Xaam:: Private insurance can’t heal all

Insurance companies achieve stability by making healthcare less accessible to the people who need it most.

Indians mostly pay for their healthcare out of pocket. More than 75 per cent on average of all health expenditure is out of pocket, whilst investment in public healthcare is even lower than some countries of Sub-Saharan Africa over the same period (less than 2 per cent on average), despite economic growth rates, averaging 8-10 per cent per annum, and despite the National Rural Health Mission (NRHM).

Between the potential catastrophes of big out-of-pocket costs for healthcare and the current weaknesses of the public healthcare system, the private insurance markets offer what looks like a way out. The idea is tempting: let people choose between insurance companies that offer different packages of treatments, integrate care, and insure people against risks without all the inefficiencies of the government.

Scott L. Greer

Don’t believe the hype. Private, competitive insurance companies add instability, bureaucracy, inequality and regulatory trickery without contributing any value to the healthcare system. Private insurance works if you are unconcerned with inequality and efficiency, or work for an insurance company.

A form of risk-pooling

Unstable? Yes. Insurance is fundamentally a form of risk-pooling. We all pay in, we all get the peace of mind of knowing we have insurance, and the person who gets cancer gets a lot of the benefit. Naturally, if there are only a few of us, our insurance payments will go up if somebody gets cancer. But if there are many of us, our insurance payments won’t go up much at all. Private, competitive insurance companies fragment risk pools. Each company competes for the most lucrative risk pool, which means the richest and healthiest people. The result is a natural state of instability in private insurance markets. Each company tries to avoid what Americans call the “death spiral” of high premiums and sick clients. Insurers solve this with some obvious tools. One is to just discourage sick or prospectively sick people such as smokers from joining. Another is “actuarial” rate-setting in which they try to match insurance premiums with likely expenditures. Actuarial rate setting is a good deal for healthy people who have an unexpected event, but a very bad deal for people in ill health, who might find insurance entirely unaffordable. If you have diabetes and your insurance premiums reflect the costs of insulin and perhaps other related procedures such as kidney failure, and the risks of related ailments such as heart disease, then it’s not an insurance policy. It’s a very expensive prepaid health plan.

Either way, insurance companies achieve stability by making healthcare less accessible to the people who need it most. And even the healthy people who benefit will not continue to benefit, since insurance rates would spike after a diagnosis of cancer or diabetes, or just go up with age.

Private insurance advocates say we can regulate these problems away. We can require insurers to take all comers, regardless of their state of health. We can regulate in detail their profit margins, lists of treatments, payments by patients, and procedures. We can encourage cooperation and subsidise from lucky insurance companies with healthy people to unlucky companies with sick people. But why create a big regulatory framework that will tie everybody up in games and court cases when we can just avoid the whole problem and have a big, simple risk pool?

What about all the other things insurance companies claim to do? Manage care? Integrate care? Encourage people to look after their health? In all cases, the burden of proof should be on the people who make claims that insurers are anything other than a financing device. The evidence that insurance companies improve health or healthcare just isn’t there.

Why? Insurance companies might be powerful relative to their clients, whose rates they can change, but they are weak relative to the healthcare system. Their information is never as good as a doctor’s or a patient’s, and even in the data-obsessed U.S. they know startlingly little about their clients’ real needs. Their ability to deny care without resistance from doctors and their clients (whether patients or employers) is limited because they have neither knowledge nor legitimacy. They certainly have no subtle instruments to make us eat less buttery food or walk to work.

Why entrust them with our health?

So why does anybody entrust health to competitive insurance companies then? In the rich countries, the answer is political. The countries that rely heavily on them — the U.S., the Netherlands, and Switzerland — have very effective regulatory regimes paired with political systems that give a lot of weight to the interests of insurance companies and political parties such as the U.S. Republicans who see no problem with being unfair to the poor and unhealthy. These three countries also are among the worst value health systems in the world, with very high costs for average, or in the U.S. below average, quality. That’s no accident. They start out with a big, costly layer of insurance companies that adds complexity and paperwork and very little value.

The risk is that a simple solution at one time becomes a problem later. It is tempting to use private insurance to increase access to healthcare among the middle classes in a country like India. But the lesson of history is that one generation’s clever solution to a problem is the next generation’s policy problem.

The U.S. tried to rely on private insurance, and the result was a politically empowered industry dedicated to preserving its business at the expense of better risk pooling, equality, more efficiency, and simpler administration. American political elites see the costs to the country of this entrenched industry as tolerable. That doesn’t mean India’s should agree to follow the same path.

Scott L. Greer is Associate Professor of Health Management and Policy at the School of Public Health, University of Michigan.

Keywords: private insurance, insurance companies, National Rural Health Mission, healthcare