Medicaid, health insurance in general, should be more like car insurance

Imagine you’ve just purchased a new car and it’s time to buy insurance. Luckily, you have hundreds of car insurance companies to choose from.

The power of choice means being able to investigate different policy options, customer satisfaction ratings, financial stability, and policy rates. It also means that if you’re unhappy with your company, you can easily switch to another one, especially if they have an innovative technology solution, like a cool app that lowers costs and improves service.

That freedom to switch provides a lot of power for us car owners. It keeps these companies hungry for our business and mindful of a bad reputation if they don’t satisfy us with good service after our vehicle is damaged. In addition, we don’t blink an eye if we move across the country, for our car insurance plan travels with the vehicle wherever we go.

This is an example of free markets working at their best. Profits are reasonable enough to keep hundreds of companies in business, and the competition keeps rates low. You can find easily comparable prices and plans with a quick Google search.

Unfortunately, for health insurance markets, none of the above features apply. In fact, we consumers face problems in this sector that center around company power, prices, how much profit insurers need to survive, and a dysfunctional system.

The first two articles in this series showed problems with Medicaid that need to be fixed, and we highlighted how states can use a Section 1115 waiver to adopt reforms that give recipients more control over their spending with better health outcomes. However, the intersections among the various public and private programs would remain clunky and awkward for families, and the fundamental problems with the health insurance industry are left unaddressed.

For example, it is possible for a family of four to have the mom using insurance purchased through the government-run Affordable Care Act Marketplace, the dad with individual health insurance coverage through his employer requiring him to pay premium shares and deductibles, and the children on Medicaid. And if the family then earns too much, the children lose their Medicaid, and the family needs to figure out how to purchase coverage for them.

Getting health insurance from our employer, as most of us do, is close to buying a service from a monopoly that faces few challenges from would-be competitors. Our health insurer can raise rates, deductibles, and copays almost at will. As the ultimate consumers, we have very limited choices that suit our lifestyle and health needs. We have next to no power to complain or push back since the employer makes the choice of the health insurance company and policies that are offered to us.

Not only that, prices of medical services are hidden from our view and our doctors don’t usually know them either. Those of us with higher medical needs are seen as a drag on industry profits that could also jeopardize an insurance company’s solvency. To be fair, insurance companies must navigate the messy and dysfunctional world of providing health services. Regardless, we may be steered away from lifesaving but expensive treatments. And if we lose that job through illness or downsizing, we are on our own, choosing to either forgo insurance or pay extremely high rates for individual plans. 

As we’ve covered in previous columns, our health insurance system gets even more complex with having government-provided care for low-income individuals and families that suddenly vanishes if their income gets too high. That’s called a “benefits cliff” and it creates large disincentives to work for higher incomes. Building “bridge” programs helps people transition to the private health insurance market and has had success in Indiana, but they aren’t a perfect solution. Opaque prices, the costs to cover individuals with preexisting conditions, and near monopoly power of insurance companies still dominate the system.

So, what is the solution?

Across the Atlantic, the Netherlands’ health-care system is one of the best run systems in the world, yet few Americans know how it works. It provides a solution to many of our insurance problems, using the best attributes of free markets while controlling for the unique problems with the health-insurance industry. There is no need for Medicaid or other public health program. Everyone has a private health insurance policy in their name that they shopped for.  

The secret to their system is an idea called a risk equalization fund. It is not the same thing as a high-risk pool, and it’s worth explaining.

Here’s how it could work in North Carolina. We start by determining health costs based on geographic areas. For example, every county has what’s known as an actuarial health cost, which refers to the expected future cost based on different attributes of the underlying population.

For example, Orange County, the home of Chapel Hill, has a lot of retirees; whereas, Buncombe County, the home of Asheville, has younger folks. These differences in average health-care costs can serve as a guide for evaluating risk characteristics for future health expenditures. Buncombe County will likely have lower actuarial costs than Orange County as a result. 

In a risk-equalization system, everything is done behind the scenes. Customers only need to worry about shopping for the best plan for themselves and their families. Meanwhile, each insurance company participates in a risk-equalization fund overseen by the state of North Carolina. No taxpayer money goes into the fund. The government then reimburses each insurance company from the fund based on the actuarial health cost of the company’s risk profile of its portfolio.

This equalization levels the playing field. It solves the problems of health insurers avoiding older, sicker individuals since each company gets funds to cover higher-than average costs. It also promotes competition among insurers to be more efficient in providing care, incentivizing them to lower their costs.

When coupled with existing subsidies that assist low-income families in purchasing insurance, it solves the issues of portability and universal coverage. That also avoids the pitfalls of nationalized health-care systems which can be overly bureaucratic and resistant to change, such as Great Britain’s National Health Service.

The good news is that North Carolina can start the process to adopt an equalization system now under federal law using existing Medicaid and health-care waivers. And the timing could not be better given the national movement to make America healthy again.

We believe North Carolinians deserve the best possible health-care system. If North Carolina’s political leaders choose to adopt such a market-based risk-equalization system, our health-insurance system will start to look more like a car-insurance market. That brings new meaning to the phrase, “going Dutch.”

*For more information on how North Carolina can reform Medicaid and health insurance visit foropportunity.org/nc-safety-net-solutions