The Self Employed

8 Problems with Our Health Care System #2

How does a country that supposedly lionizes the entrepreneur make it so difficult for him --- or ... her --- to buy health coverage?

The economics of health care worked by using an economy of scale. Insurance companies would sign up large employers and would use what is known as a community rate to determine the premiums. Essentially, everyone would pay the same rate, regardless of their medical history. In other words, those who used their insurance the least would subsidize those who needed it the most. The key to keeping the premiums low for everyone was to spread out the policy over as many people as possible.

Now, for obvious reasons, the self employed paid more for health insurance. Administrative costs for employees of a company were low because responsibilities could be shared with a company's HR department. Additionally, the insurance company only had to market to the employer. Each self employed individual has to have their insurance managed individually. Still, when the self employed were community rated, the only real difference in their premiums were in additional administrative fees. 

Now, most companies provided their employees with health insurance and even if it were optional, most employees would sign up. This kept the risk pool large. For the self employed, there is no such guarantee. The risk is certainly greater for the insurance companies. Additionally, not every self employed individual is going to try and get health insurance. In fact, those who are most likely to have a lot of medical expenses are more likely to sign up for insurance. This is known as adverse selection and it is the major issue for insurance companies.

Now, keep in mind that a commercial insurer is like any other business in a capitalist economy. They are not looking to serve the public interest; they are looking to make money. Their solution to adverse selection is experience rating. Unlike community rating, under experience rating your premium is based on your potential need for insurance. If you have a history of sickness, or you have a chronic condition like diabetes or hypertension, then you will pay a higher premium. Perhaps, even, a much higher premium. That is, if you can even get insurance. Under experience rating, an insurance company has no reason to insure anyone except the healthy.

Yes, even when the employer provided insurance system was working, the self employed were left out in the cold. They're still there today.

Source - Sick: The Untold Story of America's Health Care Crisis --- and the People Who Pay the Price by Jonathan Cohn