Tuesday, March 14, 2017

There Can Be Only One (Healthcare edition)

The nation appears to have reached a consensus that healthcare should be affordable and portable.  Our pols are now left with the impossible task of putting this square peg into the circular hole called "insurance."

Insurance is not a label; it's a concept.  Insurance covers risks that have not matured.  But we want to provide coverage for risks of illnesses that have already been contracted when the insurance policy is issued.  Unfortunately, the existence of the condition removes the risk that it will arise later, leaving only the risk that treatment will cost an unknown amount.  That risk can be insured, but the risk that the illness will occur cannot, because that insurable event has already happened.

Yet, we have decided we want to cover the costs of illnesses that have already been contracted when the insurance is taken out.  How do we do that?

One solution - the one used in Obamacare - is to require everyone to buy "insurance," all paying the same price (perhaps age-adjusted), whether they are sick or healthy.  All we have to do is add up the total expected costs of treating all illnesses, divide by the number of people paying insurance premiums, and provide assistance to those who can't afford that amount.  Problem solved.

Except for one thing.  The logic behind this solution demands that all of the premiums collected be available to pay all the claims presented.  But that cannot happen with multiple insurers in the same market.  The better a company is at servicing claims, the more likely it is to attract those who need claims serviced. Meanwhile, a company with poor service would make more money, as its premium payers leave when they get sick.  The companies would, in effect, be competing for the right to go broke.  Companies don't do that, and, mirabile dictu, many Obamacare insurance markets are finding only one player in the game.  How else could it be?  Nothing else works.

Portability is basic stuff to insurance people. A carrier can take on a matured risk if (i) it is paid the estimated cost associated with that risk, or (ii) it is reimbursed for paying actual claims associated with that risk, or (iii) some combination of both.  In the property/casualty business, so-called "loss portfolio transfers" are a common practice.  Claims incurred under one carrier's policy are transferred to another carrier in exchange for a lump sum or other negotiated payment.

A more pertinent model involves reinsurance.  Many primary insurance carriers have reinsurance agreements in place that survive a loss portfolio transfer.  Thus, when the transfer occurs, the amount the original carrier will have to pay to the acquiring carrier may be fully known and fairly small, because the real cost of the loss is borne by the reinsurer.

An Obamacare fix could adopt this reinsurance model.  Each insurance company could take the risk that a healthy insured will get sick while under its coverage, collecting a premium for that eventuality. When an insured gets sick, the company would be required to buy "reinsurance" with respect to that illness by paying an actuarially determined amount into a common Already Sick Pool (ASP),  Then, if an insured changes insurance companies, the company acquiring the risk could tap the ASP for payment.

To assure adequate financing for the reinsurance pool, some combination of three things must occur: (i) healthy people must buy insurance, or (ii) healthy people must pay a tax in lieu of the portion of the premiums they would have paid in excess of the actuarial cost of insuring them, or (iii) coverage by insurance would be automatic and free, with a tax imposed to pay for it on some basis that people find fair.  (See "Medicare.")

Note, though, that a single ASP is central to any of these approaches.  It is not a "detail to be worked out in conference."  It is essential to portability, which is essential to covering pre-existing conditions.  Unless the insurer on the risk when the illness is contracted, or someone else, pays for the cost of that illness, there cannot be portability between competing insurers. Since that is not happening now, competing insurers are withdrawing from the market, and they won't come back no matter how easy it is to enter the market, because the market itself cannot support competition without a single-payer already-sick pool.

The ramifications of a single ASP are enormous.  Insurance companies are essentially investment banks that make their money lending out their insurance reserves. Underwriting activities are just a way of collecting money to lend.  Insurers can even compete on the extent to which their investment results reduce the premiums they need to collect. So, unless an insurance company gets some money to manage, it's not really doing what its shareholders set it up to do.  It becomes a buying service for insureds rather than an investment bank for its owners.  Those are different businesses.

Who, then would manage the ASP?  In what would it be invested?  One can imagine a mechanism whereby each carrier gets to manage a chunk of the pool based on its contributions to the pool.  That might be cumbersome.  The obvious alternative would be transferring the ASP money to the Medicare Trust fund, where is would fund the national debt.  That's not a terrible idea in economic terms, as it would lower interest rates for everyone, thereby benefiting savers and borrowers. But it would deprive the capital markets of the money they now get in the form of health insurance company reserves, so that's pretty much a wash.

And, if there's going to be one pool, it might make sense to put it in a place where administering medical claims is already being done.  That means putting everyone in Medicare.  In short, if we want to insure pre-existing conditions, the only viable solution is a single payer, and the best choice for single payer is Medicare.

The rabbit is already in the hat. All that remains is for some political magician to extract it. Unfortunately, the rabbit looks like a poisonous snake. Maybe "ASP" isn't so good a name for it...