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I Can Get It for You RetailRudy Giuliani's health-care plan is great for insurance companies.

By Daniel Gross
Posted Thursday, Aug. 9, 2007, at 4:14 PM ET
Rudy Giuliani. Click image to expand.

Last week, Rudy Giuliani tried to add some domestic policy substance to his campaign by unveiling a health-care reform plan. His proposal, as Harvard economist Greg Mankiw noted, "sounds remarkably similar to the Bush health plan." In this year's State of the Union, President George W. Bush proposed a $15,000 standard deduction for health insurance, claiming a family of four making $60,000 would receive a $4,500 tax break to buy health insurance on its own. Giuliani would similarly offer a deduction of up to $15,000, which can be claimed by families that buy their own insurance. And, the New York Times credulously noted, "the money left over, he said, could be put into a 'health savings account' to be used to pay for deductibles or other uncovered medical expenses."

The time has long passed to be shocked by the ignorance that the press, many professional economists, and politicians show about the market for health insurance. After all, virtually all of them have their insurance paid for by a university, the government, or a Fortune 500 company. It never seems to have crossed the mind of President Bush, or Rudy Giuliani, or the Times reporters who uncritically noted his comments, how much insurance actually costs. (Or, in Giuliani's case, precisely which insurance companies are salivating over the prospect of insuring a 63-year-old, thrice-married cancer survivor.) The Kaiser Foundation found that in 2006, the average family premium was $11,480. (I've been buying my own—and my family's—health insurance for most of the last 14 years and claiming the tax deduction already available to self-employed people for the premiums. The policy I gave up when I joined Newsweek last month cost about $8,300 a year.)

Blogger Ezra Klein and my Slate colleague Timothy Noah have already weighed in on various deficiencies of the Giuliani plan, and, by analogy, of the Bush plan. But I'd like to focus on another angle. For these proposals, which are championed by many who claim to have a natural sympathy for business, involve an understanding of business customer-supplier relationships that doesn't seem realistic.

Think about how the admittedly imperfect market for insurance works today. Institutions—say, the American Enterprise Institute, or a law firm, or Procter & Gamble—buy insurance on behalf of their employees. Human resource staffers, trained professionals whose job it is to evaluate these highly complicated plans, negotiate with insurers and buy in bulk. Or they hire consultants to do the same. They have to pick a provider that will cover all employees, from the CEO on down to the cleaning staff. In the end, they may make a large purchase: a thousand employees at $7,000 per insured employee adds up to $7 million in annual premiums. One of the ironclad rules of business is that those who buy in bulk tend to get discounts. Citigroup certainly gets insurance on more favorable terms than the First National Bank of Podunk.

Once insurance is in force, a zero-sum game commences. Every dollar the insurer pays out is one less it gets to keep for profits. So, insurers have powerful motivations not to pay legitimate claims. But when they're providing insurance to a large group of employees at a corporation or institution, they also have powerful motivations to pay legitimate claims. If employees experience systemic problems with slow reimbursements and claims denied, insurers are likely to hear about it from the HR staff. Make life difficult for an influential employee, and an insurer can jeopardize the whole relationship. What supplier wants to alienate a huge customer like Microsoft? Of course, even given these circumstances, insurers have succeeded in passing along higher costs to corporate purchasers.

Bush and Giuliani, and advocates of their plans, want to change the dynamic. They want to turn what has been a wholesale, buy-in-bulk business into a retail business. They want to replace a bunch of giant, sophisticated consumers possessing limited bargaining power with a mass of unsophisticated consumers possessing no bargaining power. For some reason, they think you and I can do a better job negotiating with Oxford and Aetna than Wal-Mart and Coca-Cola can.

In theory, they argue, insurers will hasten to develop new products and services and slash prices to compete for the dollars of millions of insurance buyers. In practice, something else may happen. For an insurer, the utility of a customer—whether it's an individual or a large group—is based on how many revenues and losses he produces. Say an insured person who has paid a $7,500 annual premium suffers an accident, which results in a $30,000 hospital bill. Worse, one of his children comes down with a chronic condition that requires $15,000 in annual, recurring costs. The insurer can pay the claims and sustain a loss. Or it can try to figure out ways not to pay. Or it can jack up premiums to such a level that the policy holder either becomes a profitable risk or can no longer afford to remain a customer. Alienate a single insured person and the insurance company only jeopardizes a single unprofitable customer relationship.

What's the customer's recourse? Fights between insurance companies and individuals are never fair. The overwhelming majority of individuals lack the resources, time, and fortitude to confront well-funded, profit-obsessed bureaucracies. Nor do they have human resource staffs or outside consultants that can act as advocates. Michael Moore can only make so many phone calls. Ah, but what about the vaunted power of the consumer to "negotiate" by taking his or her business elsewhere? Here, again, the individual can often be at the mercy of a brutal market. If you have a pre-existing condition or an adverse history, it's not that easy to switch.

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Daniel Gross is the Moneybox columnist for Slate and the business columnist for Newsweek. You can e-mail him at . He is the author of Pop! Why Bubbles Are Great for the Economy.
Photograph of Rudy Giuliani by Marc Serota/Getty Images for NASCAR.
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Remarks from the Fray:

One of things we tend to ignore when talking about our screwed up system of health insurance in the US is the effect that wholesale insurance has had on the retail market. Consider if Medicare, Medicaid and company programs were all to disappear tomorrow. Would you see a vast swelling of the ranks of the uninsured? I doubt it, simply because without the wholesale markets insurers would have to compete for people on an individual basis. All those middle and even lower middle class people now covered by some form of company or government insurance would probably still end up insured. I wouldn't be surprised if health insurance became cheaper in this case, as no longer would there be the phenomenon of people in various jobs getting the "wholesale" price through their employer and other people paying a much higher "retail" price. On the other hand, the poor and those with existing conditions would still be SOL.

Now imagine if there was no insurance. Everyone has to pay their doctors directly. I think in many, many situations, things would be much cheaper. Drug companies would lower price in order to be able to sell the drugs. Doctors would make visits cheap enough that average people could pay. On the other hand, this would create a system where the best doctors would charge more, and the poor might receive more medical care but of lower quality.

The problem in the US is that we've created a mix of wholesale and retail where the wholesale market is the larger one, and therefore retail is much, much more expensive. We've also created a system where costs are hidden from most consumers, so the costs of drugs and treatments are inflated since they are paid by insurance.

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