Who Do You Trust?*

To opponents of health care reform, especially opponents of a public option, the controversy over when women should begin having annual mammograms looked like a preview of the risk that would attend publicly administered health coverage.  An obscure government-constituted panel could, on the basis of hard-to-understand statistics, decide that an almost universally-used procedure was no longer necessary.  And a government insurer would decide, on the basis of a government report, that the procedure would no longer be covered.

They’re right.  The mammogram controversy is a snapshot of the future of health care—whether Congress passes health care reform or not, and whether that reform includes a government-administered “public option” or not.  In fact, although insurance companies were quick to foreswear any intention of withholding coverage of forty-somethings’ mammograms, this kind of decision is already a staple of the health care system.

The question is not whether procedures will be placed off limits based on outcomes-based statistics.  They will be; they already are.  The question is who will make such decisions.  Are we comfortable entrusting such decisions exclusively to private health insurance companies?  Or would we sleep better at night knowing that a government agency could offer competing coverage?

This is what’s at stake in the debate about whether health care reform should include a public option.  There will be rationing of health care services.  There’s already rationing of health care services.  Bureaucrats already interpose their judgments into doctor-patient decisions.  Health insurance policies routinely restrict their customers’ choice of hospitals, mandate use of generic drugs over brand-names, and refuse to cover operations that they deem experimental.

For example, if routine mammograms before age fifty save one life out of 1900 women tested, someone, sometime, will have to decide whether that one life is worth the cost—
not just the cost of the mammogram itself but the cost of the biopsies and other procedures that will be done based on the false positives that mammograms sometimes yield.  Defenders of the panel recommendation say that it wasn’t about cost but about efficacy.  But if mammograms and their consequences were cost-free, we wouldn’t worry so much about efficacy.  Who cares how accurate they are if they’re free, as long as they do no harm?  But of course they’re not cost-free.  And because resources for medical care will never be infinite, choices will have to be made.

So what does it matter whether the bureaucrats who make those choices receive their paychecks from a private insurance company or the federal government?

It matters—a lot.  Not because government bureaucrats are intrinsically more compassionate than those who work for private insurance companies.  But because private insurers are in a different business, their decisions driven by fundamentally different incentives, than a public insurer would be.

A public insurer would be in the business of covering health care expenses.  Its service might feature all the negatives commonly associated with government services.  (Although, be honest: can you imagine public health insurance systems that require more paperwork, take longer to pay, or are more bureaucratic than those of today’s insurance companies?)  A public option would almost certainly be underfunded compared to the demand for coverage, and it would have to make choices like those implied by the mammography recommendation.  But with all its limitations, its primary business model would be to collect premiums and use the proceeds to pay health care expenses.

The primary objective of private health insurers, by contrast, is to not pay health care expenses.  Its business model is not collecting premiums and paying people’s health care expenses from the revenues.  Its business model is to collect premiums, invest the proceeds, realize a return on its investment and pay out as little as possible of that return on health care costs, thus booking as much as possible as profit and paying its shareholders as much as possible in dividends.  An insurance company’s primary business, in other words, is not coverage of health care costs.  Coverage of health care costs is just the way the company attracts capital to invest.

That this is the case is made plain by one of the provisions of almost every health care reform bill before Congress, the ban on excluding pre-existing conditions from coverage.  If insurance companies’ primary business was to cover the costs of illness or injury, coverage of pre-existing conditions would be a staple of every policy.  After all, who needs coverage more than someone who, by virtue of having had an illness before, is at relatively higher risk of having it again?  But these most-at-risk individuals are the first to be excluded.  Similarly, every additional day the company delays paying a claim, every additional day it takes to sort out payment responsibility between multiple insurance policies carried by married couples is a day in which the amount of the withheld payment earns interest for the company.

It’s not the companies’ fault.  Like the scorpion in the fable that stings the frog ferrying it across a river, even though it means drowning them both, it’s their nature.  They are responding to built-in incentives that reward covering only as much care as they have to to keep the premiums–the investment capital—coming.

It’s our fault, for having entrusted these kinds of decisions to profit-making companies, a decision that seems unlikely to be reexamined any time soon.

Thus the public option.  If health care coverage decisions must be made by companies that are incentivized to deny coverage, perhaps we can shift the incentives, if only a little.  If insurance companies faced competition from an insurer incentivized to cover expenses—not to mention an insurer that didn’t have to record a profit or pay dividends—perhaps the competition would countervail the incentive not to cover.  And if the competition from a public option failed to alter the private insurers’ practices, and the private insurers lost customers as a consequence, if customers flocked to the public option’s lower costs and fuller coverage, well then, wouldn’t the marketplace have spoken?

Wouldn’t more health care costs be covered for more people?  And isn’t that the point?


  1. Eric Christenson
    December 4th, 2009 | 1:19 pm

    Excellent as usual. I’m passing it along to my red-state cousins.

  2. Ira H. Klugerman
    December 7th, 2009 | 2:11 pm

    I believe the real question goes beyond what you’ve implied. That is, Should health care be subject to the whims or incentives the marketplace? This includes not just insurance companies. It includes physicians, hospitals, the entire realm of health care profiteers, all of which drive up the costs of health care to the point where individuals can no longer afford the costs and insurance companies take over. Is basic health care less a public responsibility than basic education? Shouldn’t advance health care be handled the same way higher education is? Partially government funded, partially private? Wouldn’t that drive down the costs substantially? And of course, that would mean every child would be covered.

  3. May 11th, 2010 | 7:57 pm

    I always make sure that my family gets Health Insurance from very reputable companies. health insurance is very important these days..'”

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