Many years ago I had a chance to do some work on health care policy and turned it down because it looked too hard.Â I’ve never regretted the decision, but never acquired any special expertise.
Watching the current debate, I’m a little mystified that most of the discussion of insurance companies has focused on underwriting, especially avoiding people likely to get sick, and efforts to not pay claims on existing policies.Â I’ve never been impressed with the industry’s underwriting smarts, especially when I learned that about a third of residential fires are caused by cigarettes and never saw a non-smoker discount offered in a homeowner’s policy, but trying to sell policies at average loss ratio prices to people who will have less-than-average losses certainly makes sense (for them) and so does stiffing existing customers.
What we don’t seem to talk about, to understand the incentives of the parties to this issue, is the centrality of our gross consumption of care to the size of the industry as a whole.Â In the long run, with competition, any given loss ratio, and reasonable underwriting, the profits of the health insurance industry are their premiums times (1 – loss ratio), and investment interest on their reserves, which is directly proportional to those reserves and in turn to their claims payments.Â In the long run,then,Â the size of the insurance business is the size of the medical business.Â Your fire insurance company wants you not to have a fire and will help you avoid one, but their lights and their competitors’ would be out forever if we stopped having fires. There used to be a business insuring against mule kick injuries; now not so much.
Reducing the cost of the health care system is an arrow aimed at the heart of the health insurance industry, not just the health care providers; really bending the curve is pouring red ink all over their financials.