Insurance: You Keep Using That Word…

The Obama Administration is pushing an 8-pronged list of “Health Insurance Consumer Protections.”

No Discrimination for Pre-Existing Conditions
Insurance companies will be prohibited from refusing you coverage because of your medical history.

No Exorbitant Out-of-Pocket Expenses, Deductibles or Co-Pays
Insurance companies will have to abide by yearly caps on how much they can charge for out-of-pocket expenses.

No Cost-Sharing for Preventive Care
Insurance companies must fully cover, without charge, regular checkups and tests that help you prevent illness, such as mammograms or eye and foot exams for diabetics.

No Dropping of Coverage for Seriously Ill
Insurance companies will be prohibited from dropping or watering down insurance coverage for those who become seriously ill.

No Gender Discrimination
Insurance companies will be prohibited from charging you more because of your gender.

No Annual or Lifetime Caps on Coverage
Insurance companies will be prevented from placing annual or lifetime caps on the coverage you receive.

Extended Coverage for Young Adults
Children would continue to be eligible for family coverage through the age of 26.

Guaranteed Insurance Renewal
Insurance companies will be required to renew any policy as long as the policyholder pays their premium in full. Insurance companies won’t be allowed to refuse renewal because someone became sick.

Matt Yglesias likes what he sees:  “If you can make it stick, and if you can cash these eight principles out in a reasonable way, this would transform health insurance for the majority of Americans.”

No doubt.  But I’m reminded of Inigo Montoya’s classic observation, “You keep using that word. I do not think it means what you think it means.”   In the movie, “that word” was inconceivable.  In this case, it’s insurance.  Typically, we define it along these lines:

A promise of compensation for specific potential future losses in exchange for a periodic payment. Insurance is designed to protect the financial well-being of an individual, company or other entity in the case of unexpected loss.

The whole idea of insurance is that the company collects premiums up front in exchange for assuming possible future risk. Insurance that is required to cover pre-existing conditions really isn’t insurance at all.  If I’m uninsured and wreck my car and go to GEICO to buy a policy, they’re not going to pay for the wreck I already had.  If I die without life insurance, my wife can’t go to MetLife and buy a policy on me and get paid.  Why? Because these loses are no longer potential or in the future; they’ve already happened.

Similarly, insurance companies naturally offer different rates based on projected risk.  Women typically get cheaper auto insurance than men up through a certain age because men are riskier drivers.  Young men get cheaper life insurance than old men.   Smokers pay more for health insurance.

Mandating that certain types of insurance cover reasonable risks in the category is probably good public policy.  Certainly, it’s unconscionable for insurance companies to take your money during the good times and then drop you once you’ve become ill or old, as any potential alternatives are going to charge based on your new status.

Further, I think it’s a good idea for health and dental insurance to cover routine preventative care to forestall emergency care down the road.  But plans which do that should be allowed to charge accordingly.  After all, they’ve got no guarantee that you’ll be a customer in the long term and that they’ll therefore amortize the investment.

And why shouldn’t people have the right to buy a cheaper, no-frills plan rather than having an expensive, Cadillac plan as the entry level option?  Doesn’t that actually exacerbate the problem of the uninsured?

Update (Steve Verdon): In addition to James’ point that what these “reform” measures seek to create is not insurance (Arnold Kling uses the term insulation, as in insualtion from costs), several of these items are at cross purposes. For example,

No Discrimination for Pre-Existing Conditions
Insurance companies will be prohibited from refusing you coverage because of your medical history.

No Exorbitant Out-of-Pocket Expenses, Deductibles or Co-Pays
Insurance companies will have to abide by yearly caps on how much they can charge for out-of-pocket expenses.

No Cost-Sharing for Preventive Care
Insurance companies must fully cover, without charge, regular checkups and tests that help you prevent illness, such as mammograms or eye and foot exams for diabetics.

As James noted, when there is a pre-existing condition what we are talking about is not insurance. Instead we are talking about paying for someone’s total health care expenditures. To use the language of insurance the premium is equal to the total cost of treatement. Since this would be exorbitant, everyone elses premium has to go up which is cost sharing, and depending on the costs possibly leading to exorbitant out-of-pocket expenses, deductible or co-pays.

