The Nation's Pulse

Health Insurance Deregulation

Auto insurance companies compete for individual customers. Why don't health insurance companies?

By 7.9.07

Send to Kindle

What is profit? Karl Marx called it "surplus value," while socialist George Bernard Shaw dismissed it as "overcharge." Of course, the failure of socialist economies around the world showed the vital role that profit plays in the proper functioning of an economy.

Unfortunately, the political left still clings to the belief that profit is superfluous when speaking about health care. Indeed, some take it a step further, arguing that profit in the health care system is harmful. A letter-to-the-editor at The American Spectator claimed that in the U.S., "the profit motive drives the health industry to spend more money for less goods and services." Physicians for a National Health Plan states, "Private insurers necessarily waste health dollars on things that have nothing to do with care: overhead, underwriting, billing, sales and marketing departments as well as huge profits and exorbitant executive pay." And, of course, Michael Moore says, "The problem isn't just [the insurance companies], or the Hospital Corporation and the Frist family -- it's the system! They can't make a profit unless they deny care! Unless they deny claims!"

By now it is no secret that Moore's new documentary Sicko shows health insurance companies finding all sorts of insidious ways to avoid paying for treatment. On the surface, it makes sense to blame this on the profit motive. Paying for sick people is often expensive and finding ways to deny them care is good for the bottom line. The health insurance company that utilizes the most innovative methods to avoid paying for care will be rewarded with the highest profit margin.

Yet such thinking overlooks a rather obvious question: How do health insurance companies attract customers if they treat some of their customers so badly? A company can't make any profit if no one is willing to buy its product or service. Sure, a company may be able to make a profit for a while by fooling customers into buying its shoddy products or services. But eventually customers wise up. Word that the company is bad spreads, and customers take their business elsewhere. If the market for health insurance worked properly, then companies that deny paying for care on the flimsiest of reasons would risk getting a bad reputation and seeing their customers go to companies that do not engage in such practices. So why doesn't this happen?

The answer is that thanks to government policy the health insurance market doesn't work properly. One problem is the federal tax code. Individuals get a tax break for purchasing health insurance, but only if they purchase it through their employer. This has led to our employer-based health insurance system in which individuals do not purchase their health insurance directly, instead leaving that decision to their employer. As a result, insurance companies don't have to find ways to appeal to many millions of employees. Rather, they only have to appeal to employers, a much smaller customer base, and one that tends to be concerned largely with the cost of insurance, not whether an insurance company denies care. A health insurance market with millions of individual customers would have a significant percentage of customers who were concerned with whether health insurance companies unduly denied care. This would keep health insurance companies on their toes, lest they get the kind of reputation that results in loss of business.

The tax code also makes it difficult if not impossible for health insurance companies to cultivate customer loyalty. With the combination of an employer-based health insurance system and millions of employees that change jobs frequently, insurance companies often do not know who their customers will be from one month to the next. For example, I have had three different employers in the last seven years, each with a different health insurance plan. By contrast, I have had the same auto insurance company for the last twelve years, and I suspect that, like me, most people keep their car insurance companies longer than they do their health insurance. The difference is that individuals purchase auto insurance directly. The result is that auto insurance companies have to keep their customers happy by keeping prices down and coming up with new policies, such as GEICO's 24-hour claim service or All-State's accident forgiveness. If health insurance companies had to be concerned about developing customer loyalty the way auto insurance companies do, they would likely develop products such as long-term insurance contracts or guaranteed renewable policies that would ease customers' anxieties about losing their insurance due to incurring big medical expenses.

Another problem is the various regulations that drive up the price of health insurance. Especially costly are all the benefit mandates -- regulations requiring insurance policies to cover a particular illness or treatment -- that state governments impose. There are now more than 1,900 such mandates (PDF), and they can add up to 30% to the cost of an insurance policy. As health insurance becomes more expensive, people who are younger and healthier are more likely to forego insurance. About 40% of the "45 million uninsured" are between the ages of 18-34. The young and healthy are, of course, much less likely to make insurance claims, so when they do not purchase health insurance there are fewer resources to cover the older and sicker people who do buy insurance. Unable to attract low-risk consumers but stuck with high-risk ones, insurance companies have far more incentive to find ways to deny treatment.

Fortunately, there are some recently proposed reforms that would go a long way toward remedying these problems. The first is President Bush's proposed standard deduction for health insurance that would give the tax break directly to the individual. This would have the effect of making the health insurance market far more consumer-based than employer-based. The second is the Health Care Choice Act championed by Rep. John Shadegg and former-Speaker Dennis Hastert. This legislation would permit individuals to purchase insurance from states with the fewest regulations, thereby lowering the cost of insurance and attracting more low-risk people to buy insurance.

These two reforms would go a long way toward transforming the health insurance market into one in which insurance companies compete for the business of individuals and move away from looking for ways to deny care. Yet neither reform currently has any traction on Capitol Hill. That's unfortunate because we could all profit from them.

David Hogberg is a Washington writer and host of the website Health Hog.

Like this Article

Print this Article

Print Article
About the Author

David Hogberg is a senior fellow at the National Center for Public Policy Research.  Follow David Hogberg on Twitter.