Arnold Kling  

Explaining our new Health Care System

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1. The intent was to leave Medicare and employer-provided health care largely intact. The main effects are supposed to be on the health insurance market for individuals.

2. A major goal is to enable people with pre-existing conditions who fall outside of Medicare and the employer-provided system to obtain health insurance at premiums that are below the expected cost of their care.

3. The legislation tries to solve the pre-existing condition problem by fiat, that is by making it illegal for health insurance companies to discriminate against people on the basis of health status.

4. The anti-discrimination provision alone reduces the incentive for healthy people to obtain insurance. Instead, they may prefer to wait until they get sick. To the extent that they do so, premiums will rise to reflect the average cost of health care for a sick person.

5. To counter this incentive, the legislation includes what is called a "mandate" to purchase health insurance. What this amounts to is a small tax on those who do not purchase health insurance. In practice, the tax appears to be low relative to health insurance premiums. If you were "close" to being willing to obtain health insurance at existing premiums, the tax would be enough to persuade you to buy it. However, if you were not close, the tax would not be enough.

Overall, this looks to me like a clumsy way to redistribute wealth from the healthy to the sick. The Republicans proposed a less complicated alternative approach, which is to subsidize the high-risk pools that many states have set up to help people with pre-existing conditions purchase insurance. (Note that Tyler Cowen disagrees that Republicans offered anything serious on health care.)

Will subsidies for high-risk pools work? I can think of reasons why they might not. Will the approach embodied in the legislation work? I can think of reasons why it might not. I wish we had tried different approaches in different states. (This would require states to make rules about what happens when somebody moves across state lines.) But given that we do not know what is the best solution, taking one approach, carving it in stone, and applying it nationwide strikes me as unwise.


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COMMENTS (7 to date)
Ted writes:

You'd have to pour massive subsidies into these high-risk pools. The high-risk pools are utter failures at the state level. The plans are incredibly expensive; most the uninsured aren't even eligible or can't dream of affording them; most are only bare-bones catastrophic care and people with pre-existing conditions often need more than that ; medical bills for those in the pools are still massive ; there are lifetime caps that are often far too low for any real coverage for these people etc. The high-risk pool insurance is usually terrible and incredibly expensive (so much so many of those eligible can't afford to enroll). The amount of subsidies necessary to finance high-risk pools so they actually offered even decent coverage with expanded access would likely cost more and even be less effective than the silly plan they've come up with. To make high-risk pools workable, with actually decent coverage, expanded access beyond the currently pathetic numbers, and make it so people can actually afford the out-of-pocket expenses, I've seen numbers cited as high as $300-$400 billion per year. High-risk pools are just disasters because they are a really dumb concept. The whole concept of a high-risk pool strikes me as odd. Insurance is redistributive by nature. Healthy people subsidize unhealthy people. How do we expect a system of only unhealthy people who subsidizes other unhealthy people to work? This pretty much explains why that market is a complete disaster.

Now, if you want to keep the system incredibly dysfunctional and providing terrible service you can have high-risk pools costing less than $50 billion per year in federal subsidies - but Republicans couldn't honestly think such a crappy system being subsidized would be acceptable to Democrats so it's like they offered them nothing.

I think high-risk pools are a really, really dumb way to "fix" the insurance market.

Also, most state risk pools are basically public option insurance, something I wouldn't think a libertarian would seriously support.

Ted writes:

*correction, I misread what you wrote. I thought you wrote:

"Will subsidies for high-risk pools work? I can think of reasons why they might"

missed the "not" at the end, so I didn't mean to imply you supported the idea.

J writes:

Also, most state risk pools are basically public option insurance, something I wouldn't think a libertarian would seriously support.

Not true. I would submit that most libertarians also support some level of Federalism: it's fine for the states to have public options; though I would imagine we libertarians would also probably agree that states are no better than the National Government at running such a thing. But that's okay, because the states are more likely to repeal it if it doesn't work. Not so at the National level.

John Thacker writes:

I didn't realize that Tyler had converted to supporting Medicare Part D's passage and the Republican strategy of "it's going to pass anyway, so might as well get some things like HSAs in it." I can't see how otherwise to reconcile his approval of David Frum's note.

Yancey Ward writes:

From Ted:

I think high-risk pools are a really, really dumb way to "fix" the insurance market.

I don't disagree with what you wrote, but I think the real issue is that trying to make this "insurance", or calling it that, is the most important lie in this entire debate. Would anyone healthy voluntarily make a mutual insurance agreement with someone who was already diabetic and/or in a nursing home? The very fact that high risk state pools are practically unaffordable reveals the real problem- that those with disease are expensive to treat- more expensive than almost all of them can afford. We create these idiotic pools for political reasons- no one wants to admit that covering the costs of what these people need in medical care means someone else has to step up to the plate to pay. Trying to do this through insurance just allows those payers to voluntarily not pay.

In addition, since all of us who don't die in accidents or drop dead suddenly, the insurance model of health care doesn't really work at all since there are too few people who don't end up requiring expensive medical interventions in the long run.

Yancey Ward writes:

I think one can buy insurance against the probability that you will get sick, but if such insurance doesn't have caps on payouts, then it just becomes more expensive and worth less to each additional healthy person. I wonder if the ideal insurance model here doesn't cut the tie between medical services and health insurance companies? You buy a policy that is risk adjusted by actuarial analysis, and each ailment, once identified, simply entitles you to receive X dollars counted towards the cap to spend on anything you wish. The rub here is that this requires us as a society to be ready and willing to accept the ways in which the recipients spend these funds. If we really are unable to do this, then we must simply accept that the political battles over what is covered and how much to spend on each disease/ailment will be endless and nasty.

Brittany writes:

I do not agree with the new health care bill that has been passed. Everyone sometime or another in their life is going to be sick. No one is invincible and immune to every disease and sickness that is in the world. Accidents are going to happen and no matter what in the long run we all have expensive medical encounters. People with preexisting conditions should not be discriminated against. They should have the right to just as much medical attention as those who don't have a preexisting condition. The people who are living in poverty should have the right to as much medical care as anyone else. I understand the doctors have to make enough money to cover the cost of their supplies and services but how would they want to be treated if they were the patient? Pouring out subsidies to the high-risk pools, I don't feel is the smartest idea. It should be left up to the American people to decide whether or not this healthcare issue continues any further. I personally feel like health care and insurance should be left how it is. This is doing nothing but putting what is supposed a free country under more government control.

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