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Attracting the healthy and avoiding the sick

by | 1:30 am, October 29, 2009 | Comments Off

John Goodman makes an excellent point about what happens when government forced insurers to charge the same price to everyone, regardless of their risk: they seek to avoid the sick and attract the healthy:

…think about everything you would like to get from an insurance company. Here are a few items on my list:

  • Has clear and transparent explanation of benefits
  • Is easy to communicate with
  • Answers questions and supplies information clearly and promptly
  • Approves most doctor recommended tests and procedures with few bureaucratic obstacles
  • Corrects billing errors and other mistakes promptly and with minimum hassle

… Now, ask yourself this question: How important are the above features to you? How much extra would you pay for them? If you are healthy and not using any medical services, the answer is probably: not very much. And this is especially so if you know you can switch insurers every 12 months. On the other hand, if you are sick and currently using lots of health services, my list is probably very important to you. You probably would be willing to pay something to obtain those services.

Now in a managed competition world (a health insurance exchange), insurers must charge a community-rated premium and take all comers. In such a world, every insurer is going to try to attract the healthy and avoid the sick. A good strategy is to avoid my wish list (or avoid spending any money on my wish list), get the premium as low as possible and try to attract people who are buying only on price. The opposite strategy — raising the premium in order to provide my wish list of services — would be financially suicidal.

Contrast the artificial competition that takes place in an exchange with real competition in real insurance markets. Remember the phrase “You’re in good hands with Allstate.”

Goodman also points out the hypocrisy of those who advocate a new government plan because it will introduce competition, but oppose real free-market reforms that would increase fair competition.

Read the whole post: Private Sector Socialism, Part II.

(Via EconLog)

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