David R. Henderson  

When You Lose Something You Don't Want, Is that Really a Loss?

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One of the big findings in the recent Congressional Budget Office (CBO) report on the Republican health proposal is that by 2018, about 14 million people who would have had health insurance will lose it.

That sounds bad, right? But here's the interesting paragraph from the CBO's summary:

CBO and JCT estimate that, in 2018, 14 million more people would be uninsured under the legislation than under current law. Most of that increase would stem from repealing the penalties associated with the individual mandate. Some of those people would choose not to have insurance because they chose to be covered by insurance under current law only to avoid paying the penalties, and some people would forgo insurance in response to higher premiums.

In the body of the report, the CBO writes:
In 2018, by CBO and JCT's estimates, about 14 million more people would be uninsured, relative to the number under current law. That increase would consist of about 6 million fewer people with coverage obtained in the nongroup market, roughly 5 million fewer people with coverage under Medicaid, and about 2 million fewer people with employment-based coverage. In 2019, the number of uninsured would grow to 16 million people because of further reductions in Medicaid and nongroup coverage. Most of the reductions in coverage in 2018 and 2019 would stem from repealing the penalties
associated with the individual mandate. Some of those people would choose not to have insurance because they choose to be covered by insurance under current law only to avoid paying the penalties. And some people would forgo insurance in response to higher premiums. CBO and JCT estimate that, in total, 41 million people under age 65 would be uninsured in 2018 and 43 million people under age 65 would be uninsured in 2019.

That seems a little unclear. If most of the reductions in coverage stem from repealing the penalties associated with the individual mandate, why would some of these people forgo insurance in response to the higher premiums? If higher premiums will be what discourages them from buying health insurance, then what does the repeal of the mandate have to do with it? Maybe the CBO has in mind that some people find the lower premiums attractive and would buy it even without the mandate, but that with higher premiums, the only way they would buy it is if there is a mandate. That seems like the most likely explanation.

In any case, notice that presumably a few million of the 14 million who would lose health insurance are people who would want to lose health insurance even if the premiums weren't higher. So for people who value the well-being of those people, this counts as a win, not a loss. Of course, you need to count their well-being from their viewpoint, not as a paternalist.


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COMMENTS (21 to date)
Zeke5123 writes:

Prof. Henderson,

I think the difference is that the people forced to purchase insurance due to the mandate likely are healthy people, and thus this decreases the risk of the pool. If you eliminate those people from the pool (as self-insurance is cheaper compared to insurance), the cost of insurance for those remaining behind increases (especially if you prevent discriminating against pre-existing conditions).

Therefore, there may be some people where at Price X, they are willing to buy insurance. But because healthy people leave the insurance pool, the cost of buying insurance equals X + N. At that cost rate, some people may no longer desire insurance.

Ted Sanders writes:

I want to be sympathetic to your point of view, but how can you write this post with zero mention of the subsidies?

People will buy less healthcare partially because the mandate goes away but also because the subsidies are drastically reduced.

If you give less money to the poor, you shouldn't count it as a win when they buy less stuff, just because their choice to buy less stuff was voluntary and therefore "welfare-increasing."

There may be good arguments against transferring wealth from the rich to the poor, but this post doesn't seem to be it.

Jerry Brown writes:

"When you lose something you don't want is that really a loss?" Sometimes it might be. Look at "successful" suicides. They obviously didn't want their life anymore- At the exact time they successfully ended it. But in many cases this is a tremendous loss- to their families, their friends, and maybe to their future self. If you ever knew someone who attempted suicide but went on to live a more happy life after treatment for depression you would understand that. And there is a good chance you do, even if you don't realize it.

Sure it is paternalistic to try and talk someone out of killing themselves. So what? Not everything fits into a libertarian framework all the time. People make mistakes and the choices they sometimes prefer can turn out drastically wrong. In the case of health care insurance this can happen also. Since society has decided that emergency care will be provided regardless of ability to pay, the choice not to have insurance can reasonably be described as imposing costs in the form of risk to society in general.

