LAST week Anthem Blue Cross of California announced it was hiking health insurance premiums for some customers by 39%. According to a Department of Health and Human Services report released yesterday, that followed recent requests for rate increases of between 13% and 40% by insurers in Connecticut, Maine, Michigan, Oregon, Rhode Island and Washington. At the same time, insurers are covering fewer and fewer people; the top six insurers dropped 2.2m customers in the first nine months of 2009. While the country's economy was shrinking and workers were being laid off and losing their coverage (or being shunted into government-provided coverage), these private insurers' profits rose dramatically.

Last year, as working families struggled with rising health care costs and a recession, the five largest health insurance companies—WellPoint, UnitedHealth Group, Cigna, Aetna, and Humana—took in combined profits of $12.2 billion, up 56 percent over 2008. These health insurance companies' profits grew even as nominal GDP decreased by 1 percent over this same time period. WellPoint accumulated more than $2.7 billion in profits in the most recent quarter alone. And recent data show that the CEOs of America's five largest insurers were each compensated up to $24 million in 2008.

There is nothing wrong with turning a big profit, except when there is. The insurance industry is not like the automotive industry. It does not produce a product. What it does is calculate the actuarial chances that a person will need health care, collect premiums to cover the cost of such care, and then distribute the money to care providers as needed. This spreads the risks of ill health more evenly across society, simultaneously enhancing fairness and reducing risk (thus enabling entrepreneurship). Most of what the industry does besides those tasks is rent-seeking behaviour that sucks money away from its real mission. In a sense, an insurance company is like a casino: whatever it books in profits, represents money it skimmed off of its customers. (This is not true of HMOs, which actually help organise the delivery of care, and where the profit motive can thus lead to real efficiencies.) The main difference, however, is that casinos are fun.

The picture gets worse when you consider why it is that most Americans still have private health insurance. They have it because the government massively subsidises employer-provided health insurance, by making such benefits tax-free. Meanwhile, the reason companies like Anthem give for raising their premiums is largely that young, healthy customers are dropping their insurance coverage, because it is too expensive; they are gambling they won't need it. This in turn leaves the pool of subscribers older and sicker, meaning rates must go up, and that in turn drives yet more young, healthy people to drop their coverage. This is adverse selection, the so-called insurance death spiral. It is often mentioned as something that would result if America adopted guaranteed issue and community rating without a mandate. But it's become clear over the past year that the insurance death spiral is already here.

It has never been entirely clear why our government-subsidised private health-insurance industry ought to exist. It's certainly possible to have effective universal coverage based on regulated private insurers, as the Netherlands and Switzerland do. But Canada and Britain get by largely without them, and have health outcomes comparable to America's at expenditures that are half to a third lower. France, which has the world's best health-insurance system, limits the private insurance industry to providing supplemental policies over and above the basic national policy. The reason Democrats decided to pursue health-care reforms based on a regulated private industry was that America's health-insurance companies have shown they will do their utmost to defeat any proposal for basic single-payer insurance. To do so, they are willing to spend huge amounts of money—money skimmed from the premiums of their customers, money that ought by rights to be paying for someone's health care or lowering someone's premiums.

So the Democratic bills that have passed in the Senate and House are closest to the Dutch- and Swiss-style all-private models. Should Congress fail to pass a reconciled version of those bills, there will be no end in sight to the accelerating collapse of America's private health-insurance model. Each year, millions of Americans lose their private coverage, and millions more see double-digit rate hikes. At some point, these numbers will be sufficient to force government to return to the question of what to do about the government-subsidised private health-insurance system, and it becomes ever more likely that the most attractive option will be the simplest one: end it.

(Photo credit: AFP)