David R. Henderson  

Economics of Mandated Health Insurance

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Private Death Panels... Posner on Personality...

Today's Wall Street Journal contains an interesting front-page news story about mandated health insurance, focusing on the case of Massachusetts. When Mitt Romney was governor, he pushed through a mandate, with subsidies for low-income people to buy it and taxes for those who refused.

Some excerpts:

"I can't use up all of my savings just to buy mandatory insurance," Mr. Norton says. It's like penalizing "the homeless for refusing to buy a mansion."

What a great line. Think of a mansion as health insurance with all the bells and whistles, including a low deductible. (Catastrophic doesn't cut it: more on that anon.)

The next year, premiums rose to $750 a month and to about $900 a month in 2008. The MacDonalds say their actual medical costs hadn't come close to the premiums they were paying. "What are we getting for it?" Ms. MacDonald says they asked themselves before canceling.

Notice that Mr. MacDonald is stuck in the American way of thinking of health insurance as prepayment of medical expenses rather than as true insurance. I've bought life insurance for the last 27 years. Yet I haven't died. Should I be disappointed?

Now they put aside $750 a month to cover medical costs as they arise, plus the $1,068 penalty each adult would pay for going without coverage. The biggest expense came last year, when their then 4-year-old son, James, fell and cut the bridge of his nose. The five stitches and care of a plastic surgeon cost $2,000, which the MacDonalds said they were able to pay from reserves they'd set aside.

I love this excerpt above. What a great individual response to the system, given that you're not going to buy health insurance.

And the kicker:

Mr. MacDonald said he'd be inclined to buy insurance if he could buy cheaper catastrophic coverage, but such policies don't count in the Massachusetts plan.

So maybe Mr. MacDonald does understand the essence of insurance after all. Notice also that you can't comply with Massachusetts law by buying catastrophic insurance, a major flaw in the plan. Similarly, the House bill I've read--I've forgotten which one--would make catastrophic health insurance illegal.


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COMMENTS (21 to date)
tom writes:

I keep meaning to read Nudge, but I think that with things like these and the proposed federal requirement to maintain coverage are more like Shove.

Floccina writes:

The sad thing is IMO that any sensible compromise would be to at least try pushing people to catastrophic health insurance first.


My compromise: http://un-thought.blogspot.com/2009/09/healthcare-compromise.html

El Presidente writes:

If we make the purchase of private insurance mandatory without a public option, we reduce the price elasticity of demand without placing a limit on the providers' pricing power. That's why you get this problem. Put the public option in and manage it well and that imbalance can be resolved thereby keeping rates within reason and extending access to medical care, especially the type that prevents many catastrophic conditions or events. That is, of course, if your ideology permits you to do so. Maintenance is frequently more efficient than repair or replacement when we deal with durable goods. Do we have less respect for humans than we do for work vehicles or industrial refrigerators? Maybe we need a depreciation schedule.

eccdogg writes:

Floccina, that is the exact type of health care reform I could get behind as well.

A single payer government plan with a high means tested deductible. You could still implement effectiveness research in the plan and it could even be structured as a refundable tax credit for approved medical expenses above a certain level.

Then remove the tax break for insurance or at least extend it to individuals. Plus deregulate the remaining insurance market.

Joe Y writes:

If only your column could be, forgive the trite phrase, mandatory reading for anyone trying to get at the (remarkably simple) heart of this matter, your key phrase being "prepayment of medical expenses."

What is referred to as "health insurance" is a bastardized combination of true insurance, in this case, medical expense insurance and pseudo-insurance Ponzi scheme that masquerades as a prepaid medical expense plan.

The true insurance functions just as your life insurance does, based on your age and risk factors (pre-existing conditions) at the time of purchase. Your premiums are based on these two factors. In life insurance, the payout is at death, while in medical insurance, it comes when medical treatment is required.

