Is the Private Insurance Industry Doomed?

James Suroweicki's interesting new column sees community rating -- the new law that will require health insurers to cover all comers at the same price regardless of their health risk -- as the downfall of the private health insurance industry. Kevin Drum agrees. I don't.

First, let's hear James' argument (via Daily Dish):

Congress's support for community rating and universal access doesn't fit well with its insistence that health-care reform must rely on private insurance companies. After all, measuring risk, and setting prices accordingly, is the raison d'être of a health-insurance company....Congress is effectively making private insurers unnecessary, yet continuing to insist that we can't do without them.

The truth is that we could do just fine without them: an insurance system with community rating and universal access has no need of private insurers.

OK, it's true that community rating makes large-scale risk evaluation -- or underwriting -- unnecessary, but the universal mandate to buy health care quite obviously strengthens private insurers by adding millions of subsidized customers. Even as health care reform makes these companies "unnecessary" it's also making them stronger. Here's Kevin:

I agree [with James], and it's one of the reasons that, warts and all, I support the current healthcare reform legislation so strongly. My take is that community rating at the national level can eventually lead to only two outcomes: (a) the end of private health insurance completely¹ or (b) the transformation of private insurers into regulated public utilities ... It's too bad we'll have to wait so long for this to happen, but today's healthcare legislation puts it on the road to inevitability.

I'm not so sure. On the one hand, I similarly see this bill as first step rather than a final edit of the health care system. On the other hand, the private insurance industry is very clearly strengthened by this health care bill. After all, the universal mandate gives them millions of additional mandatory customers. The absence of any guaranteed cost control provisions means that premiums aren't going to stop growing really really fast -- even though the government will be paying for much of the increase with subsidies to poorer families. There is nothing in the Senate bill that guarantees a move away from fee-for-service (although there are some limited efforts to find more affordable means of providing care), which is the main driver of our medical inflation.

One of the interesting things about the health care debate last year was that the Right rallied against the bill on the grounds of radicalism and socialism when in fact the bill's principle weakness was its lack of radicalism. The truly radical ideas where policy wonks on left and right could get even close to holding hands -- e.g.: moving away from employer coverage and the soaring costs of fee-for-service toward a combination of health savings accounts, public insurance and all-government coverage for the poor, the old, and catastrophic care -- is light-years away from where Congress was willing to go.

A while back, I wrote that calling socialism on this bill was like watching a construction company add a fourth bedroom to your house and accusing them of arson. I still think that way. I support this bill, this metaphorical room addition, but eventually we're going to have to revisit the fact that the home's foundation remains flawed.