Charles Petzold

“So you’re the people who won’t sell us health insurance.”

I was taken aback by the accusation. When you’re fresh out of college and newly employed in your first real 9-to-5 job at a famous insurance company in New York City, you expect people of your parent’s generation to congratulate you and make you feel proud. You don’t expect them to condemn your career choices in such a dismissive way. But there it was:

“So you’re the people who won’t sell us health insurance.”

I would have liked to deny it, but I could not. I wasn’t actually involved in the selling of health insurance (or, more pertinently, the refusal to sell health insurance), but I was certainly employed in the health insurance industry, and hence I was part of the problem rather than part of the solution.

My First Fulltime Job

When I graduated college in 1975, I was somewhat unfocused in my career objectives. After a few disastrous job interviews, I finally got one of the few jobs available to math majors. I was now employed at a major insurance company in New York City as an Actuarial Student.

In the decade I worked there, I was in the Individual Health Insurance Department. The word “Individual” means insurance that is purchased by individuals for themselves and their families, as distinguished from “Group” insurance, which is purchased by companies for their employees. The Individual Health Insurance Department was also responsible for Disability insurance as well as Hospitalization and Major Medical policies.

I eventually dropped out of the actuarial program but I continued at the company doing actuarial work, mostly related to product development. To sum up my job in one sentence appropriate for a resume, “I programmed and analyzed statistical studies of disability and health insurance claims, and used that data to develop new premium rates for existing policies and new policies.”

Soon after I started working, I visited my mother at her home in New Jersey. She had a guest — a childhood friend who was visiting from the Midwest. This woman had a son somewhat younger than me with a serious long-term illness. (I remember it as leukemia but my mother seems quite sure that it was instead a particularly vicious case of diabetes.) My mother’s friend asked me what type of work I was doing, and when I told her, she said,

“So you’re the people who won’t sell us health insurance.”

True enough. I hadn’t been working long, but it was long enough to know that you don’t sell health insurance to sick people. So yes, it was absolutely true. I was the people who wouldn’t sell health insurance to someone with diabetes, or at least not with a lot of exclusions. Sometimes an individual health insurance policy will specifically exclude a pre-existing condition, but if the condition often results in other health problems — and diabetes certainly qualifies in this respect — then of course the insurance company can simply decline to insure entirely.

And who can blame them? A private company selling health insurance can’t lose money in the process, or it wouldn’t be able to sell health insurance in the future.

What if one health insurance company tried to break the mold and cover individuals with pre-existing conditions? All the people with such conditions would rush to that company, and the company would experience many more claims than normal, and hence need to raise premiums, and hence make the policies less competitive to people without pre-existing conditions, leading to a spiraling up of premiums, eventually making the scheme unworkable.

Insurance and Anti-Selection

Insurance is fraught with paradoxes. Health and disability insurance is supposed to protect people against unexpected illnesses and expenses, but people have a greater propensity to purchase insurance if they know or suspect they will soon be able to make it pay off in claims. This tendency is known within the health insurance industry as “anti-selection.” (It affects life insurance as well. This is why life insurance policies generally have a two-year exclusion for suicide.)

Anti-selection affects Individual health insurance policies much more than Group policies. In Group policies, everyone at the company has the same policy, so everyone is at least healthy enough to hold down a job, and the group probably includes a bunch of young people of good health. Group insurance can be rather looser and cheaper than Individual insurance.

It’s the individuals who are the problem. Insurance companies are extremely wary of people who voluntary want to buy insurance. Insurance companies much prefer employing obnoxious high-pressure agents who sell policies to people who don’t want to buy them. People who don’t want to buy insurance are much less likely to need it or use it.

This is why my mother’s friend couldn’t buy health insurance — her family, and particularly her son (who later died of diabetes-related ailments) really needed it and really wanted it.

Health insurance companies make special efforts to avoid anti-selection, and soon after I began working, I learned of one of the most hideous methods that health insurance companies used to combat it. Here it is:

When someone first obtains a health insurance policy, it’s too expensive to review the application with a fine-tooth comb (a process known as underwriting). So generally the policy is issued without a lot of preliminary investigation.

