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True Health Care Reform-Part 3: The Role of Insurers

Insurance companies are the demonized actor in health care. A realistic look at the situation reveals that they have to invariably work through a maze of government regulations and mandates that hamper their ability to service policy holders. There is no shortage of stories of insurance company abuses and policy holder sob stories before Congress. Looked at in isolation, the story is troubling. From 1998-2008, insurance company profits increased 175% while prescription drugs are 50% higher here than in other countries and hospital stays are twice as expensive. Pharmaceutical company profit margins are 19.3%- way above the Dow Jones 500 average and much higher than the more demonized oil companies. Insurance companies exist to provide a service- write policies, collect premiums and disburse benefits while making a profit. Once publicly traded, the management team of the company has a fiduciary duty to maximize profits for shareholders. It is called capitalism and it is how capital is raised. Unfortunately, past government attempts at reform have actually stifled or decreased industry competition which is the exact mechanism that will drive costs down.

Some have suggested that they should be not-for-profit entities. Again, this would be disastrous. Many companies would simply drop out of the market while others would merge and consolidate. The end result would be even fewer companies and less consumer choice, unless the government moved to a single payer system with they being the single payer. But the government is a notoriously terrible administrator as Medicare proves. The costs would be prohibitively high and no one would be willing to raise the necessary taxes to fund such a massive entitlement. For better or worse, we need the insurance companies. The task is how the government can do two things: increase competition while forcing the companies to behave in an ethical, but profitable manner.

Moving away from the employer-based system is the first step. It is akin to a personal story. When I was searching for car insurance, after purchasing it, I was inundated with solicitations for my business by other companies for six months afterwards. What if this was the case with health insurance? Watch television any day and one sees any number of niche companies that have developed. Bad credit history? No problem- we have a car insurance policy for you. A drunk driving charge on your record? We have a policy for you. If everyone became the actual consumer of policies that best fit their needs- provided all policies had catastrophic coverage- there would be greater competition which would drive prices down and make insurance more accessible for all.

If states can mandate minimal levels of car insurance, then they can also mandate minimal health insurance coverage with that minimum being catastrophic coverage. Those 10% of people who eat up 75% of all health care spending are the catastrophic. Obamacare’s mandate has a mandate within the mandate in that its definition of “minimal” is certainly more than the standard definition of “minimal.” For example, it mandates that policies cover substance abuse and mental health counseling, and vision and dental coverage. These options should be left to the consumer. There is a good reason they are in Obamacare- the very deft work of national lobbyists. It is no wonder the insurance industry is so accepting of the Obama mandate. If I owned a liquor store and they proposed a law that everyone had to purchase a six pack every week, you are damn right I would support that law. Forcing people to purchase insurance at the end of the barrel of a gun of threatened taxation and penalties plays into the hands of the companies by increasing clients and profits. It is draped in the guise of expanding the insurance pool.

To further competition, it is important that Congress permits companies to sell policies across state lines unencumbered. But, this is more tricky than it sounds. As it stands now, insurance companies are regulated by states which mandate what must be covered in a policy. Because it may not be cost-effective to do business in a particular state, the company simply opts out of that state thus decreasing competition. For example, Aetna operates in both New Jersey and Pennsylvania, but a policy is $2,000 more expensive in New Jersey because New Jersey mandates that procedures like acupuncture, optometry and podiatry be covered. Some argue that this would create a race to the bottom. If the sale of insurance across state lines was unregulated, companies would simply relocate in states that mandate the least coverage for the greatest price and write policies based on the most lenient mandates. For example, suppose a person wants to purchase insurance from a company in Alabama. The premium is lower because California mandates coverage for lead poisoning, but Alabama does not. Imagine the surprise to the purchaser who then contracts lead poisoning and finds they are not covered.

