Health Insurers' 'Sins' Don't Justify Reform

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.