Arnold Kling  

Incentives vs. Intentions

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As Bryan points out, the incentives in the new health care legislation should discourage people from getting health insurance and discourage employers from providing health insurance. The intent of the legislation is to reduce the number of people who are uninsured.

As of now, a rational individual would not choose to obtain health insurance, and a rational new business would not offer health insurance. In both cases, that is because the legislation has made it illegal for health insurers to discriminate against people on the basis of health status. So the cost of obtaining health insurance while you are healthy will stay high--in fact, market forces should send it higher--while the cost of remaining uninsured has dropped dramatically.

Is it time to bet that there will be more Americans uninsured two years from now than there are today? Or will the law produce results that are consistent with intentions, regardless of incentives?


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COMMENTS (27 to date)
Robert writes:

Arnold,

While I generally agreee with your analysis on this and most other topics, you are not quite right about the incentives to carry insurance. In short, having insurance can dramatically reduce your health care spending, especially if you hold an inexpensive policy with a very high deductible. Such a policy is more like REAL insurance in that it is scarcely used to pay for anything. But it does give you access to dramatically reduced rates for care. Here is what I recently wrote in response to one of Byran's posts.

Something is being left out of the "heads I win, tails I break even" argument. Even within the new system, there is a strong incentive to buy insurance even if you are healthy. In fact, the primary reason I carry insurance now is that it allows me to take advantage of the insurance company rates for routine care. For example, a physical with lab work costs about $600 if you are uninsured....but only about half that if you are insured. What I do is carry a relatively cheap high deductible ($10,000) policy (effectively, I pay for my own care), but I pay dramatically reduced prices because I get the BCBS rate for care instead of the MSRP.

For example, I recently had an MRI. The MSRP was $1,200, but the BCBS negotiated rate was $400. Since I have not met my high deductible, I had to pay, but only the $400. Simply by virtue of being insured (if barely), I avoided an $800 incremental expense. Those of us in the private/individual insurance market are well aware of this incentive to carry insurance. Even under the new regime, I will have a very muted incentive to play the "heads I win....." game because of the access I have to negotiated prices by virtue of holding a cheap, high deductible policy.

By the way, none of this is very satisfying. I like neither the current system nor the new legislation. But given either system, there is a still an incentive to carry insurance.

Dave writes:

If there is widespread agreement about the need to get people insured, and if people aren't buying insurance, then Congress can raise the penalties for non-compliance. Therefore, I don't think any of this should be a major concern.

The only counter to my argument is that if/when more Republicans get elected into office, there is probably less chance that they would raise the penalties.

JH writes:

How quickly and easily can you buy insurance? If I take this "I'll only buy insurance when I'm sick" strategy, how long will it take between the time I realize I'm sick and when I can get insurance to pay for treatment?

Matt C writes:

Is it time to bet that there will be more Americans uninsured two years from now than there are today? Or will the law produce results that are consistent with intentions, regardless of incentives?

You are assuming, unrealistically, that the laws will remain as they are now.

I think it is evident to everyone on Econlog that the current scenario is unstable.

The question is, what happens next.

A popular view here is that the real intent of Obamacare is to destroy private health insurance. So, the industry was given a universal mandate backed by gigantic taxpayer subsidies to lull them into a false sense of security, and they are blithely unaware of the adverse selection issues that will eventually lead to their total downfall.

It is of course, unthinkable, that the public was lulled into a false sense of security by unrealistically low penalties for non-compliance with the mandate. It would be impossible for the laws to be changed later to fix the adverse selection problem. The penalties can not be raised, the subsidies can not be increased, there can be no such thing as an "willful noncompliance" exemption to the forced insurance coverage rule.

We know this, because the public is a dispersed interest, and the health insurance industry is a concentrated interest, and public choice theory tells us that . . . wait, how does that go again?

I wouldn't take your bet in two years. And I wouldn't bet on insurance coverage numbers in any case. But I would take a bet that in five years the insurance industry has higher revenues in inflation adjusted dollars than it does today.

