I was just listening to this week’s This American Life– part one of a two part series on understanding the current debate over health care. I had an epiphany about insurance companies and the need for a public option. Intuitively, I was already aware of this, but the argument only just seemed to crystallize:
Insurance companies stand between health care providers and health care consumers. We (or our employers) pay an insurance company to pay our doctor’s bills. We allow them to retain a small amount of our premium as profit earned for serving their function— a function we must find valuable, otherwise we wouldn’t pay them.
One of those functions is to spread risk among policy holders so that at any given time, more money comes in than goes out. We can’t do that on our own, so we pay someone else to do that for us. This makes sense.
The other thing we pay insurance companies to do is to keep costs down. An individual insurance company negotiates service fees with providers. If one insurance company can secure lower costs of service, they can require lower premiums and therefore attract more customers and make more profit. They have an incentive, individually, to keep costs down.
However, systemically, insurer profits are generally 3-5% of amount paid out. If health care costs rise across the country, the amount of payout increase and the amount of profit along with it. If health care costs fall across the country, the profits fall with them.
So, while one insurance company may have a profit motive to reduce their cost of care compared to another insurance company, there is actually a negative incentive to reduce the cost of care in general.
In this case, the profit motive is working against keeping industry-wide costs down and we see the effects in the out of control rate of increase of health care costs. It’s projected that by 2009, the average American family will spend half their income on health care. Insurance companies are clearly not earning their profit in this task.
A public-option health insurance plan with broad access (not just for the currently-uninsured) would have the benefit of changing this balance. It would be concerned by mandate and national scale with reducing not just the local cost of care, but the global cost of care. This provides a competition and a profit motive to other insurance companies to work to reduce their cost of care relative to this public option and thereby, inadvertently, work to reduce the global cost of care.
Listen to This American Life: More is Less.
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