Why Americans should be afraid, very afraid, of the next step in health care.

Saturday, 23 January 2010 13:41 Written by David Strom

The Tea Party Movement, the Republican Party, and the American people all scored a big victory this week with election of Scott Brown to the US Senate.

Brown’s election was almost certainly the last nail in the coffin of President Obama’s push for a comprehensive health care reform initiative. That’s the good news.

Unfortunately there’s the bad news that has so far remained unnoticed amidst the justified celebrations of the reform package’s demise.

Democrats have been making what seem to be encouraging noises about scaling back their health care package to cover only the popular portions of the bill. In doing so they hope to either encourage or bully Republicans into jumping on board the bandwagon. They emphatically will not, however, come close to adopting the smarter Republican ideas about how to reform health care. Instead, they will focus on the most popular portions of their bill and drop the least popular.

What would that mean? The centerpiece of their proposal will be banning insurance companies from limiting coverage for pre-existing conditions. This would be popular, and be very difficult for Republicans to oppose.

However good it sounds, however, passage of such a measure without a corresponding requirement that everyone buy health insurance would put the current insurance system into a death spiral.

Here’s how it would (not) work: by banning insurance companies from limiting coverage of pre-existing conditions Congress would be creating a massive incentive for consumers to abandon health insurance entirely, even to the point of moving into a fee-for-service model for routine health care. After all, most of us would pay much less for medical services than insurance premiums if we stick to going to the doctor for routine care.

 Sounds OK at first, doesn’t it. After all you would inject more market forces into the provision of routine health care, which would lead to lower costs and more competition.

But the flip side of that shift would be the trend of purchasing health insurance only after a serious medical condition hits in the family. Since insurance companies would have no choice but to accept all comers, a consumer could forgo purchasing insurance in good times, and subsequently shift the more expensive care onto insurance companies once disaster strikes.

That’s a great deal for consumers, at least at first. It would lower their outlay for health care without putting their finances at risk.

But how would that work for insurance companies? Put simply, their business model would likely collapse and insurance costs would skyrocket. The current insurance model works just like it does for car or homeowner’s insurance. Just as you can’t purchase car insurance to cover an accident after it occurs, you can’t purchase health insurance after you get sick.  Premiums paid in good times provide the financial cushion for the large payouts necessary when disaster strikes, the insurance premiums of the healthy subsidize the payouts of the ill. This is a good deal for everyone because none of us can indefinitely or reliably count on remaining healthy.

There’s an easy way to fix this problem, in principle: convert all insurance into high deductible policies that only cover major medical expenses, while maintaining stringent pre-existing condition exceptions (thus incentivizing insurance purchase). But that is not what Democrats have in mind, because it would not be popular with their core constituencies or indeed the American public at large.

Hence the potentially disastrous consequence of the collapse of the current health care reform package, however welcome that demise is. We could actually get something worse if this alternative is not headed off at the pass, and soon.

Of course this disaster scenario is predicated on the assumption that Democrats will be supremely cynical in their attempt to salvage something out of their defeat. Maybe I am not giving them credit for responsibility that they deserve. We can only hope.