Insurance 101
Posted 10/13/2009 07:03 PM ET
Health Care: Another day, another lesson. The Baucus plan is the latest scheme to collide with economic reality, proving once again that Congress doesn't understand the system it claims to be reforming.
Max Baucus, chairman of the Senate Finance Committee, was probably feeling pretty good last week after the Congressional Budget Office came up with a nice deficit number for his slimmed-down plan to overhaul health insurance in America. Then came a teaching moment.
Over the weekend, the trade group America's Health Insurance Plans released a study saying Baucus' plan would hammer the middle class with huge increases in premiums and taxes. The study has stirred things up because it makes a case resting on acknowledged facts. You might call them the iron laws of insurance.
One of these is that the extension of coverage to a higher-risk group will raise costs for everyone, because the average level of risk in the entire pool of insureds goes up. Another is the law of large numbers: The more low-risk people you can get in your pool, the lower you can set your premiums. Another is adverse selection, the inevitable tendency of the highest-risk people wanting your insurance the most, and the lowest-risk wanting it the least.
These laws are, in effect, walls that Congress and the Obama administration keep hitting in their efforts to make health coverage universal without breaking the bank. Their idea is to get as many people as possible — especially the low-risk young and healthy — into the insurance pool as premium payers. In this universal system, adverse selection is no longer a factor, and insurers can cover the high-risk folks along with everyone else.
That's the theory. But when it comes down to drafting laws, there's always an insurmountable hurdle. One is that health care costs so much that people either can't afford the premiums or accept the risk of bankruptcy. Another is that the government's resources are finite and subsidizing premiums in today's waste-ridden system risks bankrupting the country.
Finally, forcing people to buy insurance (through penalties at tax time or whenever) is easier to talk about than enact. The Baucus plan punted on this issue, setting penalties too low to force many reluctant buyers into the insurance pool.
The AHIP study seized on this shortcoming, concluding that the Baucus plan would fail to fill the pool on the low-risk side and would raise premiums by taxing high-end plans. The higher costs and low penalties for going without insurance would encourage more people to postpone coverage until they got sick. Then, the insurers would have to take them, raising premiums for everyone.
This, then, is the quandary Congress has come nowhere close to solving: Health coverage is just too expensive to be made universal, and none of the "reform" plans with a chance of passage has a credible strategy to keep health care inflation under control.
Ironically, for a country focused on the number of uninsured, the real problem is that we are over-insured. Our plans pay for too much routine care and give consumers little reason to insist on getting drugs, checkups and other procedures at a reasonable price.
Except for the relative handful with high-deductible plans, most people handle very little of their health care money directly. The transactions are between insurers and providers, and they pass their costs on to employers, who quietly take them out of wages by paying higher premiums.
The only way to stop this inflation machine may be to redefine health coverage as true insurance, against catastrophic financial loss. But we doubt if most Democrats will have the political will to buck the unions on this issue.
There's a good chance they will pass some kind of bill on health care and call it reform. But it will probably just add to the deficit and leave real reform to a future Congress. This Congress is still trying to figure out what it's dealing with. It has a long way to go.
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ObamaCare is going to drive prices for people with private insurance higher than if we do nothing.
Its simple math and economics.
