One of the most confusing aspects of health care reform is the idea that competition amongst private insurers should lead to lower prices, more insured people, and more coverage since these are all things that would presumably attract new customers and retain existing customers - a real winner - on paper. I am quite sure that it stumps people when they hear someone arguing this point (it used to stump me), and in fact I am convinced that more than a few accept it as actually being true, although they may still smell a rat.
To help us all understand at a little deeper level and in a way which will stick in our memory why this is not the case, and can never be the case, I invite you to journey with me on a little thought experiment.
Imagine you are a good capitalist, an entrepreneur, and you are going into business.
Now imagine that you are in a business selling a product that everybody absolutely has to have. What could be better? You of course have to compete against other sellers, all trying to make a profit.
But this product is a little unusual in that the more your clients actually use it, the less money you make. How do you go about making money in this situation?
A few of your strategies for making money might be:
- spend money on marketing to businesses and the public (and independent agents) to try to differentiate yourself from the other sellers
- filter out potential clients who seem likely to actually use your product
- raise the cost of the product for those who actually do use it to either ensure a profit, or just tell them outright that it's no longer available to them
- dissuade clients from actually using your product and offset your costs when they do by passing on as much of the cost for using the product as possible
Can you think of others?
How about enrolling whole groups of people to use your product through massive marketing efforts, and then raising the costs for the whole group when your profits are threatened (like some in the group start using a lot of the product)?
How about going back and reviewing applications for eligibility to use the product after the client starts actually using the product and finding an "error" or "omission", thereby removing your obligation to the client (retroactively, if possible)?
There are more, but that's enough for now. I think you get the idea.
This is how our current private insurance system works. It is quickly obvious that all of these tactics lead to
less coverage
more expensive coverage
fewer insured (or more with inadequate insurance)
What happened? Why isn't the same thing true in the auto insurance industry, or home insurance, or renter's insurance, or any other type of insurance you can think of?
Let's take auto insurance. In this type of insurance the claims are actually underwritten, that is, the insurer goes to some pains to see how much of a risk each individual represents and charges them accordingly - clearly an unacceptable practice for health insurance unless we are willing to penalize those with needs for our personal advantage (which, frankly, some people find acceptable). And clearly impossible to do accurately (unless it's an extremely large group, say, everybody) since any one individual's needs can change in an instant. And a car is just a car, after all (you'll notice that all auto insurance has a clear limit on medical liability). It should also be noted that underwriting is creeping more and more into the private health insurance system, especially for individual subscribers.
Underwriting is used in most other types of insurance which all have to do with either a limited payout (life insurance) or a physical asset (a house, some personal goods, etc.) with a clearly defined maximum value. All of these can be underwritten to a degree that has the potential to make the insurance on them profitable to sell most of the time.
I hope you find this helpful the next time you find yourself confused about why competition actually leads to undesirable outcomes in the private health insurance industry. I realize that it's rather simplified (this was purposeful); there are reasons that are much more complex but they are also unique to this industry and involve the delivery end of the "product", that is, the health care providers. Maybe fodder for a future entry...