I was going to tackle health savings accounts next, but I realized it might be worth spending some time on the basics for those just joining us. Let’s talk about risk pools.
If you’ve heard me (or anyone) discuss the problems of Medicare and Medicaid financing, you’re heard someone mention risk pools. Basically, insurance companies try to manage risk pools, or the population they cover, so that they are not overloaded with unhealthy people. That’s not immoral, it’s the only way to stay solvent. Because if you get too many unhealthy people in your risk pool, you go broke; conversely, if you manage to eliminate unhealthy people from your risk pool, you make tons of money.
Take this example. Let’s say there are 5000 people in Anytown, USA. 4950 of them are healthy, and spend about $500 a year on health care. 40 of them are chronically ill and spend about $10000 a year. 10 of them are really bad off, with major diseases or end-of-life care, and are going to spend $200,000. Everyone in Anytown gets their insurance from Insurogiant or Wecare. The plans cost about $5000 per person. Let’s say they start pretty evenly, with the risk pools evenly divided. That means:
- Insurogiant covers 2475 healthy people, 20 chronically ill people, and 5 really unhealthy people. Total premiums: $12.5 million. Total health care costs: $2.4 million. Total cost per person: $985. Awesome.
- Wecare covers the same: 2475 healthy people, 20 chronically ill people, and 5 really unhealthy people. Total premiums: $12.5 million. Total health care costs: $2.4 million. Total cost per person: $985. Awesome.
And fair! Recognizing that there are other costs to the system, that’s not all profit, but they both do fine. But let’s say there’s some uneven circumstances. Some sick people in Insurogiant die. And some people in Wecare get sicker. So next year:
- Insurogiant covers 2475 healthy people, 10 chronically ill people, and 0 really unhealthy people. Total premiums: $12.5 million. Total health care costs: $1.3 million. Total cost per person: $538. Awesomer.
- Wecare covers 2475 healthy people, 30 chronically ill people, and 10 really unhealthy people. Total premiums: $12.6 million. Total health care costs: $3.5 million. Total cost per person: $1407. Not as good.
And now we have a problem. Insurogiant shows record profits and lowers their rates to $4000. Conversely, Wecare is forced to increase theirs to $7500 because care is now costing so much more per person. Massive numbers of healthy people defect to Insurogiant. Sick people (with prior conditions ) can’t change insurance. Now:
- Insurogiant covers 4000 healthy people, 10 chronically ill people, and 0 really unhealthy people. Total premiums: $16 million. Total health care costs: $2.1 million. Total cost per person: $523. Awesomest.
- Wecare covers 1000 healthy people, 30 chronically ill people, and 10 really unhealthy people. Total premiums: $7.8 million. Total health care costs: $2.8 million. Total cost per person: $2692. Horrific.
Wecare goes bankrupt. All the healthy people go to Insurogiant for even better rates. The sick people from Wecare are now uninsured.
But what if Wecare was a government program and couldn’t go out of business? It’s costs per person are WAY higher. It starts reimbursing less. It’s going bankrupt. That’s Medicare. But it’s not Wecare’s fault! The risk pool was bad. And small pools are almost always bad, because small changes in health have huge effects. Big risk pools, on the order of hundreds of thousands, are really needed for stability. A single-payer plan (for instance) avoids this problem by having one very large and fair risk pool.
Private insurance gets to cover cheap, healthy people primarily. Public systems cover the poor, the elderly, and soldiers – all of whom are expensive. The situation above (which resembes the current landscape) leads to fractured and inequitable risk pools, a situation where private insurance gets to cover two-thirds of people and only pays for one-third of care.
