Arnold Kling  

Health Insurance Innovation?

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Tyler Cowen waxes romantic.


Let me also tell you my ideal world. Insurance companies are judged by honest third party intermediaries. Insurance companies compete like heck to make customers satisfied. Insurance companies monitor doctors, read Robin Hanson, and require evidence-based medicine. Insurance companies which fail at these pursuits either go bankrupt or they must abide by an ex ante contract to permit the exile of their CEOs to Greenland. Every year prices would fall in real terms, quality would improve, and coverage would be expanded.

I doubt it.

The insurance industry may be the only private-sector institution that I trust less than government. In auto insurance, I find that unless I change providers every few years, my premiums just get ratcheted up for no reason. I think that life insurance is a huge rip-off, particularly considering that it starts out with a tremendous tax advantage.

I do not trust my fellow consumers to understand the concept of insurance well enough to make insurance companies offer products that make sense. Too many consumers think that good insurance is something that provides payouts for small problems rather than protection against rare catastrophes.

In fact, as I have pointed out before, most people do not want insurance of any sort. They get homeowners' insurance to satisfy the mortgage lender. They get car insurance to satisfy the state. They get health insurance only when they think their employers are "giving" it to them.

The insurance industry is heavily regulated, and it has gotten quite cozy with that arrangement. My guess is that something like the Massachusetts health care mandate, which completely eliminates any meaningful form of competition but which leaves the private insurance companies still standing, appeals to the typical insurance company.

My wife recently sought information on long-term care insurance. What I concluded is that we would be trading one risk for another. Now, we face the risk that long-term care would eat up our savings. If we had insurance, we would face the risk that the insurance company would not pay a claim, because of how it reads the fine print in the contract. I'd rather take the risk I understand--having my savings not accumulate--than the risk I do not understand--getting into a dispute with the insurance company over a large claim.

I think that meaningful innovation in health care is more likely to come from Wal-Mart than from Aetna. But Wal-Mart is likely to be thwarted by the credentials lobbies. If practice regulations and licensing were not a factor, Wal-Mart could rely less on formal schooling and more on internal training for its medical workers. Then you would see real improvements in quality and reductions in cost.


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COMMENTS (13 to date)
Brad Hutchings writes:

You nailed this one Arnold. I remember how the mandatory car insurance law was sold to us in California. The companies, under the purview of state regulation, just ratcheted up the uninsured motorist line until it was ridiculous. The other thing they pushed was no-fault, which caught some traction in Republican circles basically because it was the exact opposite of what Ralph Nader successfully pushed. All the players in this game are rats.

One thing I disagree a little bit with you on is consumer attitudes on insurance. Car and medical insurance aren't just for small things that happen often or large things that are rare. They're like a payment plan for medium things that are bound to happen eventually. The insurance companies have found a couple very sweet spots, in that many people don't have liquid savings that could cover the costs of a car accident until the at-fault party reimburses them or have to cover costs for one where they are at fault.

Additionally, with car insurance, and having dealt with attorneys, I am sure that I'm in a stronger position settling a law suit with my insurance company involved than with hiring a lawyer myself to represent my interests. The arms race of attrition for legal representation keeps this sweet spot really sugary. The whole system is disgusting, but I'm resigned that there's not much improvement possible.

bt writes:

Brilliant analysis Arnold! You have put into simple language what I have felt for some time but could not articulate. Bravo!

mjh writes:
They get car insurance to satisfy the state.
How many people get comprehensive auto insurance vs. liability only? All of the states that I've lived in have only required liability insurance yet most of the people that I know have comprehensive. If this turns out to be the general case, then aren't auto insurance consumers buying insurance w/out state requirements?

There has been a 92 percent increase in the number of complaints about long-term-care insurance from 2001 to 2006.

This statistic is particularly weighty, since it is coming from an impartial source: the National Association of Insurance Commissioners (NAIC).

When considered in light of other reports made by the NAIC, this statistic loses its “shock value.”

In the year, 1999, according to the NAIC LTC Experience Report, the long term care insurance industry incurred over $1.5 Billion dollars in claims.

In the year, 2004, (which is the most recent publicly available data), the long term care insurance industry incurred over $3.3 Billion dollars in claims (according to the same report.)

Over that 6-year period, long term care insurance claims increased by 117%.

If any company had twice as many customers this year over last year, it's only reasonable to conclude that the number of complaints would double as well.

Here we could conclude that a 117% increase in usage, has resulted in a 92% increase in complaints. That would mean that the overall complaint ratio has actually decreased over the past several years.

According to the March, 2007, NY Times article, the leading long term care insurers average one complaint for every 10,000 policyholders. According to that same article, the largest long term care insurer averages only one complaint for every 12,434 policyholders.

According to the Des Moines Register, only 18% of long term care insurance complaints are “claims-related”. That means the leading long term care insurers receive one “claims-related complaint” for every 55,550 policyholders.

Long term care insurance is regulated on both the state and federal level. Every long term care insurance policy has a specific “claims process”, that meets state and federal guidelines.

