LET ME KNOW WHAT YOU SPEND AND I’LL REIMBURSE YOU

12/10/09

As regular readers know, I have a lot of problems with the proposed health care (health insurance, really) legislation in either its House or Senate variations. In addition to general philosophical objections, these problems center around the legislations’ reinforcing, rather than severing, the tie between health insurance and employment, the proposals’ not forcing consumers to put more “skin in the game” in the form of meaningful deductibles and co-pays, and our public servants’ continued silly insistence that we are somehow going to insure 30 million or so additional people while cutting costs. If we are going to dramatically expand coverage, it’s going to cost us something. Any honest debate must proceed from that premise. (See my already seminal 10/13/09 piece “I TOLD YA I WAS SICK.”) However, to expect our public servants, who live in a fantasyland, literally and figuratively, and who are convinced, perhaps with some justification, that the American public is too benighted to comprehend or deal with such things as costs and benefits, to engage in honest debate is wishful thinking on yours truly’s part. But I digress.

Yet another problem has emerged as the Senate bill winds its way toward passage, and its not that expansion of Medicare is a transparent back door method of achieving the long held liberal dream of a single payer health care system; I’ll leave that one to the usual cast of yahoo drones on the right. The shortcoming that I choose to address is setting the medical loss ratio, the percentage of premium income that health insurance companies must spend on actually providing health care, as opposed to administration and profit, at 90%, or at any fixed ratio, for that matter. Setting such a ratio provides perverse incentives to keep costs and premia high rather than seeking ways to reduce costs and premia.

Think about it. If an insurance company derives revenue of $100 (Put as many zeroes after that number as necessary; we’ll keep the numbers small to enhance and simplify the analysis.), under the Senate legislation, it must spend $90 on health care and can spend $10 on profit and administration. If the insurance company somehow finds ways to reduce health care costs to, say, $81, or by 10%, it can then only derive premium income of $90, reducing its profit/administrative margin to $9, or by 10%. If, however, the insurance company spends, say, $100 on health care, it can then increase premia to $111.11, and increase of 11.1% from its original $10 profit/administration margin. Such an arrangement is very much akin to the “cost plus” contracts that so enhanced the profitability of defense contractors at the expense of taxpayers in the Cold War era. One can easily see collusion between health care providers and insurance companies to increase health care costs, thus enhancing profitability for both. Thus, setting and mandating a medical loss ratio at 90%, or at any percentage, for that matter, works to increase, rather than cut, medical costs. Since the insurance company would derive no benefit from cutting costs, but would derive plenty of benefit from increasing costs, should we be surprised of health care costs increase dramatically under such a regime?

Once we start telling supposedly private, profit seeking insurance companies whom they must insure, how they can underwrite, and what their profit margins can be, we will have effectively nationalized health care, or at least we will have made delivery of health care very much akin to delivery of electricity or heat, effectively “utilitizing” health insurance. If we are going to do that, why maintain the ruse of a private sector health insurance system? Why not just go ahead and nationalize health care?