Randy writes:

I think that what we can expect to see is equilibrium. I agree that the incentives will produce a decline in those who are "covered" by "insurance", but there is no reason to believe that people will also have access to the same standard of healthcare that is currently possible. What we will have is not a "right" to healthcare, but a "right" to stand in line waiting for the available healthcare, and the "right" to die while waiting.

dullgeek writes:

I predict that people will follow their individual incentives rather than Washington's intentions. There'd be a bigger conflict if the intentions were their own.

mark writes:

As an employer, I can tell you there is definitely a strong incentive to dump coverage. The penalty is far less than the cost of employee coverage. Which means you can give a substantial wage raise, pay the penalty and dump coverage. You would be trading the risk (v. high, imo) of annual premium increase for the political risk of penalties increased (lower, imo). Now some employers won't, because of collective bargaining or because the market for labor is too competitive or because they want the coverage pool they are in to be as large as possible or because they are below the threshold. But some will if the chance arises.

Joey Donuts writes:

Arnold:
You state,

In short, having insurance can dramatically reduce your health care spending, especially if you hold an inexpensive policy with a very high deductible. Such a policy is more like REAL insurance in that it is scarcely used to pay for anything. But it does give you access to dramatically reduced rates for care.

Maybe its because of my name :), but everytime I visit a doctor for any reason, I tell the staff that I am paying cash, that there will not be any insurance forms to fill out, that I want the best price they have to offer. I always get a price that is far below the MSRP and I think many times it is below the insurance company rate.

You might try that tactic. Ask for the best price. You'll soon see that your "insurance" makes no difference except that in some cases you'll pay more.

Ted Craig writes:

"If there is widespread agreement about the need to get people insured, and if people aren't buying insurance, then Congress can raise the penalties for non-compliance. Therefore, I don't think any of this should be a major concern."

You can create all the penalties you want, but the real issue is enforcement.

staticvars writes:

I believe this may be a case where people act irrationally. There could be a strong resentment to paying a penalty and getting nothing in return. People may be more willing to overpay for their own insurance where there is some chance of them benefiting from it. (Would people rather buy 10 lottery tickets for random others or 100 tickets for themselves?)

To Robert's comment, are you sure that high deductible plans are going to be legal on the exchanges? If they don't meet the criteria for bronze, silver, or gold, which include various provisions for insanities like $0 deductibles on preventive care, how can they continue to be sold?

Lord writes:

The mistake is to think of them as uninsured; they will now be insured even if they only pay the penalty. This will be the catastrophic coverage you have suggested.

Michael writes:

In an earlier post JH asks: "How quickly and easily can I buy insurance?" That is, how easy will it be to wait until I'm sick to pay and recieve coverage? The answer is pretty damn easy and pretty damn quick. There is already an existing system in place for this. Every County hosptial has an eligibility worker. If you need medical care you only need to drop in to an ER. Since the hospital wants to get paid they will meet with the patient and assess them for Medi-Caid eligibility. If they are eligible then an application is sent to the State. It may take awhile for all the paper work to be done but coverage is retroactive to the ER visit and all subsequent care. I see this daily.

gnat writes:

I welcome the HCR because it addresses most of the obstacles to a competitive market place and starts the transition from the current disfunctional market institutions. It provides incentives to move from employer-based to exchange based insurance. It solves the private insurance adverse selection problem. It requires output-based price and quality transparency. All of these are required for private markets to work. A lot of the "imperfections" that are cited reflect the fact that transitions have to take place and I am confident they will. What we have learned from healthcare and finance is that institutions to support competitive markets do not spring up magically. They have to be created

Dick King writes:

Robert, your point in the first comment is salient.

I've always wondered why insurance companies don't offer plans with an infinite deductible. They would never indemnify, but clients get to take advantage of in-network rates. They could offer the service for a modest fee, because network-only clients improve their market clout.

-dk

John writes:

Whatever you're having that makes you think "responding to incentives" means people will forgo cheap insurance for more expensive penalties without insurance, I'd love a shot. Please, oh please, let people start taking your bet.

Chris writes:

mark-
So we'll move what we should have all along, a system in which the insurance decision and costs are borne directly by the consumer. I don't see the problem.

Jim Ancona writes:

Robert:

Will your high-deductible plan still be available once Obamacare takes full effect? My understanding was that the minimum coverage requirements will exclude most such plans.

