Living without the Health Insurance Industry

LIVING WITHOUT THE HEALTH INSURANCE INDUSTRY….The LA Times reports on the latest from the health insurance front:

Blue Cross of California is sending physicians copies of health insurance applications filled out by new patients, along with a letter advising them that the company has a right to drop members who fail to disclose “material medical history,” including “pre-existing pregnancies.”

….The letter wasn’t going down well with physicians. “We’re outraged that they are asking doctors to violate the sacred trust of patients to rat them out for medical information that patients would expect their doctors to handle with the utmost secrecy and confidentiality,” said Dr. Richard Frankenstein, president of the California Medical Assn.

Blue Cross may or may not be within its rights to send out this letter, but they aren’t doing anything either illegal or unusual. After all, any profitmaking insurance company is going to do its best to avoid covering people who are likely to incur large medical expenses. It’s just the nature of the beast. If they don’t do it, they’ll go out of business.

So let’s get rid of health insurance companies. They cherry pick clients, add huge administrative costs to the system, and do nothing to drive innovation or bring down costs. What good are they? Tyler Cowen answers:

Let me be clear: the incentives today are screwy. Let me also tell you my ideal world. Insurance companies are judged by honest third party intermediaries. Insurance companies compete like heck to make customers satisfied. Insurance companies monitor doctors, read Robin Hanson, and require evidence-based medicine. Insurance companies which fail at these pursuits either go bankrupt or they must abide by an ex ante contract to permit the exile of their CEOs to Greenland. Every year prices would fall in real terms, quality would improve, and coverage would be expanded. Imagine the whole health care sector working like laser eye surgery or cosmetic surgery.

….I believe we know why insurance companies don’t work this way, namely monitoring problems; they screw you over instead of serving you and they can get away with it. Go ahead, call me a pollyanna, but modern information technology and measurement can indeed resolve many monitoring problems. We can now monitor central bank performance quite well or show up in Sicily with a credit card and rent a car. Neither was the case forty years ago.

Maybe. But I’m pretty skeptical. The problem is that the incentives to make money the old-fashioned way are huge, and the level of monitoring by “honest third party intermediaries” — i.e., the government, in any realistic scenario — would have to be fantastically onerous to keep insurance companies on the straight and narrow. It seems likely to me that the only way to provide universal coverage and keep insurance companies from cheating would be regulation so heavy that you’d end up with something more like a public utility than a private corporation.

But if it’s price signals and competition you’re after, why not cut out the middleman and have consumers pay doctors directly? For example, imagine a national healthcare plan that paid 75% of all medical expenses but required you to pay the other 25%. Your maximum out-of-pocket expense each year would be capped at, say, 5% of income at low income levels, 15% in the middle, 30% at the next level, and 50% for the rich. Or something like that. It covers everyone, it limits catastrophic medical expenses, and it eliminates insurance companies and their bloated administration costs. But the copay is high enough that it gives consumers an incentive to shop around and doctors an incentive to compete.

This kind of single-payer system obviously requires lots of government funding, but on the regulatory front would probably be more conducive to competition and innovation than desperately trying to bring down ever-bigger hammers on private insurance companies who are gaming the system. And since the government would basically just be in the check writing business, not the spending business, deadweight costs would be fairly low.

Obviously libertarians would (I assume) prefer that the government not be in the business of providing universal healthcare at all. But if you’re willing to entertain the idea, why not a simple single-payer system with copays instead of a massive new regulatory structure designed solely to keep health insurance companies in business? What’s the point?