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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
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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.”

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