Why Do We Need Health Insurers?

The health insurance industry is very nervous about the reform bills making their way through Congress, and rightfully so, as lawmakers are getting cold feet about requiring individuals to buy insurance, or penalizing them if they do not.

Arguments about individual liberty aside, mandating the purchase of coverage is a critical, make-or-break issue for carriers, because early on the industry agreed to abide by the one reform everyone seems to support—eliminating the right to deny coverage or charge too high a premium differential due to preexisting conditions.

This is the only way this bargain can work. If people may put off buying coverage until they get sick, assured that no carrier can reject them or charge a considerably higher premium, it defeats the purpose—which is to broaden the pool as widely as possible with healthy individuals to spread the risk and lower the cost for all.

If no individual mandate is imposed, or if fines are too affordable, it's the worst-case scenario for carriers, more than offsetting the benefit of drawing millions of more customers into the health insurance market.

There is also concern about a public option somehow sneaking into the final reform bill. While the Senate Commerce Committee fought off calls to include a government-run plan in its version, another Senate measure does have such a provision, and the House of Representatives likely will include one as well.

That means it's possible a public option could make the final bill coming out of the Senate, or out of a conference committee reconciling the House and Senate versions.

That, too, might prove to be the death knell for private insurers, which fear they cannot compete with a non-profit insurer backed with the unlimited financial resources of the federal government.

Rep. Anthony Weiner, D-N.Y. (who happens to be my representative in Congress, and who used to be my New York City Council member) has been outspoken in pushing the public option. He has thrown down the gauntlet in numerous forums—including HBO's “Real Time With Bill Maher”—demanding to know value what, if any, health insurers bring to the market.

It's not an unfair question, especially if a reform bill is passed precluding rejection of individuals with preexisting conditions. If insurers cannot underwrite applicants and set a premium rate accordingly, are they really an insurer anymore, or simply a bill-paying system?

Private carriers already overlook individual medical histories in group plans, spreading the risk among an account's insureds. If insurers are also no longer allowed to “discriminate” against individual buyers seeking coverage based on medical history, how does the carrier set a “fair,” let alone “reasonable” price?

In such an environment, one must then ask, what exactly does a private insurer add to the equation, other than cost? Even if they are permitted some surcharges to discourage unhealthy behavior, is that worth the price of the private system?

When challenged by “civilians”—those outside the insurance business—I have struggled to make a coherent argument about why private health insurers should be preserved, no matter what the cost.

Some might argue against having “the government” control all health insurance, and therefore all health care (although few are suggesting we do away with Medicare, Medicaid or Veterans Administration hospitals). Outcries against “socialism” are also quite loud. But those are political and ideological arguments, not economic ones.

I could use your help in defending the industry. What are the purely economic arguments for preserving private health insurance, rather than eliminating profits and frictional costs by going with a public option?