Beware when insurance is too good

By C.V. Allen
The Modesto (Calif.) Bee, Aug. 23, 2014

My column on the inefficiency in Medicare Advantage (Page D1, July 29) inspired several letters to the editor. Some were from people who are enjoying the benefits of the plan (which is not the issue), a few were in agreement with my column because they understand the inflationary effect of Medicare Advantage borne by the taxpayer, and others objected – often with the same phrases and wording, suggesting a common origin.

So I’ll try to explain this a different way. The following is part myth (the government doesn’t sell auto insurance) and part reality – an example of how an insurance program can be gamed for private benefit to the detriment of the public – which is very much the issue.

Those wishing details can pick up a copy of  “Medicare overpayment to private plans,” an article in the International Journal of Health Services from May 10, 2013, at the Maino Community Health Library at McHenry Village or you can find it online.

Pretend for a moment you are a government employee responsible for developing an automobile insurance plan for sale to the public. You know that most drivers rarely use insurance, but there is a minority – those convicted of DUIs, teenagers – whose bad driving records significantly raise insurance costs for all. But your plan includes everyone and will cost $75 a month to break even.

One day a man sidles up to you and says, “Have I got a deal for you!”

He says he’s from Los Angeles; he’s an ordinary looking man with impenetrable sunglasses, blue suede shoes and a salesman’s soothing voice.

“You pay me $70 per person and I’ll sell auto insurance to anybody who wants it – and save you $5 each!”

Because you weren’t born yesterday, you reply, “You’ll have to take all comers, even those with a bad driving history. How can you do it so cheap?”

He smiles and says, “I run a driving school and I teach people how to avoid accidents.”

Saving $5 per person is enticing, so you go to your boss, who says fine, and the deal is made. For a while things go well and he sells a lot of insurance. Then you begin to notice that the costs of those who have remained in your plan is rising, first to $80 a month then gradually to $85. You go to your “friend” and ask how he is doing.

“Just fine,” he says, “and my clients just love my policy.” No wonder. Not only do they get insurance at lower rates, they also get amenities – tickets to the Giants, free gym membership and picnics in the park.

Because you weren’t born yesterday, you call a detective friend, explain the situation and ask him to investigate.

A month later he reports: It seems that most of those with DUIs and bad driving records have somehow migrated back to your policies, and teenagers are largely missing from your “friend’s” private policies. Without those high-risk drivers, his costs are down to about $60 per person while he is receiving $70. He now drives a Maserati and recently bought a big house in L.A.

So you go back to your old pal, and he gets upset when you mention all this to him. “Leave things alone,” he says, “or you’ll be sorry.”

When word of this slips out and there are calls to cancel the wasteful private program, there is an uproar from its members and the strutting of politicians vowing to “stop the massive cuts” when no such cuts are planned – only a return to the basic plan so costs are kept low for everyone.

Concerned, you ask your boss, “Who pays the added cost of this plan?” He smiles a sad smile and says, “The taxpayers of course, but they’ll never understand – it’s the way things work. Were you just born yesterday? By the way, what’s the name of your pal’s plan?”

“Auto Insurance Advantage,” you say.

Does this clarify the situation? Or were you born yesterday?

C.V. Allen is a semi-retired physician and community columnist.