David R. Henderson  

Thoughts on the Republican Health Insurance Reform

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I've held back on commenting in a big-picture sense on the Republicans' plan for repealing and replacing Obamacare. I've found comments by Megan McArdle, Peter Suderman, co-blogger Scott Sumner, and Steven Landsburg, among others, useful. They've tended to focus on many of the negative aspects of the plan.

I asked my health analyst friend Merrill Matthews of the Texas-based Institute for Policy Innovation what he thinks, and he sent me links to four of his pieces on the plan. They are here, here, here, and here. I notice from his bio that he has a 6th degree black belt in Tae Kwon Do, so I will be careful in my criticisms, if any.

Seriously, though, I tend to agree with Merrill. As I wrote over 20 years ago, the combination of guaranteed issue and community rating, a key feature of Obamacare, leads to the destruction of insurance markets. No one would advocate forcing insurance companies to issue house insurance policies to people whose houses are burning, at premiums equal to those paid by others whose houses aren't burning. And the twin requirements would cause more and more people to refrain from buying insurance until their houses are on fire. Insurance companies, knowing this, would charge astronomically high premiums.

As Merrill Matthews points out, the Republicans had a good plan for getting rid of guaranteed issue, but caved:

But in the past week or two, Republicans apparently abandoned actuarial principles--just as Obamacare did. Under their new plan, if a person wants to buy coverage in the individual market during an open enrollment period, insurers have a 12-month "look back." If the person has been uninsured more than 63 days in that period, the insurer will charge the applicant 30 percent more than the standard premium for the next 12 months. Apparently, that 30 percent increase will happen even if the applicant is perfectly healthy.

One thing I would like to see more discussion of in the commentary is how/whether we could adopt some of the best elements of Singapore's plan. No, it would not pass a libertarian test, but it would pass an incentive test. Co-blogger Bryan Caplan has written here, here, and here about what is so good about Singapore's system. When I covered Bryan's pieces in my fall economics class, two of my students were from Singapore. They emphasized that virtually everyone, rich or poor, has skin in the game, that is, pays something for any given health care service.


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COMMENTS (15 to date)
Thaomas writes:

Could you explain why community rating and guaranteed issue prevent the insurance market from functioning? It seem that it still works as it should. The insured receive the payout when something bad happens they get sick. If one is worried about adverse selection the is the mandate/tax on non purchase or a subsidy to make "self insurance" until sickness strikes fairly uncommon. Premiums will not be "astronomical" unless the community is really sick. What would that not work?

foosion writes:

Consider employer based insurance, the universal healthcare in just about every major country or Medicare.

Essentially, all of these cover every applicable person (guaranteed issue) and they don't discriminate based on an individual's health (community rating).

The key is that everyone is covered, which spreads costs, increases the plan's bargaining power and prevents people from gaming the system.

foosion writes:

The problem with the Republican's 30% additional premium is that it provides an incentive not to buy insurance. This narrows the pool, leading to adverse selection, higher premiums for those remaining, etc.

Skin in the game works well for minor stuff when there's price transparency and other adequate information and the opportunity to shop. It doesn't work all that well for emergencies or major (highly expensive) health problems. We don't even have price transparency for the vast majority of doctors and hospitals.

mariorossi writes:

Can I point out one tiny detail about the singapore model? The government owns most hospitals and runs them as non-profit. That makes most doctors effectively state employees. The government offers a state insurance policy to cover catastrophic care (aka the public option). Everybody has to have a policy.

You are going on about the cost of routine care, but that's a small percentage of overall costs. For example a natural birth will likely cost half or less than a c-section and a premature birth will probably cost the equivalent of 20 natural births.

Mark Bahner writes:

Federal health insurance of any kind has no basis in the Constitution. However, the federal government is already violating the Constitution via Medicare and Medicaid, and is likely to violate it even more through something new. Therefore, it would be nice to see some attempt to look at the best aspects of government health insurance in all the countries of the world, and come up with the best aspects of each.

Hazel Meade writes:

Could you explain why community rating and guaranteed issue prevent the insurance market from functioning?... The insured receive the payout when something bad happens they get sick.

Because people will wait until after they get sick to buy insurance. Why would you pay premiums for insurance when you are not sick if you can wait until you get sick and then sign up at no additional cost?

And, even with an additional cost, that additional cost must be greater than the cost of the premiums. Not sure that paying an extra 30% for one year is going to be enough of an incentive. If your premiums are $200/month, you can save $2400 per year, every year, until you get sick, and then pay an extra $720 the next year. If you don't get sick for four years, you save $10000 at the cost of $720. No rational person would do anything else.


AlanG writes:

David, I think you should get a copy of TR Reid's 2010 book, "The Healing of America: A Global Quest for Better, Cheaper, and Fairer Health Care" Mr. Reid visits a number of countries that have universal health care systems and shows how they deliver better care than one 'normally' gets in the US (I'll leave aside the millionaires in this country that can pay for the "best" healthcare). Of course this goes against the libertarian grain as all the examples Reid cites require individuals to either purchase an insurance policy (usually with a co-pay from their employer) or they are covered under a state paid national health service.

As mariorossi already noted, Singapore's health system is highly regulated, and this is not a "tiny" detail though I think he was being a bit sarcastic. Although they require payments for service so that patients have "skin in the game" so do many European systems. The chapter on France in Reid's book is highly instructive in this regard and at the time of the book's writing 2009, France was ranked number one of all countries according to the World Health Organization.

As is evident, and counter to what libertarians want, the only way to assure a decent functioning and cost effective health care system is to either go the NHS route as in Great Britain, or require the mandatory purchase of insurance by everyone.

