Bryan Caplan  

UBI and Health Care: What's Wrong With Murray's Approach

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How would a Universal Basic Income handle health care?  Normally, UBI advocates just say, "separate issue" and move on.  But not the great Charles Murray.  His In Our Hands: A Plan to Replace the Welfare State proposes two regulations to tackle the problem head on.

Regulation #1. UBI recipients must purchase health insurance. 

Regulation #2. "Legally obligate medical insurers to treat the population, of all ages, as a single pool."  Health insurance is still private and competitive.  But if an insurer wants to cut its price, it must cut it for everyone.
On the surface, it's ingenious.  Most UBI advocates exclude health care because health insurance premiums vary tremendously from person to person.  But if health insurers have to charge a uniform premium, this problem seems to go away.  Averaging over everyone, premiums would be well below Murray's proposed UBI of $10,000 per year.  Everyone could therefore afford to comply with the mandate.  Maybe you shouldn't even call it a "mandate"; it's just a rule you have to follow to collect your UBI.

The problem: As long as health insurance remains private and competitive, health insurers compete on quality as well as price.*  Since their elderly and sick customers are losing ventures, there's an obvious incentive to selectively cut their quality so they take their business elsewhere.  In Murray's world, no insurer wants to be known as a geriatric specialist.  Instead, prudence urges them to lavish services on the young and healthy.  Physical fitness programs.  Free contraception, delivered by drone for no extra charge.  That kind of thing.

How severe would the problem be?  Very.  The cost of insuring a 91-year-old is far higher than the cost of insuring a 21-year-old.  If the law forces firms to charge both the same rate, firms will desperately search for ways to repel the aged and attract the young.  Blasting "today's hottest music" over the P.A. system is only the beginning.

Of course, the government could impose a comprehensive system of quality regulation to prevent this kind of thing.  But given the immense cross-subsidies, enforcement would have to be both encyclopedic and draconian.  The UBI aspires to simplify the welfare state, but ends up piling a whole new strata of regulation on top of the status quo.  What's the point?

I'm a huge Charles Murray fanIn Our Hands is my favorite book on the UBI.  But his elegant effort to fold health care into the UBI fails.

* This is a key part of Murray's vision: Like me, he advocates supply-side health-care reforms like ending medical licensing and allowing contractual limits on medical liability.


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COMMENTS (15 to date)
Justin writes:

If you force insurance companies to only offer a single price, you're forcing them to only offer a single type of coverage. I think I would prefer having some choice.

Hazel Meade writes:

That's even worse than the ACA.
At least the ACA lets insurers charge older people 3 times what they charge the young. Murray's program is total socialization of health care costs. The insurance companies would be reduced to just cost-plus administrative contractors.

Jesse C writes:

If we went down this road...

1. You could force some sort of pooling based on age - all 85-year-olds treated the same, all 25 years olds treated the same.

2. Allow HSAs + catastrophic coverage, make that the norm, and ease into the program over, say, 20 years. A young adult today could be in the new program now, an older person would not. (Uh.. interpolate in between somehow?) Eventually, people would be using HSA funds to pay much of the costs (office visits, etc). Demand being a thing again could bring prices down?

3. Excise tax on Werther's Originals to subsidize medical costs for elderly.

jc writes:

All interesting ideas. Combine them, and you get something that's at least somewhat reminiscent of permanent life insurance, with its mix of coverage for catastrophe (i.e., early death) and inevitable events (fact: if you don't die before age 65, you will die after age 65).

There's a tax-favored, forced-savings element that effectively funds expenses that are, across groups of people, extraordinarily expensive at older ages and, in fact, are guaranteed to eventually come.

Premiums for older people are kept low due to the increase in the % of payouts coming from self-funding as people age (i.e., these folks were forced to pay far higher premiums than needed to cover their risk of catastrophe when young, and most of this excess can now be used to fund claims when people get old).

And if you want to use some of the extra money to fund non-catastrophic healthcare, college educations for the grandkids, retirement, etc., the law may let you do just that (e.g., tax-free withdrawals to basis followed by tax-free "loans" against the rest that are paid back by the eventual proceeds).

Different cultural dynamics, e.g., taking care of orphans or the term-vs.-whole life insurance debate...versus healthcare as a "right" provided by civilized people who take care of their own, tendered by medical practitioners who are wise and holy healers, wholly immune from greedy capitalism-based imperatives.

