Monday, March 01, 2010

An Admission Of Failure

By now, you've heard about the kerfuffle over the recent request by WellPoint Insurance in California for a whopping 40% increase in rates. Not being the CEO or CFO of WellPoint and not having studied their financial position carefully, I can't judge the fairness of this request.

However, little noticed in this request is an admission that insurers have failed to keep up, despite the bushels of money they've extracted from the pockets of the American working public.

Her testimony, and other statements she and other WellPoint executives have made, suggests that insurers can't profitably manage through periods of high unemployment. They can't price policies in a way that keeps healthy young people in the same pool as older people, producing a mockery of the very point of indemnity insurance. Despite a decade of unobstructed consolidation, which was sold to regulators as a way to control healthcare costs by creating mega-insurers like hers, her industry can't control healthcare costs.

In other words, the only way an insurance company can effectively make profits on private health insurance is to sell policies to enough healthy people to cover the costs of the older and sicker.

To put it analogously, the only way a car insurer could make money is to issue car insurance to people who don't drive.

Insurance of any kind is a bet: enough people will feel uncomfortable without it that they'll purchase peace of mind to cover those who really need help with their bills. As an insurer, if you keep up, and you'll make money. Don't keep up, and you'll lose.

So here's the thing: if insurance companies are losing customers as people lose their jobs and can't keep up, why aren't the costs of medical care coming down proportionately?

It's true, we as a nation are getting older, and sicker. We have an obesity crisis across the land that's had reverberations in diabetes, colon cancer, strokes and heart disease, ad infinitum, ad nauseum. A sicker nation means more spent on healthcare, and as we've learned in Econ 101, a higher demand forces prices higher.

But a higher demand does not force costs higher and there's the rub. It's no coincidence that the AMA has opposed a public option because the government would be the 800 pound gorilla in the room that would force everyone, from insurers to patients to doctors, to take account of its actions.

There's only one way to lower prices on a supply-and-demand basis. If you can't lower demand, then obviously the thing to do is to raise supply: bring more availability to the market place to increase competition, which will lower prices across the board and will create a market force that will dampen down the costs of medical care.

Add to that the influence (or spectre, depending on how paranoid you get) of the Department of Justice subpoenaing your billing records or the IRS auditing your tax returns to ensure compliance with cost-cutting programs, and medical costs will quickly come down.

In truth, classic economic theory practically demands a public option, with a mandatory buy-in, which will create market forces to bring prices down. This is not unheard of in American society: we did it with our power utilities until they were deregulated, and we were fine with putting together an infrastructure that could be privatized eventually, even if the privatization became a mess after Republican greed got its mitts on it.