Notebook — From the December 2009 issue

Understanding Obamacare

( 2 of 4 )

The private insurance industry, as currently constituted, would collapse if the government allowed real competition. The companies offer no real value and so instead must create a regulatory system that virtually mandates their existence and will soon actually do so.

A study by the McKinsey Global Institute found that health insurance cost the United States $145 billion in 2006, which was $91 billion more than what would be expected in a comparably wealthy country. This very large disparity may be explained by another study, by the American Medical Association, which shows that the vast majority of U.S. health-insurance markets are dominated by one or two health insurers. In California, the most competitive state, the top two insurance companies shared 58 percent of the market. In Hawaii, the top two companies shared the entire market. In some individual towns there was even less competition—Wellmark, for instance, owns 96 percent of the market in Decatur, Alabama. “Meanwhile, there has been year-to-year growth in the largest health insurers’ profitability,” the AMA reports, even as “consumers have been facing higher premiums, deductibles, copayments and coinsurance, effectively reducing the scope of their coverage.” And yet no innovating entrepreneurs have emerged to compete with these profitable enterprises. The AMA suggests this is because various “regulatory requirements” provide “significant barriers to entry.” Chief among those barriers, it should be noted, is an actual congressional exemption from antitrust laws, in the form of the McCarran–Ferguson Act of 1945.

Insurance companies aren’t quite buggy-whip manufacturers. But they are close. In the past, one could have made an argument that in their bureaucratic capacities—particularly, assessing risk and apportioning payments—insurance companies did offer some expertise that was worth paying for. But all of the trends in politics and in information technology are against insurance companies’ offering even that level of value. Insurance is an information business, and as technology makes information-management cheaper, technological barriers to entry will fall, and competition will increase. (People who relied on the cost of printing presses to maintain a monopoly should be able to relate.)

At the same time, the very idea of assessing health risk is beginning to be understood as undemocratic, as was revealed by the overwhelming support for the 2008 Genetic Information Non-Discrimination Act, which bars insurers from assessing risk based on genetic information. Over time, more and more information will be off-limits to underwriters, so that insurance ultimately will be commoditized—every unit of insurance will cost about the same as every other unit of insurance. Managers know that one must never allow one’s product to become a mere commodity. When every product is like every other product, brand loyalty disappears and prices plummet.

Which perhaps is one reason why the insurers themselves have always favored the central elements of the Democratic plan. As long ago as 1992, when Hillary Clinton was formulating her own approach to reform, the Health Insurance Association of America (now America’s Health Insurance Plans, or AHIP) announced that insurers would agree to sell insurance to everyone, regardless of medical condition (guaranteed issue) if the government required every American to buy that insurance, and used tax dollars to subsidize those who could not afford to do so (universal mandate). Carl Schramm, the president of the association, said this was the “only way you preserve the private health-insurance industry. It’s plain-out enlightened self–interest.” The deal collapsed nonetheless, in part because Congress wanted to introduce a “community rating” system that would have put an end to underwriting by making insurers sell insurance to everybody in a given community for the same price. Insurers wanted to maintain the profitable ability to charge different prices to different people.

Last December, though, AHIP said it would support community rating as well, and since then the real negotiation has been all about details. The insurance companies would agree to sell their undifferentiated commodity to all people, no matter how sick, if the government agreed to require all people, no matter how healthy, to buy their undifferentiated commodity. Sick people who need insurance get insurance and healthy people who don’t need insurance cover the cost. A universal mandate would include the 47 million uninsured—47 million new customers.

The Democratic plan looks to be a huge windfall for the insurance companies. How big is not known, but as BusinessWeek reported in August, “No matter what specifics emerge in the voluminous bill Congress may send to President Obama this fall, the insurance industry will emerge more profitable.” The magazine quoted an unnamed aide to the Senate Finance Committee who said, “The bottom line is that health reform would lead to increased revenues and profits.”

is a senior editor of Harper’s Magazine .

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Commentary January 31, 2010, 11:08 am

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