Insurance Companies

INSURANCE COMPANIES….In the post below, Kevin asked why Victor and I included a role for insurance companies in our Universal Healthcare Voucher plan. There’s more to this than just political compromise. We think there are important reasons to keep them in the system.

First, as Kevin suggested, we believe that they can provide an engine to innovate in delivery of services. And with vouchers there will be several incentives to do so ? stronger incentives than in the current system. Currently, most individuals do not have a choice among insurance companies. Their employers pick one and they get that one. Vouchers expand choice and this will require insurance companies to compete for individuals.

Second, to compete for individuals the companies will have to distinguish themselves. They will have to work to be efficient and use the savings to offer more services.

Third, how do we prevent them from “cherry picking healthy people and lemon dropping the sick”? This is a serious problem when you offer a capitated rate ? the same payment regardless of how sick a person is. There are several ways to prevent this: for example, prohibiting insurance companies from dropping people or excluding coverage for pre-existing conditions; guaranteeing people that they can be enrolled in whatever plan they want; and requiring minimum services for many ailments.

The voucher plan offers other interesting ways to prevent this cherry picking. One idea I like is multi-year contracts. If people sign up for 3 years then it is harder to screen for who will get a costly illness and thus cherry pick. Cancer is unpredictable in that way, for instance.

Another idea is to penalize companies when people leave and require them to pay a portion of their next year’s medical costs. This has the problem of requiring a lot of administration but creates interesting incentives.

But the best way to prevent this cherry picking is what is called risk adjusting premiums. Adjust how much is paid by age, sex, smoking status, etc., and you can really reduce the incentive to avoid the sick. With finer risk adjustment the incentive will substantially decline. We are not quite there yet with the technology for perfect risk adjustment. The Federal Health Board will have to invest in research on risk adjustment to fine tune. And although a lot of data will be needed, this data will be good for both quality monitoring and risk adjustment ? ensuring profits do not undermine quality of care ? a good two for one.