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Why Would Health Insurers Tell Congress: Please Hurry!?

One would think American health insurance companies would be caterwauling about the provisions laid out for them in the healthcare reform legislation which Harry Reid (and a few of his elves) assembled for us Americans in their secret workshop just before Christmas.

On their face, those provisions do not appear to allow insurance companies a viable business model. Insurers under Reid’s bill would be required to accept all comers, regardless of age or underlying medical conditions. They would be required to cover all manner of healthcare services, including outpatient and inpatient services, maternity and newborn care, mental health and substance abuse services, rehabilitative services, lab services, preventive and wellness services, chronic disease management, prescription drugs, dental care, and eye care. They would be limited in what they can charge in the way of insurance premiums, and their profits (if by some miracle there were any), would be strictly capped.

Surviving under such provisions would be difficult enough for the insurance companies, even if the mandate requiring all Americans to buy health insurance had teeth.  But the mandate described in the Senate bill will permit healthy people to forgo purchasing health insurance, instead allowing them to pay a “fine.” Reasonable people will quickly discover the “fine” to be a form of insurance insurance, such that, by paying the fine in lieu of buying health insurance, folks would be reserving the right to buy actual health “insurance” once they get sick.

DrRich, for instance, a self-employed American who buys his family’s health insurance himself, would jump at the chance to pay a fine instead. Simply consider that (for a policy that does not cover medication, dental or vision care), between his premiums and his large deductible, DrRich will be out nearly $20,000 a year before the insurance company has to pay out its first dollar. The prospect of paying a $750 fine (or even a large multiple of that), which would reserve his “right” to buy health insurance if somebody should get sick, sounds like a much better deal to DrRich.

So, given that the Senate bill requires insurance companies to insure anyone who wants health insurance at whatever time they decide they want it, requires them to cover the manifold medical services the government now deems “essential,” and formally restricts their ability to make a profit, one might suppose that the insurance industry would by now be unleashing at least Harry and Louise, if not the slathering minions of Hell (who, it is said, these companies keep on retainer), in an all-out attempt to put a stop to this travesty.

But that is not at all what they are doing. Instead, in response to the Senate bill the industry’s trade organization, the American Health Insurance Plans (AHIP), released the following statement:

“Health plans support legislative changes that would provide guaranteed access to all Americans, with no pre-existing condition limitations and no health-status-based premiums. … At the same time, specific provisions in this legislation will increase, rather than decrease, health care costs; reduce coverage options; and disrupt existing coverage for families, seniors and small businesses – particularly between now and when the legislation is fully implemented in 2014.”

Really? That’s all? Faced with legislation that drives a stake through the heart of their time-honored business model, the insurance industry puts out a tepid statement like this?  It’s a statement of fundamental agreement – whose chief complaint is that the changes won’t be implemented fast enough!

What gives?

As DrRich has explained many times, the health insurance industry has shot its wad. It is finished. The industry has tried every underhanded trick imaginable to figure out how to avoid providing health benefits to its subscribers, and it has already raised insurance premiums to the breaking point. But despite everything, the American public (through its gluttony, sloth, consumption of tobacco and alcohol, texting while driving, insistence upon aging, &c.) continually soaks up ever-increasing volumes of expensive healthcare services. And the insurance industry finds its profit margins (already small) nearly gone. The industry’s business model – taking in inflated insurance premiums, then withholding medical services – is irreparably broken.

This, indeed, is why the insurance industry has been relatively silent during the entire healthcare debate. Bereft of all ideas for maintaining continued profitability, the industry has been silently praying (and, probably, secretly dealing) for something new – a new business model, perhaps, or at least a graceful exit strategy. “Hope and change” has been their watchword.

And now,  as Richard A. Epstein has pointed out in the Wall Street Journal,  Harry Reid (whatever his intention may have been) has presented the industry with the outline of a new, potentially viable business model – that of a public utility.

Public utilities came about in the last century, when certain essential services were identified that: a) required developing and maintaining extremely complex and expensive infrastructures, and b) were deemed necessary for the general public welfare. Electricity, gas, water, sewage, and telephone services are the most obvious examples. If such services were left to companies which practiced pure capitalism, it was reasoned, those companies would form monopolies (or at best, oligarchies), resulting in high prices and discriminatory services. On the other hand, even the New Dealers realized that if these essential services were run entirely by the government, you’d wind up with inefficiency, poor quality, political interference, and siphoning off cash flows for (say) pork.

So public utilities were invented. Utilities are companies that have CEOs and boards of directors, and that pay dividends, just like real companies. They are awarded a monopoly or near monopoly for the service they provide, and in return must operate under tight governmental regulatory controls. For instance, they are required to maintain certain standards of performance, to make their services readily accessible to everyone, and to gain approval by a Public Utility Commission before increasing the rates they charge their subscribers. At the same time, the U.S. Supreme Court has ruled that public utilities must be permitted to receive a reasonable rate of return on their investments and services – which is why holding shares in the electric company has (at least until the threat of Cap and Trade) always been a reasonable investment strategy for widows.

The public utilities model, DrRich believes, is one the health insurance companies will cling to for dear life. It will be a far better outcome for them than almost any other which DrRich (or the insurance industry, he’ll wager) can imagine.

The requirements which the Reid bill places on health insurance companies go a long way toward re-creating them as public utilities. The Reid bill requires that insurance companies make government-defined levels of service accessible to everyone, limits (indirectly) what they can charge for their services, and limits (explicitly) the amount of profit they can make. The only public-utilities-feature missing from the Reid bill is the requirement that a utility must be provided with the means to receive a market rate of return for their investments – that is, with some way for the insurance companies to achieve a favorable bottom line. The Reid bill does not do that. Since such a provision is required by the Supreme Court for any public utility,  this is something that will have to be addressed later.

What would such a “means to a favorable bottom line” look like?  Perhaps the best model might be the U.S. Postal Service, an organization that delivers an essential public service, at an accessible price, under strong government regulation and control, but which suffers from a chronic inability to make ends meet. Here, the “favorable bottom line” (in this case, breaking even) is provided by chronic, massive federal infusions of cash.

So, while doctors and patients may not be enamored with the idea of providing and/or receiving medical care in a Postal-Service-like environment, DrRich thinks the health insurance industry would be delighted with such an outcome.

To the insurance industry, the Reid bill looks like a major step in the right direction – in the direction of a public utility. This explains why AHIP’s obligatory negative statement about the bill is, at it’s bottom, a cry to please, please hurry.

Indeed, judging from its statement is is apparent that AHIP finds the prospect of the health insurance industry surviving until 2014, without federal intervention, to be problematic.

*This blog post was originally published at The Covert Rationing Blog*


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