Then there is this part,

No Gender Discrimination
Insurance companies will be prohibited from charging you more because of your gender.

What if women do cost more? After all they do do one thing men don’t: have babies. If they are paying the same rate as men, then it must be that men’s premiums are higher…thus cost-sharing.

Basically, this is just a continuation of the same old things that have been playing a role in getting us to the position we are in. Cover everything and anything, and don’t let insurance companies charge the correct prices. Insurance companies can screen for people with pre-existing conditions, they have small armies of actuaries who can tell who cost how much on an expected basis. The reason we have some of the problems we do is that people’s health care choices are often divorced from the costs associated with them. For example, in the Netherlands and Switzerland people have to buy their own insurance (in the Netherlands there is partial payment from employers). Could this out-of-pocket expense help people select policies that are more suited to their actual situation than that cover a huge assortment of services and benefits they might not want? The problem with people like Matthew Yglesias is that they are operating under the misapprehension that “yes, we can” grow the world’s food supply in a flower pot.

FILED UNDER: Government, Health, Popular Culture, , , , ,
James Joyner
About James Joyner
James Joyner is a Security Studies professor at Marine Corps University's Command and Staff College and a nonresident senior fellow at the Scowcroft Center for Strategy and Security at the Atlantic Council. He's a former Army officer and Desert Storm vet. Views expressed here are his own. Follow James on Twitter @DrJJoyner.

Comments

  1. Dave Schuler says:

    I think it’s rather clear that few want health insurance that is, in fact, insurance. What seems to be wanted is a prepaid maintenance program without the “pay” part.

    As I’ve been reminding people for some time, the cost of health insurance (as it’s defined even if it’s not insurance) must be proportional to payouts. That’s why my primary concern is cost control.

  2. Zelsdorf Ragshaft III says:

    My question, though not strickly speaking on topic, is if I like what I have and can keep it.
    Where is the emergency to change the system. If most of America can keep the system they have, how can that relate to “must change to avoid disaster”? Seems the two ideas do not mesh with eachother. I smell something fishy. Maybe I should send it to flag@whitehouse.gov.

  3. sam says:

    @JJ

    Insurance that is required to cover pre-existing conditions really isn’t insurance at all.

    Ok, but then how to address the health care of such folks? (And though is a topic for later, I think: Just how are we to define ‘pre-existing condition’? I mean, are you Ok with including acne in the definition?)

  4. kth says:

    I agree that it would be ruinous to require insurance companies to community rate, in the absence of any other provisions. The premium would then simply be the average cost of treating everyone in the defined geographic area. That price would obviously be a lot higher than most healthy people pay now, with the result that many of them would drop coverage–until they got sick, then buying coverage and hence the vicious circle.

    But if you are required to carry medical insurance, either yourself or through your employer, you simply won’t have the option of opting out until you get sick, so that adverse selection problem is taken care of. Far as I can see, mandatory coverage is the only way to address adverse selection consistent with universal access.

    Some healthy people will react that this is unfair. But there’s really no other way to make sure that high-risk people are covered. Especially under conservative proposals to decouple employment from coverage: good luck keeping your insurance if you get sick and you aren’t in a group plan.

    More importantly, assuming we’ve decided to cover everyone, and not let people with cancer or diabetes die because they can’t afford treatment: community rating by itself guarantees that premiums go up. We can provide universal access either by mandatory coverage (in which the healthy guy at least gets coverage that can’t be taken away from him), or by something like an expansion of Medicaid (in which the healthy guy gets nothing for his probably-increased taxes).

  5. PD Shaw says:

    The notion of insuring against unknown casualties cuts both ways though.

    If I am struck by another car on my way home from work today, the other driver’s insurance will pay for the resulting health care costs, whether incurred this year or in future years.

    If I am diagnosed with a complicated, potentially fatal disease today, then my health care insurance will pay for those expenses incurred in the premium year. The following year, the premium will be adjusted based upon the new knowledge that I will be an expensive insured.

    Which of these is more consistent with the notion of insuring against unforeseen events? I would say the first one. Our healthcare insurance artificially restricts the unforeseen event to a set timeframe, and treats subsequent time periods as stepped-up maintenance contracts.