Each policy also has a simple, step-by-step “appeals process” if the claim is initially declined. If a claim is declined the insurer is required to delineate the reasons for denial. Appealing a denied claim rarely requires an attorney. In most cases, it simply requires a clarification of information provided by your doctor or care provider.

According to Sen. Grassley, 70% of LTCi claims that are initially declined are approved after the “appeals process”. This indicates that there is a lack of understanding in the healthcare industry of what is needed to process a claim for long term care. Most healthcare professionals are accustomed to processing medical insurance claims, not long term care claims. Fortunately, the appeals process works.

The risk of needing 5 years or more of long term care is significantly higher than the risk of having a long term care insurance claim denied.


Scott A. Olson, CLTC
www.LTCInsuranceShopper.com

Tyler may be right, increased competition may generate better insurance companies. But regulatory barriers create economic barriers to entry. PLus, the employer provided fetish incentivizes a certain kind of product.

Its a conversation without much evidence, though. Without being an insider, its impossible to tell what regulatory and market constraints create the insurance products we see. Upon their appointment, state insurance czars create all sorts of stupid mandates to get their name in the paper as fuel for their next campaign.

Some executives buy portable foreign policies and negotiate reimbusements from their various employers. These policies seem more like term life insurance- so long as premiums are paid during the term, they are non-canceleable. Deductibles are high, but coverage is not limited to certain providers, etc. I haven't read the policy, though.

Josh writes:

Arnold, I agree with everything you say, but I think you discount insulation. Perhaps we shouldn't call it "insurance" then, but insulation is a feature that some (most?) people like and would pay money for. To me, this should be included as part of the innovation that Mr. Cowen talks about, not against it.

In as much as regulation is causing people to choose insulation over insurance or to choose too little insurance (and I have no doubt it is on both fronts, anywhere from tax incentives all the way to tort issues), then that's something to worry about. But absent regulatory intervention, the fact that people want to pre-pay for small health care costs (or don't see the value in home or car insurance), that shouldn't say anything negative about them.

Lord writes:

Insurance really requires regulation due to the separation of cost and benefit. The cost is upfront and clear, while the benefit never is. A more innovative approach would be to ban insurance entirely for anything but catastrophic coverage. People could pay, charge it, or providers could compete by arranging payment plans, ex post. Mandating HSAs for people to cover these expenses would be worth considering.

spencer writes:

Wait a minute -- you wrote a half dozen paragraphs on insurance companies and then used that to draw conclusion about medical personell.

I'm sorry -- that is not a logical jump in my book.

Nothing in the first half dozen paragraphs had any relationship to the conclusion you reached in the final paragraph.

What am I missing?

Dr. T writes:

Having recently quit a job at a VA medical center, I definitely distrust government more than insurance companies. Other than that, I completely agree with the essay. It is hard to describe how much physicians hate and distrust insurers (health insurers, workers' compensation, and medical malpractice insurers). Also, because we generally have high earnings, we have to carry huge amounts of auto, home, and personal liability insurance (many doctors have umbrella policies with more than 3 million in liability coverage). The insurers have no difficulty siphoning money from our wallets. However, getting money from the insurers often requires much effort over weeks or months. Few states act against insurers for late payments, so they can stall with impugnity.

Professor Mike writes:

A major part of the problem here is the tax code which drives employees to obtain health insurance from the boss since that part of income is tax-free. Around 88% of employers offer one health plan to workers with virtually firms in the small group market in that boat. How would any market work if the vast majority of customers had one choice?

Jake writes:

In my opinion, the problem is that we expect insurance companies to be like saints, doling out money to us when in need, whereas the truth is they are simply out to make profit like any other businness in other industries. The author mentions that he prefers the risk of not saving enough over not getting his insurance claims. I think that this is what insurance companies are constantly worried about too, i.e. not getting paid enough to cover insurance claims AND earn a profit at the same time. Obviously though, they have the means to tilt the result in favour of themselves.

The truth is, some people win and others lose in the game of insurance, akin to buying lottery. Yet no one seems to complain over that.

Troy Camplin writes:

If you, like most of us, live in a state where auto insurance is mandatory, you shouldn't be surprised at the price increases. The government is enforcing a cartel, meaning prices can and will go up and up. However, if we did not have to have insurance, they would have to compete with people having no insurance. In other words, they would have to convince people that what they provide, at the cost they provide it, is better than paying nothing to have nothing. Further, states where they have mandatory insurance laws have more accidents because everyone understand everyone else has insurance. The same thing happened with mandatory seat belt laws. Politicians pointed to the drop in death rates from accidents, but what they didn't point out was that a decreased death rate can come about from the numbers of deaths remaining the same while the numbers of accidents goes up.

R. Richard Schweitzer writes:

When will serious people start separating insurance, which is the transfer of risk from "healthcare," provision which is the meeting of a need?

When will people begin to understand that the business of insurance is not taking risks, but spreading risks?

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