Matthew Holt

Why AHIP needs the public option

It’s been a fun week. After years of THCB explaining that neither could AHIP do genuine research nor could its venerable President open her mouth without lying, the rest of the world has caught on. I won’t rehash the blow by blow here—Jonathan Cohn is among many who’s done that already—but essentially AHIP commissioned PWC to include the half of the analysis about the Baucus bill that was favorable to them and leave the rest out. And the fall from grace has been particularly fun to watch. Even the whores from PWC who wrote the report criticizing the bill have been backing away from it. And some astute commentators think that the debacle has helped the likelihood of a more liberal bill’s passage.

Now to be fair (or overly fair as they’d never concede this to the other side), the insurers have a point. They loaded Baucus up with lots of cash and put a former Wellpoint exec in as his chief of staff. They romanced the White House and kept quiet when Pelosi and the rabble criticized them. The deal they thought they’d cut was that they would give up the way they currently make money by underwriting and risk skimming in individual-small group and being overpaid for Medicare Advantage, and in return they’d get 45 million more customers, all forced to buy insurance and subsidized by the government to do so.

But somehow along the way the Democrats, despite lots of tough talk about “bending the curve,” lost the cojones to find even a mere $100 billion a year to redistribute from the probably $1 trillion waste in our $2.5 trillion health care system.

So they had to go look for new taxes, and also decided that the “cost” of the changes had to come in at under $100 billion a year. Joe Flower eloquently asked why $1 trillion over 10 years was a relevant number, but it’s somehow become politically sacrosanct. But if you can’t find all the money elsewhere in health care, and yet you still want the uninsured to buy real insurance, you have to subsidize them.

If you decide that you have to spend less than $100 billion, you have to lower those subsidies, which means fewer customers for the insurers. And worse, in the Baucus bill, the rules on the insurers forbidding them from business as usual on underwriting are not matched by a serious individual mandate and there’s no employer mandate at all. So that was the reward the insurers got for their money and pliability. A glass they perceive to be half empty.

Employers get more or less what they want—no employer mandate. The unions get what they want, no real tax on health benefits and the maintenance of the awful employer-based health benefits system. And the poor suckers now are the insurers, especially the Blues (including Wellpoint) who stand to lose their very profitable small business and individual market business. And yet they are not going to get many more enrollees. So they can’t make it up on volume!

The insurers are terrified that they’re going to have to sell insurance to a bunch of sickies who’ll game the system (and from Charlie Baker’s story of his experience in MA they will!) and they won’t be able to use their usual self-protection techniques of underwriting and price discrimination. Soon, or in 2013 anyway, hordes of sick people will begin to buy insurance that’s effectively guaranteed issue at a regulated price, and yet no hordes of healthy people will also buy to expand the risk pool. For insurers this becomes a very difficult situation.

What then would be their way out?

Wouldn’t it be good for the insurers to find a greater fool on whom to pawn off these sickies? Someone who had by law to take all comers, who had to do it at a lower price, and who could lose money without going out of business? Wouldn’t it be good if there was that type of pool to risk shift against?

Doesn’t that sound like a government-run public insurance option?

I said a few weeks back that the liberals advocating a government option might be surprised because private insurers are very good at risk shifting against it. But it’s only recently occurred to me that AHIP and its fellow travelers not only need higher subsidies for so that poorer people can buy their products, they also really need a public pool to surreptitiously dump their bad risks into.

So it seems to me that AHIP will have to quietly support the public option. Otherwise they’re really in trouble. If they don’t they may actually have to think about trying to reduce overall costs in the system. Something historically you might say they are not best suited for.

I await Ms Ignagni’s next public pronouncements with interest.

Categories: Matthew Holt

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