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.
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).
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.