Saturday, February 16, 2008

So what is the social and economic value added by private health insurance firms?

Any fact-based and rational discussion of America's health insurance "system" will get stuck on the question "What do private health insurance companies do to add value to the health delivery system? Here is a brief discussion from Harold Pollack :
Why do we have this industry again? I understand that history and politics make this industry hard to replace, but what social value does it really create? I don't ask this question about the oil industry, the pharmaceutical industry, or computer software giants. Whatever the misdeeds of particular firms and the pressing needs for public regulation in these latter industries, we understand why it's good to have firms competing to find new energy sources, new drugs, new operating systems. I don't believe private insurers are less ethical, as a whole, than soft drink manufacturers or manufacturers of plush carpet. I just can't explain what we are getting here.

In the case of private health insurance, firms have some expertise administering claims and perhaps designing wellness programs. Yet to the extent that their business relies upon avoiding high-cost patients their activities are social wasteful. In so many ways, their incentives are poorly aligned with the public good.

Even if we could correct these misplaced incentives, it seems as though anything beneficial insurers can do could be accomplished better and cheaper by government. Private insurers are too fragmented to promote needed efficiencies such as electronic medical records. A Chicago provider dealing with 20 payers is hardly swayed by the pay-for-performance standard of any one of them. In general, private payers are too fragmented to exert powerful market discipline on providers. The embarrassing history of Medicare managed care provides one of many embarrassments for those who assert the inherent superiority of the private sector.

Private insurers do have two advantages: They are more nimble than government is. More important, they can take the political heat for saying "no" when patients want some desirable but unjustified service, drug, or therapy. This is hard for government to do, and "no" should sometimes be said even when this is painful.

But maybe we have this backwards. It seems to me that even when insurers are justified in saying no--as Cigna might have been in the liver transplant case promoted by John Edwards, and as insurers sometimes are regarding potentially useless or harmful experimental therapies--profit-making firms lack the legitimacy to deny anyone a desperately wanted treatment that provides some plausible benefit. Denying important treatments is an inherently political question. A transparent process, by financially disinterested parties, is required to secure public legitimacy.

If this is so, private insurers themselves have a strong stake in government assuming a larger role in scrutinizing costly therapies. And they have a strong stake in some larger regulatory structure to constrain the more predatory aspects of current market practice.

I write this as (by HuffPo standards) a politically moderate free-trade policy wonk who instinctively favors market solutions for most economic concerns. If people like me feel this way--and many of us do--the industry should be worried.
We know that any reform of the health care system will immediately face insurance company financed "Harry and Louise" ads to try to scare voters out of rationally considering the problems insurance companies cause and their inability to add anything positive to the health care delivery system. But really, are physicians and nurses so brain washed that they are willing to continue to waste thousands of man-hours trying to get insurance companies to do things that are rational and provide decent patient care?

It is fear of government bureaucracy? Why is rational government bureaucracy any less efficient than the existing multiple bureaucracies of thousands of different health insurers? (Answer - a single government-run bureaucracy is clearly capable of being much more efficient than what we have now.) Given that the inherent difference in the source of a bureaucracy is negligible, then the clear cost savings of a single, rational bureaucratic system with a decent appeals system and media oversight is obviously preferable to the current inefficient and corruption-ridden private enterprise system. And health care providers will have greater ability to influence a government-run single payer health care financing system than they do to influence powerful insurance executives who answer to no one except their investors.

I think America is ready for realistic health insurance reform. I do wonder if Barack Obama understands why previous efforts have failed and what he has to do to avoid those same traps if and when he is elected President. Hillary is clearly the preferred candidate if the intent is to reform health care. She understands the need and understands many of the pitfalls that Bill Clinton was unable to navigate around in 1993.

This is a subject that needs to be continually readdressed. America can't afford the gold-plated system that fails one in six Americans when they need it.

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