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Former insurance CEO describes market failure of the private insurance model

October 16, 2019

Topics: Quote of the Day

By J.B. Silvers
The New York Times, October 15, 2019

Much to the dismay of single-payer advocates, our current health insurance system is likely to end with a whimper, not a bang. The average person simply prefers what we know versus the bureaucracy we fear.

But for entirely practical reasons, we might yet end up with a form of Medicare for All. Private health insurance is failing in slow motion, and all signs are that it will continue. It was for similar reasons that we got Medicare in 1965. Private insurance, under the crushing weight of chronic conditions and technologic breakthroughs (especially genetics), will increasingly be a losing proposition.

As a former health insurance company C.E.O., I know how insurance is supposed to work: It has to be reasonably priced, spread risks across a pool of policyholders and pay claims when needed. When companies can’t do those fundamental tasks and make a decent profit is when we will get single payer.

It’s already a tough business to be in. Right now the payment system for health care is just a mess. For every dollar of premium, administrative costs absorb up to 20 percent. That’s just too high, and it’s not the only reason for dissatisfaction.

Patients hate paying for cost-sharing in the form of deductibles and copays. Furthermore, narrow networks with a limited number of doctors and hospitals are good for insurers, because it gives them bargaining power, but patients are often left frustrated and hit with surprise bills.

As bad as these problems are, most people are afraid of losing coverage through their employers in favor of a government-run plan. Thus inertia wins — for now.

But there’s a reason Medicare for All is even a possibility: Most people like Medicare. It works reasonably well. And what could drive changes to our current arrangement is a disruption — like the collapse of private insurance.

There are two things insurers hate to do — take risks and pay claims. Before Affordable Care Act regulations, insurance companies cherry-picked for lower-risk customers and charged excessive rates for some enrollees.

Those were actually the first indications of market failure. Since the enactment of the Affordable Care Act, insurers have actually had to take these risks as they were supposed to all along and provide rebates of excessive profits.

With insurers under such pressure, we’re now facing another sort of market dysfunction. Insurance companies are doing what they can to avoid paying claims. A recent report says that Obamacare plans average an 18 percent denial rate for in-network claims submitted by providers. Some reject more than a third. This suggests that even in a regulated marketplace like the Obamacare exchanges, insurers somehow manage to dispute nearly one out of every five claims.

These are systemic failures that can and should be fixed by regulation of the exchanges, better information on plan performance and robust competition. Unfortunately, consumers often still can’t make informed choices, and the options they have are limited.

But even if we fix these problems, there are two bigger factors looming that threaten the integrity of the entire system. Insurance at its root assumes that the payout required cannot be determined for each individual but can be estimated for the whole group. We can’t predict who will be affected by trauma or a broken bone, but in the aggregate, it is possible to estimate what will happen to the insured group as a whole. Some will suffer losses while the majority will be fine, and all will pay a fair average premium to cover the expenses that result.

Yet with the increases in chronic conditions and the promise of genetic information, these insurance requirements are not met. Someone with diabetes or rheumatoid arthritis will have the same condition and similar costs in each future year. And the woman with a positive BRCA gene is much more likely to develop breast cancer. In these cases, known costs simply must be paid. Instead of spreading these across all enrolled populations, they must be financed across time for the increasing numbers with such conditions. Loading private insurance companies with these expenses results in uncompetitive rates and market failure.

There is only one solution: pooling and financing some or all of these at the broadest levels. In a nutshell, that is how we get a single-payer government system.

It is how we got Medicare. The cost of care to the elderly was known at the individual level for virtually everyone, so private insurance just wouldn’t work. So we had to finance this largely predictable cost through the government and its enormous pool of taxpayers.

It has been a tremendous, albeit expensive success. For the most part, people on Medicare like it a lot. This is the reason such a disruptive change is even a political possibility.

We will face the same need sometime in the future for the rest of us. Then a form of Medicare for All will look better than the alternative — a failing private insurance system.

J. B. Silvers is a professor of health care finance at the Weatherhead School of Management at Case Western Reserve University.

https://www.nytimes.com…

About J.B. Silvers, PhD:
https://weatherhead.case.edu…


Comment:

By Don McCanne, M.D.

J.B. Silvers is both a former insurance executive and currently a professor of health care finance. What is his lesson for us? The indications of market failure of the private insurance model are already there, and private insurance “will increasingly be a losing proposition.”

“There is only one solution: pooling and financing some or all of these (health care costs) at the broadest levels. In a nutshell, that is how we get a single-payer government system.”

The sound bite? Private insurance has already failed us and establishing a single health care financing pool is the only solution that will work for all of us – Single Payer Medicare for All.

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About the Commentator, Don McCanne

Don McCanne is a retired family practitioner who dedicated the 2nd phase of his career to speaking and writing extensively on single payer and related issues. He served as Physicians for a National Health Program president in 2002 and 2003, then as Senior Health Policy Fellow. For two decades, Don wrote "Quote of the Day", a daily health policy update which inspired HJM.

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