Why You're All Wrong About the Insurance Debate!

I’ve always kept this blog as something of a geek-only site, but the current situation with the insurance overhaul is driving me nuts. The government is being accused of death panels, care rationing, raising our taxes, and more – even though these are EXACTLY the same things our private insurers are ALREADY DOING! So I’m taking my own little stand and sharing my thoughts with both of my readers.

First, the basics:

Insurance companies are funded by member premiums and investments that increase the value of the banked premium fees. (And private investment, but let’s leave that out for now) The insurance company is profitable provided that it earns more money from these two revenue streams than it has to pay out to pay back medical providers, and cover its overhead costs.

There are three major points of risk here:

Medical cost increases: If the cost of health care rises too much, the insurance company’s profit will decline accordingly.

Unexpectedly high pay-outs: If the overall payout for member medical bills is higher than expected, it will eat into the insurance company’s cash pool, and force them to cash out longer term investments, which can get expensive fast.

Investment Losses: Insurance companies rely HEAVILY on the revenue they earn from their various investments. If those investments sour, it’s a short ride to bankruptcy.

Are we good on the basics, here? Okay, now let’s look at how an insurance company manages those risks, and how those would affect the proposed public insurance plan, and see which has the most advantages:

Aggregated risk: By taking on lots of subscribers, insurance companies aggregate risk and create a hedge against extraordinary payouts. While a few subscribers may have large medical bills that exceed what they’ve paid in, other subscribers subsidize this care through their own premiums, since they pay in more than the insurer has to pay out. The public option would work in the same way, with members paying the premiums. (And, it’s worthwhile to note that this is the same way taxes, social security, medicare, medicaid, pension plans and many other public and private institutions are run – there’s nothing new here).

WINNER: To-be-determined. Whichever insurerer has the most members will have the greatest degree of risk aggregation. If the Republicans are right, and the public plan ends up taking over the insurance business, then the public plan will be the big winner.

Negotiated Pricing: Insurance companies negotiate fixed rates for various medical procedures. This is why your “out of network” coverage is costlier than “in network” coverage among physicians that have agreed to these pricing agreements. The government already does this in its medicare and medicaid programs, and would continue to do so with a public plan. Doctors, as always, will be free to not join a given insurance network, probably including the public plan (they can not join medicaid/care if they wish), so there’s no real strong-arm tactics there.


Rationing care: Insurance companies often place restrictions on what care is covered for any particular subscriber. Some plans, for example, don’t cover maternity care, others require physicians to only use certain procedures, even if there are comparable treatments available, and many (most?) plans restrict subscribers to generic drugs. These restrictions sometimes conflict with the physicians’ recommendations, and we may infer from this that it conflicts with the patients’ best interests. There is no reason to believe that the public option will be any different in this regard.


Death panels: Okay, it’s an absurd term, but I couldn’t resist. Insurance companies avoid paying out excessive amounts by dropping subscribers with or without cause, and/or refusing to cover new subscribers who have pre-existing conditions. And, as above, they may also refuse necessary treatments to extend or save the lives of gravely ill/injured subscribers. The public plan would not be permitted to drop a subscriber nor deny coverage due to pre-existing conditions or long-term care needs.

WINNER: Public option, as it will provide care indiscriminately.

Higher premiums: Charge more at the door, and you have more money for paying out, investing, and giving bonuses to the CEO. (Cheap shot, sorry) Since the public plan won’t have the option of denying care to really sick people, it may actually end up costing MORE than an equivalent private plan. On the other hand, since it’s not-for-profit and won’t be paying equivalent salaries or shareholder dividends, it will have a higher share of the premiums to cover costs. Of course, the more you pay, the better coverage you get, so we really need to know the structure of all the involved plans before we can judge.

WINNER: To be determined. Quite possibly a tie.

Higher taxes: Two things, here: First, higher premiums may as well be higher taxes, it’s money out of your pocket either way. You’re already paying higher premiums because your insurance company has to pay the physician’s higher prices since the physician is providing service to uninsured people who will never pay their bills. (See how many people at the ER have less-than-emergency conditions, but are still get $100 tubes of Neosporin). The same will be true of the public plan.

