The following are some of my thoughts on a March 19th, 2012, Health Affairs Blog by:
by William Kramer
for the original blog.
It is easy to miss the real problems with the state exchange model. When this happens it is comforting to think that we might tweak a system a bit that was, in what will be the final analysis, guaranteed to fail from the start. Under the tweak approach we can fix a few isolated problems in much the same way that Copernicus fixed a few of the problems with the geocentric universe.
The problem, unfortunately, is that in insurance markets there actually is a single best, most efficient, and least problematic design. The optimal size for an insurer is the largest possible portfolio possible. In the case of health benefits this would entail eliminating hundreds of smaller, less efficient health benefit plans and insurance policies in favor of a single insurer covering all 309,000,000 Americans.
This single insurer, with a single set of benefits, a single set of forms, a single set of standards for evaluating the costs and outcomes of interventions, is the most mathematically efficient insurer possible.
By efficiency I refer, of course, to the proximity the insurer’s loss ratio to the population loss ratio for the population served. No smaller insurer will have loss ratios as close to the population loss ratio as the single largest insurer possible. In fact, simple applications of the Central Limit Theorem will allow us to specify how much further from the population loss ratio a smaller insurer’s loss ratios are likely to fall.
If a relatively large and reasonably efficient insurer, our Paradigm Insurer, has a loss ratio that wobbles around the population loss ratio of 0.7500 from year to year, in a manner that suggests that about 95% of years will produce loss ratios of 0.6500 to 0.8500, how far from 0.7500 would our national health insurer’s loss ratio be likely to fall over the same number of years if it is insuring 309,000,000 and offering identical benefits?
The answer is that the national health insurer’s loss ratio would lie between about 0. 7443 and 0.7557. This assumes that the standard error of the estimate of the population loss ratio for the Paradigm Insurer is 0.0500 and multiplies this by the square root of the ratio of the size of the national health insurer’s portfolio to that of the Paradigm insurer. In short, the standard error of the estimate of the population loss ratio for our national health insurer is about 0.0028, far lower than the Paradigm Insurer’s standard error.
Among the advantages of this largest possible insurer are that it would have a higher probability of achieving reasonable profits, it would have a far lower probability of incurring solvency threatening losses, it would provide higher benefits per premium dollar than any smaller insurer, and it would need far less surplus to assure its solvency. From a purely mathematical viewpoint there is no number of insurers greater than 1 that can compete with these operating characteristics.
No amount of political ranting and intentional misinformation can overcome the obvious advantage of a national health insurer yet this does not stop either the ranting or the intentional misinformation.
Even beyond the mathematical superiority of a single, optimally sized national health insurer, is the elimination of all the inefficiencies that accrue with hundreds of insurance companies, thousands of specific benefit benefit plan inclusions and exclusions, the resulting uncertainties about benefit eligibility, and the massive litigation over benefits, not to mention the waste and inefficiencies involved in insurance underwriting, rate making, reserving, and capitalizing all these inefficient insurers.
So, given that there actually is a mathematically, single most efficient insurer, we must focus on why we continue to look everywhere else but there for solutions to our problems, with all too predictable results.
In the final analysis the answer seems clear enough. Our current system of hundreds of health insurers and health benefits companies accomplishes something that the national health insurer will never be able to accomplish. We succeed in rationing care, limiting access to health care, delaying and denying potentially expensive health care services at arm’s length through our current system.
If we implement a national health insurer we will actually have to decide, and explain in detail, what benefits everyone will be eligible to receive. Politicians and benefit overseers will have to go on record and state that certain kinds of services will not be paid by the national health insurer. Perhaps we will not provide liver transplants to life long alcoholics. We may not provide tube feeding for near comatose patients in their 90s who have not communicated with anyone for years, but are lying in nursing homes because some entity is paying for their care.
This enormously successful ability to ration care, at arm’s length, with the notion of “Plausible Denial” about what we are doing, is the most obvious benefit our fragmented and fractured health care (finance) systems bestow at this point. Unfortunately, our fragmented and fractured health care (finance) systems provide this cover at far greater cost to individual patients, health care providers, payors, and the public at large, than would be the case with an optimally sized national health insurer.
So, the answer really is that the efficiencies the authors suggests could be achieved by combining state health insurance exchanges purchasing with better, more efficient benefit plan purchasers is exactly what our policy planners, researchers, and politicians are working so hard to avoid – a coherent, well documented, health benefit plan that would equally well serve everyone in the United States, where everyone would know what benefits were available, and in which those benefits would actually be provided.
Combing purchasing would eliminate the finely orchestrated system of inconsistent benefit entitlement determinations that have been finely tuned by insurers and insurance risk assuming health care providers, who are motivated by the increased profitability that denying and delaying services provides to them.
This finely tuned health care rationing system saves trillions of dollars each year compared to any imaginable system in which everyone would have the same exact access to health care services whether they were active duty military personnel, homeless veterans struggling with war zone injuries and PTSD, senior citizens, the poor, transients, college professors, or factory workers.
Apparently almost nobody in America really wants an efficient health care finance system or we would already have one since the mathematical basis for such a system is abundantly clear.