One Simple Change Could Have Huge Results

There is an insurance company business practice which, if altered, could make health insurance affordable for millions more Americans, and reduce the cost for everyone. Changing this practice would also make insurance portable. Those are two of the biggest goals of insurance reform that nearly everyone would agree upon.

This practice is grouping policy holders into pools. Your “pool” is usually your company. The problem is that this practice is an artificial structure that is intended to maximize insurance company profits by segmenting each pool (or group) as its own profit center. In fact, the insurance company’s real “pool” is every individual holding a policy with the company.
I have no problem with insurance companies making profits. I understand the business model of segmenting profit centers so that, if each one is managed to maximize profits, then if one or more do not make a profit in a given year, the profitable ones more than make up for it.
However, let’s look at the results of this practice. If you are an employee of a large company, that company, because it is a large pool, gets its insurance at a lower cost. A smaller company pays more for the same coverage. An individual can’t even afford that coverage, nor can really small businesses.

For example, let’s say there is an insurance company called Purple Shield. If I am self-employed, I can’t afford good coverage from Purple Shield because I have no “pool”. Purple Shield treats me like a one man (or one family) “pool” whose risk is spread across only itself. However, if next week I give up my attempt at self-employment and I am hired by Mega-Corporation, which is insured by Purple Shield, suddenly I can get a policy for a fraction of the price I would have paid as an individual. What has changed? I’m still the same risk. They could have thrown me as an individual into the pool with the employees at Mega-Corp when I was self-employed and let me pay the premiums. Plus, now if I lose my job at Mega-Corp, I’m out on the street again without insurance.

The only way to bring down the cost of insurance to individuals and smaller entities is to stop this practice of artificially grouping the insured by the company (or union) for which they work. Pricing is done based on spreading the risk across the group that is insured. The real group for which the insurance company is providing insurance is every policy holder they have.
Mandating the elimination of this “group” (or “pool”) business model will accomplish two things: It will allow everyone to buy insurance at lower prices because everyone will have the risk they represent spread across the largest possible number of people. Secondly, it will automatically make insurance portable, because the individual will no longer be tied to the pool they were in when the company they worked for purchased insurance for them.

Expanding the risk pool even more by allowing insurance companies to sell insurance across state lines will also help lower the cost.

Companies could still purchase insurance for employees as a perk, but that insurance would be of the employees choosing and would still be available at the same price to that employee if the relationship with the company is severed. In addition, if the tax rules were changed to give individuals a write-off for insurance, more people would be willing to buy lower cost, tax deductable policies.

This is “health insurance reform” that could make a difference. It’s also incredibly simple. It is no more complex than mandating something like “mark to market” (which didn’t work out very well because of what it was, but the point is that the government CAN mandate a business practice).

This “pool” (or “group”) concept is so ingrained that people don’t seem to be able to even consider that it is, in fact, artificial. I keep hearing experts talk about allowing small businesses to group together to form larger pools, or allowing individuals to group together to form larger pools in order to bring down costs to these smaller entities. That conversation misses the point. The risk to the insurance company is NOT really spread across whatever the insurance company defines as the pool you are in. The risk to the insurance company is, in fact, spread across everyone they insure.

The reality check is this: Mid-sized Company A is insured by my mythical Purple Shield insurance company and the cost of insurance is based on the size of the risk pool represented by the employees of Company A. There’s a toxic gas leak at Company A and every employee is affected. They all have to go to the hospital and receive expensive treatment. The premiums paid by Company A do not cover the massive expense. Where does Purple Shield get the money to pay the extraordinary hospital bills? From the premiums paid by all of the other people they insure! The risk is, in reality, shared across the entirety of Purple Shield’s portfolio of insured people. Profits will go down a bit for Purple Shield as a result of the extraordinary expense. But, if the reality was that Company A’s risk was only spread across its own employees, Purple Shield would never have been able to pay the hospital bills. Purple Shield is not bankrupt, and is in fact still highly profitable because the risk for each individual working for Company A is actually spread across every policy Purple Shield has sold. If that is the reality, why continue to price policies as though the person insured is part of a smaller subset group, making it difficult for small businesses and individuals to buy health insurance?

This very simple change to insurance company business practice, combined with allowing insurance companies to sell across state lines will result in lower cost to the consumer, more competition as insurance companies vie to create the largest risk pools possible, and create policies that attract more people into their “pool” to share the risk. It will also automatically make policies portable, because your policy will no longer be tied to your employer because your policy is no longer based on the risk pool your employer represents.

Isn’t this what we’re actually clamoring for when we ask for health insurance reform?