Here's where the Ponzi scheme in medical insurance kicks in: In life insurance (variable life, an entirely different type of product, not always included), YOU NEVER PAY MORE THAN YOU PUT IN (please forgive the caps; I can't get the style tags to work). In fact, in whole life, at a certain age, the policy cash value equals the payout and you can't even put in any more.

With medical insurance plans, hardly anyone gets back anything like what they put in. For example, take the example above and say that the family of four pays 10.8K a year for 20 years: that's 216K. The policy kicks back a certain amount each year in medical payments, but remember, it didn't cover pharmaceuticals. Let's say, after decuctibles and copays are met it comes out to an averages out to 3K a year, or 60K over 20 years.

You're talking about a 166K, but that's before interest is counted on the net of 7.8K every year for 20 years. This is crucial, because that's how life inurance companies calculate costs.

And what happened to the money? Gone to support massive bureaucracies, unions, and most crucial of all, the Tort Bar. (Hey, how do malpractice lawyers do in Canada, the UK, France, etc? Funny how this never come up in the debate, isn't it?)At 65, the couple in question, will have put in a tremendous sum of money, and they will go on Meidcare and all those funds will be gone.

The true insurance component--to pay for catastrophic medical care--is a tiny fragment of this. People under 40 can get a million of term life for less than a thousand dollars a year, usually much less, depending on age. Why? Because young people don't die. Why? Because they hardly ever get sick, and mainly die for other reasons.

I've gone on more than long enough, but all that's required to make the medical insurance crisis turn into a manageable problem is true catastrophic insurance combined with Health Savings Accounts, just as the people in the WSJ article are already doing, de facto, if not de jure, and without the tax deduction.


DWAnderson writes:

Why make catastrophic coverage illegal? How would that square with the promise not to change the coverage people already have?

David writes:

My small business has small group HMO health insurance in NY. My family premium has increased 86% in the last 5 years. For years I have looked for an alternative. Finally, this year HDHP/HSA plans are available in NY at reasonable premiums. I was able to find an EPO plan that is superior in every way to my soon-to-be-terminated HMO. Even if I have to spend the entire $5,950 deductible every year I will still be paying $250 less every month. I feel like a huge burden—almost as much as my mortgage, in fact—has been lifted and if Obama and Congress mess that up I'm going to be very angry. And I voted for the guy so don't start.

Instead of single payer, think about the concept of "single pool." One national pool, insurance separated from employment, no large groups/small groups/individuals, no community rating. Any insurer in any state can make offers toward this pool without regard to pre-existing conditions, etc. Let's have insurers freely compete with each other before competing with the government on unequal terms.

dullgeek writes:

DWAnderson, As I understand from the President's speech last week, the legislation that he wants would require certain minimum coverage. As a result, a plan that is exclusively catastrophic coverage provides less than the minimum coverage requirements of the legislation. This effectively makes catastrophic health insurance illegal.

I don't believe he said that you wouldn't have to change the coverage you had. I think he said that if you like your health insurance you wouldn't have to change it. I think he's going on the assumption that those who have catastrophic insurance don't like it.

But I could be wrong.

dullgeek writes:
Notice that Mr. MacDonald is stuck in the American way of thinking of health insurance as prepayment of medical expenses rather than as true insurance. I've bought life insurance for the last 27 years. Yet I haven't died. Should I be disappointed?
Isn't Mr. MacDonald's characterization of health insurance essentially accurate? Your co-blogger, Arnold Kling pretty much says as much in his book, calling it "insulation" instead of insurance.

I agree that it's a problem that American's see health insurance that way. But it's not because it's an inaccurate viewpoint. It's completely accurate. The problem is that we have set up insurance that way.

IMHO, no you shouldn't be disappointed that you haven't taken a payout from life insurance. Because that's actually insurance. But with our health "insurance" system, I think we should be concerned that we're getting back less than we're putting in. As a form of pre-paid healthcare, health insurance acts more like a bank account than insurance. Wouldn't you care if you put $100 into your savings account but only got $50 out?

Cruss writes:

I'm glad I read this site today. I feel better knowing others have the same concerns as me.