I imagine this sounds like some kind of moralizing on my part. I'm no saint, I didn't have health insurance for 20+ years until Obamacare made it possible. I have Obamacare insurance and it is far from great, but I do not want to lose it. Everything I have read about the individual health insurance market leads me to believe that this market will no longer continue to function if something like the AHCA is implemented. And I know from personal experience that this market did not function for individuals not in some kind of pool before Obamacare.

LK Beland writes:

We should note that many would rather not pay for health insurance under Obamacare because insurers cannot overcharge for pre-existing conditions. This leads to higher premiums for those with no pre-existing conditions. So huge incentive to wait until suffering from a condition before enrolling.

Under Trumpcare, insurers are allowed to surcharge, but not much (30% the first year), which also leads to higher premiums for those with no pre-existing conditions. Once again, huge incentive to wait until suffering from a condition before enrolling.

Obviously, government intervention to forbid insurers from charging more to the sick and the old raises premiums for the young and healthy. They'll want to opt-out, unless they get subsidies (or face a penalty if they opt-out).

Ted Sanders writes:

Let me also add that policy choices that make some individuals happy are not necessarily the policy choices that maximize aggregate happiness.

For example, consider a tax cut for 14 million people. These 14 million people will be happy because they get to pay less tax. But the other 300 million Americans who rely on those payments to fund the Federal government will lose out.

Similar situation here. If the majority of those 14 million people are happy because they get to stop subsidizing the sick, good for them, but that could still lower aggregate utility because now the sick have to pay more or get less.

John Thacker writes:

One of the interesting things about this estimate is that it assumes a sudden jump in the amount of people who buy on the exchanges from 2016 to 2017 and then 2018 if nothing happens. There's some reasons to be skeptical of that; the 2016 enrollment numbers are well below the initial CBO estimates of the law in 2010, 2012, and 2014.

It's certainly possible that the increasing stringency of the mandate would cause exchange sign-ups to rapidly increase, even though exchange sign-ups leveled off between 2015 and 2016. If instead you make the assumption that sign-ups would continue to level off and increase yearly between 2016 and 2018 the same as between 2015 and 2016, that eliminates fully 7 million of the people who would lose insurance under the AHCA as compared to the PPACA status quo.

The CBO could be right (and certainly their estimation job was very tough in 2010 when the mandate was new), but I think it warrants some additional explanation of their model assumptions.

John Thacker writes:

One difficulty with the PPACA itself is that it attempted to make changes without imposing penalties on a large swath of upper middle class to lower upper class people with good jobs. That actually meant that, under distributional analysis, the third through ninth decile all have net losses and have greater net losses than the upper decile. (The top 1% do pay extra taxes, but people in the top 10% but not in the top 1% largely do not.)

Another difficulty is the age banding that limits premiums charged to any age range to no more than 3 times the premiums charged any other age range. In reality, people 55 to 64 have average expenses far greater than 3 times the difference. (The GOP bill would change this to 5, which could help.) As a result, insurers generally to make money must charge people in the younger 20s and 30s higher than the average for their age, chasing them away. Charging people the average for their age would still involve people with better health subsidizing the sicker, and would hardly seem unfair since everyone old was younger once. It would certainly reduce the level to which the insurance is unfairly too high for the young, discouraging them from participating.

Starting with appropriate premiums and then subsidizing individuals in a transparent way through funds raised through taxes would make more sense than hiding a large percentage of the subsidies through premium shifting. (I do recall in the original PPACA debate a lot of complaints about premiums subsidizing emergency room usage; the current solution is no different.) None of it really ultimately will deal with how people don't want to pay nearly the percentage of their income towards health that health care is a percentage of GDP. (In the employment group setting, a large percentage of corporate paid premiums don't show up in payroll deductions, though the PPACA has moves to change that, and the AHCA preserves that provision.)

