Why health insurance premiums will always go up
Several weeks ago, the San Jose Mercury News did this story comparing the cost involved in driving a car versus taking public transportation. (Because the Mercury News is a very uncool paper that doesn't make their stories available on the web indefinitely for free, the story I'm referring to is called "Running on Empty: Bay Area transit in crisis" and was written by Mike Rosenberg. The story ran on January 9, 2010 on what I believe was the front page of the main section of the Merc).
Anyway, the conclusion of the story was that -- surprise, surprise -- in almost all circumstances, taking public transportation around the Bay Area is an all-around loser. It takes longer to get where you're going -- sometimes 2 or 3 times longer -- and you don't save enough money to make the extra time spent worth it. On top of that, depending on the agency, you risk being beat up or stabbed. The only way public transit makes sense is if parking a car is either very expensive or very difficult. When I go into downtown San Francisco, for instance, I always take public transit because parking is so expensive.
The reason for the Mercury News' article originally was that the imploding economy is causing many public transportation agencies in the Bay Area to lose money as income falls but expenses don't. To plug their deficits, these agencies are raising fares.
The problem with raising fares, as the Mercury News discovered, is that it actually makes the deficit worse. As fares get more expensive, people with cars decide that it's actually more convenient (and possibly cheaper too) to drive instead. As a result, fewer people take public transit which means the agency still gets fewer fares. The only result of higher fares is that people who have no choice but to take public transit (the elderly, the poor, the young, etc) are forced to fork over ever increasing amounts of money to get where they're going.
This same phenomenon is quite common in other arenas. When newspaper or magazine circulation decreases -- perhaps because the subscriber views the paper online, people think the reporting sucks, etc -- the publication itself gets less subscription revenue. It may be tempting to simply raise subscription rates on the remaining subscribers to make up the difference, but what does that do? Right. It causes more people to cancel their subscriptions which means even less revenue. When you factor in advertising, the problem gets even worse. Fewer subscribers means lower advertising rates since advertisers don't want to pay a lot to advertise in a paper few people read. If you raise advertising rates to make up the difference, you merely accelerate the rate at which advertisers leave.
The other arena (or at least the other arena that comes to mind right now) in which this occurs is health insurance. Recently, Anthem Blue Cross made headlines in California because it wanted to increase health insurance premiums for some customers by 39%. The reason? A variety of factors, including the poor economy, the higher cost of treatment, etc.
Like most people, I've noticed for the longest while that the cost of health insurance just keeps going up -- often much faster than the rate of inflation. I struggled for the longest time to understand where all that money was going, but now I think I understand.
Because health insurance is not mandatory, healthy people who are unlikely to need health insurance -- for example, healthy 23 to 26 year olds -- often get rid of it to save money when the economy gets bad. The underlying idea of any type of insurance is that the premiums paid by those who are unlikely to need it subsidize the expense of providing benefit to those who are likely to need it. In other words, healthy people help pay for the cost of treating the unhealthy. As more and more healthy people drop their health insurance, poor people necessarily have to pick up more of the true cost of their treatment.
By raising premiums on the unhealthy, however, you simply cause more people to drop their insurance. For example, maybe it was the healthy 23 to 26 year old customers who dropped their insurance when the economy went south. This caused premiums for everyone else to go up in order to provide the same coverage for those who remained. The new higher rate, however, will cause the healthy 28 to 31 year old customers -- people who likely don't need health insurance also, but who have less price elasticity than the healthy 23 to 26 year old customers -- to drop their coverage. This in turn causes premiums to go up even more for the people who remain.
At this new higher rate, maybe the healthy 32 to 36 year old customers will be incentivized to drop their coverage, thereby causing rates for those who remain to go up further still, which then causes the health 37 to 40 year old customers to drop their coverage... and the cycle keeps going.
Thus, it's not so much the cost of health care is increasing rather than there are simply fewer people remaining to cover that cost.
Anyway, the conclusion of the story was that -- surprise, surprise -- in almost all circumstances, taking public transportation around the Bay Area is an all-around loser. It takes longer to get where you're going -- sometimes 2 or 3 times longer -- and you don't save enough money to make the extra time spent worth it. On top of that, depending on the agency, you risk being beat up or stabbed. The only way public transit makes sense is if parking a car is either very expensive or very difficult. When I go into downtown San Francisco, for instance, I always take public transit because parking is so expensive.
The reason for the Mercury News' article originally was that the imploding economy is causing many public transportation agencies in the Bay Area to lose money as income falls but expenses don't. To plug their deficits, these agencies are raising fares.
The problem with raising fares, as the Mercury News discovered, is that it actually makes the deficit worse. As fares get more expensive, people with cars decide that it's actually more convenient (and possibly cheaper too) to drive instead. As a result, fewer people take public transit which means the agency still gets fewer fares. The only result of higher fares is that people who have no choice but to take public transit (the elderly, the poor, the young, etc) are forced to fork over ever increasing amounts of money to get where they're going.
This same phenomenon is quite common in other arenas. When newspaper or magazine circulation decreases -- perhaps because the subscriber views the paper online, people think the reporting sucks, etc -- the publication itself gets less subscription revenue. It may be tempting to simply raise subscription rates on the remaining subscribers to make up the difference, but what does that do? Right. It causes more people to cancel their subscriptions which means even less revenue. When you factor in advertising, the problem gets even worse. Fewer subscribers means lower advertising rates since advertisers don't want to pay a lot to advertise in a paper few people read. If you raise advertising rates to make up the difference, you merely accelerate the rate at which advertisers leave.
The other arena (or at least the other arena that comes to mind right now) in which this occurs is health insurance. Recently, Anthem Blue Cross made headlines in California because it wanted to increase health insurance premiums for some customers by 39%. The reason? A variety of factors, including the poor economy, the higher cost of treatment, etc.
Like most people, I've noticed for the longest while that the cost of health insurance just keeps going up -- often much faster than the rate of inflation. I struggled for the longest time to understand where all that money was going, but now I think I understand.
Because health insurance is not mandatory, healthy people who are unlikely to need health insurance -- for example, healthy 23 to 26 year olds -- often get rid of it to save money when the economy gets bad. The underlying idea of any type of insurance is that the premiums paid by those who are unlikely to need it subsidize the expense of providing benefit to those who are likely to need it. In other words, healthy people help pay for the cost of treating the unhealthy. As more and more healthy people drop their health insurance, poor people necessarily have to pick up more of the true cost of their treatment.
By raising premiums on the unhealthy, however, you simply cause more people to drop their insurance. For example, maybe it was the healthy 23 to 26 year old customers who dropped their insurance when the economy went south. This caused premiums for everyone else to go up in order to provide the same coverage for those who remained. The new higher rate, however, will cause the healthy 28 to 31 year old customers -- people who likely don't need health insurance also, but who have less price elasticity than the healthy 23 to 26 year old customers -- to drop their coverage. This in turn causes premiums to go up even more for the people who remain.
At this new higher rate, maybe the healthy 32 to 36 year old customers will be incentivized to drop their coverage, thereby causing rates for those who remain to go up further still, which then causes the health 37 to 40 year old customers to drop their coverage... and the cycle keeps going.
Thus, it's not so much the cost of health care is increasing rather than there are simply fewer people remaining to cover that cost.
posted by Andy!! at 1:20 PM
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