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Is There a Future for Private Health Insurers?

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In my brief experience in the blogosphere, my first lesson has been that writing the words "insurance companies" reliably prompts the largest number of R-rated responses. This is not surprising, since people are so regularly provoked by the inhumanity and perfidity of our private insurance system. In the past week, for example, the Washington Post described how privately insured amputees can't get needed prosthetic limbs. The Los Angeles Times includes the unsurprising line: "The state's largest for-profit health insurer is asking California physicians to look for conditions it can use to cancel their new patients' medical coverage." Not to be outdone, the New York Times included its own accounts of insurance billing. Next week will surely bring similar stories.

Ezra Klein, a creative wonkish writer from American Prospect recently wrote about this, in a bluntly titled essay "Why Insurers Suck, And Five Ways to Fix Them."

If anything, Ezra understates the issue.

Increasingly, I and others scratch our heads to wonder: Why do we have this industry again? I understand that history and politics make this industry hard to replace, but what social value does it really create? I don't ask this question about the oil industry, the pharmaceutical industry, or computer software giants. Whatever the misdeeds of particular firms and the pressing needs for public regulation in these latter industries, we understand why it's good to have firms competing to find new energy sources, new drugs, new operating systems. I don't believe private insurers are less ethical, as a whole, than soft drink manufacturers or manufacturers of plush carpet. I just can't explain what we are getting here.

In the case of private health insurance, firms have expertise administering claims and designing wellness programs. Yet to the extent that their business relies upon avoiding high-cost patients their activities are social wasteful. In so many ways, their incentives are poorly aligned with the public good.

Even if we could correct these misplaced incentives, it seems as though anything beneficial insurers can do could be accomplished better and cheaper by government. Private insurers are too fragmented to promote needed efficiencies such as electronic medical records. A Chicago provider dealing with 20 payers is hardly swayed by the pay-for-performance standard of any one of them. In general, private payers are too fragmented to exert powerful market discipline on providers. The embarrassing history of Medicare managed care provides one of many embarrassments for those who assert the inherent superiority of the private sector.

Private insurers do have two advantages: They are more nimble than government is. More important, they can take the political heat for saying "no" when patients want some desirable but unjustified service, drug, or therapy. This is hard for government to do, and "no" should sometimes be said even when this is painful.

But maybe we have this backwards. It seems to me that even when insurers are justified in saying no -- as Cigna might have been in the liver transplant case promoted by John Edwards, and as insurers sometimes are regarding potentially useless or harmful experimental therapies -- profit-making firms lack the legitimacy to deny anyone a desperately wanted treatment that provides some plausible benefit. Denying important treatments is an inherently political question. A transparent process, by financially disinterested parties, is required to secure public legitimacy.

If this is so, private insurers themselves have a strong stake in government assuming a larger role in scrutinizing costly therapies. And they have a strong stake in some larger regulatory structure to constrain the more predatory aspects of current market practice.

I write this as (by HuffPo standards) a politically moderate free-trade policy wonk who instinctively favors market solutions for most economic concerns. If people like me feel this way -- and many of us do -- the industry should be worried.

Ironically, then, insurers themselves have a stake in the success of the Democrats' proposed health reforms. If health reform dies -- particularly if private insurers have their fingerprints on the murder weapon -- millions more Americans will stop scratching their heads and will support a single-payer plan.

I myself haven't given up on less radical reforms. I support Barack Obama, who seems the most promising figure to get elected and to get this done. Single-payer would require a huge Democratic majority, and we just don't have that time to wait.

Someday, the sun and moon might align to permit a single-payer. To enact such a change, we might have to find WPA contract jobs for the industry spinning datatapes and processing forms within a fundamentally different financing system. Boy, this would be a price worth paying.

Postscript: Blogging inspires a valuable sharpness that easily shades into self-righteousness. Obviously the problem is the overall market structure and not the individual men and women working in the industry, many of whom do an admirable job. I do not believe it is nice, correct, or productive to demonize individuals when the problem is much larger.