By Daniel Sholler, University of Pennsylvania
The role of risk rating is an often-overlooked aspect of the ongoing healthcare debate among the general public. Mention “healthcare” and “risk” in the same sentence at any middle-class American barber shop or in line at the grocery store and you’re likely to spark a conversation about preexisting conditions and insurers dropping risky clients.
But perhaps the most important definition of risk in this debate, especially in proposals for a taxpayer-backed system, involves the valuation of insurance corporations. A great deal of conservative opposition to a public option is due to the market cornering that could ensue if an “Uncle Sam Insurance Company” is introduced in the market. According to some, vying against private insurers with a capital base of taxpayer money would result in unfair competition and the eventual downfall of a percentage of insurers.
The other key argument in the conservative opposition to a public option also involves capital. The government-run insurer would not need to make a profit and could therefore charge lower premiums, crowding out private insurers and investment. Even if this were avoided by mandating that prices of medical services be lowered, this would lead to hospital closures nationwide.
A key comparison to this situation exists in the financial sector and, depending on interpretation, could be used to prove or disprove conservative theory. However, I believe the evidence points to the latter rather than the former. The usage and downfall of Fannie Mae and Freddie Mac as government-based, low-rate banks is often blamed for the collapse of other banks in the sector. Taxpayer backing for these banks allowed low rates to be charged, much like a taxpayer base would levy a much lower risk rating upon a public option insurance agency. What conservative theorists don’t take into account, though, is that banks and insurance agencies are rated much differently and that premiums for the public option could be benchmarked to other factors.
Risk rating is based off of insurance companies’ ability to pay for a calculated and estimated projection of claims by its clients. A measure of an insurance company’s risk incorporates patient health and the cost of care, so I believe the overall effect of instituting a public option would actually add to the profits of private insurers. It is unlikely that people with insurance through employers, which comprises 62.2% of all insurance among the non-elderly, would abandon this coverage in favor of a public option. But to compete, private insurers would also be incentivized to promote healthy living among clients to minimize risk rating. This in essence would lower the cost of insuring clients, which would lower premiums and maintain the clientele base and profits.
A major fear of the public option is that a government-run insurance agency would pay lower rates to healthcare providers. While this may be true, it is unlikely that this will be as substantial as widely conceived. The government will not pay Medicare rates for non-Medicare patients.
It is unknown what form the healthcare bill will take (if any) before it is passed. The prospects of a public option are dwindling, but it should be reconsidered at all levels of government. In any case, a plan needs to be instituted that affords coverage to lower and middle income Americans. Many favor a tax credit system. However, this incentivizes insurers to charge higher copayment and coinsurance. While this is all good and well for encouraging healthier living and lower spending on healthcare, plans with high copayments and coinsurance are unlikey to attract a large clientele base.
