Arnold Kling  

Mass Delusion on Health Care

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In today's Wall Street Journal, the author of a new book on health care policy writes (subscription required--free version here),


The elected leaders of Massachusetts have come up with a novel solution for the vexing problem of paying for health care: abolish the laws of arithmetic...

The Massachusetts health plan promises to provide health-insurance companies with subsidies in order to induce them to offer these low-deductible insurance plans. The arithmetic suggests that these subsidies will have to be large -- thousands of dollars larger than the $295 per worker that the state plans to collect from employers that do not provide health insurance.

The problem of paying for health-care coverage, which politicians are declaring they have "solved," is really just beginning. The only way to make zero-deductible health insurance available at low cost is with a large subsidy; how much will depend on negotiations with insurance companies.


The Massachusetts plan makes a large, open-ended spending commitment, while raising no new taxes, apart from a tiny $295 annual fee to be charged businesses for each worker they have for whom they fail to provide health insurance. Governor Romney (R) has threatened to line-item veto even that fee. Both he and the legislature (D) are acting like honor graduates of the George Bush school of fiscal responsibility.

A single-payer system, with the state directly providing insurance to modest-income residents, would have been less costly and more transparent. Instead, the politicians' plan will force insurance companies to offer no-deductible health insurance to people on modest incomes, at premiums ranging from $1000 to $2000 per year. My guess is that the insurance companies will not be willing to pay for more than about $2000 per person per year in claims, and they will demand that the state provide reinsurance for the rest. Given average health care spending in Massachusetts of $6000, "the rest" could be a big number.

Even though private insurance companies will participate, I do not see this as a market-oriented approach. The insurance companies will not be providing market discipline. They are only there to stick their snouts in the trough.


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TRACKBACKS (6 to date)
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The author at Cafe Hayek in a related article titled Damn Reality! Full Speed Ahead! writes:
    Those with a faith in government -- as well as the secular priests who minister to them (politicians) -- continually commit what science writer Matt Ridley calls the reverse naturalistic fallacy: inferring an is from and ought. Those who commit [Tracked on April 7, 2006 6:51 AM]
The author at The Club for Growth Blog in a related article titled Friday's Daily News writes:
    This Money Won’t Buy Happiness - Steve Forbes, Forbes.com Unemployment Rate at 4 1/2 Year Low - FoxNews.com 527 Reform? Spare Us - IBD Editorial Playing the Irony Card - John Samples, Cato Institute Big Health in Massachusetts - Washington... [Tracked on April 7, 2006 9:32 AM]
COMMENTS (6 to date)
Xmas writes:

I think you're missing out on something here. Massachusetts keeps insurance companies on a very short leash, insurance here is highly regulated.

Also, there's a provision to force people who can afford insurance to purchase insurance. That means all of the moderately high-income (high middle income?) young men who who work for themselves and who don't see doctors regularly must by insurance. If they don't buy insurance, they can lose out on there personal tax deductions.

So, not only is there a penalty on companies, but also individuals that don't get insurance. It also means that insurance companies will have access to a pool of payees that are minimal users of medicall services.

Not that I'm a supporter of the plan. The no deductible thing seems a little fishy. Especially since health savings accounts are currently untaxable.

Eye Doc writes:

The no deductible thing is going to lead to plenty of overutilization of services, and the insurance companies are going to get shafted because the premiums they're going to receive are not going to be adequate. As far as I can tell, there's nothing to keep insurers from dropping out of the plan, or refusing to participate in the first place.

Add in the fact that families making up to $50,000 a year (which is above the median family income in the US) are going to be eligible for subsidized insurance with no deductible, and I can't see how the plan is going to work, because it means that most families in Massachusetts are going to be receiving this type of coverage. I would anticipate the plan will wind up costing far more than planned, and the Boston Globe today wrote an article postulating the same thing.

Boonton writes:
A single-payer system, with the state directly providing insurance to modest-income residents, would have been less costly and more transparent. Instead, the politicians' plan will force insurance companies to offer no-deductible health insurance to people on modest incomes, at premiums ranging from $1000 to $2000 per year.

How about the following:

1. A single payer plan in the form of a voucher funded by a dedicated tax. No entitlement problem, people want more heath insurance they have to accept higher taxes if they want lower taxes they have to cut spending.

2. The voucher can be used to purchase health insurance or be partially refundable against employer provided insurance (say split 50-50 with both employer and employee to provide an incentive to maintain coverage on both).

3. The voucher could be used to pay for any type of health insurance (within reasonable limits of course). However the only condition would be limits on how much variation in premiums companies could charge. If companies want the voucher market they cannot rig the premiums to price out the sicker people who need insurance the most.

4. Those who don't use their voucher will be enrolled in a plan selected at random.

5. People who want more comprehensive coverage are free to use their own money to buy any type of supplemental plan the market might offer.

Arnold and other libertarian types have a bizaar fixation on low co-pays as the root of all healthcare evil. This doesn't make any sense. The HMO model uses low co-pays as an incentive to induce consumers to get preventative healthcare (check ups, vaccines etc.) so as to avoid expensive costs later on. (It's both healthier and cheaper to catch cancer or heart problems early, for example). The high co-pay model is great if you think the core of the problem is consumers not shopping around enough for standard checkups or simple things like a script for anti-biotics but I don't think this is the real problem.

Anyway #3 essentially lets the market decide. If the low co-pay model contributes to high health costs then such plans will be more expensive which means people would have to chip in on their own to buy them.

Lord writes:

It would seem that the government would both have to determine reasonable cost and act as intermediary for those unable to find a policy at reasonable cost. It is one thing to say everyone that can afford to must buy it, and another for those to actually find it. Many may have large incomes but have to face extremely large premiums due to past incidence.

Brad Hutchings writes:

Congrats on the new book Arnold! It's in my Amazon shopping cart. I hear that Romney is personally calling people who don't just love his plan and are writing their disagreements, so when the phone rings, give him hell. I just hope that we get a few years to evaluate the effects of this plan before other states try to adopt it or Romney rides it to the White House. Sadly, what any plan will have to do is convince healthy young people with healthy life habits to pay way more than they can expect to recover from the system in order to support older, less healthy, and less health conscious people. The only way to convince them is through force. Funny how that works.

JohnJ writes:

So much effort is being expended trying to make a free market work in a socialist-style society! Can anyone see the inherent problem with criminalizing the choice not to have health insurance?

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