A Health Insurance System that Works
Why does the market function better for pets than for humans?
May 7, 2012, Vol. 17, No. 32 • By ELI LEHRER
Around the time Lisa Mulhearn’s Old English Sheepdog, Goober, turned 12, a veterinarian discovered a bone tumor in his nose. The doctors at Red Bank Veterinary Hospital in Tinton Falls, New Jersey, gave Mulhearn a grim prognosis. Without expensive chemotherapy treatment, her dog—the newly divorced woman’s “best friend”—would die a painful death.
An online pet-insurance primer
But Mulhearn had purchased an insurance policy for Goober. The policy let her stay with her vet, pick whichever hospital she wanted, and decide between treatments ranging from a costly, good-enough-for-humans, pinpointed radiation to older, more-common-for-animals, unfocused treatment. She weighed the options with the care and concern of a deeply worried parent. “The premium treatment would keep Goober at the hospital for the daily treatments—he had been a pet store dog and not the most stable mentally,” Mulhearn explained via email. “Knowing I was doing this to keep him with me, I didn’t want him to spend what could be his last few months at the veterinary hospital. I decided weekly treatments would be best.”
It wasn’t easy. Much of Goober’s fur fell out and his vision failed in one eye. But the treatment worked. The tumor got small enough for doctors to remove. And an insurance policy that cost around $80 a month covered a large chunk of a bill that approached $20,000. Mulhearn, for her part, is thrilled with what she got: “no network requirements, no referrals, no hoops,” she says in describing her insurance. Indeed, Mulhearn, herself covered by an HMO that required everything to go through a “gatekeeper,” jokes that Goober had better health insurance than she did.
The contrast is instructive. The market for pet health insurance is a competitive one that offers many popular, desirable policy features—including many that politicians want to impose on the human health insurance industry. But it’s not perfect. A detailed look at the market, the least regulated broad health benefits system in the country, suggests it would be impossible for the human health insurance system to simultaneously do everything people say they desire, contain costs, and follow purely market principles. This isn’t a reason for free market health care reformers to despair but, rather, a cause for them to be careful about what they promise.
The positive aspects of the pet insurance market aren’t trivial. For starters, it offers far more choices. Only 3 companies market individual health insurance in New Jersey, while at least 10 write policies for dogs and cats. And the pet insurance carriers offer plans with benefits to fit any budget. Almost all pet insurance policies provide the same coverage at any hospital or vet, whereas almost all human health policies have no or limited benefits for “out of network” care. While people over 50 can have a very difficult time finding individual health insurance at any price, coverage for older dogs and exotic breeds isn’t a problem since several companies will write a policy for any dog or cat of any age. And many of the features politicians have felt themselves compelled to mandate in health insurance plans are provided by pet carriers as a matter of course. Even very cheap policies often throw in some “wellness” coverage that discounts routine tests and checkups. And the pricing schemes are also more attractive than those in the private individual health market. Although pet insurance premiums rise yearly as individual pets age and veterinary costs go up, many pet insurers don’t increase them on the basis of claims history, and most promise never to drop coverage no matter how sick a pet gets.
All these attractive features exist in a market with far, far fewer rules than the health insurance market for human beings. Each of the 50 states regulates pet insurance underwriters to make sure they can pay the claims they reasonably expect to receive and the entire industry to make sure it uses legally allowable insurance contracts. (Most regulators treat it as a form of the “inland marine” property and casualty insurance used mostly to cover trucking.) This treatment of pets as property—which is how the law usually treats them otherwise—explains a lot of the pet insurance marketplace’s success and also sheds light on its limitations.
And these limitations aren’t insignificant. Most important, widely held values make it praiseworthy to euthanize animals facing reduced future “quality of life” but rule out doing the same to humans, even though the inability to cut costs by speeding death almost certainly requires that human health insurance have a benefit limit much higher than that of most pet plans and, thus, higher front-end premiums. Most pet insurance policies top out below $20,000, and that certainly contributes to making them easier to buy. More relevant to the current political debate over human health insurance, no pet insurer offers coverage for preexisting conditions, while American human health insurers are required to do so for most people in group plans now and will have to for everyone else starting in 2014.
Benefits are also scantier in some cases. While typical human group health insurance plans cover all or almost all charges for “in network” care after policyholders meet a deductible and make co-pays, typical pet insurance policies cover 80 percent of charges associated with a disease or injury. Most pet insurance policies also exclude a variety of expensive-to-treat conditions, including cancer. (Mulhearn paid for additional coverage.) The market also differentiates pricing a great deal on the basis of breed. Chris Ashton, CEO of mid-sized pet insurer Petplan, says his company will charge up to 500 percent more for high-risk purebred dogs. Most people who own pet insurance policies also have to pay bills in full upfront and wait for reimbursement. And this self-payment system, contrary to some attacks on “third party payment” in the human system, hasn’t contained costs. Between 2000 and 2010, they rose 48 percent for human medical care and 79 percent for vets.
But the market alone has provided solutions to once-vexing coverage challenges. For example, coverage for hereditary conditions common to certain breeds was almost impossible to find 15 years ago, but, thanks to improved insurance rating methods, is offered by almost all major pet insurance carriers today (often for an added cost). But other annoyances seem unlikely to change. Since so few pets have insurance (no more than 3 out of 100 and maybe only a tenth of that by some estimates), animal hospitals and vets have no incentive to take care of paperwork for customers the way doctors typically do.
Some “problems,” however, cannot be considered market failures in the economic sense. Benefit limits—which exist on all property insurance policies—are a part of the regulatory package states use to carry out their role of ensuring property insurers can actually pay promised claims. Insurance, by its classical definition, is a product people purchase in anticipation of a potential loss: Pet health insurers don’t cover preexisting conditions for the same reasons auto insurers won’t spring for repairs for a car that’s already in the shop, life insurers won’t underwrite people at death’s door, and modern human health insurers have never voluntarily sold products that cover preexisting conditions. (In opinion polls, upwards of 70 percent of Americans, nonetheless, think they should.) Costs for veterinary care have also risen at a rate even faster than they have for human care largely because new and expensive technologies have become available. Likewise, pet insurance plans remain affordable and accessible to everyone largely because many of them exclude so many expensive treatments.
Markets, as they should, put a dollar value on everything. The pet health insurance market does this well by literally treating pets as property. And this isn’t bad for animals or their -owners. When it comes to certain aspects of human health—even serious but not life-threatening events like contracting shingles or breaking a leg—such personalized cost-benefit thinking that treats individuals’ bodies like pieces of personal property might serve Americans and the medical system far better. Many “wellness” benefit mandates that even many conservatives assume the government must impose also seem to emerge naturally if the pet insurance market is any guide. But when it comes to the most consequential and costly parts of medical care—cancer, HIV/AIDS, and agonizing end-of-life decisions—a look at the pet insurance market suggests a purely free market will not provide the things people tell pollsters and politicians they want.
For all its cold market-like thinking, the pet insurance market still produces an enormous share of heartwarming stories. Goober, for his part, lived two extra years as a result of the treatments insurance helped his owner afford. “When we said goodbye to Goober,” Mulhearn says, “it was old age and the loss of muscle and use of his rear legs that took him. It was [the insurance policy] that made him a cancer survivor.”
Pet insurance offers an important model for human health care reformers to learn from. And, where it falls down, it isn’t because markets are flawed, bad, or immoral, but rather because certain aspects of human health simply transcend the economic.
Eli Lehrer is vice president of the Heartland Institute.
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