(Arnold Kling's post on this was good. Channeling Robin Hanson, it's possible that the key mandatory feature of any successful plan is its ability to allow us to believe the holy healer narrative. Most of what we're actually buying may be a mixture of hope plus perceived virtue and signaled concern for fellow tribe members...since so much of healthcare today is not technically insurance against catastrophe.)

blink writes:

If we are already restricting to a single price, could we not tackle this by requiring that the company not deviate too far in its customer base from current demographics? While a bit heavy-handed, this seems like a pretty simple fix.

Yaakov Schatz writes:

The solution would be to adjust the UBI for age. The UBI would be $X + (average cost of minimal health insurance for your age). You would have to buy healthcare for the same age you declare in receiving the UBI so you do not gain much from lying about your age.

Silas Barta writes:
Instead, prudence urges them to lavish services on the young and healthy. Physical fitness programs. Free contraception, delivered by drone for no extra charge. That kind of thing. ... Blasting "today's hottest music" over the P.A. system is only the beginning.

Heh, I've suspected that if car insurers had to sell to men and women for the same rates, you'd see them redesign their sites to be repulsive to men.

In any case, shouldn't the Obamacare insurers be using the tactics you describe already, since they have to undercharge the old?

Jesse writes:

This is only a question that would even need to be asked in the US.
You buy the basic plan on behalf of the UBI recipient from a single pool that covers everyone. Like the rest of the developed world does (minus the any leftover for the UBI) for now

Thaomas writes:

Good analysis but it typically stops where so many Libertarian analyses stop, when it finds the first downside. It's like saying we cannot have a minimum wage because it will cause some unemployment. Point is, is this the least bad distortion that can be introduced to achieve the objective?

In its own terms, why not just make the UBI age related in slices thin enough to not make it worth insurers while to try to game the 62/63 year old cost differential?

Rob Thorpe writes:

This is very close to the system we actually have in Ireland.

Jesse C writes above: "You could force some sort of pooling based on age - all 85-year-olds treated the same, all 25 years olds treated the same." Yaakov Schatz writes something similar. That's how it works in Ireland, it's called "Lifetime Community Rating".

The system of Lifetime Community Rating has only just been introduced. Before that all health insurance policies with the same benefits had to cost the same regardless of age. The government dealt with the age problem by redistributing income between health insurers. This was very clumsy and contentious, that's one reason why the system has been changed.

Don Boudreaux writes:

Thaomas writes:

Good analysis but it typically stops where so many Libertarian analyses stop, when it finds the first downside. It's like saying we cannot have a minimum wage because it will cause some unemployment.

The minimum wage is a very poor example of Thaomas's point. Economists over the years - including many of a libertarian bent - have, when analyzing the effects of minimum-wage legislation, often gone well beyond pointing out that minimum wages destroy employment opportunities for some low-skilled workers. Other consequences of minimum wages that have long been noted in the literature - including in the writings of libertarian-leaning scholars such as Deirdre McCloskey, Milton Friedman, Thomas Sowell, and Walter Williams - include:

(1) the loss of current earnings by those made unemployed by minimum wages is not the only loss; another loss is the loss of opportunities to gain job experience and on-the-job training; this latter loss also reduces (but in ways very difficult to measure accurately) the affected workers' future earnings;

(2) the distribution of the minimum-wage's benefits (higher wages for some workers) and losses (unemployment or worse jobs for other workers) isn't random; the winners in the U.S. disproportionately are better-schooled whites (likely each with his or her own private means of transportation and no parental responsibilities) while the losers disproportionately are blacks and other minorities.

Philosophically mature analysts of minimum-wage legislation also understand two other realities.

First, if the relevant population is considered to be everyone - rather than, as Thaomas would seemingly have it, only low-skilled workers and their households - economic theory is quite clear that, in the absence of monopsony power in the market for low-skilled workers, the size of the winners' gains will be less than the size of the total losses suffered by society at large.

Second, even if we assume that the relevant populations to consider are to be confined to low-skilled workers and their households, considerations such as points (1) and (2) above make any cost-benefit analysis of minimum wages very impractical compared with the intellectual stance of treating the determination of the market prices of hours of low-skilled labor no differently from how we treat the determination of the market prices of hours of high-skilled labor, of toothpicks, of automobiles, and of feta cheese. If we have no itch to withhold judgment on the merits of allowing the market to price these (and countless other goods and services) until we conduct cost-benefit analyses on the use of price controls in each of these other markets, what reason is there to believe that the market for low-skilled labor should be treated differently? Once the analyst of minimum wages disproves (or casts healthy suspicion on) the widespread presumption among today's minimum-wage proponents that minimum wages have no negative employment effects, that analyst - whether libertarian or not - bears no further burden to prove that minimum wages fall some cost-benefit test.

