There Are Always New and Inventive Ways to Deny Health Coverage to Risky Prospects

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Brad DeLong links today to his wife, Ann Marie Marciarille, who in turn links to a New York Times article from a few days ago about small companies who choose to self-insure for health coverage. Here’s the basic drill:

  1. Regulations are looser for companies that self-insure, so more small companies are doing it.
  2. Obamacare is (probably) accelerating this process.
  3. But small companies that self-insure need “stop loss” coverage, just in case one employee has a gigantic health disaster that could bankrupt them.
  4. Stop loss insurers are loosely regulated too, which means they can choose to insure only companies with young, healthy workforces.
  5. And they do.

The Times explains what happens next:

As a result, companies with less healthy work forces may find self-insuring more difficult….Insurance regulators worry that commercial insurers — and the insurance exchanges being set up in every state to offer a range of plan options to consumers — will be left with disproportionate numbers of older, sicker people who are more expensive to insure.

That, in turn, could drive up premiums for uninsured people seeking coverage in the exchanges. Since the federal government will subsidize that coverage, it, too, could face higher costs, as would some employees and employers in the traditional insurance market.

And Marciarille picks up the story from there:

The moral of the story? Wherever and whenever we have competing insurance products whose profitability is determined by calculating every health care payout as a loss, the insurance markets will respond accordingly — ever inventing more methods, even if once or twice removed, to screen those who need health insurance out of the health insurance marketplace.

This is the problem with private insurers: they only have three basic ways of making more money: (a) charging higher premiums, (b) operating more efficiently, or (c) reducing payouts. Option A is limited by competition. Option B is nice to think about, but pretty hard to implement consistently. And Option C….

Well, Option C means either denying coverage to iffy customers in the first place, or else denying treatment to sick people who you have the misfortune to cover despite your best efforts. In a free market the incentives to do these things are very strong, which means the only way to stop them from spiraling out of control is with heavy-handed regulation, of the kind they have in Switzerland. But Obamacare doesn’t quite have regulations that heavy-handed, and that’s going to cause some growing pains. Eventually we’ll get there.


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