Taxes come in directly if the public plan can’t cover its tab, then we might have to shore it up with tax money – which may be drawn from other programs, rather than a direct hit at your pocketbook.

Of course, we ALREADY subsidize our private insurance through taxes, so what does it matter? Not only do we pay interest (funded with taxes – yay!) on the treasury bonds insurers invest in, but you may have noticed that we recently paid out a pretty hefty sum of money to the banks holding these investments and a huge portion of that money went directly to insurance companies. AIG got nearly $200 BILLION from us taxpayers!!! As for the public plan, well, it’s supposed to be self-funding, but it will also invest money (by lending government bonds, among other things) to fund itself, so it will be victim to the same market forces.

WINNER: Let’s call it a tie. What’s a few hundred billion dollars between friends?

Consumer choice: Yep, insurance companies benefit GREATLY from consumer choice! How? Well, if you have employer-paid insurance, you get to choose WHATEVER PLAN YOUR EMPLOYER OFFERS! Hooray! Want to pick a physician? You get to pick WHICHEVER PHYSICIAN YOUR INSURANCE COMPANY PICKS FOR YOU! Hooray! Looking for private insurance as an individual? Congratulations, you can ONLY receive highly restricted, minimal coverage plans, unless you shit solid gold bricks and eat platinum covered Wheaties for breakfast every morning. That’s right, REGULAR MARKET FORCES DO NOT APPLY IN THE INSURANCE INDUSTRY! Well, at least not in the sense of consumer choice. Consumers have, effectively, NO CHOICE WHATSOEVER.

The public plan, on the other hand, will publicize everything it does and be answerable directly to The People and their government representatives. It may be just as restrictive and shitty as any other plan, and it might only be a plan of last resort for people who can’t get anything better. So I wouldn’t be too worried that it’ll create anything approaching a free and competitive market.

WINNER: I’d say the public plan is the winner, but there’s no reason to believe that it will be a good plan, or that it won’t screw its subscribers just as much as the private plans.

In conclusion, as consumers, we’re fucked.

Insurance is a very high stakes game of roulette for the companies involved, and even higher stakes for individuals. Everybody’s hoping that they pay out less than they get in return.

Insurance companies have the advantage in these games, with multiple sources of income and the ability to aggregate risk and reward across a huge scale. You, on the other hand, have your own health and money to gamble with. The odds are that you’re better off paying out of pocket, because MOST insurance subscribers pay more than they get in return – that’s how the insurance companies stay in business, after all. But then, statistics only apply to the population, not to the individual. You wouldn’t dare aggregate your risk by letting your daughter die of lukemia so that you can afford to pay for your wife’s heart surgery.

When I got laid off many months ago, I investigated private insurance, and learned that it was out of the question to cover me, due to pre-existing conditions, and my family’s plans to have another child would need to be put on hold, because I couldn’t get maternity coverage at ANY price. I’m, thankfully, employed and covered by my employer’s insurance plan. But those premiums just went up by more than $500/month, and I have no control over whether they’ll go higher.

Did I mention that I’m also paying to cover the losses our various insurance companies took? Yeah, they did get into the pick-who-gets-to-live question, and our lovely government has a public option to insure the insurers and the companies that hold their investments. Apparently they’re Too Big to Fail, even if I’m Too Little to Insure on my own dime. So I’m really looking forward to paying taxes on all that bailout money and watching inflation soar over the rest of my lifetime.

Is the public plan a panacea? Not hardly. Fully socialized insurance would provide some benefit in greater risk aggregation, and the removal of the profit motive. But, then, it may also just go bankrupt, as Canada’s public health system nearly did, or provide terrible coverage. At least in a competitive market I have a choice, right?

No, I don’t. Neither do you.

I probably got a lot of this wrong, so please sound off in the comments and let me know why I’m misguided, stupid, or a communist.

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Written on October 12, 2009