Jim

Yancey Ward writes:

john,

Where are we to find this cheap insurance that people won't be forgoing?

ColoComment writes:

Robert, I too have a $10k deductible with HSA plan, and happen to believe that is an excellent construction for health care and health insurance. However, in one of the earlier versions of HCR such high deductibles were prohibited. Do you know for a fact that deductibles greater than, say, $2500 are permitted under this new law?

stanfo1 writes:

If you are buying insurance for you or your employees, instead of paying for your childs tuition or investing that money in the company, you are now a sucker.

TJR writes:

John,

Whatever you're having that makes you think insurance will be cheap under the new system, I'd love a shot myself.

Considering you'd only pay an annual penalty of $700 until you get sick and need insurance (in which case it may still be affordable to pay out-of-pocket), there's hardly any question here as to which alternative will be cheaper.

Unless, of course, you're chronically ill. Arnold's argument is largely for those who are relatively healthy.

John Thacker writes:

people will forgo cheap insurance for more expensive penalties without insurance, I'd love a shot.

Rates in New York, New Jersey, and Massachusetts, other states with mandatory issue and community rating, are the highest in the country and climbing faster. The CBO agreed that for people not being subsidized, rates will go up.

Sure, people poor enough to be heavily subsidized will buy insurance, but there's a large number of young professionals who will have a lot of incentive to not get coverage, since they'll be priced the same as old sick people.

PJens writes:

There is no such thing as "cheap insurance". What I have read leads me to believe that in the near future, high deductible plans will no longer be available. We all shall see, maybe insurance premiums will go down 3000% as the president claimed. Heck, I would be happy if they only went down the $2500 he promised over and over and over again during the campaign.

Sigh...Ok, I will be happy if the new HCR law doesn't add one dime to the deficit.

Sung Tin Derek Kan writes:

According to the topic which is about incentive vs intention. Whether the people are going to purchase a health insurance or the insurance companies are going to sell provide insurance plans are depending on the supply and demand problem.

Simply if the prices of the insurance is much higher than the seller expected, the demander such as those rational people who are still being healthy are less likely to buy this insurance, as they think that they do not have the incentive to buy it, and they are not necessary to buy the insurance. This case can be observed inversely for the cases of the seller of insurance.

Under the new legislation by the government, people are less likely to purchase the insurance because the fee for penalties are not that high which stop people from buying insurance in order to compensate the loss.

BryanS writes:

Unfortunately, I think what health insurers really sell is a hedge against risk. Buyers pay premiums based on uncertainty about the future. Insurers cover their costs of business by offering rates that attract enough consumers to spread the risk. My problem is (1) it appears we've increased the number of people covered by government entitlement, and (2) we've eliminated uncertainty about the future. If people don't have to worry about preexisting conditions, they don't have to worry about future illness, right? Now, for insurance companies to cover themselves, they have to assume people have preexisting conditions and raise prices to account for their increased risk. Unless I'm off base, increased demand and increased risk for insurers should probably lead to higher prices in the future. Seems like what Anthem/Blue Cross did in California (30-40% increase in rates) might have anticipated the new health care model.

Arthur_500 writes:

Robert is corre ct that insured individuals pay lower rates. So why does the proponents of this legislation continue to say that the insured are subsidizing the uninsured?

whitehall writes:

In response to Dick King about insurance companies offering infinite deductable plans.

The closest approach to that is Vision Service Plan (VSP). For a monthly payment, usually through your employer, you get a once a year (or so) eye exam and discounted prices on frames and lenses.

However, even with the discounts, one can take a prescription and get it filled via the Internet for a fraction of the in-office discounted price.

It can be demonstrated that it would be better to pay for the eye exam and buy the glasses on the net than to pay the premiums and the plan's prices.

I've long argued with my spouse as to the silliness of VSP but to her mind, it offers some security that I've not been able to identify. I see it as a marketing plan for the optical industry, much like paying $20 for a book of coupons.

In response to Arthur_500,

Most uninsured patients are CHARGED higher prices but seldom pay them. The insured patients pay for the uninsured' accounts uncollectable.

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