Friday, September 18, 2009

There's no money in selling insurance to sick people: more reasons free markets don't work in health care

In my last post I wrote about why health insurance doesn’t work as a private industry because of insurance companies’ incentive to avoid medical costs. Revoking your coverage only once you get very sick and need to use it is profitable, but it defeats the purpose of having insurance.

There’s another reason I hadn’t thought of: once you get sick, it becomes impossible to shop around for better coverage. What made me think of this is an email I got from a list I somehow ended up on:

Dawn [Smith] is a few years younger than me. She lives in Atlanta. She's an aspiring playwright. And four years ago, she was diagnosed with a rare, but treatable brain tumor.

Dawn's doctors are ready to treat the tumor, but they can't. CIGNA, her insurer, refuses to pay for the care she needs because the only hospitals qualified to treat her are out-of-network. And after years of fighting, Dawn just received her final denial letter.

For me, the scariest thing about Dawn's story is that it could happen to any of us - to a friend of mine, or someone in my family. After all, Dawn has insurance. But as long as private insurers are the only game in town, they'll continue to have the power to deny Americans the care they need.

Dawn is fighting back. And while CIGNA may be able to ignore Dawn, they won't be able to ignore millions of us standing together with her. I'm joining Dawn's fight to shine a light on Big Insurance's abusive tactics, get Dawn the care she needs, and make sure they don't do this to anyone ever again. Will you join me by signing a statement of support?

The heart-breaking part is that her condition is treatable. But CIGNA's refusal to treat her has brought her to "the end of my rope," as she puts it. CIGNA gladly accepts Dawn's premium payments, but when she needed care, they refused to pay for it, coming up with new reasons as they went.

The libertarian response to this would be to invoke free market platitudes: “the free market solves Dawn’s problem because no one would sign up for an insurance plan that refuses to cover the treatments they need. A company can’t ‘ignore’ its customers as the story suggests, because competitors would quickly swoop in to scoop up the dissatisfied customers. As long as people are free to choose between competing providers, they will always get the best service at the lowest cost.”

The problem with this reasoning is that in the health insurance market, there is no ability to shop for better providers after you’ve become sick; just as no one insures a house that’s already burned down, there’s no money in selling insurance to sick people. Once you know for certain that you will need costly medical treatments, no rival insurance company will cover you because doing so would be a guaranteed money loser. Once you become sick, you’re stuck with the company you’ve got, and the free market assumption of many buyers and sellers no longer holds true. When you’re in a market of one, it’s very easy for the insurance company to ignore your needs.

Now the free market fundamentalist may respond, “That makes sense, but what about your responsibility to make a good initial choice of insurance providers? Why would anyone pay for insurance they knew in advance wouldn’t cover the treatments they need? Dawn should have known better when she made the decision, even if she’s stuck with it now.”

But that’s exactly the problem - you don’t know in advance which treatments you will need. No one buys insurance hoping to use it - the point is to insure against the risk of an unexpected disaster you hope never happens. In other insurance markets, these disasters’ identities are relatively straightforward, so it’s easier to compare costs and benefits of different policies in advance. You buy home insurance in case your house is destroyed and you need to buy a new one. You buy auto insurance in case you wreck your car and need costly repairs.

Health insurance, on the other hand, is more complicated, because you have no idea what disease you may get or what the treatments would be. When you are shopping for plans and comparing the various treatments they will cover, you have no way of telling which plan fits your needs, because you have no idea which diseases you need to insure against. If you did know, then the insurance company wouldn’t sell you coverage. And that doesn’t even mention how fine print and technicalities make it difficult to assess what will actually be covered when you get sick. Thus, the other basic assumption of free markets, that buyers and sellers have perfect information, breaks down as well.

Any intro economics course will teach you that for free markets to work, two things must be true: there must be many buyers and sellers, and each must have perfect information. Without the first, one party can unfairly wield disproportionate bargaining power, and without the second, it’s impossible to make rational choices that reflect your self-interest. Because neither of these conditions hold true in the health insurance market, there is no such thing as a free market for health insurance.

Of course, most people on the Right don’t like to bother themselves with assumptions, exceptions, or other forms of complexity, preferring to believe in elegant, unchanging “truths.” By definition, conservatism is opposition to change, and that includes changing ideas. If you believe that markets always work, for example, then Dawn Smith’s story or other observations suggesting that there are times when markets don’t work, simply cannot be true. Once you start looking at the exceptions to the rules, and examining the assumptions on which rules rely, the world suddenly seems less black and white, and you can’t apply the same eternal truths to every situation. Thus, you preserve your beliefs, and reject observed facts. After all, changing your ideas based on new facts would be, well, progress.


WSJ inadvertently supports case for health care reform: do you want to trust your health to profit and loss?

The Catch-22 for Opponents of Health Care Reform

The Takeover: What opponents of health care reform don't get

Are Sarah Palin and Martin Feldstein closet universal health care supporters?


  1. Nice work on this blog and your point about the markets not always working is true.

    And let's not forget how we really don't have a choice when it comes to picking our providers. It's based on who our employers have already chosen for us--and on which state we live in since the "business of insurance" is exempt from federal anti-trust laws, each state regulates the "business of insurance."

  2. Good points. In these last couple of posts I've been talking mostly about the individual and small business insurance market, since in most cases large group policies can cover sick people (since they have to accept everyone at the company into the risk pool). It's in the individual market where you're at most risk of getting dropped. But you're right - while they may not rescind your coverage in a group policy, they will fight tooth and nail over specific treatments when you file for benefits.

    I'm curious - have you heard cases of people with group policies getting them rescinded?

  3. They have to accept everyone but they don't have to treat everyone or pay benefits. We know that one firsthand.