The Basic Problem for Health Insurance

The health insurance market is changing. And the changes are not good. Even before there was Obamacare, most insurers most of the time had perverse incentives to attract the healthy and avoid the sick. Now, the perverse incentives are worse than ever. Writing in the New York Times, Elizabeth Rosenthal gives these examples:

• When Karen Pineman of Manhattan sought treatment for a broken ankle, her insurer told her that the nearest in-network doctor was in Stamford, Connecticut – in another state.
• Alison Chavez, a California breast cancer patient, was almost on the operating table when her surgery had to be canceled because several of her doctors were leaving the insurer’s network.
• When the son of Alexis Gersten, a dentist in East Quogue, NY, needed an ear, nose and throat specialist, the insurer told her the nearest one was in Albany – five hours away.
• When Andrea Greenberg, a New York lawyer, called an insurance company hotline with questions she found herself speaking to someone reading off a script in the Philippines.
• Aviva Starkman Williams, a California computer engineer, tried to determine whether the pediatrician doing her son’s two-year-old checkup was in-network, and the practice’s office manager “said he didn’t know because doctors came in and out of network all the time, likening the situation to players’ switching teams in the National Basketball Association.”

But aren’t these insurers worried that if they mistreat their customers, their enrollees will move to some other plan? Here’s the rarely told secret about health insurance in the Obamacare exchanges: Insurers don’t care if heavy users of medical care go to some other plan. Getting rid of high-cost enrollees is actually good for the bottom line. To appreciate how different health insurance has become, let’s compare it with the kind of casualty insurance people buy for their home or their cars. Dennis Haysbert is the actor I remember best for playing the president of the U.S. in the Jack Bauer series, 24.  You probably know him better as the spokesman for Allstate. In one commercial, he is standing in front of a town that looks like it has been demolished by a tornado. “It took only two minutes for this town to be destroyed,” he says. He ends by asking, “Are you in good hands?” The point of the commercial is self-evident. Casualty insurers know you don’t care about insurance until something bad happens. And the way they are pitching their products is: Once the bad thing happens, we are going to take care of you. Virtually all casualty insurance advertisements carry this message, explicitly or implicitly. Nationwide used to run a commercial in which all kinds of catastrophes were caused by a Dennis-the-Menace type kid. In a State Farm ad, a baseball comes crashing through a living room window. Nationwide’s “Life comes at you fast” series features all kinds of misadventures. And, of course, the Aflac commercials are all about unexpected mishaps. Now let’s compare those messages with what we see in the health insurance exchange. Federal employees have been obtaining insurance in an exchange, similar to the Obamacare exchanges, for several decades. Every fall, during “open enrollment,” they select from among a dozen or so competing heath plans. In Washington, DC, where the market is huge, insurers try to attract customers by running commercials on TV, in print and in other venues. If the health insurers followed the lead of the casualty insurers, their ads would focus on what could go wrong and how good they are at treating the problems. After all, why do you need health insurance? Because you might get cancer, heart disease or some other expensive-to-treat condition. And when that happens, you would like to be in a plan that give you access to the best doctors and the best facilities for your condition. In fact, this is what you never see in a health insurance commercial in Washington, DC. There is never a mention of cancer, heart disease, diabetes, AIDS or any other serious health condition.  Instead, what you see are pictures of young healthy families. The implicit message is: If you look like the people in these photos, we want you. What explains the difference between the health insurance and casualty insurance markets? In the latter, people pay real prices that reflect real risks. In the former, no one is paying a premium that reflects the expected cost of his care. The healthy are being overcharged so that the sick can be undercharged. So, insurers try to attract the healthy and avoid the sick. The perverse incentives don’t end after enrollment. The incentive then is to under-provide to the sick (to encourage their exodus and avoid attracting more of them) and over-provide to the healthy (to keep the ones they have and attract even more). Rosenthal explains what this means for people who need care: “For some, like Ms. Pineman, narrow networks can necessitate footing bills privately. For others, the constant changes in policy guidelines — annual shifts in what’s covered and what’s not, monthly shifts in which doctors are in and out of network — can produce surprise bills for services they assumed would be covered. For still others, the new fees are so confusing and unsupportable that they just avoid seeing doctors.” So what’s the answer? In a previous post, I argued that we can denationalize and deregulate the exchanges. And by instituting “health status insurance,” we can have a market with real prices that gives real protection to people with pre-existing conditions. There is no reason why the health insurance marketplace cannot work just as well as the market for homeowners insurance and auto liability insurance. This article originally appeared at Forbes.