But if a claim follows a little too quickly after issuance of the policy, then the real work begins: Much effort is spent attempting to find a misstatement on the application. This could be a deliberate misstatement or an accidental omission. It doesn’t matter. It also doesn’t matter if the misstatement directly relates to the claim or not. If a misstatement is discovered, the policy would be declared null and void, and any premiums paid would be refunded.

Of course, the sick claimant would then be left with medical bills and no health insurance policy, and very likely no chance of ever getting health insurance in the future.

Health insurance companies have a very long tradition of cancelling policies.

How High can Healthcare Costs Go?

At the time I was working in the health insurance industry, healthcare costs were rising so quickly it was difficult for insurance companies to keep up. Premiums on existing policies would be raised frequently to accommodate the new costs even though the policy benefits would remain the same.

At my company, there were still in effect a couple old Major Medical policies originally sold in the 1950s with high deductibles and high maximums. Due to rising healthcare costs, these policies had evolved into what are sometimes called "junk" policies with inadequate maximums. But premiums on these junk policies had to be raised regardless because the deductibles were met more easily. People who had these policies were very unhappy about getting premium increases with no apparent increase in benefits, but they were even more unhappy when they discovered these policies were inadequate to pay their medical bills.

It's a general rule that people who aren’t skilled in health insurance don't understand their health insurance policies, and are usually quite surprised when the policies fail to pay.

I think it was during my stint in the health insurance industry that healthcare costs rose above 10% of Gross Domestic Product, and much handwringing ensued as a result. But not everyone was dismayed. One of the actuaries where I worked wrote a paper or gave a talk somewhere that I found very thought-provoking. In the future, he said, healthcare costs might rise to be as high as 50% or even 90% of GDP, and there would be nothing intrinsically wrong with that. It would simply reflect our evolving priorities of valuing good health more than anything else in our lives.

But the idea of healthcare costs rising to 50% of GDP highlighted the fundamental flaw in the whole system: As long as private insurance companies govern who gets health insurance, there will be a perpetual class of people who will never be able to obtain it. How can we possibly tolerate an economy devoted so much to healthcare coexisting with companies that refuse to insure people who want and need health insurance the most?

The Failure of the Free Market

With healthcare, the free market has clearly failed. The United States now has the highest per capita healthcare costs in the world, but not a commensurate level of health, and many people still can’t afford or don’t qualify for health insurance.

Yet, everyone except the very wealthy ultimately need health insurance. You can’t anticipate the morning when you’ll find a scary lump or encounter a drunk driver, and few people can afford the high costs that can follow. In contemporary America It is now considered a matter of fundamental personal responsibility to purchase health insurance for one’s self and family.

What’s the solution to this failure of the free market?

In practical terms, people have found their own solutions. Many people without insurance use hospital emergency rooms as their primary source of medical care. This is not a very efficient use of medical resources, and it is one of the causes of high healthcare costs. The costs are spread out to the rest of us.

Some people dip into their savings or borrow money to pay for catastrophic healthcare costs, with the result that more personal bankruptcies in the U.S. result from healthcare costs than any other reason. Again, the rest of us pay.

Or, people who need healthcare simply go without, or delay getting a medical issue checked out for so long that it becomes a much more serious problem.

When the free market fails so dismally, the government is forced to act. We simply cannot afford to tolerate a situation where people can’t pay for adequate healthcare. Healthcare costs have really become a matter of national security.

Solutions and Conservative Solutions

It turns out that the United States already has a first-rate health insurance system run by the federal government. It’s called Medicare, and the only real problem with it is that you have to be 65 years old to qualify.

One easy solution to the healthcare problem is simply to remove the age restriction on Medicare. This is known as a “single-payer” approach, and instead of everyone collectively paying for everyone else’s healthcare through health insurance premiums (and costs that we all pay for as a result of people without health insurance using hospitals ERs or going bankrupt), we instead pay for healthcare in a more equitable and efficient way though taxes.