  6. Don Young says:

    Coming from an insurance background, I have to agree with James’ comments that the term “insurance” is being misused by most proponents for change. Two concepts seem to be missing: Insurance is designed to spread the risk, and to return the person to their pre-loss condition. All of these reform ideas sound good, but have little to do with insurance. If we want everyone to have access to a health care fund, call it what it is. It is an individual’s decision to decide what level of risk they will self fund. I’m sure Ben Franklin is having a big laugh over all this.

  7. RW Rogers says:

    PD Shaw wrote: The following year, the premium will be adjusted based upon the new knowledge that I will be an expensive insured.

    In what states is raising the rate on one individual policy because of claims made under that policy permitted? Citation please. Thanks

    KTH: I agree. The only way way mandated acceptance works is with mandated participation.

  8. PD Shaw says:

    RW Rogers: I can’t give you citation to authority. I can say that this is my personal experience in Illinois where insurance premiums in my small business roughly tripled for all employees when one employee came down with about three potentially fatal disorders.

    Our insurance broker recommended firing her, which, of course, we did not do.

  9. JKB says:

    The issue isn’t insurance but rather the buying program. Some are in decent buying programs through their work. My brother-in-law gets a good price on Fords through his company’s buying program. Some get a decent deal via Medicare where the force of government causes lower reimbursement rates for providers. Of course, if you’re self-employed or don’t have an employer plan, you’re stuck buying not only retail but marked-up retail to subsidize the buying program discounts offered.

    The problem is, medical care isn’t scalable. Volume discounting doesn’t work. I’m reminded of a description of Lasik type surgery in the Soviet Union I read. They put a half a dozen patients on a turntable and they rotated around to different stations where the “doctor” would do his sub-task of the surgery. That’s volume medical care but not really what most will accept in the US. People don’t even like to see the Physician Assistant rather than the MD for minor issues.

  10. RW Rogers says:

    PD Shaw: Ah, that is different. When I was more intimately involved in the field, carriers didn’t experience rate small groups, but a few were known to remove groups such as yours from their regular community pool into the “sub-prime” community pool in order to be able to be offer lower rates than the competition that didn’t have such clauses in their contracts. That sucks, I agree, but it is done to the group as whole not to an individually purchased contract. Considering the advice you’ve received, looking for a new agent and carrier might be something to consider.

  11. Michael says:

    Insurance that is required to cover pre-existing conditions really isn’t insurance at all.

    Likewise, insurance that is required to cover known future expenses (checkups) or voluntary expenses (pregnancy) isn’t insurance at all. As has been pointed out numerous times on this blog, our current system is “insurance” in name only, it’s already a maintenance plan.

    The problem isn’t that we use our so-called insurance to pay for these things, the problem is that you have to have so-called insurance to be able to afford these things. Unless the cost of health care comes down, it doesn’t matter what it’s called, either the rich and healthy will subsidize the poor and sick, or the poor and sick will no get health care.

  12. Thank you James.

    If wishes were horses beggars would ride Young Mr. Yglesias would have a clue. As I have asked in another thread, everybody wants the government to provide something for nothing. Now where would they get that idea?

  13. steve says:

    With rescission, you may not even have insurance when you think you do. I am in full agreement that people should be able to buy different levels of insurance. However, I also think people should be able to get insurance even if they have pre-existing conditions.

    One caveat to the buying cheaper insurance. Let us say you buy a cheaper plan that drops you when you get sick and actually cost something. You should not expect the rest of us to bail you out. Pay up or suffer.

    Steve

  14. Michael, the fact that some health care expenses are incurred on a regular basis does not mean it isn’t insurance. State Farm can absolutely guarantee that there is a fairly predictable number of roof replacements they will pay for this year because of hail or storm damage. By your logic this means that all of State Farm’s homeowner policies are really maintenance plans. I do not think this is correct.

    Some have proposed that catastrophic health care insurance is what most people really need. I think that is largely correct, but that doesn’t mean that it all isn’t insurance.

  15. Michael says:

    One caveat to the buying cheaper insurance. Let us say you buy a cheaper plan that drops you when you get sick and actually cost something. You should not expect the rest of us to bail you out. Pay up or suffer.