I have a personal insurance policy with a high deductible. (I can't deduct my premiums like I could if my plan were employer-provided; I feel somewhat like a second-class citizen.)

The Baucus Plan would force me to buy into a "health care club" -- a club I don't choose to use very often. I am not a wealthy man; I need bare-bones insurance. Insurance, not a health care club. What I see in my future is having to go insurance-less so that I can pay the "stay out of jail" fee.

I have insurance now. Their reform will make it too expensive to continue. Then they will fine me for not having insurance. That's insane.

While I support single payer like in Canada or the U.K., I completely oppose this brand of so-called reform.

CK writes:

El Pres.,

Your comment asserts two things about the public option which I think are very debatable.

1. The PO can provide a equal level of service for a lower price than private plans.

The primary mechanism for this seems to be the elimination of profits. However, research shows that health insurers' profits are practically a rounding error compared to overall healthcare spending. It is true that top industry execs get paid a lot more than GS-scale but in the middle and lower ranks I wouldn't be surprised if the civil service folks get paid better than their private counterparts.

2. Maintenance saves money.

Maintenance doesn't prevent repairs so much as it defers them. Discovering you have diabetes at age 40 instead of 50 may mean the difference between having a foot amputated at 52 versus 65, and dying at 67 versus 57. So, the system ends up paying for the complications, and it pays for the increased coverage provided between age 40 and 50, and on top of that one guy gets to collect Social Security for a couple years while the other doesn't.

As an individual, I'd much rather be the one who gets the maintenance. It's certainly a better quality and quantity of life, but it may well not be cheaper for the system than living hard and dying young.

And if you say, "but we can reduce obesity and thus prevent diabetes/heart disease/etc more often," then I say to you, go out and write a book and open a clinic. Oprah will see to it you become almost as wealthy as her. For decades we've spent billions a year on an astounding variety of weight-reduction treatments, and the one thing they all have in common is a 95% failure rate. It's as though NASA spent 20 years trying to get to the moon and hasn't gotten a rocket above ten feet.

Yancey Ward writes:

High-deductible plans are anathema to health reformers because they don't allow the fleecing of people that don't go to doctors, clinics, or hospitals because they aren't sick.

I think politicians know that they can't raise taxes enough to fund their Medicare/Medicaid promises, and want a way to hide their responsibility for the coming denial of services. Medicare and Medicaid are broke.

Their "solution" to this political and economic problem is to put everyone into one medical care pot. We then all get equal amounts of services at whatever high tax rate the government can levy. The young must be coerced into this system, to extract as much money as possible to serve the old.

Of course medical services will be meager under "health reform", with rationing and slow delivery for everyone. The government has promised $88.6 trillion in unfunded services, including Medicare, Medicaid, Drug benefits, and Social Security. Politicians now find that just $1 trillion in increased cost during the next 10 years is politically unacceptable. That is the center of the healthcare debate. So, $88 trillion in "needed" services are not going to be delivered in the next 75 years, more than $1 trillion per year. This would also kill any progress in medical care, as we all stew in the rationed system that covers over the fraud of the mostly Democratic politicians.

The alternative is more fair but also ghastly. The government made promises to the now-old that it can't keep, and the now-old did not save enough for their own care or retirement, relying on the wishful-thinking or lies of the government. They would experience even less care corresponding to the minimal amounts that they have saved or that can be raised with current taxation.

Obamacare Bails Out Medicare

Brandon Berg writes:

Similarly, the House bill I've read--I've forgotten which one--would make catastrophic health insurance illegal.

Correction: It would ban health insurance, period. First-dollar coverage isn't really insurance.

Jeremy, Alabama writes:

El Presidente says "That is, of course, if your ideology permits you to do so."

A conservative might paraphrase Presidente's post as "we tried massive government intervention, but strangely there were unintended consequences. So let's amp up that intervention, let's manage it with a 'pretty please' instead of just a 'please', and if we only spent a little more we could save more."

Perhaps we could try less government intervention, that is, if your ideology permits you to do so.

