Private Senior Health
Insurance
Health insurance is one of the most
controversial forms of insurance because of the perceived conflict between the
need for the insurance company to remain solvent versus the need of its
customers to remain healthy, which many view as a basic human right. Critics of
private health insurance claim that this conflict of interest is why
state and federal regulation of health insurance companies is necessary.
Some say that this conflict exists in a liberal healthcare system because of the
unpredictability of how patients respond to medical treatment. But proponents of
regulation argue that too many health insurance companies put their desire for
profits above the welfare of the consumer or patient.
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The following is a hypothetical example of a situation that might confront an
insurance company: Suppose that a large number of customers of a particular
insurance company contracted a rare disease and the hospital charged 10 million
dollars a patient to treat them. The insurance company would then be faced with
a choice of paying all claims without complaint (thus losing money and possibly
going out of business) or denying the claims (thus outraging patients and their
families, discouraging potential customers, and becoming a target for lawsuits
and legislation).
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Since a health insurance policy is a legal, binding contract between the
insurance company and the customer, the insurance company should pay all valid
claims without question. Many insurance companies purchase re-insurance to
protect themselves from a catastrophic loss due to an unforeseen event. But just
like any other business, a health insurance company does not have a right to
shirk its legal obligations just to make a profit or stay in existence.
Health insurance companies and consumer advocates agree that private
health insurance faces unique problems. Health insurance companies
use the term "adverse selection" to describe the tendency for sick people to be
more likely to sign up for health insurance. Insurance companies say that
asymmetry of information about a person's health and behavior is likely to lead
to adverse selection and (ex-ante) moral hazard. Health insurance companies say,
that in essence, those seeking health insurance are likely to be those with
existing medical problems or those who are likely to have future medical
problems, and that those who take out insurance may engage in risky behavior,
such as smoking and excessive alcohol consumption, which an otherwise sane
person would not do. Insurance companies say that the cost of providing health
insurance to these bad risks raises the cost of insurance to the 'good'
insurance risks, possibly pricing them out of the market, and could create a
situation in a market where insurance was uneconomical for private insurance
companies to provide.
One must also recognize that both
public and private health insurance will also suffer from ex-post moral
hazard. This phenomena is in essence the consequence of reduced prices
for medical care. Since most insurance plans, whether public or private,
reduce the out-of pocket cost of medical care, the behavior of
individuals will be affected by those reduced prices. In the same way
that people treat water with little care when it is very inexpensive,
people will also tend to over-use medical care when the out-of pocket
costs are small. Of course, medical care still needs to be financed, and
so taxes or premiums will be higher than the optimal amount. This
inflation of taxes or premiums to cover the choices made under
subsidized prices is what is termed ex-post moral hazard, and is a
different phenomena than the ex-ante moral hazard mentioned above.
Critics of private health insurance state that those who are sick should
be able to get health insurance because they need it the most and that
if everyone had health insurance, adverse selection would not be a
problem.
With publicly funded health insurance the good and the bad risks all
receive coverage without regard to their health status, which eliminates
the problem of adverse selection, although it introduces a problem of
moral hazard. As to the concept of moral hazard, those who favor public
health insurance ask, do people play with matches in their homes if they
have fire insurance or drive like maniacs if they have auto insurance,
or do some people just engage in self destructive behavior for no
rational reason.
Insurance companies explain the economics of insurance by saying that,
in general, if many sick people buy health insurance from a private
health insurance company, but few healthy people buy it, the price of
the insurance rises. (Critics of private health insurance point out that
few sick people are allowed to buy health insurance). Insurance
companies also say that if more healthy people buy health insurance, but
few sick people buy it, the price drops. In other words, the price drops
if more money goes in and less is paid out.
According to the latest United States Census Bureau figures,
approximately 85% of Americans have health insurance. Approximately 60%
obtain health insurance through their place of employment or as
individuals, and various government agencies provide health insurance to
25% of Americans.
Because of advances in medicine and medical technology, medical
treatment is more expensive, and people in developed countries are
living longer. The population of those countries is aging, and a larger
group of senior citizens requires more medical care than a young
healthier population. (A similar rise in costs is evident in Social
Security in the United States.) These factors cause an increase in the
price of health insurance.
Some other factors that cause an increase in health insurance prices are
health related: insufficient exercise; unhealthy food choices; a
shortage of doctors in impoverished or rural areas; excessive alcohol
use, smoking, street drugs, obesity, among some parts of the population;
and the modern sedentary lifestyle of the middle classes.
In theory, people could lower health insurance prices by doing the
opposite of the above; that is, by exercising, eating healthy food,
avoiding addictive substances, etc. Healthier lifestyles protect the
body from disease, and with fewer diseases, the insurance companies
would pay fewer doctor bills.
Under these circumstances, consumer would hope to benefit from the
savings; however, critics of private health insurance claim that too
much of the insurance premiums are paid out in executive salaries or
retained as profits by the company.
Before buying health insurance, a person typically fills out a
comprehensive medical history form that asks whether the person smokes,
how much the person weighs, and has the person ever been treated for any
of a long list of diseases. Applicants can get discounts if they do not
smoke and live a healthy lifestyle, which might encourage some people to
quit smoking or make other improvements in their lifestyle. The medical
history is also used to screen out persons with pre-existing medical
conditions.
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