Denying Claims

Last updated on: November 20, 2007 at 7:45 pm by Morning's Minion

Denying Claims 2007-11-20T19:45:36-05:00 Morning's Minion

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Gerald from the Not-So-Closed Cafeteria is having problems with the American health care system. Specifically, his insurance company is denying him dental coverage because it is a pre-existing condition. Welcome, Gerald, to the reality of American health care! Maybe now he will take the claims in Sicko seriously where employees of insurance companies explain how they are rewarded based on how many claims they can get away with denying. He seems to be well on the way to an awakening, noting that the insurance companies are “incompetent and inefficient”.

But not quite. In the very next breath, he links to an essay by Ramesh Ponnuru defending the treatment of health care in terms of actuarial rather than social insurance. In Ponnuru’s view, in line with the Republican consensus, the problem is over-consumption. Because you do not bear enough of the cost yourself, you will not ration health care appropriately, a problem Ponnuru feels is exacerbated by employer-based insurance. So if you give people tax cuts, they can pay for their own health care, which will be cheaper. Problem solved.

But this is a fundamentally flawed mode of reasoning. For a start, the assumption that consuming too much health care is the root of the problem seems more than a little bizarre with 47 million uninsured and the fact that health care is rationed extensively by cost in the US (survey evidence suggests that more than half of sick Americans stayed away from the doctor on health grounds over the past couple of years). It basically misses the core market failure in the health care domain.

Let’s talk about pre-existing conditions for a minute. We know that three Republican presidential nominees– John McCain, Rudy Giuliani, and Fred Thompson– are cancer survivors. And all three support purely private sector solutions to the health care crisis. But, as Ricardo Alonso-Zaldivar points out, under the plans they have put forward, cancer survivors like themselves could not be sure of getting treatment, especially if they were not covered by a government- or employment-based plan. Indeed, experts claim that cancer survivors are very likely to be denied insurance, unless the state has very strong consumer protection laws. In a survey of 22 insurance companies concerning whether they would cover a hypothetical breast cancer survivor five years after treatment, 11 said they would deny coverage outright, 1 said they would double the premium, 1 said it would exclude any further cancer treatment, and 3 did not respond. Only 6 said they would provide insurance at normal premia.

Here’s the rub: you cannot simply move to a system whereby people purchase their own insurance and expect the market to work. This is a clear case of market failure (adverse selection), as it is in the interest of the insurance companies to deny claims and coverage. Remember, insurance companies make money by screening people and weeding out the greatest risks. Americans’ health care choices remain at the whim of faceless insurance company bureaucrats. The insurance companies spend $50 billion a year doing this. Just look at the comparisons: Medicare devotes about 2 percent of its resources to overhead, compared with about 20 percent in the private insurance sector.

If you want to go the private route instead of single payer, then you must be able to tell insurers who to cover and how much to charge them– which goes against the free market ideology. Ultimately, the only solution is a form of social insurance, underpinned by a large risk pool whereby the young and the healthy subsidize the old and the ill, on the understanding that they themselves will be taken care of in their time of need. It’s efficient, as risk is spread among a large group. It’s also equitable and accords well with the Catholic principle of solidarity, of a community that looks after its own. The Republican solution instead focuses on the actuarial principle: you pay based on your own individual risk (much like car insurance). This relies on an individualist anthropology, and views individuals as personally responsible for their lot in life (no wonder it’s so popular among those most influenced by Calvinism).

The best form of social insurance is a single payer model, with one large risk pool, and one insurer (see here for arguments in favor). But there are other ways. For example, Clinton’s approach would combine an individual mandate (a requirement to purchase insurance) with a ban on insurance companies discriminating based on condition– they will be forced to charge based on average member of the risk pool. And how do you put together the risk pool in such a model? Clinton’s idea is to create a purchasing pool maintained by the government, so that people can select plans much as those in current risk pools do today. And if you are still too poor after all of this, you would qualify for financial assistance. There is another nice feature of the Clinton plan: one of the options available to people will be a government-run plan, using the basic Medicare model. So people will be able to choose between the private and public sector– and may the best man win!

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