I Can Get It for You Retail

Rudy Giuliani’s health-care plan is great for insurance companies.

Republican presidential candidate Rudy Giuliani

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.

Consumer behavior can, of course, bring down the prices of all sorts of commodities, products, and services. But frequently, the magic works because a powerful, smart agent is acting on consumers’ behalf: a wholesaler or a retailer that buys in bulk. Wal-Mart’s customers can’t show up at factories and demand that the owner sell them a pair of shoes for $8. Wal-Mart can. Wholesale is always cheaper than retail.

Given this, you have to question the real motivation behind the plans of these business-friendly candidates. Are they really interested in unleashing the power of millions of consumers on insurance companies? Or are they more interested in giving corporations an easy way of relieving their burdens and tilting the tables even further in favor of insurance companies?