El Presidente writes:

CK,

Your comment asserts two things about the public option which I think are very debatable.

1. The PO can provide a equal level of service for a lower price than private plans.

Profit is the issue, and it dominates the prevalent business models within health care. You have to look to the reinsurers to measure the aggregated profit. The retail market does exhibit the characteristics you state. The wholesale market does not. There are many fewer reinsurers than insurers or providers. Follow the rainbow to the pot of gold.

2. Maintenance saves money.

What does it cost to create a worker? Would extending their productive capacity by 2, 3, 10 years contribute to repaying fixed costs; and what of increasing their average productivity without extending their productive years? Of course there is variability with respect to the costs of education and training, sustenance, and wellbeing. There is also variability in the output of individuals under like conditions. However, if you were operating a business, you wouldn't close up shop as long as revenues contributed to fixed costs. We might argue that we should choose lower fixed costs, but we don't forbid people to have children, so our endeavors begin with the question "What do we do with them?" Even the Intro to Micro students here can grasp that. I'm not pointing it out to belittle anybody. I'm just saying that it's as durable a principle as we have in this field and it would be foolish to overlook it or pawn it for something sexier.

This gets at the point I was making. We somehow see people as black holes rather than the productive instruments they can be. We cannot respect their metaphysical properties while disrespecting their physical ones. We can handle the physical just fine with machines. Somehow we forget about these basics when we deal with people. I sincerely wonder why that is.

Oprah will see to it you become almost as wealthy as her.

See, that's the problem with public servants: we aren't in it for the money. :-)


Jeremy, Alabama,

Perhaps we could try less government intervention, that is, if your ideology permits you to do so.

My ideology _demands_ less government if I have sufficient reason to believe that will work. Otherwise, it does not. Persuade me, if I should care how a Conservative might paraphrase my post.

To El Presidente,

You wrote: "You have to look to the reinsurers to measure the aggregated profit. [*]The retail market does exhibit the characteristics you state. The wholesale market does not. There are many fewer reinsurers than insurers or providers. Follow the rainbow to the pot of gold."

[*] Says that CK is correct about the profits of the retail insurers. Those profits are too small to be causing high medical insurance rates.

Now, if you want to make your point, supply the link to the information and explain the size of the reinsurance profits that you think are inflating insurance prices.

-----
About (2) "Maintenance saves money". Your paragraph is quite philosophical about the meaning of people's lives. But, it doesn't answer CK's point, that many types of "maintenance" don't reduce costs.

If more healthcare "prevention" is cost effective, people could pay for it themselves and gain the greater income of a longer and more profitable working life. Even better, insurance companies would reward lifestyle changes with so much lower premiums that it would be profitable to the individual to pay to take more tests or enroll in effective weight loss clinics.

Unfortunately, prevention is more expensive than treatment, because you must apply prevention to everyone, but only a few become ill and need treatment, or the prevention is not very effective and most people need treatment anyway.
Prevention costs 8x as much

Here's a thought for everyone's consideration. I'd welcome your ideas.

The proposed tax on people who don't buy health insurance not only won't work, but probably violates the Constitution (for reasons I won't get into).

What if instead of taxing people who don't, we reward people who do? We determine an appropriate amount of money to give an 18-year-old who buys health insurance, and lesser amounts to people as they grow older, until people turn 65, when they can get Social Security coverage.

If someone waits until he is, say 40 (when he gets sick), to buy health insurance, he will have lost all the money he could have received in the previous 22 years. So there is an incentive for buying early.

Also, by rewarding people, you help make it possible for them to afford insurance (which the threat of a tax penalty does not do.)

Finally, the reward adds money to the economy, which stimulates the economy.

Yes, it's deficit spending, but in reality, so is every other plan.

Any thoughts?