Of course, a considerable proportion of the American public feels that the federal government should not have so much jurisdiction over these things, so other solutions are sometimes proposed.

In 1989 and 1992, the well-known conservative think-tank The Heritage Foundation released two studies, “Assuring Affordable Health Care for All Americans” and “The Heritage Consumer Choice Health Plan,” which described approaches to health insurance that preserved the role of the free market, and hence appealed to conservative ideology. The Heritage Foundation recommendations involved requiring health insurance companies to make available policies with certain minimum standards and covering pre-existing conditions, but also require everyone to purchase health insurance, much like everyone who operates a car is required to buy automobile insurance.

It’s certainly not as elegant as single-payer “Medicare For Everybody,” but it seemed to be a reasonable conservative approach that retains a dominant role for the private-sector health insurance industry. Policies are required to cover pre-existing conditions, but there’s no anti-selection because everyone is required to buy health insurance.

Another essential guard against anti-selection is a uniformity of benefits. Medical costs that are more elective than others — such as pregnancy — can’t be optional because people planning a pregnancy would get the extra coverage before conceiving, and then drop the coverage after delivering. Such coverage must be mandatory for the system to work.

In 2006, Republican Governor Mitt Romney signed a bill implementing the Heritage Foundation approach in Massachusetts, and in 2010 the Heritage Foundation approach was adapted for nationwide use (but still administered by individual states) as the Patient Protection and Affordable Care Act, known popularly as Obamacare.

Insurance and Fear

By the summer of 1985, I was getting so much freelance work from PC Magazine that I quit the insurance company, and I’ve been self-employed ever since. Prior to leaving, I had the opportunity to convert my group coverage into an HMO, and even though that HMO eventually became part of another company, I’ve kept the same policy all these years. Since 1985 my premiums have increased annually, and they are currently $869.18 a month. My wife (also self-employed) has insurance through a different carrier, and her premiums are even higher — so high, in fact, that she is embarrassed that the amount be publicly revealed!

Could we have done better over these past years by utilizing the free market and shopping around for cheaper health insurance?

What stopped us, of course, was basic fear. Different doctors are members of different insurance networks, so changing insurance policies could result in losing a familiar doctor. And the older one gets, the more the pre-existing conditions accumulate. I’ve had two shoulder surgeries in recent years. If a problem related to these surgeries developed in the future, would another insurance company consider that a pre-existing condition? I’d rather not find out!

Does this even qualify as a “free market”? I don’t think so.

For these reasons, I’ve simply kept the same policy since 1985 as the premiums steadily increased to $869.18 a month.

This is What a Free Market Looks Like!

The Affordable Care Act has changed the rules, however. I thought I’d be keeping this same policy in the future simply out of inertia, but like many people, I discovered this was not to be. Much to my consternation, my policy will be cancelled at the end of 2013, and I had to get on the web to find a new one.

Fortunately, I live in a state whose government has tried to help its citizens obtain health insurance rather than hinder them, so I got on our local health insurance exchange (nystateofhealth.ny.gov) to find another policy, and the whole process turned out to be only occasionally rocky.

The exchange is quite amazing: Policies are listed side by side with benefit descriptions and premiums. I have never seen anything like this. Even when I was working for the insurance company, it was extremely difficult to obtain tables of premium rates charged by other companies.

Now this is what a free market looks like!

It turns out that I can get a Platinum (i.e., no deductible) policy for as low as $443 a month, and even the highest — an $896 outlier; the second highest is $621 — is just a little bit more than what I’ve been paying in 2013. Wow!

This is a time to be proud. For the first time in this country, we have the beginnings of a system to provide for universal health insurance coverage. It’s not single payer, and it doesn't address many of the problems discussed in Steven Brill's essential cover story in Time on healthcare costs, but it’s certainly a step forward.

And no one can ever again accuse anyone else of being “the people who won’t sell us health insurance.”