Our Health Insurance System: Privatizing Profits & Socializing Risk

The original $700 billion bailout package pushed by Treasury Secretary Henry Paulson and the Bush Administration gave money to Wall Street with no way for taxpayers to recoup their money. Many objected [1] to such a crude giveaway [2] to private interests.

Yet that has been the dynamic in our health insurance system for decades. Private insurers fight to take on the least amount of risk, trying avoiding covering people who might get sick, leaving government with the bill for their care.

Medicare was first enacted because private insurance companies did not want to cover older people who are more likely to need medical care. Medicare is the federal program that provides publicly administered health insurance to people 65 years of age or older and to younger people with severe disabilities, According to "The Evolution of Medicare... From Idea to Law [3]," by Peter A. Corning, found on the web site of the Social Security Administration:

"The 1950 census showed that the aged population had grown from 3 million in 1900 to 12 million in 1950, or from 4 to 8 percent of the total population. Two-thirds of these people had incomes of less than $1,000 annually, and only 1 in 8 had health insurance. Old people were long considered "bad risks" by commercial insurers, and unions had not made much headway in obtaining coverage for retired workers through employer-sponsored plans."

So the government took on the risk of providing automatic, guaranteed health coverage to everyone over the age of 65 when it enacted Medicare in 1965 [4].

Over time, Medicare took on the risk of insuring two other costly sub-populations, whom the private insurance companies did not want to cover. In 1972, Medicare eligibility was extended [5] to people with severe long-term disabilities (those who had received Social Security Disability checks for 24 months) and people with end-stage renal disease (those who require regular, costly dialysis treatment and/or a kidney transplant). In 2000, Medicare eligibility was extended once again [6] to people with amyotrophic lateral sclerosis (ALS).

The irony is that while Medicare has been charged with covering the highest risk individuals, it still manages to keep costs down better [7] than the private insurance companies that cover the less risky working population. And private insurance plans are now willing to cover people with Medicare because the government has been willing to hand them huge subsidies [8] that far exceed the cost of providing care under the original Medicare program.

The same shifting of risk to taxpayers can be seen in the high-risk pools established in many states to cover the "medically uninsurable [9]."

Many people who do not get health benefits through their employers are left to try to buy insurance in the individual insurance market. But insurance companies in the individual insurance market do all they can to avoid covering anyone who might pose a risk to their bottom lines [10]. That includes anyone who has a pre-existing condition [11], such as asthma, diabetes or even hay fever.

So what have state governments done about it? Just six states have forced insurance companies to stop "cherry-picking [12]" and accept anyone who applies. More than 30 states [13] have instead chosen to socialize the risk by creating government-subsidized high-risk pools while letting the private insurance companies keep the profits of insuring the healthier population.

High-risk pools [14] have not provided a workable solution to this backward fractioning of the risk pool because they undermine the very concept of insurance. As "Health Insurance: A Primer [15]," by Bernadette Fernandez of the Congressional Research Service puts it:

"The main objective of insurance is to spread risk across a group of people. This objective is achieved in health insurance when people contribute to a common pool ("risk pool") an amount at least equal to the average expected cost resulting from use of covered services by the group as a whole. In this way, the actual costs of health services used by a few people are spread over the entire group. This is the reason why insuring larger groups is considered less risky—the more persons participating in a risk pool, the less likely that the serious medical experiences of one or a few persons will result in catastrophic financial loss for the entire pool." [Emphasis added.]

High-risk pools offer people a choice of private insurance plans with the state subsidizing a portion of the costly premium. The inevitable consequence has been that high-risk pools suffer from a myriad of problems that keep the medically uninsurable from accessing good, affordable health care. A study [16] published in Health Affairs found that in most state high-risk pools:

"Coverage is expensive, the waiting period for coverage of preexisting conditions is long, and benefits may be limited... most discourage enrollment in the high-risk pool in myriad ways and fail to ensure access to the individual market for persons with health problems."

What we need is a public insurance [17] option available to anyone who wants it, that assumes risk for its members, like Medicare. Giving people the choice of joining a public insurance plan that competes with the private plans is the way to drive competition and accountability from the private insurance market, and reduce overall health care costs. It can also protect people with costly conditions, whom profit-driven insurers will always try to avoid, while maintaining a healthy balance sheet for taxpayers with a large, fair risk pool.