    That would be fine, as long as the insurance you had continued to pay out for the illness you got while covered. If I am diagnosed with cancer while insured, they should continue to pay for my treatment of that cancer even if I change insurers.

    Likewise, my new insurer wouldn’t have to cover pre-existing conditions, because the insurer I had when they were discovered will continue to pay for them. That is how real insurance works.

  16. Michael says:

    State Farm can absolutely guarantee that there is a fairly predictable number of roof replacements they will pay for this year because of hail or storm damage. By your logic this means that all of State Farm’s homeowner policies are really maintenance plans. I do not think this is correct.

    There is a difference between a know future cost, and a collective average future cost. If State Farm covered new paint, sod and pressure washing every year, then it would be comparable to health insurance.

  17. But then health care plans should cover manicures and facials, right? We will have to agree to disagree about this one Michael.

  18. PD Shaw says:

    Part of this discussion needs to take into consideration that 55% of employer-sponsored healthcare coverage is self-insurance, including 77% in companies with 200 or more workers. LINK (pdf)

    That has at least two effects: First, state regulatory mandates don’t generally apply to self-insurance. Second, self-insurance has a number of features that make it cheaper than conventional insurance.

    So in Charles’ example, if the state requires manicure and facial coverage, most large companies would be exempt; it’s simply a burden on small business.

    However, if providing employees with manicure coverage is something that makes employees happy and it’s cheaper (because of preferential tax treatment) than increasing salaries, then a large business might provide it anyway.

  19. Dave Schuler says:

    Self-insurance is something I’ve been mentioning to people for some time but somehow it doesn’t seem to sink in.

    Note that in self-insurance the “insurance company” bears no risk; that means there’s no motivation whatever to engage in adverse selection.

    Indeed, since the “insurance company” is generally compensated based on the total value of the plan or on the number of transactions their incentives are quite the other way around.

  20. PD Shaw says:

    I probably should have hat-tipped Dave for bringing the self-insurance issue to my attention. Here

    Since self-insurance has moved from 44% to 55% in the last eight years, the trend is significant, but it sneaks up on you.

  21. Michael says:

    But then health care plans should cover manicures and facials, right?

    I’m saying that health insurance shouldn’t cover regular doctor’s visits and pregnancies.

  22. Herb says:

    As long as we’re using movie quotes…this is my view on health insurance, courtesy of Kaiser Soze:

    The greatest trick the devil ever pulled was convincing the world that everyone needs an insurance company involved in the doctor-patient relationship…

  23. dutchmarbel says:

    What if women do cost more? After all they do do one thing men don’t: have babies. If they are paying the same rate as men, then it must be that men’s premiums are higher…thus cost-sharing.

    gosh, your marriage seems to be very different from mine. Are you telling me that Amanda got a daughter and you had nothing to do with that?

    (in the Netherlands there is partial payment from employers). Could this out-of-pocket expense help people select policies that are more suited to their actual situation than that cover a huge assortment of services and benefits they might not want?

    Thats old system. New system is that everybody pays for themselves. You can sign up for the employer approved insurance, with discount, but we for instance liked another insurance better and got our insurance via a consumer group (‘united consumers’) with the same discount.

  24. Steve Verdon says:

    gosh, your marriage seems to be very different from mine. Are you telling me that Amanda got a daughter and you had nothing to do with that?

    No, but single women can get pregnant and the health care pertains to the woman while pregnant, not the man. This even applies to married women. Or to put it another way, how about a gay couple and a hetero couple. If I found the gay couple had a lower premium because there was a very low probability of (assume two men) having a baby vs. my wife and I, don’t think I’d pitch a fit. I’d nod and say, yeah, that makes sense.

    Thats old system. New system is that everybody pays for themselves. You can sign up for the employer approved insurance, with discount, but we for instance liked another insurance better and got our insurance via a consumer group (‘united consumers’) with the same discount.

    Thanks again Dutch. I hope you keep posting, this information is good to know.

  25. odograph says:

    On preexisting conditions, I always picture the guy I know who got his pacemaker at age 17. A guy like that is going to be screwed in an “insurance” system. The question is how screwed he should be.

