03/20/2012 05:59 pm ET Updated May 20, 2012

The Democratization of Health Care: The Limits of Private Insurers

If you have been following the debate over health care reform, you are aware that the small government community, as an article of faith, is zealously opposed to the federal government acting as a health care insurer. Their preference is a market driven by individual retail transactions, similar to the way in which we buy cars or computers. But market forces require that we purchase health care through the risk-pooling effect of insurance. Faced with this confounder, small government advocates find private insurers an acceptable alternative, believing that they are better able to provide the financial backbone for our health care delivery system than is the federal government.

The principal domain of private insurers is the employment-based market, where workers collectively use a portion of their wages to purchase health care insurance. These insurers are quite willing to sell policies to all comers who can pay the quoted premiums, but well over one hundred million Americans (including seniors, the unemployed, part-time workers and workers whose wages do not include health care benefits), with a wide variety of medical needs, cannot afford or are unwilling to buy private sector policies that as consumers they know cannot adequately provide for their medical needs.

The oft-maligned private insurers have played and will continue to play a vital role in our economy. By aggregating and spreading the risk for health care, they have made it possible for millions of working Americans to purchase medical products and services. The ability of these consumers to pay has in turn encouraged companies to invest in innovative technologies to meet growing demand, and as a result we have had a vibrant and robust health care market with people living longer than in any other time in human history. Private insurers should be thanked for that work.

The reality is, however, that these private insurers have limited ability to service the full extent of the market. Even within the sector of the market that they dominate, private insurers have found it difficult to meet consumer demand while keeping their products affordable. (Frankly, I suspect that some of the growth in cost may be related to their efforts to restrain consumer demand, but that is a discussion for another occasion.) Higher premiums mean less available income for workers to purchase other commodities and higher wages for employers. Consumers and employers voiced their dissatisfaction with rising premiums to elected officials, complaining that private insurers were charging more for a shrinking product (shrinkage that is made manifest through higher deductibles, redefining prior conditions, shifting more costs to members, restrictive prescription drug formularies and outright denial of services). The volume, frequency and intensity of these complaints drove and will drive political action.

Medicare, in concert with the system enhancements that are the promise of the Affordable Care Act, is the federal response to the apparent inability or unwillingness of private insurers to create a product that satisfies the full extent of consumer demand. Shrewd politicians know that repealing or restructuring these public programs so that they serve fewer people or degrade the quality of health care will ultimately end in political defeat as those actions will force their constituencies to turn to political rivals who better understand market fundamentals and know how to harness those forces to the advantage of all consumers.

And so we have the democratization of health care, but what does that mean exactly? Does it mean that the blunt instrument of government should be setting prices, choosing winners and losers, or norming medicine to labor productivity or gross domestic product? I will offer more thoughts in another posting.