One more reason why it's tough to be alone

Okay, so why hasn't that plane crashed? Why does health insurance still exist?

The main reason is a curious structural fact about how most of us get private health insurance here in the U.S. Our employers negotiate with the insurance companies and sign a contract to cover their workforce, or as much of it as they want to cover. That means we come pre-packaged into groups, called risk pools. Obviously employers want to attract and retain employees based on their value to the company and don’t want to get involved in medical underwriting if they can help it. Of course they have to balance that against cost so they do generally tolerate things like no coverage for pre-existing conditions in their contracts, and they might endorse a break for non-smokers, that sort of thing. But generally everybody gets the same benefits, or chooses from the same menu, and pays the same share of the premiums.

There are some perverse effects, however. A company’s premium cost each year may be adjusted by its recent history of medical losses, which is called experience rating. That could lead a company to disfavor older employees, or try to find ways to get rid of people with chronic conditions such as HIV, or avoid hiring them. It’s illegal, but that doesn’t mean it can’t happen.

However, this means that if you’re trying to buy insurance as an individual, without being part of a group, you have a very tough time. You will get the full Monty medical underwriting. For most people, it’s pretty much impossible.

Second, there is regulation. States can constrain medical underwriting and require minimum benefit packages, by law. Note another common conservative proposal, to allow companies to sell policies across state lines. This is presented as a way of increasing competition and benefiting consumers, but we already know what happens when you allow unregulated competition. In other words, they’re lying to you. So regulation is actually good for the insurance business. If your competitors face the same regulations, you can still make your profit. But of course they’ll always try to find ways to cheat, and they do.

So what’s the first step toward fixing this mess? Get everybody into the same risk pool. Now insurance can do what it’s supposed to do. If you require community rating -- which means everybody in the state or region or however you want to define it pays the same price -- you eliminate all that nonsense about pre-existing conditions, risk factors and recissions. Now, if insurance companies want to compete on price, they have to find other ways of holding their costs down. That could be good or bad, but it won’t leave whole groups of people out in the cold. For it to work, however, you also need to mandate at least a minimum set of benefits and severely limit caps and co-pays; otherwise they could offer a very low-cost but fairly useless package that would appeal only to young and healthy people, and you wouldn’t have everybody in the same pool after all.

Now, someone could argue that this is unjust because if young and healthy people want insurance, they will have to pay more for it than they would otherwise – they’re subsidizing the older generation. You might come up with a defensible objection to eliminating age rating, but I don’t think the justice argument works – we’re all going to be older some day, or we hope we will anyway, and then we can collect on the up-side of the proposition.

But, there’s still a problem. What if those young and healthy people decide not to buy insurance at all, until something goes wrong and they actually need it? This is called Moral Hazard, although I’m not sure that it really has anything to do with morality. Now the whole beautiful picture is ruined again. You aren’t getting those lower cost customers into the pool to help subsidize the higher cost people, and when they're hit by a bus we're still going to have to pay.

So if you’re going to enforce community rating, you need to require people to buy insurance. Another way to accomplish the same thing is to tax people and then give them insurance, like civilized countries do. There really isn’t any important practical difference but for some reason, in the U.S., it’s harder to pass something called a tax than it is to pass something called a mandate.

Either way, conservatives tend not to like it because it appears to constrain liberty by requiring people to use their money in a certain way. Now your personal moral calculus might happen to balance out differently, and you might just say that it’s worth the impairment of liberty for the sake of justice over the life course and the subsidy to old and sick people who need it more. But if that doesn’t persuade, there are strong counterarguments that liberty is not really impaired by such a requirement because of the externalities we discussed earlier – all of society is made more prosperous and happy, enhancing liberty in general – and also because of the consequences of a principle called the Rule of Rescue, which I will get to shortly.