Republican Representative Eric Cantor said today that Republicans would keep two provisions of Obamacare: permitting children to stay on their parents' insurance plans until age 26 and prohibiting insurance companies from refusing coverage to patients with preexisting conditions. Cantor doesn't understand basic economics: forcing companies to offer unprofitable products destroys market efficiency and will only hurt consumers and health care providers in the long run. In fact, this idea is analogous to pressuring banks to issue high risk mortgages. How's that working out?
The following essay was originally posted on March 23, 2010 as a Facebook "note."
The preexisting condition exclusion is necessary to make health insurance work the way it works best. That doesn't mean that people with preexisting conditions should be left with no options. It just means that solutions for those with preexisting conditions should be provided separately from commercial health insurance. I'll explain in a moment.
Insurance is a great idea that we have corrupted. The original concept was that you pay a low recurring fee for protection against a relatively unlikely catastrophe. For example, homeowner's insurance will help you replace your home in the unlikely event that it is destroyed in a fire. By getting many people to buy this form of protection, insurance companies can give homeowners a sense of security, make big payouts to clients whose homes burn down, and still make a profit. Everybody wins.
Somewhere along the line we transformed health insurance into a magical third-party payer. Instead of paying a small recurring fee for protection from an unexpected major illness, we pay a large recurring fee and expect the insurance company, in exchange, to pay out more in benefits than it takes in. This reminds me of people who have tried to get me to work for them for free in exchange for "exposure." All people--including the owners and employees of insurance companies--deserve fair compensation for their work.
If insurance companies are required to provide immediate comprehensive coverage to everyone regardless of preexisting condition, then what motivation does the healthy consumer have to buy insurance? There is none. They can wait until they get sick, buy insurance, and then demand that the insurance company pay increasingly exorbitant bills.
There is an obvious way around this problem: force everyone to buy insurance. Unfortunately, not everyone can afford today's health insurance premiums, and forcing insurance companies to accept everyone regardless of risk drives up premiums for everyone. Couple that with limiting insurance companies' ability to raise premiums, and you have a formula for driving health insurance companies out of business.
It's no secret that some people want the federal government to become the sole insurance company--the "single payer" solution. I can only appeal to anyone who sees virtue in being somewhat skeptical to consider these points: a single provider insulated from competition will tend to be inefficient and ineffective; the easiest way for government to control costs is to limit access to expensive products and services; and an industry run by salaried officials is susceptible to favoritism and even corruption.
To fix the system, we need to accurately identify what's broken. Unfortunately, that is a hotly disputed--and expansive--topic. I'll just say that I believe the problems boil down to two primary causes. First, whether you like or don't like programs such as Medicare and Medicaid, such programs increase prices overall by adding bureaucracy and payment delays, and by limiting and denying benefits for specific services. Second, we have removed almost all of the direct consumer-provider interaction that forces providers to offer competitive prices. It's not just the politicians' fault--we have all acquiesced with this state of affairs.
Many states already have health insurance pools for people who cannot get commercial insurance at standard rates. When these plans were first conceived, state officials feared they would be overwhelmed with applicants for what is, in effect, subsidized health insurance. I don't claim to be an expert on this but the evidence I have seen suggests that many if not most of these plans have been under-subscribed.
The solution--if it's not too late--is to let private insurers and private health care providers do what they do best, and let government focus on those who can't get private insurance. For example, government could provide subsidized health insurance for people with genetic conditions--people who are born with "preexisting" conditions; government could step in to pay the costs of patients who incur extraordinary costs, such as children requiring liver transplants; and government could encourage taxpayers to establish health savings accounts so that more people can purchase lower cost (higher deductible) insurance plans. These steps would allow insurance companies to concentrate on providing affordable insurance to the maximum number of people, so that government can concentrate on making sure no one suffers because they can't pay.