Recently, the Trump Administration released final rules on an executive order signed in October 2017 that deals with association health plans. Ostensibly, this order attempts to lower the cost of health insurance for the self-employed and small businesses by allowing them to band together for the purchase of insurance. While this is a noble goal, it’s worth noting a few facts to keep in mind as the discussion continues.
First, it’s almost universally accepted that the larger the organization buying a service or product, the lower the unit price that organization will pay. In the majority of industries, this idiom makes sense and holds true. It is cheaper per unit for me to manufacture 1000 fidget spinners than it is to only make 10 because a good portion of my costs don’t increase proportionally to the number produced, such as rent, utilities, equipment, etc. Plus, the more raw materials I buy, the more these economies of scale work their way up the supply chain and lower their cost.
Unfortunately, insurance isn’t like most industries because the “service” they provide is paying some else’s bills. The majority of their costs are payments of medical claims. In fact, the Affordable Are Act stipulated that, at minimum, 80% of all premiums dollars collected in the individual and small group markets (85% for large) had to be spent directly on claims. Yes, there are economies of scale that come into play. If I’m the largest insurance provider in the area, then I can negotiate to pay doctors less per service than, say, a smaller startup insurance company could. But these negotiation happen at the insurance company level, which represents hundreds of thousands of members with millions of claims annually, not at the individual business level. Put another way, a small business is already benefiting from the negotiating power of the insurance company.
Second, it’s important to understand that small businesses and individual are already banded together for the purposes of buying insurance. When purchasing insurance, and individual is lumped in with all the other individuals buying insurance in that market, and receives the same rate that anyone else in that market would based on their age. The same goes for small businesses under 50 employees. This system was dictated and driven by ACA, though many states had adopted a similar model prior.
Since the main driver of insurance costs are rising medical claim costs, it’s impossible to make any significant dent in health insurance premium without reducing medical claims. And the only way to do reduce claims is to either reduce the demand (healthier population) or reduce the supply (excluding coverage). Which brings me to the next feature of the executive order. Small group and individual plans currently have to include certain mandated coverages, such as hospital services, maternity, pediatric dental/vision, and prescription drugs. This isn’t to say that plans couldn’t have covered them otherwise, simply that they may not have had to. The new rules allow these associations to be treated as large employers, instead of falling under the small group and individual mandates. But by cherry-picking and excluding such services, plans can reduce their claims and therefore costs. The problem is that consumers don’t know what they’ll need until they need it. And if people only pay for the coverage when they need the specific care, then it’s no longer insurance. The cost of the insurance would logically be equal to the cost of the care, that is to say unaffordable for most people.
What brings this to a head is the simple fact that a small number of individuals incur the majority of claims. In general, 20% of a population will incur 80% of the medical expenses, though that math has become even more lopsided over the years. This means that 1 person is using far more than they put in, whereas the other 4 are paying far more than they get. Unfortunately, going from being a “payor” to a “user” can happen overnight, regardless of how healthy the person’s lifestyle. And they system cannot survive if participants only pay in when they’re sick. Insurance in all forms is a method of spreading risk. It is certainly understandable that no one wants to pay a lot for something from which they receive little benefit, but until the crystal ball is perfected or healthcare becomes free, going without insurance is a risk that most cannot afford to take.
It’s admirable that the administration and legislation continue to acknowledge and look for solutions to what has developed into a serious problem, the unaffordability of health insurance. But insurance costs are merely a highly visible symptom of a disease, and that disease is the increasing healthcare costs. Just as we can’t cure strep throat with cough drops, we can’t address rising healthcare costs by regulating (or deregulating in this case) health insurance. The harder discussions will be around what level of care we are willing to accept for the cost we are willing to pay.