03/18/2010 05:12 am ET | Updated May 25, 2011

By Revealing Their True Colors, Insurers Eliminate Any Reason to Compromise With Them

The release of the PriceWaterhouseCoopers report reveals the insurance industry's true colors for all to see. Everyone who has followed events closely saw insurers publicly supporting reform ("We want to work with you, Mr. President."). The pros knew that, at the same time, their lobbyists have been working hard to strip the proposals, especially the Senate Finance Committee's version, of provisions that would guarantee robust coverage and might actually keep expenditures under control.

Not content with the prospect of huge new profits from the addition of millions of currently uninsured to their rolls, greedy insurers have worked hard to strip "most of the serious proposals ... to curb costs" from the bills under consideration. (New York Times, "Lobbyists Fight Last Big Plans to Cut Health Care Costs," October 11, 2009) Unless Congress rebels against this duplicity, unhappy voters will discover -- when they need care -- the limitations of the new coverage they must buy. The result is likely to be profoundly disappointing to everyone but the insurers.

As one example, the Finance Committee proposal includes several levels of insurance plans, one of which would require that the insurers cover only 65 percent of medical bills. We already know what happens when out-of-pocket expenses are that high -- they are the 25 million who are underinsured. These are folks who value health insurance enough to have bought a policy they could afford, but who have been unable to actually use the services they need because of the out-of-pocket costs. If this provision passes and everyone must buy coverage or face a penalty, the numbers of underinsured Americans will increase exponentially. Only now they will be the result not only of greedy insurers, but of weak-kneed elected officials who succumbed to pressures from insurance lobbyists.

The silver lining from this cloud of duplicity may be that insurers have destroyed any lingering justification for trying to please them in exchange for their public support of reform. If our Representatives and Senators are as angry as they should be for having been played for fools, they could wind up passing a much stronger bill -- one that would provide good coverage to more people at relatively modest cost. The fact is that reforms that rely on competition among insurers has always been a weak strategy. The reason is that competing firms have only 3 ways to differentiate themselves: availability (who can buy their policies), quality (what the policies cover and the terms of coverage), and price. Of the three, price is the key because it is easiest for consumers to interpret (even though out-of-pocket costs may add considerably to the total annual cost). To keep their prices low, insurers will try (1) to restrict availability to those who are less likely to need medical services and (2) to either reduce the services covered, impose burdensome administrative requirements (like prior approval), or require onerous out-of-pocket payments from subscribers.

If their supporters think I have misstated the case, they should ask the insurers to correct the record and tell us what other tactics they plan to use that would result in their providing good quality coverage at affordable prices to a wide range of Americans.

Otherwise, it may not be too late to choose one of the stronger approaches that have been rejected. One, of course, is Medicare for All (aka "single payer"). It would cover everyone for a comprehensive set of benefits and a Commonwealth Fund analysis shows it would be less expensive than the proposals now being considered. Its principal weakness is cost containment because although it changes incentives on consumers to find a personal primary care physician, to use preventive services, and to seek care early in an illness episode, it would continue to pay providers fees for individual services.

A more radical solution would be to require everyone to pay an income-related amount into a federal Health Insurance Fund (HIF) and to issue vouchers with which they could choose a competing private insurance policy. (See my blogs about Paying for Health Reform, Parts 1 and 2, August 12 and 13, 2009.) Private insurers would offer identical comprehensive benefit packages, but the HIF would pay them risk-adjusted amounts. The insurers would differentiate themselves in the providers they offer and in the quality of their service. Risk-adjusted payment would protect those that happened to attract large numbers of people at higher risk for using services (older or with pre-existing conditions), and would prevent those that happened to attract disproportionate numbers of healthy people from reaping a windfall. Over time, insurers might recognize the value of negotiating arrangements with providers that, by sharing the financial risk, could improve quality by stimulating the formation of groups and facilitating the use of coordinated teams to provide care.

The bottom line is that the insurers have demonstrated that there is no reason any more to cultivate their support. That being the case, Congress has a new chance to do the job right.

Davidson, a Boston University School of Management professor, is author of the forthcoming book, In Urgent Need of Reform: The U. S. Health Care System.

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