Critical Condition

The Real Race to the Bottom

Kaiser Health News — perhaps the most prominent cheerleader for ever-greater “coverage” (that is, third-party payment of medical bills and the perverse incentives attendant upon it) – reports that Blue Shield of California “will cap profits at 2 percent and issue millions in policyholder refunds…” 

Blue Shield formally is nonprofit, meaning that no group analogous to shareholders has the legal right to the profits remaining after all costs have been paid. In contrast, for-profit insurers must answer to a world capital market, and so will not be able so easily to capitulate to the politically correct view that “profits” are the source of the massive inefficiencies afflicting the U.S. market for health care and health insurance.

Let us shunt aside the larger reality that it is not “profits” — always the favorite target of leftists seeking to avoid scrutiny of the adverse effects of their own policy preferences — that explain the problems characterizing the U.S. health-care market. Instead, let us merely mention two related issues that loom large as a result of the Blue Shield willingness to muddy the waters. First, “profits,” however defined, are hardly constant over time; they can be strong one year, weak the next, and negative the following. If profits are capped but losses are not, then — obviously — over time capital invested in the provision of health insurance services will fail to earn a competitive return. Only by severely limiting actual coverage of actual medical services can such a “cap” be viable.  Has anyone at Blue Shield thought about this?

Second, in the short run the “cap” means lower premiums, whether ex ante or ex post in the form of refunds. Consumers will gravitate toward the insurers offering such goodies. Will there be adverse selection in reverse, with Blue Shield attempting to preserve its economic viability by turning away sicker patients?  The limits on coverage noted above are an implicit way to do this. Has anyone at Blue Shield thought about this, either?

In short: There are no free lunches. If Blue Shield prefers to cap its profits rather than stand tall and tell hard truths about the actual sources of our health coverage mess, fine; but let us harbor no illusions about who the ultimate losers will be.  Those poor souls will be patients generally, and the sicker among them in particular. Such are the fruits of political compassion.

Benjamin Zycher is a senior fellow at the Pacific Research Institute.


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