Are health insurance companies evil? A web search for the phrase turns up almost a million hits. The common reasons for this passionate indictment are insurance company profits, denial of claims, and rescission of policies. But these do not justify the Democrats’ goal of expanding political control of health insurance. Rather, they call attention to existing controls that unfairly advantage insurers and limit competition that would keep insurers honest. They also suggest government’s failure to enforce contracts.
“No one should profit from another’s misfortune.” This is a common indictment of for-profit health insurance companies. But the opposite is true. Insurance companies profit from their customers’ good fortune. Once you buy a policy, the insurance company profits most if you avoid misfortune and hence submit no claims.
Yet House Speaker Nancy Pelosi has referred to insurers’ “immoral profits.” To put this in perspective, health insurers’ profit margins are about 3%, which the AP calls “anemic” compared to other industries. In 2008, the total profit for the top fourteen insurers was less than $9 billion, or less than $50 per privately insured person in the United States.
If Pelosi wants something to complain about, she should consider Medicare and Medicaid fraud, which amounts to more than $1,000 per Medicare recipient and more than $500 for Medicaid recipient annually. But Medicare and Medicaid need not concern themselves with profit. Potential profits would motivate them to reduce fraud. As economist John Lott observes:
Getting rid of profits wouldn’t make costs go down — they would go up, because without profits there would no longer be the same incentive to hold down costs. Profits are the reward that firms get for figuring out what customers want.
The problem is not profits, but a pro-insurance tax policy that severs the profit motive from satisfying patients. The tax code punishes you for paying for medical care with cash instead of through insurance. This empowers insurers as gatekeepers between you and doctor-recommended treatment. Worse yet, the tax code punishes people for buying insurance directly from insurers rather than through their employers. As the policy holder, you are the consumer but not the customer. Insurers try to satisfy employers rather than you. Patients are essentially stuck to their employer’s plan. To buy a competitor’s product they must find a new job or pay a stiff tax penalty on a plan purchased directly from an insurer.
But if you still prefer a non-profit insurer, this is no reason to support a new government-run plan or “Medicare-for-all,” which would compete unfairly with non-government insurance. If you do not like for-profit banks or financial service companies, you can join a credit union and invest with the Vanguard Group.
The same goes with medical insurance. Did you know that non-profit (and non-government) insurers dominate markets in many states? Further, non-profit health co-ops already exist. Health Partners, Inc. in Minneapolis and the Group Health Cooperative in Seattle each have more than a half-million members. Such co-ops would be more common if government got out of the way. Current law prohibits member-based mutual insurance organizations from operating as non-profits.
Michael Moore says the way insurers “make more money is to deny claims or to kick people off the rolls.” But Medicare and Medicaid also deny claims, and they don’t make money. Medicare denies claims more often than major insurers, according to the American Medical Association. The most common reason is the treatment was “not deemed a ‘medical necessity’” by Medicare administrators. In Massachusetts, Medicaid “denied the highest share of claims” of the state’s main insurers, reports the Boston Globe.
Denying a claim is not always wrong. It’s only wrong if the insurer refuses to cover something that the policy says it covers. Denying invalid or fraudulent claims can benefit consumers by keeping premiums low. This makes some administrative costs a good investment. To be sure, denying legitimate claims is wrong, and government should penalize insurers who do not honor their contractual obligations. If insurers often deny legitimate claims, this could be a symptom of lax law enforcement or insufficient penalties, as economist Tyler Cowen has noted.
Claim denial would not be such an issue if the tax code didn’t encourage us to pay for medical care through insurance. We’d pay for more treatments with cash, and costs would decrease because providers would compete on price. The tax bias for employer-sponsored insurance makes claim denials worse: insurers know you’ll tolerate lots of red tape because it’s so costly to switch to a competing insurer. So don’t attack claim denials themselves, but the tax policy that limits insurers’ need to compete and be accountable.
As with claim denials, “kicking people off the rolls,” or rescission, is already illegal except in certain cases. An example is if the policy holder, out of either carelessness or deliberate deception, misrepresents or omits parts of his medical history when applying for insurance. Depending on the omission, the insurer can justifiably rescind the policy or re-underwrite it at a higher premium.
Almost all states allow insurers to investigate medical histories for up to two years after issuing the policy. Supporters of such provisions claim that without it, insurers would commit significant resources to thoroughly investigate each applicant’s health history before quoting a premium price. This would both increase premiums and how long applicants must wait to receive coverage. Critics claim that insurance companies who take advantage of it do it to avoid paying expensive claims. Yet this issue does not justify Democrats’ health “reform.” As Scott Harrington, a Wharton professor of insurance and risk management, writes:
If existing laws and litigation governing rescission are inadequate, there clearly are a variety of ways that the states or federal government could target abuses without adopting the president’s agenda for federal control of health insurance, or the creation of a government health insurer.
More competitive insurance markets would also discourage insurers from illegitimately rescinding policies, as an insurer’s reputation is critical to its success. For example, Aetna touts the quality and fairness of their rescission and rescission appeals process. As economist Arnold Kling notes, lifting political controls that reduce competition could encourage such actions. These controls include guaranteed issue, community rating, and the ban on buying insurance across state lines. Community rating also inhibits innovative products like health-status insurance, which would make it easier to switch your insurance company, despite having a significant medical history.
For every problem, politicians sell a “solution,” which is often legislation that erodes our freedom. Yet problems arising from health insurer profits, claim denials, and rescission arise from existing legislation and lax enforcement of contracts.
Don’t further empower politicians to “fix” problems they created in the first place.