I’ve heard it said that health insurance companies are evil. They deny people care when they are sick and they deny the sick insurance. They create a headache for all with their utilization review, managed care, denial of benefits, and required pre-approvals. They drive a wedge between the doctor/patient relationship. For any blogger they are an easy target.
But why “Evil Us?” Before I go there let me define a few terms that will help explain my accusation. Hold on. The first is “concentration of costs.” A very few of us spend the majority of the money in health care. The top 1% most expensive Americans use 22% of the health care dollars. The top 2% use 33% of the health care dollars. The top 5% use 49% of the health care dollars, and the top 50% use 97% of the health care dollars. That means that half of all Americans only spend in total 3% of the health care dollars (Zuvekas and Cohen, 2007). The concentration of spending at the top has immense repercussions throughout all health care policy debates. For insurance companies this leads to a term called adverse selection. This phenomenon is the bane of the insurance company. The single easiest way for an insurance company to be profitable is to avoid the people at the top of spending curve, and the easiest way for an insurance company to fold is to have a disproportionate share of the most expensive health care users. However, the insurance companies do not have accurate information on who is high cost and who is low cost. The consumer, likely does know if they are high cost or low cost (are they likely to use the health insurance or not?). This is called asymmetry of information. Anyways, guess who is more likely to seek health insurance? You got it. The high cost person. So what do insurance companies do? They raise premiums for everybody so that they can cover that potential high cost person. So what does the low cost person do? You got it. They think, “Wait. This insurance thing is too expensive. Why would I pay $9,000 a year when I only use a few hundred dollars of care a year?). So in any given pool of insured people the low cost people are more likely to drop the insurance and the high cost person is more likely to hold on for dear life. That is adverse selection. So this pool with low cost people jumping ship (possibly to a newer and lower cost plan) and high cost people hanging around for dear life (remember once they are high cost no smart insurer will touch them) the costs to the insurer rises. What does the insurer do when it is time to renew? You got it? It raises the premiums. More low cost people jump and high cost people hang around. This continues to happen until only high cost people are left and premiums are astronomical. It’s called the death spiral.
Back to why we are evil. The low cost person (which I am one) is constantly looking for the better and cheaper plan filled with other low cost people. It is in their best interest to be with low cost people. But their self-interested actions make health care for the people who actually need the care unaffordable.
So is the insurance company evil for charging higher and higher premiums to its members in these high cost pools or avoiding the high cost people all together? Is the low cost individual evil for jumping ship and placing the burden on the high cost people? I actually think that neither is the case, but it seems that in our current system when everyone acts in their best self-interest the people that need care are the ones who lose out. Maybe its just the system.
(Quick note: This phenomenon I described above is true for the individual and small group insurance markets and is not true for the large group insurance market. I can explain this later if people are interested)
Zuvekas, S., Cohen, J. (2007). Prescription drugs and the changing concentration of health care expenditures. Health Affairs. Volume 26, number 1.