Michael Wolraich's picture

    Health Insurance - The Cheap Rider Problem

    I'm a freelancer and pay for my own health insurance. Since I'm (relatively) young and healthy, and since I rarely see a doctor more than once a year, I have a fairly inexpensive plan with a pretty high deductible.

    Stupid question: If the House health care bill is adopted, shouldn't I opt for the cheapest plan that I can find?

    Who cares about the deductible, the benefits cap, or the allowable procedures? Since the health care bill prohibits insurance companies from rejecting customers based on preexisting positions, couldn't I buy the "Kia" plan and upgrade to a "Cadillac" if I were to get sick?

    Thought experiment: Suppose that there are two insurance companies, one that sells only Kias and one that sells only Cadillacs. Healthy folks buy the Kias; sick folks buy the Cadillacs. When the healthy folks get sick, they upgrade. In this scenario, the Kia dealer makes easy money because it never has to pay out anything. The moment its customers get sick, they upgrade, and then the hefty benefits payments are the Cadillac dealer's problem. Conversely, the Cadillac dealer gets screwed. No matter how high the premiums, benefits for sick people cost more than their premiums, which is why the sick people sign up for the Cadillacs in the first place.

    Stupid question #2: If the House health care bill is adopted, shouldn't insurance companies offer the fewest benefits they can?

    In becoming a Kia dealer, an insurance company can maximize the number of young, healthy members by offering low premiums, and it can minimize the number of old, sick members by offering paltry benefits.

    If that's the case, then every insurance company would eventually become a Kia dealer, and there would be no more Cadillacs for sale. The nation's insurance premiums would go down, but the benefits would be poor. Deductibles would be high, and expensive procedures would be prohibited.

    To date, there has been much discussion about the free rider problem, according to which "free riders" game the system by purchasing insurance only after they get sick. The mandatory insurance requirement of the health care bill avoids the free rider problem.

    But what about the cheap rider problem, according to which "cheap riders" game the system by purchasing expensive insurance only after they get sick. Is there anything in the health bill to deal with this problem?

    I should note that the the "cheap rider" problem may not be all bad. It could certainly bring down health care costs by eliminating expensive, unnecessary procedures. But it could also deny Americans access to expensive, important procedures that we may not want to give up. Worse, it could mean that Americans without a lot of money may forgo essential treatment because of the high deductibles.

    I confess to limited understanding of the health care bill, and perhaps someone can explain how the bill avoids this problem. If so, please speak up...


    G, I can't say whether this is part of the House healthcare bill (if that's the bill you're referring to), but one proposed solution to this problem is to average costs over the whole population so that everyone pays the same amount for coverage.  The argument for this is usually based on the upward pressure on healthcare demand as we age.  So, we pay more when we're younger so that healthcare remains affordable when we're older.

    Another way to address this problem, at least in part, is to do something that many other nations do: Fix prices for basic care and prohibit profits on the same.  But the success of this depends on a unified payment system.  Since everyone pays the same amount and costs of basic care are tightly regulated, patients who suddenly have greater needs don't need to jump to a "Cadillac plan" or a much more expensive risk pool.

    As I think about this some more, both schemes seem to rely on essentially averaging costs among the population.  When it comes down to it, private insurance is probably not the best model for financing healthcare.  Maybe we'll figure that out someday.

    There are definitely ways to avoid the problem, as you present, but I'm not sure how the current House plan avoids it, and I haven't seen anyone raising concern about it.

    Yeah, I have no idea either.  It's one downside to enacting a hodge-podge of seemingly disparate reform initiatives as opposed to simply moving to a different system of finance.

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