Christmas has come a little early for the pharmaceutical and health insurance industries. The new Medicare bill left them gifts of 17 billion and 12 billion of extra annual profits, respectively, tied with a pretty ribbon and with a card promising no federal reimportation of cheaper drugs from Canada. The government also made an early New Year's promise of never ever using its formidable buying power to actually affect the market prices. Imagine that, using pressure to lower prices in the market! This from the editorial of the Nation magazine on December 15, 2003.
So who's been nasty, who's been nice? I leave it to others to judge, but nasty is what the future might look for many elderly patients who rely on Medicare to finance their health care expenses. The reason is the privatization steps that are built into the new bill.
Why is privatization nasty here? Think about this: in most health insurance the buyer pays the price of the insurance policy, its premium, before getting sick. These premia are the revenues of the insurance company. Its profits are then found by subtracting its costs from these revenues. The costs largely consist of the health care expenses of the buyers when they get sick. So to earn the largest possible profits, what would the company do?
Clearly, it would try to have the premia as large as possible and the costs as small as possible. The premia are difficult to raise, especially if other companies don't follow suit. But cutting costs is much easier. Usually lowering costs is seen as a good thing. Health insurance is trickier, though. While making treatments efficient at lower cost is a great idea, costs can also be lowered in two other ways which are not at all nice, yet are very likely to affect the Medicare patients.
These ways are: 1. cut back on the amount of treatment covered, and 2. try to keep out customers who can be predicted to be expensive to treat. Remember, the revenues are pretty much collected from the customers before they are sick? So profits are maximized if existing customers can be given less care and/or customers are carefully preselected.
It's the second method that's likely to lurk in the Christmas stocking of many future Medicare patients. Private health insurers will enter the Medicare market and offer policies which will be carefully designed to attract the healthiest elderly customers and those with larger incomes. This 'cherry picking' will leave the federal program with all the 'rejects': those too poor and/or sick to attract the private companies. And then the Mr. and Ms. Scrooges will start wondering why such a 'special interest' program is funded at all. But then that's the point of the whole exercize.
I want this Santa to get stuck in the chimney flue.