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April 7, 2010

More Self-interest in MA Healthcare

Filed under: Healthcare — Steve Krupa @ 5:31 pm
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Mr. Adam Smith (again)

On 4/4/2010 I blogged about insurance cycling in Massachusetts.  News reports state that some MA consumers are gaming the system  by purchasing health insurance prior to getting an elective procedure only to drop it after receiving the service.  For many consumers, especially those without chronic illness, it is cheaper to pay the $93/month penalty than a $400/month insurance premium, unless of course the cost of the services you need exceed the short-term cost of  health insurance.  This behavior, which  is allowed by insurance regulations in MA, is economically rational (albeit mean and not for the good of all).  Widespread experience of this type of behavior would certainly increase the individual cost of health insurance for those that maintain continuous coverage. 

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Today, 4/7/2010, we have a cadre of Massachusetts insurance companies, led by Blue Cross Blue Shield of MA, suing the state’s department of insurance (DOI) for refusing to approve proposed premium increases, claiming, among other things, that they (the cadre) stand to experience substantial losses if the rate increases are not approved.  Apparently the MA DOI has rejected 235 of 274 applications for premium increases, demonstrating their intention to impose a cap on premium increases.  Traditionally the primary role of the DOI is to protect insurance consumers by monitoring the financial solvency of insurance companies. 

In MA healthcare is now 100% under the purview of politics, with some reports suggesting that MA’s healthcare program is significantly over original budget estimates (did I mention that the proposed rate increases range from 8-32%?).  If you are a politician, bureaucrat or consumer in MA, rate caps initially appear to be the perfect solution to rising medical costs. 

However, it is unlikely that insurers will stay in a market where they are certain to lose money, a reality I am certain the MA bureaucrats (read: DOI) understand.  If the insurers vacate certain markets where will consumers go for their health insurance?  If this situation were to play out to its extreme and insurers were forced to abandon certain markets would this be viewed as a failure of the bureaucracy, the elected politicians or the private insurance system? 

If you were an elected politician would you expect to remain in office if the private insurance system failed under your watch? 

A failed private insurance system would certainly boost the argument for a “public option,” a euphemism for “an insurer of last resort” and a potential transitional step toward a single-payer HC system, which is a rational bureaucratic objective.

April 5, 2010

The Genius of the Healthcare Consumer

On 3/23/2010 in my post, A First Reaction to Our New Healthcare Reform Law,  I wrote that an engaged and accountable consumer would be a necessary element for universal coverage to work. 

Of course, consumers are always “engaged and accountable,” most notably to themselves, and so, I went on to say parenthetically that HC should not be perceived as “free” or a “right,” but as a cost/liability managed by the collective diligence of individual beneficiaries (and I point out here that often some of my better points end up inside parenthesis).

So what did I mean by this?  Well, check out what is claimed to be going on in Massachusetts, as reported by today’s Boston Globe in a piece titled, Short-term Customers Boosting Health Costs:

“Thousands of consumers are gaming Massachusetts’ 2006 health insurance law by buying insurance when they need to cover pricey medical care, such as fertility treatments and knee surgery, and then swiftly dropping coverage…  [According to Blue Cross Blue Shield of Massachusetts] the typical monthly premium for these short-term members was $400, but their average claims exceeded $2,200 per month…  The problem is, it is less expensive for consumers — especially young and healthy people — to pay the monthly penalty of as much as $93 imposed under the state law for not having insurance, than to buy the coverage year-round.”

Here we again have individuals acting in their self-interest, something we have been able to predict perfectly since the origins of economic theory.  The Bay State healthcare law contains perverse incentives and consumers are exploiting them to the detriment of the collective goal.  No doubt, this behavior will be a cause for premiums to rise unless incentives are altered.

Ideally, self-interested consumer behavior, which is a given in all cases, should be leveraged to improve quality and lower cost in HC.  This requires that all individual consumers have a direct economic stake in HC costs.  That is not the case in HC today and it will definitely not be the case under our new reform law, which contains the same moral hazard problems as the Massachusetts law.

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