The Health Insurance Death Spiral

Health insurance companies are easy targets at a time when everyone is looking for someone to blame.  Who among those fortunate enough to have insurance hasn’t had a nasty disagreement with their health insurance company at some point?  These companies always seem to be headquartered in lavish buildings, and many of their executives appear to enjoy opulent lifestyles.  A New York Times editorial recently reported, “America’s five largest health insurers made a total profit of $12.2 billion last year; that was 56 percent higher than in 2008, according to a report from Health Care for America Now.”  I would guess health insurance executives have popularity ratings comparable to politicians, bureaucrats, and bankers at the moment.

Insurers probably deserve a good share of the blame for rising health care costs, but targeting the companies as the only culprits is a mistake.  The City of Albany’s premium payments over the past three years have been substantially less than the claims paid by our insurer.  The total premium amount collected by our insurer from the beginning of fiscal year 2008 through last month was $11,046,695, while claims during the same period totaled $12,250,954.  No insurance company can stay in business very long if it is paying out more in claims than it is collecting in premiums.

Paul Krugman, a Nobel Prize winning economist, recently called attention to what he describes as the “California death spiral.”  He explained in a recent column, “…cash-strapped Californians have been dropping their policies or shifting into less-comprehensive plans.  Those retaining coverage tend to be people with high current medical expenses.  And the result, says the company [WellPoint], is a drastically worsening risk pool:  in effect, a death spiral.”  Krugman suggests universal coverage is the best solution to the problem.

Higher claims and reduced premium revenue are obviously not unique to California.  The same problem is playing out on a smaller scale in Albany and will not change unless there is a substantial increase in the number of people who have health insurance coverage or a significant reduction in demand for medical service.  The problem would likely persist, however, even if both conditions were satisfied.

Medical costs continue to increase at a much higher rate than general inflation.  During the past decade, the average annual rate of increase for health care was 4.3 percent, while the Consumer Price Index (CPI) went up at an annual rate of only 2.6 percent according to the Bureau of Labor Statistics.  While costs have increased, health care outcomes have not necessarily gotten better.

Healthier lifestyle choices, a more effective insurance system, and better utilization of health care resources may all be necessary to stop the death spiral and make possible high quality, sustainable health care for all of us.