Hazel Meade is petty straight forward as to why the 30% surcharge was never going to work as an incentive for the young and healthy.

Peter H writes:

Megan McArdle who you link to above has a new piece out today which emphasizes just how difficult copying aspects of other nations' systems onto our own is.

For example, Caplan mentions in one of the pieces you cite that Singapore charges more for people in private rooms than in open wards. But US hospitals do not generally have open wards because both government insurance and the mandated benefits of private insurance require coverage of private rooms. As such, you could not do either the NHS scheme (everyone on an open ward) or the Singapore scheme (pay to get off the open ward).

We have literally poured the concrete on higher prices in American hospitals in this way.

There are also more figurative forms of poured concrete. Many hospitals and other providers have substantial debt burdens and if faced with a sudden steep drop in payments due to Singaporean price control measures would go bankrupt, and many would not be viable ongoing concerns afterwards given lower reimbursement rates.

I don't think you necessarily consider Singapore's stringent price control scheme to be one of its better aspects, but realistically it is. Low prices make Singapore's system possible - and those low prices are principally due to government price controls.

RPLong writes:

@ Mark Bahner -

I have some experience with different health care systems as a heavy user. In my opinion, the three most important metrics for success in health care systems are: (1) Access to medicine, (2) Individuality of treatment (the more individualized, the better), and (3) The ability to hop a queue if you are willing to pay for it.

The best "system" on these three metrics, in my view, is "medical tourism." It's the closest I think we'll ever get to a competitive health care market in my lifetime.

Corry B. Peacock writes:

Since the constitution is silent on healthcare, leave it entirely to the states. A simple law stating that health insurance may be purchased across state lines, and making premiums and health saving accounts tax deductible, leaving indigent coverage to the states, shouldn't suffice. Also, this policy would economically reflect reality for the states' support for illegal immigration.

WalterB writes:

Peter H - thanks for your interesting comments and links, but I am compelled to point out that no actual concrete was poured in either of your examples. Still, it's fun to think of liberating health care markets with a jackhammer!

Hazel Meade writes:

I doubt we're going to see a radical shift towards a Singapore style system.

What's frustrating is we can't even make incremental changes that shift us away from the employer-based one with all of the problems it creates.

mbka writes:

As others pointed out, people like to hold up the features of Singapore health system in a very selective way. It's always done as if you could just lift some features that the author likes, while ignoring features that most Americans would never accept, because they got used to their own system. The bottom line is, even in Singapore, if you want American style care, you'll pay American style prices. You'll use either the state mandated forced savings for that (highly regulated what you can use for what, e.g. no elective procedures on the forced savings etc). Or you use private co-payment, or private insurance. If you can't afford any of these, you'll be in an open ward with no a/c but you will receive care. If your savings are insufficient even for the basic option, there will be means testing including your family. Children are required to pay for their parents etc. Only if these means are also exhausted does the government subsidize. A lot of things in there I suspect Americans would find hard to adopt. Oh and after a certain age, there is a mandatory insurance portion, so it's not all forced savings. It's cheap though, about $500/year. If you want it to cover private wards, this goes up to $1500/year or so, still cheap.

BTW someone mentioned the French system. Very interesting. In France, there is a 20% mandatory co-payment, most people get around this by top-up private insurances to reduce or nullify the co-payment. If you want top care, in France too, you'll pay privately. Also, the system is not single payer, it is organically grown and quite byzantine. Co-payment as a percentage or a flat rate is instituted in many European countries.

So why do Europeans pay less for health care and health insurance? In essence, since everyone is insured, the young and healthy pay for the old and sick, and this is of course they way it's supposed to be in insurance. The lucky ones pay for the unlucky ones. Due to the nature of human aging and human health, for such a system to work it MUST be mandatory for all to get insurance or else people wait until they are old and sick. Since most of us will be that one day, the system is just on average and over a life time. It's not that hard to understand the economics of all of that. The fundamental question is a moral one. Do the citizens of a country declare that:
1) they willingly will force every person lucky in health to pay for every unlucky one? Benefit: compassion. Cost: loss of free choice; or
2) they leave the unlucky ones to their own devices? Benefit: free choice for all. Cost: no compassion.

That's all, the mechanics of the consequences are understood. The contortions about ACA / ACHA are purely political to pretend one can achieve the benefits w/o the respective costs.

Mark Bahner writes:
Since the constitution is silent on healthcare, leave it entirely to the states. A simple law stating that health insurance may be purchased across state lines, and making premiums and health saving accounts tax deductible, leaving indigent coverage to the states,...

So when everything else has been tried, follow the law, eh? It sounds crazy, but it just might work! ;-)

Jake writes:

It's a little shocking to me how stagnant the healthcare debate is, even among intellectuals.

I think paying too much attention to what X country is doing or what Y political party wants is missing the mark. As economically literate people can we not see that even in "successful" countries there is a ton of market distortion, along with fundamental economic principles being ignored?

Forget Obamacare and Ryancare -- any policy reform short of completely starting over is not enough.

Begin with three basic questions:

1) How do we convince people to live healthier lives? (which lowers healthcare costs)

2) When people do get sick, how do we provide medicine -- e.g. doctors, hospitals, drugs, etc -- in the most efficient way possible?

3) How does healthcare get paid for?

Topic #3 is where most popular discussion occurs, but people don't realize that putting work into #1 and #2 makes the financial part a lot less important.

And the easy -- and in my opinion correct -- answer is still Econ 101.

With apologies to Ken Arrow, we don't really need a different set of economics for this particular set of goods and services. Traditional thought works just fine, so what does it tell us?

Putting a stop to market distortions is step one and it will get us 90% of the way there. Then we can have an actual intelligent debate on where to go next.

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