Health Care Wonkery Straight, No Chaser

This week’s column is a gentle primer on why, in some markets -- like health care -- choice is bad. Hey, they just gave out the Nobel in economics for this. But it's necessary when right-wing editorialists pretend that letting insurance companies sell policies nationally -- so they can cherrypick their customers everywhere, not just state-by-state -- is a good idea.

WHEN MARKETS FAIL, TAX CREDITS WON'T HELP
East Valley Tribune, Oct. 21, 2007

Choice is good, right? But with health insurance, not so much.

With the campaign season heating up and candidates repackaging sound bites into health care "proposals," it’s worth going over a basic point, to explain why buying a computer isn’t like buying health care. When it comes to health insurance, some types of choice may be good, but some types of choice are destructive -- hazardous to your health, even.

The first type of bad choice is giving private insurers the right to choose their customers. If you let insurers decide which customers to take and which to shun, then the most important economic decision they can make is not taking the wrong customers.

If you were a health insurer, the best way to make money is by insuring only healthy people. Healthy people need less care, so they cost much less than people with health issues. If you can avoid getting stuck with anybody likely to need health care, then health insurance is a wonderful business.

And there are lots of ways to avoid having to insure less-healthy customers. Too many customers with kidney problems? Sign up fewer nephrologists, or only those with inconvenient offices. Raise premiums on individuals who develop medical issues. Make sure people with pre-existing conditions never get accepted in the first place. Sign up groups where workers are younger and healthier than average, or with higher incomes because income seems to correlate with health, too.

This selection process isn’t because insurers are evil or stupid; it’s because those are the incentives the market provides. It’s pretty difficult to get people to change their heredity, environment, or behavior. It’s a lot easier to screen out people who will need lots of care, and the better job you do of screening, the more money you make.

There’s even a big financial incentive to be over-inclusive in your screening, because while not letting in somebody healthy may lower revenues a bit, letting in somebody who isn’t healthy will increase expenses a lot. So giving insurers choice in picking customers hurts not just those with bad health indicators, it also hurts the healthy who may have an unhealthy characteristic or two. Better to pass on a marginal customer than to get stuck with a real loser.

The other type of choice that’s bad in health insurance is letting individuals choose whether or not to carry health insurance. Sure, people don’t like to be told what to do, but if you let people decide, then anybody offering health insurance faces what’s called "adverse selection."

Health insurance isn’t truly necessary if you’re healthy. If you don’t need much health care, buying coverage isn’t necessarily economically smart. If you’re really an accounting type, you may buy a high-deductible policy to protect against a catastrophe, but in most cases, the young and healthy can do better self-insuring.

Until one of two things happen, however. Eventually, all young and healthy people get older or sicker, and often both. Once that happens, they look to buy insurance -- but now the insurers are faced with customers who are older and sicker than average. So insurers raise premiums, which means that even not-so-young and not-so-healthy people decide to self-insure, which makes the insurance pool even older and sicker. It’s called the "death spiral," when customer choice makes insurance ever more expensive and unavailable to those who need it most.

So while it may sound wonderful to offer tax credits or health savings accounts or allowing insurers to offer policies nationally instead of state-by-state, there’s a big problem. Letting insurers choose whom to insure, and letting consumers choose whether or not to get insurance, is a recipe for expensive, incomplete, and patchwork coverage -- like the U.S. system today.

That’s the "miracle of the market" in health insurance: We give people and insurers choice, so that Americans can pay so much more than everybody else, and get less by almost every statistic available.