  26. Policy by anecdote.

    Bankruptcy by a thousand cuts.

    Whatever.

  27. Michael says:

    On preexisting conditions, I always picture the guy I know who got his pacemaker at age 17. A guy like that is going to be screwed in an “insurance” system. The question is how screwed he should be.

    Under a true “insurance” system, if he had insurance when he had to get the pacemaker, that same insurance would cover any future costs associated with that condition, so any new insurer wouldn’t be concerned about that pre-existing condition, because it’s someone else’s responsibility.

  28. odograph says:

    I think the answer to Charles and Michael is that we do want a system that satisfies real world conditions. An example like a pacemaker may be an anecdote, but “childhood illness extending into adult costs” is a real and broader category.

    A system that (a) got my friend’s parents insurance, and (b) insured that insurance was there for my friend’s lifetime, would be great. We don’t have that though.

    We’ve got something broken that people want to keep nonetheless.

  29. Michael says:

    I think the answer to Charles and Michael is that we do want a system that satisfies real world conditions. An example like a pacemaker may be an anecdote, but “childhood illness extending into adult costs” is a real and broader category.

    I agree. My 5 year old son can’t get coverage by any private insurance because he’s been diagnosed as high functioning autistic. At this point, the only thing that separates him from his peers is that his speech pattern is a little different, and he reads on a 3rd grade level. And yet nobody will insure his health.

    Believe me, I do not want to keep the current system.

  30. Steve Verdon says:

    I think the answer to Charles and Michael is that we do want a system that satisfies real world conditions. An example like a pacemaker may be an anecdote, but “childhood illness extending into adult costs” is a real and broader category.

    I haven’t seen any data on this kind of specific issue, but based on the data I’ve seen on health care costs in general, I think the above represents a small subset of the costs. Most of the costs for health care come from the 60 and over sub-group in the population. While some of them might have had problems as children/young adults, I’m inclined to think it is pretty small.

    If this is true, it is possible that situations such as the one Odograph describes could be subsidized if we could get enough savings out of the 60+ sub-population. From what I’ve read there are savings to be had, getting them though is the hard part.

    Again, no hard data to really provideds strong support for this view, just speculation based on the data I have seen.

  31. dutchmarbel says:

    No, but single women can get pregnant and the health care pertains to the woman while pregnant, not the man. This even applies to married women. Or to put it another way, how about a gay couple and a hetero couple. If I found the gay couple had a lower premium because there was a very low probability of (assume two men) having a baby vs. my wife and I, don’t think I’d pitch a fit. I’d nod and say, yeah, that makes sense.

    It’s a matter of pragmatism and solidarity, though the solidarity bit often is pragmatic too (“tit for tat” still works)

    It’s still hard to get pregnant without some male assistence. They tried f/f, but that hasn’t been succesful yet…

    Even the gay couple could very well end up with children. The desire for kids isn’t linked to sexual orientation – and those kids still have to be born out of a woman.

    The problem with those kind of rules is that there are always things you can debate about. There are hardly any men who get breastcancer, so why pay for screening or treatment? There are no women who get prostate cancer, so why pay for that? But what if it is your spouse, your sibling or your parent that you talk about? In Dutch law it is explicitely stated that making a difference on the base of gender or race or age is not allowed, unless the treatment is provabely linked to those differences (they give as an example some medication that works much better on black people than on white ones, and will thus only be paid for when given to black people).

    The rule of thumb for what should be covered by the health insurance is based upon the impact and efficiency of the treatment. Our advisory board recommended that for every QALY no more than 80.000 euro should be spend. So in our current system the cost of a hearttransplant is a litte less than 40.000 euro, so that should only be paid for if there is a reasonable chance that the patient will live 6 months longer because of the treatment. Exception is made for temporary situation: kidney dialysis is more expensive, but is assumed to be temporarily till a replacement kidney has been found, so it doesn’t have to follow the 80.000 euro for every gainded life rule.

    It’s no done deal yet, there is discussion about it, but it doesn’t strike me as a very unfair system. And it only decides what is in the basic package, the one that is obligatory. Everybody still has the option for either more expensive and extensive packages, of for paying for additional treatment through private means.