Health Insurance is an Oxymoron!

Let’s step back from the health reform debate and look at “health insurance.”  IT’S NOT INSURANCE!!!

Insurance is “the equitable transfer of the risk of a loss, from one entity to another, in exchange for a premium, and can be thought of as a guaranteed and known small loss to prevent a large, possibly devastating loss.”  Insurance “indemnifies,” or makes whole, the policyholder after a large loss in excess of some deductible.

Our health insurers don’t indemnify.  Wednesday, President Obama poignantly described his mother’s anguish on her death bed that her insurance company wouldn’t pay.  We all know of similar stories.  Health insurers avoid covering the poor, the elderly, those in poor health, and the unemployed – some 47 million at last count out of 305 million Americans.  They only cover the healthy and charge exorbitantly for that.  They don’t negotiate lower prices on our behalf from hospitals, pharmaceutical companies, and other health providers.  They limit our choices of doctors, tests, treatment, and access to new medical technology, worsening our health outcomes. They are driving many doctors to leave the profession just when we need them most, and those that remain are overspecialized.  Our health insurers have a lot of power over our political leaders and regulators as Business Week wrote recently, and, in the middle of the worst recession since the Depression, our health insurers are one of the few industries to remain profitable, although not the “record profits” cited recently by President Obama.  If you describe such an industry, without naming it, to any economist, the first word that would pop to mind is MONOPOLY.

In a 2004 Health Affairs article, Professor James C. Robinson examined U.S. health insurance and found that in 36 states three or fewer insurers accounted for 65 percent of the commercial health insurance market in 2003.  The Department of Justice and the Federal Trade Commission use the Herfindahl-Hirschman Index (HHI) of market concentration to decide whether to block mergers and acquisitions.  Robinson computed the HHIs of health insurers and found that 34 states had HHIs greater than 1800, the level of heavy concentration and antitrust enforcement kicks in under federal guidelines.  Robinson also found that from 2000 to 2003, when U.S. medical costs rose faster than inflation, the revenues of private insurers increased even more rapidly.  So they were able to pass along those rapidly rising costs to consumers and increase their profits at the same time, prima facie evidence of monopoly power.  The annual American Medical Association survey of private health insurance focuses on 314 major metropolitan areas and last month found that 94% were controlled by one or two companies.

The Urban Institute argues that a public insurance option, as proposed by President Obama, would not drive private insurers out of the market, but it would break their stranglehold on consumers and would expand coverage to those without it.

The problem for President Obama and Congress is to generate sufficient public understanding of what health insurance monopolists are doing to us to pass legislative reforms.  Recent town hall shouting matches don’t give much evidence that anyone is listening.

One thing about economic policy, when the world spins out of control, as it is with runaway health care costs, eventually people notice and force their political leaders to do something else.  I hope America wakes up soon to the price we’re paying for ceding monopoly control of health care to insurance monopolies.  We broke up Standard Oil in 1911.  Maybe we can break up WellPoint, UnitedHealth Group, Aetna, and Cigna in 2011.

For an excellent concise history of how health insurance arose in the United States, see John Goodman’s article in the Library of Economics and Liberty.

Wikipedia’s article on health insurance is quite informative and offers a very handy comparison of health systems in major countries around the world.

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