Health Care Reform Multiple Risk Pool Problems

Multiple Health Insurance Risk Pools Fail to Control Costs

General rule: the greater the number of risk pools, the greater the inefficiency of the health care system. Hence, one risk pool -- a single payer system -- is ideal for keeping health care costs under control. An "individual mandate" without complete restructuring of the health insurance market results in the greatest number of risk pools and hence is the most inefficient way to allocate medical resources.

Why? Let's look at health care costs of comparable countries. The US has the greatest number of risk pools and neglects to cover 48 million people. All the other countries have a single(or very few) risk pool and cover their entire populations for half the expense with little difference in health care quality. Obviously, the US system is the least efficient.

Why does a multiple risk pool system add to health care administrative costs?
1) Creates a medical loss ratio. Insurance companies make much of their money on what Wall Street calls their medical loss ratio (i.e., how much money they have to spend on actual medical care versus insurance overhead and profit). Many individual policies have a medical loss ratio of 45%, meaning over half the money that is collected into that risk pool goes to insurer profits and overhead, making Wall Street investors happy. Under Medicare, a single payer system in the US, the medical loss ratio is 96%, meaning more money goes to health care instead of insurance stock dividends, making more people healthier. A typical PPO medical loss ratio is 72%. An "individual mandate"(a requirement that everyone must buy insurance) maximizes the number of risk pools, hence greatly increasing insurer profits. This is the reason why health insurance companies have always supported an "individual mandate" on health insurance and why Governor Schwarzenegger proposed an individual mandate as his optimal method of getting universal coverage.
(To ameliorate windfall insurer profits from low medical loss ratio risk pools, Schwarzenegger's plan imposes an 85% medical loss ratio floor on insurance companies. But he has not specified an enforcement method which is especially important because the insurers will have every incentive to thwart the cap through accounting gimmicks and other methods.)

2) Multi-risk pools create perverse financial incentives for insurers to public health.

a. Incentives on insurance brokers to sell different policies which increase health care costs on providers and insurers. Insurance brokers make a commission on each policy they sell. Naturally as salesmen, they will try to sell the policies that give them the greatest commission. These brokers will insist on new plans offering different benefits to help them sell more policies to employers and individuals to make sales easier. The problem is that each different policy with different administrative rules creates costs on the provider side, as they have to follow different regulations to comply with the plan the broker wants to sell. But the broker doesn't see any of this cost, as his commission is not based on how easy it is for the hospital to administer a particular insurance plan. This misaligned incentive is rampant throughout our healthcare system and a major part of why our health carre administrative costs are 5 times the rest of the industrialized world.
b. Incentives for murky market. Any functioning market requires buyers to be able to adequately compare products. In the case of health insurance this is nearly impossible as the contracts are often 70 pages long. The problem is further complicated by the fact that the insurance brokers have a strong incentive to keep them complex to keep themselves in business. Hence, even when government regulates plan standardization, the brokers sabotage it by offering so many other plans that each adds some benefits onto the government standard that the plans quickly become difficult to compare. Unfortunately, the insurance brokers have every incentive to undermine the health insurance plan comparison because the brokers are necessary in any many risk pool system.
c. Incentives for avoiding accountability. A major problem with a multi-pool system is that it encourages incentives to avoid responsibility for expensive patients. Since the insurers only gain when expensive patients drop their policy, they have every incentive to encourage expensive patients to drop their policy through a variety of mechanisms (e.g., higher prices, legal tricks, etc.). Hence, the multi-risk pool system attempts to isolate the expensive patients outside the insurer's risk pools, creating the high risk pool problem. No rational insurer will cover these people because they cannot make any money on them. Insurers try to dump these expensive patients on various government agencies whenever possible to avoid responsibility for the cost of the expensive people they sold policies to. Their incentives should be to manage their patients regardless of health the best they can within their resources.
d. Incentive to "cherry pick" inexpensive patients. Multi-risk pools mean that insurance is for the profit of insurance companies and their brokers. Hence, their primary incentive is to maximize profits for their stock holders by lowering the medical loss ratio. The easist way for insurers to profit is to "cherry pick" low risk clients. Because of the 20/80 rule(20% of the patients are 80% the cost), insurers find it more profitable to focus on getting lower risk clients rather to innovate in better health care outcomes. A single risk pool eliminates cherry picking and forces the bureaucracy to innovate in better health outcomes instead of creating more risk pools.

3) Creates massive transfer cost between risk pools. Because so many risk pools exist and patients are constantly going in and out of them, an enormous administrative overhead must be maintained. Providers must have systems to deal with each insurance policy and its unique regulations. This increases providers' administrative costs by 30% or more, yet the cost to insurers is nothing. Insurance brokers get a commission on complicated policies they sell. Insurance plans must be marketed. Complicated systems must be created to try to track which person is in which risk pool at a particular time. It creates an administrative nightmare just so that insurers can maintain their complicated system of risk pools. It makes it much more profitable to be an insurance executive than a doctor.

4) Increases legal costs. Because of the 20/80 rule an ugly game of accountability is created where the insurers have to be forced by attorneys to cover their policy obligations, which vastly increases the legal costs of the system. Because multi-risk pools mean different policies, each with different contracts, an enormous amount of legal work is created, such as to fight over what the policies say. The existence of a multi-risk pool system is a leading reason why legal costs add to the cost of health care.

5) Creates huge ER problem. Federal law states that all ERs must treat a seriously injured person who comes in their doors. This forces hospitals to provide basic services to uninsured people. Because a high percentage of the uninsured cannot pay their bills, hospitals shift the cost of providing these services to the insured population, the government and various charities. A single risk pool eliminates this cost-shifting and compensates the hospital directly by automatically covering everyone. When costs are paid through many middlemen, it greatly increases the administrative costs. In this area, conservative policy analysts are correct in stating that the more direct payment to the provider, the better.

6) Creates policy churn. Following the 20/80 rule, insurers shift more expensive patients into risk pools with higher premiums. People who are healthy purchase less expensive policies. This supposed insurance market benefit creates incentives to churn through health insurance policies, adding enormous marketing and administrative costs, as insurers focus on acquiring and maintaining their inexpensive policy holders. Hence, the insurers' market focus is on the creation and sales of new policies instead of efficient medical management.