Friday, June 22, 2007

The Wicked Truth: A Hypothetical Case Scenario as to Why Johnny Has No Health Insurance

Johnny is 25 years old, and he is part of the largest, atleast as a percentage, group of uninsured Americans. That is, he is young, healthy, older than college age, younger than the age that most people get sick, and though this problem afflicts women as well, he is even more likely to be uninsured as a man. He has a two year vocational degree and is learning the real life ropes as an auto mechanic making about $26,000/year. He is white, his family was working class, but by no means poor, and he comes from a middle sized city in Middle America.

So what's the deal? Johnny's father gets insurance from his current job as an assembly line supervisor, and he covers Johnny's sister and mother. Johnny's mother gets no insurance from her position as a receptionist for a building that houses a few small private law firms. She has never really looked into it anyway, because his father has been fortunate enough to work for Widgets Inc., which has covered its employees since the 1930s. Johnny however, lost coverage through his father's employer when he finished trade school. He has been uninsured since, and it hasn't been a problem thus far. On the surface, Johnny appears to be the one in trouble. Looking deeper, a more severe crisis is about to unfold.

Only a handful of states allow insurance companies to band ages when determing risk. Johnny doesn't live in one. In his state, rather than being lumped in with other young healthy adults, he is lumped in with every 75 year old diabetic. In fact, it is illegal for companies to offer certain variations in treatment options or premiums. What they do of course is find an average where it is most profitable to sell insurance, deny people who are too sick, and sell insurance to young healthy people at a rate much higher than their personal risk justifies. In his state, Johnny would have to pay $150/month even for catastrophic insurance. He has a friend in a state that allows banding who pays only $70/month. He sees his offer as a ripoff, and he is right. He thinks about it and realizes that his odds of getting sick are very low, and insurance is more than 6% of his gross income. Besides, if he gets really sick, no one will let him die. It scares him, but he makes a choice that seems cunningly rational. He goes without. Atleast he doesn't live in a state that requires insurance to offer everyone treatments ranging from psychotherapy sessions to in vitro fertilization. Those things really run up the cost to the risk pool, and his premiums would have been even worse.

Johnny's father started working at Widgets Inc. at the age of 18. He was never a particularly bright person, but he was reasonably hard working. He is now 52, and he has been credited with 34 years of service. He has a pension that he will be able to access in old age and a company insurance guarantee that promises him benefits until death. He has considered opting for early retirement next year, which would lower his total monthly pension benefit, but would let him retire five years early.

Here's the problem. Widgets Inc. never really produced a cheap product. In fact, the product quality has probably declined since the companies inception, though there has been a recovery to a degree. The problem is that a new company formed in 1976, called Things Corp., has started producing the exact same product for 70% of the price. How? Simple, they had a better business model, a more efficient production line, and they don't have a load of pension obligations weighing them down. In effect, they are a better business. Once Things Corp. entered the market, Widgets Inc. started losing market share. They have only turned a profit in one of the last 8 years. The shareholders are getting restless. The company has considered filing for bankruptcy. Of course, one of the first things that they will be requesting in bankruptcy court is the right to reorganize (aka eliminate many of the benefits from) the pension fund. This really isn't because Widgets Inc. is evil or has some sort of conspiracyl; they simply cannot compete or fund future pension obligations with the current business model.

For Johnny's father however, it could be devastating. Bankruptcy might mean layoffs. Layoffs might mean he would become unemployed. Not only would this leave him with no job or pension (assuming restrucuring), but it also leaves him with no health insurance. If he loses his health insurance, the results could be disasterous for his wife and daughter.

Widgets Inc. never had any intention of offering health insurance when it formed in 1926. However, New Deal caps on wages forced the company to find another method of recruiting skilled labor. Like many companies, they started offering health insurance as an incentive. Before big companies like Widgets Inc. started offering health insurance, the entire insurance market was really a small niche industry, and almost no one actually carried insurance. Widgets Inc.'s attempt to get around government regulation in the 30s left them susceptable to future competition. The full impact of this is only being felt now

Health Insurance Inc. is a business that sells health insurance. Like all businesses, they want to make money. With a market of over 40 million uninsured in the US, the company president is seeking a way to tap into this untapped market in order to increase its profit. They now that many of these people are actually working, and they are seeking a low cost solution to offer basic services to these people at a price that they will buy at. People like Johnny are the perfect client. He is young, healthy, and low risk. The company keeps excellent records and determines at what price they can offer health insurance to people just like Johnny at an acceptable profit. They know that they can't try to make too much money, or Johnny won't buy it. For the rare accident or illness that does occur in this age range, they will offer coverage. For those that don't get sick, they will have been paying premiums that they can afford.

