Should We Have Mandatory Group Health Insurance or Individual?
The Obama administration’s pledge to reform health care has set in motion one of the most important debates affecting small businesses in recent memory. Next to tax reform, the cost of health care and health insurance ranks highest on surveys of small business owners’ concerns.
As the debate unfolds in the coming months, small business owners will need to get up to speed on the current system’s problems. A recent hearing before the House Committee on Energy and Commerce’s subcommittee on Health provided some eye-opening testimony on the current system’s problems and why mandatory, universal health insurance should be a cornerstone of reform efforts.
"Insurance, in its simplest form, works by pooling risks: many pay a premium up front, and then those who face a bad outcome (getting sick, being in a car accident, having their home burn down) get paid out of those collected premiums," explained Katherine Baicker, a professor of health economics at Harvard’s School of Public Health.
"Uncertainty about when we may fall sick and need more health care is the reason that we purchase insurance, not just because health care is expensive," Baicker explained. "It is impossible to ‘insure’ against an adverse event that has already happened, for there is no longer any uncertainty. Try purchasing insurance to cover your recent destruction of your neighbor’s Porsche; the premium will be the cost of a new Porsche. You wouldn’t need car insurance, you’d need a car."
The same logic explains why insurance companies attempt to weed out or deny coverage to those who are already sick, or have so-called pre-existing conditions. "The reality of the health insurance market is that a carrier’s success depends on its ability to minimize its risk. This means that each company is better off if it only insures people who will not need medical care. This provides incentives to cherry-pick healthy people, and limit the number of unhealthy people covered," Mila Kofman, Maine’s superintendent of insurance, told the committee.
"Since an estimated 20 percent of people account for 80 percent of health care spending, avoiding even a small number of high-cost individuals can substantially reduce an insurer’s losses," Kofman noted. "While the desire of insurance companies to reduce risk is rational from a free market perspective, it creates a market which many Americans cannot access. No one competes to insure sick people."
Insurance works because not everyone will fall sick at the same time, so it is possible to make payments to those who do fall sick even though their care costs more than their premium, by tapping the pooled insurance premiums. Thus, the system is undermined by the uninsured, both healthy and unhealthy.
For uninsured or under-insured individuals who are sick, uncertainty is no longer a factor. They need health care -- not health insurance -- but lack the money to pay for it, because they lose the benefit of tapping a pool of insurance premiums.
By the same token, when healthy individuals choose to go uninsured, the model breaks down as well, because they are limiting the pool of reserves available for those who are sick. If they wait until they are sick to get insurance, they defeat the purpose of insurance, too. That’s why Massachusetts, one of the states leading health care reform efforts, requires universal participation in its health program.
Today, two years after enacting sweeping health care reform, 97.4 percent of Massachusetts’ residents have health insurance coverage, compared with 85 percent on average nationally, said Jon Kingsdale, executive director of the state’s Commonwealth Health Insurance Connector Authority.
"As a result, financial barriers to obtaining care have fallen markedly, Kingsdale said. In 2007, the first full year of reform, the number of people in Massachusetts who deferred needed health care because of high costs declined to between one-half and one-third of the national average. "And it is reasonable to expect that financial barriers continued to decline in the second year of reform, as the number of newly enrolled continued to grow," he added.
Although it’s been widely reported that 47 million Americans have no health coverage, millions more are underinsured, defined as families that have out-of-pocket medical spending amounting to 10 percent or more of their income. According to one study by the Commonwealth Fund, 25 million adults who had health coverage were underinsured in 2007, a 60 percent increase from the 15.6 million Americans who were underinsured in 2003. In short they are living on the precipice, one serious medical emergency away from financial disaster.
Indeed, nearly half of all bankruptcies in the United States are related, at least in part, to health care expenses. And, of those facing medical bankruptcies, roughly three-quarters had health insurance at the onset of their bankrupting illness, according to Judy Feder, senior fellow at the Center for American Progress Action Fund, a Washington, D.C.-based think tank.
Seven out of 10 respondents in a recent survey of borrowers in foreclosure reported unmanageable medical bills as an underlying cause of their foreclosure, or had experienced other medical disruptions to their income, such as lost work due to illness or using home equity to pay medical bills, Feder said.
Under the current system, the widespread lack of adequate health coverage is estimated to cost our economy $60 billion to $130 billion annually. One way or another, taxpayers pick up that cost, whether it’s through tax write-offs by hospitals for unreimbursed care, federal programs like Medicaid, or through the worst possible outcome -- medical related bankruptcies and foreclosures
That’s why reform needs to begin with mandatory, universal health insurance coverage, ideally offered through private carriers with some sort of government safety net. It’s critical to getting a handle on both direct and indirect health care costs and bringing the level of care up to the standards of other developed nations.
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