The Discredited Magic of Competition in Private Health Insurance Markets
The Beginnings of Health Insurance
America’s Health Insurance Plans (AHIP)
Learning Center
In the late 19th and early 20th centuries, the business of both accident and sickness insurance grew rapidly. Many new companies were formed, and existing fire and life insurance companies entered the accident and sickness field. However, the new industry faced a number of problems:
- Competition was intense, and in response many companies cut their premium rates so low that they could not make a profit.
- Despite some progress, companies still had insufficient information and experience to accurately predict the incidence of illness and so determine how much premiums should be to cover the costs of claims. Consequently, even those companies that made every effort to charge adequate premiums often miscalculated and lost money.
- Also because of insufficient experience, many companies accepted applications for insurance that they should have refused as bad risks. As a result, these companies paid more in claims than they received in premiums.
http://www.ahiphiwire.org/LearningCenter/Feature.aspx?doc_id=163021
Comment:
By Don McCanne, MD
We can learn much from the private insurance industry’s professional organization, AHIP. In this instance, we learn its perception of the flaws of earlier insurance products.
Those of us who contend that private insurance is an obsolete method of financing health care are not the least surprised by AHIP’s statement that “many companies accepted applications for insurance that they should have refused as bad risks.” AHIP’s contemporary position is that private insurers should not cover individuals with significant health care needs because that drives premiums so high that they are priced out of the market. Instead they support taxpayer-funded programs to pay for the 80 percent of health care used by the 20 percent of people who have higher health care needs.
What is really interesting is what AHIP has to say at a time when both Republican and Democratic presidential candidates support competition between private health plans as the preferred model of reform. AHIP states that one of the major problems that the insurance industry faced in its earlier history was that “competition was intense” causing the companies to price their premiums so low that they could not make a profit. So if competition between health plans is not supposed to bring us lower premiums, then just what is it supposed to do?
It appears that the insurance industry has learned that they should insure only health and not sickness, and that they should not compete based on premium prices.
So the private health insurance plans of the 21st century have decided that should include only the healthy, ending pools that enable a transfer from the many who are healthy to those with sickness or injury. Also they realize that they should avoid competing with each other based on lower premiums, rather they should use their oligopolies to push premiums up to the maximum that the market will bear.
When what we really need are (1) the transfer made possible by a universal risk pool, and (2) an equitable financing system that is based on ability to pay rather than on medical need, is there anyone who seriously contends that the 21st century health insurers have not become obsolete? Well, yes. Apparently our presidential candidates still believe in the discredited magic of competition in the private health insurance markets.