The president figures that he can do this by limiting the number of services that his company offers. He'll cover many of the common ailments that plague people in Johnny's age group, but he'll offer different plans at different prices that cover different things. As he attempts to move into Johnny's state, he is in for a rude awakening. He tries to offer insurance aimed at Johnny's age group. He finds out that this is illegal. He tries to eliminate services that while often desired, are not life or death, it is also illegal. He figures that he could offer insurance that covered the standard of care for 10 years ago, which still is the standard of care in many countries. He finds this either illegal or finds no hospitals willing to comply, as they will be liable for malpractice by not honoring the current standard of care. By the time that he complies with all of the regulations, he is shocked that he cannot beat the current market best price of $150/month for catastrophic. He is disappointed, but it makes no sense for his company to enter the market. Besides, it's nearly impossible to get passed the state regulatory board. Ironically, he offers insurance in the next state over, where the still significant, but less stringent regulations, allow him to offer the insurance to Johnny at $100/month. He figures that he might still turn a profit at this price, but he finds that it is illegal again. Johnny can't buy his health insurance from the next state.

The basic point is that health insurance for Johnny really is over-priced. I say this not because it is expensive, but because the only things stopping it from being cheaper are all sorts of rules and regulations that follow special interests, the well connected, the well intentioned, and some of the insurance companies within the state who themselves fear the competition. This isn't the true market price, and that is why it is overpriced. These regulations that help certain individuals have seriously hurt Johnny. Johnny is now a victim of regulations that protect others over him.

The rest of his family has also been victimized. The illogical process of offering health insurance through a job has made his father vulnerable to any market downturn that impacts a single company. His position is precarious. There is no reason why he should have purchased health insurance through a company. It is a fluke of history that failed to die based on a now defunked market control scheme instituted over 70 years ago. There is no reason that health insurance should be as all encomapassing as it is, leaving those that don't have it on the outside for basic treatment. There is no reason that group purchasing of insurance should go through jobs. It could operate through any sort of association, probably with a lot less variability and unpredictability than it does through a job. Regardless. the victim in this case is exactly the person that most of the rules have been instituted to protect.

5 Comments:

Anonymous Mr. Hat said...

I've enjoyed reading your blog for some time, and I think that this may well be your best post yet. You hit the nail right on the head on so many points - one of which is that regulations regarding health care often "protect" (give special treatment to) certain groups while screwing another. Unfortunately the AARP has a little more power than the 25-year-old age bracket....

Though I have GREAT health insurance through the facility where I work, I wouldn't be sad to see health care coverage abolished through employers for the exact reasons you stated. In a couple years when/if I start medical school, I will have to quit my current job and my family of four will pretty much be hosed unless we end up in a state where insurance companies are allowed to price individually for young families.

2:59 PM  
Blogger MiamiMed said...

Thanks for the reply,

I find it astonishing that everyone thinks that creating some kind of quasi-public private universal healthcare scheme through a job is a good idea. There is no reason whatsoever why it should work that way. Even for the universal healthcare proponents, of which I am not one, the continued involvement of insurance through job in all proposed plans totally baffles me.

5:19 PM  
Anonymous Mr. Hat said...

Baffling indeed. We're so used to having health insurance provided through employers that people have come to believe that this is just the way things work and is how things "should be". But why health insurance? When you really think about it, it makes as much sense as your employer providing grocery store credits or your routine car maintainance.

Funny thing is, my employer spends so much on my healthcare package (about $16,000 per year just for health) that if they'd just give me the cash I could buy a good cat. plan, pay all my routine doctors visits as well as for my deductable on the cat plan should the need arise, and still pocket probably at least a good $4-5K even on a bad year. So I think the fact that many people don't realize is they're actually being ripped off by the employer-provided health care scheme. Just give folks the cash and they'd actually wind up much better off financially and still have good health care if they make wise purchasing decisions.

7:53 PM  
Blogger MiamiMed said...

I agree

8:26 PM  
Blogger Tamara said...

I just found this site and really enjoyed the articles and comments.
I'm now officially a fan. Good job.
BTW. I created an interested business model that effectively cuts out the unnecessary cost (profit, adminstration, taxes, and margins) without compromising benefits. I call it a community model and it manifests in the form of a association sponsored health plan (ERISA). The eligible members are physician employer groups which actually is a very broad descriptions. I designed it purposefully to extend beyond the practice to other certain employers, universities, suppliers. Given the fundamental relationship between medicine and economics, the premise is redistribution of money and (quality) information. It's really good and seems to be taking off. Wrote the business plan in 1999, conducted a pilot-successfully, obtained capital, developed a proporietary PPO with unique reimburement methodology that produced net increase in reimbursement YET contributes to reducing premiums (the counterpart to reimbursements), an integrated operating system (to enable bypassing the retail layers) and A paper. As that takes off, I've shifted focus to social networking as a way to create multiple referral channels to providers--driven more by physicians and the patients than by payers like healthplans and employers. It's in beta test now and looks very, very promising.
thanks for the fun dialogue! Tamara

7:42 PM  

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