Let me put this last point somewhat differently: if the income gains, from a minimum wage, captured by some people are to be counted as 'benefits' to be weighed against the losses of other people - and if these gains can in principle be so high relative to the losses that the minimum wage passes a cost-benefit test - then a Pandora's box of utilitarian horrors is opened.

For example, someone (call him CB) might propose that the state prohibit the employment of all blacks under the age of 20. CB would correctly point out that, while his policy would obviously have some losers, it would also produce winners - namely, the wages of non-black, mostly young workers will increase as a result. And he'd be correct. I can also imagine that, in reality, the measured increases in aggregate pay of this policy's winners would be larger than the measured decrease in the aggregate pay of its losers (even if we confine "losers" only to the black teenagers who lose jobs). Yet who would counsel that we should, therefore, withhold judgment on CB's proposed policy until a cost-benefit analysis is conducted? Who would think it to be "libertarian" or "one-sided" or "unscientific" to prejudge as unacceptable a policy of prohibiting the employment of blacks under the age of 20?

Jake writes:

The simple truth is that once someone gets old and/or sick enough, they become uninsurable.

As Hazel Meade points out, this proposal is nothing new, just a more extreme version of individual mandate/guaranteed issue/community rating i.e. Obamacare.

So it handles the problem by stretching the insurance model beyond its limits, which can only be achieved by redistribution.

A better way would be to create a sovereign wealth fund that actually saves and invests, as opposed to redistributionist systems like ACA and Medicare. If they had done this back in the 60s then this probably wouldn't be much of an issue today.

An even better way would be as a society to accept death as a natural consequence of life and simply stop spending this huge amount of resources just to forestall the end a bit longer.

Taylor Elliott writes:

When I first read Charles Murray’s regulations on Universal Basic income and health insurance, I agreed with him 100%. Health insurance is expensive, and I don’t think it’s fair that people with more money can get better coverage just because they have a larger income. So reading these regulations I thought it was the perfect idea to charge one universal price for everyone. But then I started thinking about it more and came to the conclusion that it would actually be a terrible idea.
Like the post said, a twenty-one-year-old is a lot easier and cheaper to ensure than a 91-year-old. I am 19 years old and I go to the doctor maybe once every six months, if that. If I have a cold or allergies, I can take some medicine and my body will pretty much heal itself. When a person reaches the age of 90 its harder for their body’s to fight off illnesses without the help of a doctor. Older people need more medications and doctor visits than people who are in late beginning stages of their life. If we had laws in place to require a set price for insurance, no one would be able to afford it because the price would have to be enough to ensure the older generation or insurance companies would suffer a great loss.
I think they’re ways to change health insurance policies and rates to better fit the needs of our society. One thing that could help is making a set price for different age groups. This would allow insurance agencies to charge everyone the same price but still giving them the coverage that they need. I don’t think making all insurance premiums the same price is the right answer but I think it’s on the path to the right answer.

Thomas Sewell writes:

This solution reminds me of High Modernist griddism. If the government can just make everyone the same, then it becomes easy to create plans for everyone.

The flaw of course is that everyone isn't actually the same, so trying to solve things by forcing them into an identical situation just creates other problems.

Where is individual choice and knowledge used in this proposed solution?

Maximum Liberty writes:

I wonder if the problem goes away if you make the pool small enough. This thought experiment makes me think not.

Suppose you had a system where the insurer could change its price based only on:
- birth year
- sex
- presence of health conditions not caused by behavior (e.g., type I diabetes)

Suppose further that the government handed out a voucher to every person that also varied by these factors, such that the average insurer ended up charging a flat price for insurance for the same policy, after taking the voucher into account. (E.g., Joe's bill would, on average, be $150 per period and Mary's would be $175 per period, but Joe's voucher is for $50 and Mary's is for $75.)

Does that eliminate the problem? No, because the insurer would have every reason to reduce the attractiveness of its policies on the basis of features that are NOT the basis of pricing, such as the presence of health conditions that are attributable to behavior, like type II diabetes, obesity, lung cancer, COPD, etc.

So the problem is not "pooling" exactly. For example, you could get down to pools where each pool is a different date of birth. The problem is that age is just a useful proxy for health risk. And the insurers can make their policies work directly against healthiness, rather than against the proxy. Working against the proxy is fine for pricing, but not for coverage.

And that leads us back to only three alternatives:
1. the government deciding what the policies must cover;
2. insurers being allowed to manipulate their policies; or
3. the insurers being able to price for conditions.
I prefer #3, because you can at least buy the insurance then. In the scenario above, much of the health risk would be absorbed by the variation in the voucher, and much of the rest is really in the hands of the insured. (Don't smoke, don't do drugs, eat better, exercise some.)

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