The Difficult Math of American Health Care

It’s not just Aetna: The way Obamacare handles the excessive costs of treatment simply doesn’t work.

Jonathan Ernst / Reuters

There are plenty of reasons to be critical of the health-insurance behemoths that are pulling out of Obamacare exchanges. They complain that they can't make money when their administrative costs are much higher than those of Medicare. And in Aetna's case, there’s reason to suspect that the company is following through on its earlier threat to scale back participation in the exchanges if the Department of Justice blocked its merger with Humana—which it did.

But the other big issue is that the insurance companies are actually losing money on Obamacare, primarily because more sick people are enrolling than healthy people, and those sick people are filing more claims than expected (in part because of pent-up demand from years of not having coverage). The Obama administration implicitly acknowledges the problems that insurers face, and is trying to help by getting more young, healthy people to buy policies. Yes, insurers are motivated to make profits for shareholders, and yes, they are losing money in part because they are inefficient. But the underlying problem is that Obamacare was designed to rely on the private sector (and jettisoned the public option that it would be really nice to have right about now).

The truth is that health care in America is just too expensive. Everyone knows that, but not everyone is aware of what that means for the health-insurance market. In general, people think that goods and services should be allocated by markets in which people only buy things if they value them at more than their price. But the basic problem is that health care has gotten so expensive that many people who have to bear its real cost are saying they’d rather not.

That's why there was so much pent-up demand before the Obamacare exchanges launched: Many people had been declining to buy insurance on the individual market for years because they didn't think it was worth it. That's also why insurers are losing money today: Relatively healthy people don't think insurance is a good deal, but if you know that you're likely to be sick, then it becomes worth its price.

At the end of the day, who has health insurance in the U.S.? It’s people on Medicare and Medicaid, who don't pay the full cost of their coverage because the government picks up most or all of it. It’s people on employer-sponsored plans, who tend not to realize they pay the full cost because they get large (though declining) subsidies from their employers. And it’s people who buy Obamacare policies, many of whom don't pay the full cost because they get subsidies, and many of whom place a high value on insurance because they know they are sicker than average.

In other words, at current prices, the health-insurance market is a huge loss-making system. The losses exist because the total price of health insurance—premiums, cost-sharing, Medicare payroll taxes, general revenues that fund Medicare and Medicaid, etc.—exceeds the total amount that individuals would collectively be willing to spend on it. The losses are borne by the federal and state governments (and hence taxpayers); workers who don't realize that they end up paying the full cost of their policies in the form of lower wages; healthy people who either buy more coverage than they need or pay penalties for not being covered; and, in some cases, insurance companies.

Health insurers are upset about bearing part of the losses. The policy problem is that, unlike uninsured individuals, insurers don't have to bear losses if they don't want to; they can pack up their toys and go home. The obvious market-based solution is to keep increasing the penalties for not being covered until enough healthy people join the pool so insurers can make profits. But all that accomplishes is shifting more of the overall losses onto healthy people.

In this situation, there are two things that matter most. One is lowering the real price of health care, which is the only way to reduce the overall losses in the insurance system. The other is distributing the losses as fairly as possible. The simplest way to accomplish both of these goals is a universal, government-sponsored insurance program. The most effective way to control prices, used in every other developed country in the world, is to consolidate buying power. And the fairest way to distribute losses is to do so via a progressive tax system.

This doesn't have to be a single-payer system. There could be large, nonprofit insurers that are funded by progressive payroll taxes and closely regulated by the federal government. Or there could be a private market for supplemental policies, like with Medicare. But the point to recognize is that a competitive market for health insurance, in which companies deliver policies that cost less than people are willing to pay for them, just doesn't work. Obamacare rests on the premise that, with the right regulations, the health-insurance market can be goaded into providing a socially acceptable outcome. But in this case, juggling the parameters—the prices of policies on the exchanges, the penalty for not being insured, minimum coverage requirements, and so on—will just result in a different, and still unacceptable, allocation of the losses produced by the American health care system.