Several sources state this would create a perverse system where the healthy would pay lower premiums and those most in need of health care would pay the highest. Here, some federal intervention is required and it would not run afoul of the Commerce Clause since it would apply to interstate sale of policies. To sell across state lines, they would have to adhere to some acceptable standard of minimal. Instead of leaving that to lobbyists and the political process, services currently mandated in 26 of the 50 states would fall under this minimal standard. In fact, a cornucopia of coverages would be standard; at current, some 31 categories would be covered from substance abuse treatment to cervical and breast cancer screenings. This would help prevent the tendency of companies to domicile in lenient states. For example, neither Alabama nor Iowa mandates cervical cancer screenings, but at least 26 other states do. However, an Alabama company offers insurance at a lower cost than one in Iowa. Because the policy is sold across state lines, the person in Iowa would automatically be covered for cervical cancer screenings since it satisfies the 26 state rule. Of course, if an Alabama resident wants to purchase from an Alabama company, then Alabama law would control that policy. Additionally, in order to get something covered, lobbyists would have a more difficult time convincing at least 26 state legislatures rather than convincing a handful of federal legislators.

Individual purchasers could decide on higher co-pays in exchange for lower premiums which would further drive down costs. It would make consumers more cost-conscious of their health care dollars. For example, our Iowa resident above is paying for cervical cancer screenings and this contributes $15 to the cost of the policy. Being a single male and lacking a cervix, he could be exempted from 50% of that cost thus lowering his premium $7.50. Of course, that makes sense for him, but little sense if he is married with a daughter. Even though covered, the INDIVIDUAL would be allowed leeway and discretion based upon their personal needs. And every other option out there, like acupuncture, would simply be optional add-ons that would affect the price of the premium. The analogy with car insurance is towing services or rental cars- for a few extra bucks a year, it is an option, not a mandate. Some argue this would create a dispute resolution nightmare, but with a specific and readable policy, this can be alleviated.

Forgotten in the Obamacare debate was antitrust reform with respect to health care insurers. They are exempt from antitrust laws under the McCarran-Ferguson Act which was passed to protect state regulation of the insurance industry and to allow them to share loss data amongst themselves in order to set accurate premiums. However, a 2003 study found that three companies dominate 50% of the health care industry in any given state. Furthermore, the sharing of loss data is no longer necessary since the high risk behaviors that lead to bad health consequences are well-documented. In order to encourage competition, they should no longer be exempt from antitrust laws. That exemption is based on the reality in 1945, not 2012. The CBO actually scored this issue and found it would not affect the Federal budget or the price of anyone’s premium. And legal analysis concludes that it would not diminish a state’s regulatory role.

Administrative costs account for 7% of health care. It is necessary given the complexity of policies, the varying regulations and mandates from state to state, and to avoid fraud. The interstate sale of insurance policy would actually remove many of these regulatory mandates. Fraud actually costs about 3% of the bill with Medicare fraud being the worst. Tom Coburn, a Senator and physician, once suggested undercover patients to root out fraud- not a bad idea. The CBO estimates that for every $2 million invested in fraud detection and prevention, it saves $173 million. However, insurance fraud currently carries only a civil penalty. Perhaps it is time to elevate it to a criminal act. As Medicare has proven, the greater the number of regulations, the greater the opportunity to perpetrate fraud and game the system. Additionally, those on both sides of the issue concede that computerized medical records will decrease administrative costs considerably. So what is the hold up? Initial costs of setting up digital records is the only thing holding this reform back from being used universally. The government needs to encourage its use by utilizing Medicare payments as leverage. Refusal to convert to digital records would necessitate reduced physician reimbursements. If they do it, they can write its cost off 100% upfront as a business expense. If they opt out, they get less money from Medicare. The fact is that 90% physician participation in digital medical records would save about $80 billion annually.

As one can see, there is a workable solution short of that nonsense called Obamacare. And these commonsense solutions further strengthen purchaser choice. It would encourage competition which would lower premiums across the board. Insurance companies would continue to profit, but they would have to innovate in order to thrive. New, niche insurance carriers would enter the market. States and the federal government would continue to play a regulatory role to some degree, but the market, not politics and lobbyists, would dictate prices.

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