Pamela Yeager writes:

I keep hearing how the proposed House legislation might make it "illegal" to have high deductible, catastrophic insurance, or even private insurance (your comment Brandon Berg). Would someone please help me find where in the Bill this is discussed. I have an HSA account and want to contact my Congressman with specific references in the Bill to have him address this directly. One of the best ways to reduce costs for consumers is to have access to catastrophic health insurance, and yet this could be taken away from us under the hypocritical guise of "reform"? Makes my blood boil! Thank you.

annie writes:

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El Presidente writes:

Andrew_M_Garland,

Working on finding you something concise and linkable for the insurance question.

Prevention costs 8x as much.

Pricing is part of the problem. It's a matter of elasticities and these can be dramatically affected by the pricing pressure of a well administered public option . . . and death panels (if I use the name enough maybe it will become comical instead of creepy or just plain stupid), or experts who assemble and review evidence on the effectiveness and cost of alternative therapies so that they can promote the use of the most effective and efficient therapies and change your multiplier. In this vein, teaching children to have healthy lifestyles counts as prevention (AKA "wellness"). It's also very, very cheap. Is the President allowed to talk to them about that?

Your link avoids discussing return on fixed costs. So, it deals with variable costs instead. Alright. Maintenance increases some variable costs while it decreases others, but does it also increase revenue? If my pizza oven gives out and I need to have it repaired, I can't use my competitor's pizza oven in the mean time. I lose business. If my body gives out, I can't borrow yours because you're already using it. If I keep my oven well maintained, I won't have as much downtime and I get a longer serviceable life out of the machine. I don't get as many burned or doughy pizzas and my customers like the product better. The same is true of my body. Neither John Stossel nor Sally Price nor Doug Elmndorf can prove otherwise. If you want to discuss what sorts of maintenance are likely to lead to better individual health, and which are most cost-effective, that's a good thing. If maintenance does not help the whole equation (P = R – C) then it doesn't make good economic sense, but the link does not deal with the whole equation from the perspective of the whole economy. It deals with costs of healthcare (prescribed therapies) in isolation, for a limited period of time, and with an emphasis on fiscal concerns. If we look at the whole economy, allow some flexibility in the timeframe and assume that we are smart enough to change our fiscal policy so that it enables a healthy economy composed of healthy people, there is ample room for reasonable differences and discussion.

The link you posted says nothing whatsoever about the productivity of workers. John Stossel is still writing pieces that move you so I presume you think he is producing value . . . thanks to Lipitor. Of course, many people who eventually come to rely on therapies to manage chronic illness do so because they have failed to prevent or delay the onset of the disease. There is often a way to forgo the illness entirely, not merely to treat it. That's where CBO is really missing the mark, and they admit it is simply because they do not have the information they would need to include it in _fiscal_ analysis; chiefly the sort of information that death panels are intended to gather (is it funny yet?).

Our concepts of revenue and cost need to expand to the whole economy, not simply explicit healthcare transactions that have direct, measurable, and known budgetary effects on the federal government. Please show me the part of CBO analysis that evaluates the economic impact of better individual performance, reduced absenteeism, an extension of average working years and subsequent reduction and/or postponement of Social Security, disability, and Medicare claims realtive to contributions, the retention of the accumulated knowledge of older workers in the workforce, more efficient utilization of available capacity and the reduction of excess capacity for the most expensive types of treatment, etc. There are a number of other policies that would help to control the contributing factors for the prevalent diseases highlighted in your link (diabetes and cardiovascular disease). Reminding people they are at elevated risk might prompt them to consider these policies too, not to mention their own personal behavior. Arnold has advocated having people pay their own way specifically so that they will consider price in their decisions. If the price is premature death, I think a little advertising on a noticeable price tag would go a long way. It does for me, and according to the CBO it seems to have made a large difference in the number of new smokers thereby producing great savings, albeit over a long period of time.

That said, eventually people die. This is an inescapable fact, and it should not go without mentioning that the greatest intensity and expense of medical care typically occur at the end of life. Maybe it would be a good idea to encourage people to think about the end of their life ahead of time in calm and sober ways rather than waiting until it comes then trying to rescue each person from the inevitable. What sort of cost savings would that produce? Let's ask Doug if CBO can figure that one out.

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