Map of life expectancy at birth from Global Education Project.

Tuesday, December 29, 2009

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.


Scutterbuck said...

First, let me say that I agree that the current insurance system is in dire need of reform. That said, I have two issues with the above considerations. First, although I understand that insurance operates via "risk pools," and that by increasing the size of the risk pool (particularly with those in their twenties and thirties) they would hypothetically improve their ability to provide for those who need coverage, I disagree that the younger generation should be required to fork up the money. We are already looking to that generation to step up and provide for an irresponsible generation of baby-boomers that failed to put their own money away for retirement. Now we push further, asking them to pay for our ever increasing health care costs. And all the while, we do this assuming that they have greater means to pay for it. I'll admit, I don't know whether they do or not, but it seems contrary to reason that a twenty-five-year-old with less than a decade of experience would make more than a fifty-year-old with a potential of thirty years of experience. Most twenty-somethings that I know are ripe out of college and have starting salaries of less than half that of my middle-aged acquaintances. And that along with ever increasing student loans to pay back (which, as I understand it, we are also trying to seek government help for).
My second objection is to the creation of a general risk pool. I neither find this fair nor effective. Let me explain. Take an individual who runs four days a week, refrains from red meat and fatty foods (e.g. fast food), doesn't smoke, and is in a monogamous relationship. Compare this individual with a four-hundred-pound individual who hasn't exercised since they were ten, smokes, eats McDonald's six days a week and has had a dozen sexual partners in the past six months. The risk factors aren't in the same ballpark - they're not even playing the same game. And yet, in a general risk pool, both would be paying the same (or at least similar) premiums. Worse, let's say that the latter individual was living on a poverty-level income. Then, they might be paying less despite multiple high risk behaviors that have the potential to cost thousands of dollars. A responsible individual would be called upon to provide for the indolence, licentiousness, and ignorance of others.
To end, I read your previous article on such behavior and how, at least to some degree, it can be attributed to chance (i.e. where one was born, how they grew up, etc.). I don't disagree; however, even a quick glance at natural history will demonstrate that such behavior leads invariably to extinction. A quick read through just the first volume of The Decline and Fall of the Roman Empire demonstrates that such natural processes do apply to civilizations, and have already contributed to the decline and fall of one of the greatest empires in human history. When the responsible citizens of a country or empire are required to support such behavior, they are pulled down by the weight of those they are working to support. There is an unavoidable law of cause and effect.
So ultimately, I feel like the question we must ask is, what exactly are we aiming to do? Are we merely seeking to extend the years of life, or are we seeking to improve life? And perhaps more importantly, can we honestly hope to achieve the former even if we want to?
By the way, thanks for the posts - they've been interesting to read.

Cervantes said...

I love to get extended and thoughtful comments. It's a lot more productive to have discussions, I think, than just a monologue. I'll wait and see if anyone else wants to weigh in before offering my own responses.

Brian said...

Although I usually find his stuff rather dry, Bob Herbert has a good column in today's NYT titled "A less than honest policy".
In it, Herbert explains why the health care bill -- with its reliance on taxes on so-called "Cadillac" plans -- is far more likely to end up burdening the middle class and reducing health insurance coverage for tens of millions of people:

"In fact, it’s a tax that in a few years will hammer millions of middle-class policyholders, forcing them to scale back their access to medical care. Which is exactly what the tax is designed to do. . . .
Within three years of its implementation, according to the Congressional Budget Office, the tax would apply to nearly 20 percent of all workers with employer-provided health coverage in the country, affecting some 31 million people. Within six years, according to Congress’s Joint Committee on Taxation, the tax would reach a fifth of all households earning between $50,000 and $75,000 annually. Those families can hardly be considered very wealthy. . . .
The idea is that rather than fork over 40 percent in taxes on the amount by which policies exceed the threshold, employers (and individuals who purchase health insurance on their own) will have little choice but to ratchet down the quality of their health plans. . . . These lower-value plans would have higher out-of-pocket costs, thus increasing the very things that are so maddening to so many policyholders right now: higher and higher co-payments, soaring deductibles and so forth. . . .
Proponents say this is a terrific way to hold down health care costs. If policyholders have to pay more out of their own pockets, they will be more careful -- that is to say, more reluctant -- to access health services. On the other hand, people with very serious illnesses will be saddled with much higher out-of-pocket costs. And a reluctance to seek treatment for something that might seem relatively minor at first could well have terrible (and terribly expensive) consequences in the long run"

The mandate being championed now in the Senate bill is nothing more than a bailout for the Medical Industrial Complex. This type of reform is meaningless, and potentially harmful without a so called "public option". I agree with you, Cervantes, that the semantics of "mandate" and "tax" carry connotations that seem to ruffle some feathers and smooth others. The question I want the answer to is, "why"??

Cervantes said...

I'll get to the issue of making people pay more out of pocket as a way to hold down costs in a couple of days. Thanks for bringing it up.

I think the word "tax" and the idea of taxation have just been tainted by demagoguery over the years, very much as they succeeded in doing with the word "liberal." Taxes aren't inherently good or bad, it's just a question of whether you think what they pay for is worth having; and whether they are allocated fairly.

Whether I'm paying for health care by sending money to an insurance company or to the government, it's still the same money. The question ought to be which of them I have a better chance of getting to look out for my interests. The answer seems obvious to me but apparently some disagree.

Brian said...

And to Scutterbuck...regarding collective risk pooling...

Not to sound trite or anything... but if your kid is a goof off, has ADHD, or lacks the acedemic discipline to study and do his homework and requires more intensive resources to make it to graduation in our local public school system, than why should I have to pay the same property tax rate to subsidize said public school system as you do?

Or better yet, if you decide to send your kid to private school and pay out of pocket...why should you still sibsidize said school district at the same rate that I, your neighbor, does?

Or even better yet...what if i don't even have any children...why do I still have to subsidize said school system via my property taxes?

Why? Because we (a somewhat civilized bunch) VALUE education as a COMMON GOOD. Infrastructure, if you like, that sets some sort of baseline gaurantee that our children will have the necessary (I know, this is debatable)tools to be productive members of society.

Isn't good health, or at least access to what we call the "health care system" such a value?

C. Corax said...

The younger generation sure doesn't look that almighty healthy to me. Obesity, drug addictions beyond the wildest dreams of the kids of my generation, obesity, shite diets, obesity, sedentary behavior, obesity...did I mention obesity?

Anyway, were we to have a risk pool the size of the entire nation, the added expense for young'uns vs old farts would probably be quite small, wouldn't it? I'm asking a question, not stating a fact.

(C)onservatives tend not to like it because it appears to constrain liberty by requiring people to use their money in a certain way

How touching that they gallantly fight for The People's right to use money however they want...but fight equally viciously to deny women the right to use their bodies the way they (women) want.

roger said...

it seems to me that my risk of contagious disease is directly proportional to the number of people with contagious diseases. bigger germ-pool = more chance for contact. so preventive care for all would be good for me in direct health terms. preventive care that included education might reduce obesity, diabetes and who knows what. stds? unwanted pregnancies? timely medical attention for all might leave emergency rooms to care for disaster problems. actual trauma.

what i'm saying is that a healthy population is good for all in terms of both health and money.

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