Reports that former Sen. Tom Daschle will be appointed Secretary of Health and Human Services suggest that reform of the U.S. health insurance system will be an early priority of the next administration.
If so, then over the next six months, we should expect vigorous debate about the direction any such reform should take. Past debates on the topic have largely ignored a fundamental difference between individual and pooled coverage. Pundits and politicians often discuss the two approaches as if they are interchangeable. From an insurer’s perspective, however, they are profoundly different.
In an individual policy, the insured's financial health risks are transferred to the insurer. This has three major cost implications. First, insurers must charge a premium for assuming the risk, based on its probability and size. Second, before issuing an individual policy, the insurer must assess the risk it is assuming. Finally, the insurer must thereafter manage its risk – for example, by terminating ill policyholders, as some insurers have been doing here in California.
Individual policy premiums must cover these costs. If the insurer’s risk assessment is accurate, each policyholder's rates should reflect his or her individual financial health risks plus the costs of assessing and managing those risks; individual coverage should not ultimately shift costs among policyholders.
In pooled coverage, by contrast, financial health risks are shared among members of the pool. If the pool is large enough, the insurer bears very little of the risk. In consequence, competitive insurers should not charge significant risk premiums, no risk assessment costs should be incurred before a new member can be admitted, and risk management costs should be low. As a result, the costs of pooled coverage should, on average, be substantially lower than the costs of individual coverage.
Case in point: I am currently paying premiums on an individual policy for my healthy 23-year-old daughter. The monthly premiums for her individual policy are higher than those for the pooled coverage of all of the rest of my family put together – two 50-somethings and two risk-taking 6-year-olds. Same company. Identical coverage. Higher individual policy premiums for one healthy individual than for pooled coverage of four beneficiaries of mixed health.
Pooled coverage provides these cost benefits only if admission to the pool is not elective. Typically, we become eligible for employer-provided health insurance if and only if we work for that company. We can’t just opt in or out at will. Similarly, we become eligible for Medicare by getting older. The more elective admission to a pool becomes, the more the insurer must intervene to manage its risks and charge a premium for those risks.
So what does all this mean?
First, all else being equal, pooled coverage should always be cheaper than individual coverage. The non-health care costs of Medicare, for example, are only 3 percent, while the non-health care costs of private health insurance run between 30 percent and 35 percent.
This is not because government is more efficient. It's rather because private health insurers must charge risk premiums and recover risk assessment and management costs – no portion of which amounts go to pay for actual health care. Medicare avoids these costs simply by reason of the fact it provides the ultimate in pooled coverage.
In other words, because of the risk premium, assessment and management problem, it is inherently impossible to provide individual coverage at costs comparable to pooled coverage.
Second, because elective admission to a pool effectively converts pooled into individual coverage from an insurer’s perspective, free markets operating at the individual level cannot provide pooled coverage. If we give each individual $5,000, as Sen. McCain proposed to do, and let them comparison shop, competitive insurers will still have to charge risk premiums and recover their risk assessment and management costs.
In other words, unlike markets for spaghetti, jeans, or apartments, health insurance markets cannot find the lowest cost solution without government intervention.
The U.S. solution has been to create an $80 billion per year tax subsidy for employer-provided pooled coverage, Medicare pooled coverage directly for seniors, individual coverage for others who can afford it, and a hodgepodge of backup solutions (like emergency room care) for everyone else. The European solution, for the most part, has been to offer pooled coverage directly to everyone.
Because of the inherent cost advantages of pooled coverage, we should expect the European solution to be substantially cheaper for the same level of coverage. And indeed, on average Europeans pay a substantially lower percentage of GDP for a much higher level of coverage.
American conservatives are tempted to call this “socialism”, and I suspect we’ll hear that accusation a lot in the coming months. I like markets. If free markets could provide equivalent value more cheaply and efficiently, I might echo the conservative critique. But they can’t.
Any cost-effective proposal, therefore, is going to have to look more like Medicare than the competitive market in individual policies Sen. McCain was advocating during the recent presidential campaign.
This does not mean that any such proposal will need to limit a patient’s choice of doctors. Indeed, were I designing a new health care system, my sales slogan would probably be something like: “We pay, you choose.” Pooled coverage can be fully consistent with patient choice.
But to take advantage of the inherent cost benefits of pooled coverage, any such proposal will have to be mandatory and effectively universal. It may rely on a mix of government and employer funding. It may ask insurers to compete to insure mandatory pools at the lowest possible cost.
But it won’t look anything like the classic unregulated market.
absolutely objective info...but there should be some way to improve the situation - a kind of initiative from society.
http://www.queentorrent.com
Posted by: Tony Moore | March 18, 2010 at 01:08 PM
today the personal health care has evolved significantly, thanks to technologies developed and the diversity of products that benefit the internal health, physical and mental, would be important to know more about this field for the benefit of all in general. Thanks for sharing the theme.
Posted by: hydroxycut online | April 29, 2010 at 10:19 AM
hi ... this blog about "Understanding Health Insurance" is very interesting .. I am very interested in this subject because I have to submit a report of this in college. The part that catches my attention is "I am currently paying premiums on an individual policy for my healthy 23-year-old daughter. The monthly premiums for her individual policy are higher than those for the pooled coverage of all of the rest of my family put together – two 50-somethings and two risk-taking 6-year-olds." thanks for the information.
Posted by: frontline plus | April 30, 2010 at 01:24 PM
maybe these insurance are expensive, but they help you to feel relaxed and cool!
Posted by: viagra online | July 13, 2010 at 03:09 PM
Thanks to technologies developed and the diversity of products that benefit the internal health, physical and mental, would be important to know more about this field for the benefit of all in general. Thanks for sharing the theme.
Posted by: pool service jacksonville | September 12, 2010 at 05:01 PM
interesting! technology has been a great help to us may be on business and other things
Posted by: medieval clothing | October 18, 2010 at 01:51 AM
What options for health insurance coverage are available and how can you access health insurance coverage when you have lost your job?
Posted by: bankruptcy attorney Chicago | October 27, 2010 at 11:38 PM
It seems like the entire health care system is in shambles.
Posted by: regulatory compliance policy | November 16, 2010 at 02:19 PM
definitely a Health Care crisis.
Posted by: stephen | January 11, 2011 at 08:42 PM
First, everyone in our country has a constitutional right to qualified legal defense.
Posted by: white collar crime defense | May 17, 2011 at 02:44 AM
I still don't understand the tax system and have read this article three times!
Posted by: washing machine spares | July 21, 2011 at 10:56 AM
Is that last bloke thick or something.....
Posted by: Oven Element | July 21, 2011 at 10:57 AM
Yes...I liked this one.
Posted by: Unfiled Tax Returns | July 30, 2011 at 10:08 AM
Me too...keep it up
Posted by: File Old Tax Returns | July 30, 2011 at 10:09 AM
Health insurance industry and Americans have given new rights and benefits. There are more children get health coverage longevity and the annual limit care are over and children under years of age may remain covered by health insurance for parents. There is still a long way to go before these changes as necessary, but at the moment, people still have to go through the hassle of finding adequate health coverage for themselves and the most important question for the average family is cost. If there is any pre-existing condition by a member of the family insurance can be denied even if there is a movement .
Posted by: International Health Insurance Deals | August 27, 2011 at 12:19 AM
That gave a vast understanding on what I applied for.
Posted by: easy christmas loans | November 23, 2011 at 09:35 PM
In end result, aggressive providers should not charge considerable possibility prices, no possibility evaluation expenditures should be accrued before a new associate can be accepted.
Posted by: סופרדסק | November 30, 2011 at 10:43 AM