exert pressure through your employer. But threats to not take a job, or to leave your existing one, are either dangerous or hollow. Meanwhile there's lots of inertia in a company's choice of health insurers. There's only a very small incentive for insurers to provide good service; they only have to avoid publicity disasters, some of which they can mitigate by changing their name, logo, or slogan. Meanwhile they compete on how many claims they can get away with rejecting. Some of this can be changed without dumping employer health care: regulation can prevent rejecting claims for reasons like pre-existing conditions, for example. But the lack of incentive, stemming from lack of consumer choice, is inherent to an employer-based scheme.

While the first problem exists because the existing market is uncompetitive and poorly-maintained, the second problem is that employer-based health insurance distorts markets that are completely unrelated to health. Large companies get better deals, per employee, on their health insurance than do small companies. The stated reason is that large companies present a larger risk pool. That doesn't really make any sense. If the profile of workers and type of work is the same at each employer, each worker represents the same risk individually to the company, and the insurer's client base is the risk pool. If an employer represents, say, half of the insurer's client base, I can buy the idea that taking on all those clients reduces the insurer's exposure. But I believe that it's mostly just a volume discount.

Volume discounts exist in just about all industries. Wal-Mart gets better deals from its suppliers than anyone else because suppliers want that huge guaranteed chunk of business. This is, in my mind, basically fair. A large retail operation with an efficient supply chain and lots of volume has won itself an advantage over its competitors in its field of endeavor. Now consider large employers. Presumably they've become large because they're good at something and have established ways to profit reliably. So they have an advantage in terms of their ability to offer employees good salaries and benefits. They've earned that. But an employee of IBM doesn't get a better deal on bananas than an employee of Joe's Computer Shop. If both employers provided their employees with bananas IBM would probably get a better deal.

That's what happens in health care. It's not only harder for small employers to hire people because of their disadvantages in the industry, they also have to pay disproportionately higher health-care costs. This severely limits the pool of people that can found or work for start-ups. Large companies and small companies tend to specialize in different types of innovation. Large companies solve the hard problems that only they have the resources to solve. Start-ups figure out how to avoid solving hard problems by giving people what they want in a novel way. Their style of thinking often has to be creative and customer-based. If people with greater health care needs can't work for start-ups that makes it harder for talented people that aren't young single males to contribute to this kind of innovation.

The third problem is that the nature of employment is changing. In the past people expected their employer to be a stable presence in their life. These days people change jobs much more frequently. Changing health insurance is a nuisance for them, and could even be disruptive to ongoing treatments (including those of their dependents). People increasingly, in the field of computing, make a living on contract work. Should they be at a disadvantage purchasing individual health insurance? People increasingly work remotely, from different cities or states. Does it make sense for a person living in Kansas to get health insurance from a Kansas insurer with a Kansas network, or from his Florida-based employer? I haven't seen any evidence of these trends reversing, and there's no reason for people on the leading edge of them to carry a greater share of our nation's health-care burden.

De-coupling employment from health insurance would not solve many important problems in our health care system. It would not, inherently, bring us closer to universal coverage for children and those that desire it (the question of whether insurance should be compulsory is complex in itself, dependent upon other types of regulation, and independent of the type of insurance). It would not, inherently, stop insurers from denying claims frivolously (I think that more effective competition would help in this regard, though). It would not do anything about the non-insurance concerns that I mentioned earlier (malpractice costs and freeloading on research). It would, however, make market forces and competition work towards better insurance rather than worse.

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