James Hanley writes:

I think the answer to your question is that the plan doesn't only eliminate the mandate but reduces subidies. So you have two groups of dropouts,each responding to a different element in the policy.

MikeP writes:

But the plan also reduces the subsidization of older consumers' premiums through younger consumers' premiums.

That should tend to increase the number of young and healthy insured.

Jerry Brown writes:

When you aren't required to buy health insurance on the individual market, insurance companies automatically start wondering why you want to purchase it. They have less information about your future health than you do, and this is an entirely rational thing for them to do. So they would send you pages and pages and pages of health questions when you apply for one of these policies asking all kinds of questions about anytime you ever went to a doctor ever, and god forbid you don't remember something and get sick and need that insurance because that is grounds for rescinding your policy even if you were young and healthy like me, when you applied.

Anyways, that was always my personal experience with applying for health insurance previous to Obama. That market just did not work, and I don't think it could ever work.

And so you just end up going without health insurance, which is great, until you get sick or hurt and have to go to a hospital. And then you are stuck. Because the amazing thing is that when you pay cash at a hospital you pay at a rate that is far, far higher than even the exorbitant rates paid by people with insurance. Until you run out of money. Because the entire system is wacked. It is not anywhere close to a market system and that has been understood for many years.

Obamacare is a type of compromise. It is not great. But I signed up as soon as it was available even though it is expensive and I am not eligible for any subsidies and am in good health. We can definitely do better. But this AHCA plan is going in the wrong direction.

MikeP writes:

The wrong direction?

As I understand it -- and, to be sure, the media is doing a terrible job of actually explaining it so I may be wrong -- it sounds like the AHCA plan is going exactly where you want it to go.

It still covers preexisting conditions, which seems to be your main complaint. But if you are in good health, then your base premium should go down under AHCA since you won't be subsidizing the premiums of those older than you. And even if you are not eligible for any subsidies under ACA, you will actually get a tax credit under AHCA to buy in the individual market regardless of your income.

So for you it seems better in all ways, unless you are on the older side where your premiums will be higher and the tax credits not necessarily compensatory. But then the average older person far outearns the average younger person, so the higher premiums should be tolerable.

David R. Henderson writes:

@Ted Sanders,
I want to be sympathetic to your point of view, but how can you write this post with zero mention of the subsidies?
Because I’m writing about the CBO’s claim that I quote above.
@John Thacker,
Thanks for your comments. Excellent, as always.

Jerry Brown writes:

Mike, yeah I would do a little better personally if the exchanges continue to operate, but what I am worried about is the market not operating if healthy people are no longer purchasing insurance. The system breaks down if only people who are sick buy insurance- that's the problem. And that was the problem before the ACA. As far as my age, I am 50 so probably on the higher end of costs under the AHCA plan. But overall, I believe you are correct that I would be able to save money under the new plan because of the tax credit- but only if the insurance continues to be able to be purchased. And don't forget, somebody (as in us)is already paying for the treatment of the uninsured who cant afford care but get it anyways.

JC writes:

When I lose something that I don’t want anymore, I don’t really consider that a loss. When I don’t want a specific item anymore, I tend not to really think about that item. For example, let’s say you just bought a new IPhone 7 and you transfer all the stuff you had on your old phone on to your new phone. You’re not going to want to keep your old phone anymore, so you put it down in your room somewhere and it gets lost. You are probably not going to notice that it is missing because you are so focused on you brand new phone, so it wouldn’t really be a huge loss at all. That is what this article by David Henderson makes me think about.
Henderson talks about how in the future less people will receive health insurance because of the new health insurance policy. From what I read in the article, the new policy that will take place in 2018, the penalties that you received from not getting health insurance will no longer be in effect. Henderson mentions that this is the main reason for the decrease in people buying health insurance. They only got it to avoid being penalized, and now with this new policy, they won’t have to worry about that. I guess that if those people didn’t really want health insurance in the first place, then it really wouldn’t be that great of a loss. I think that even if the penalties go away, having health insurance does help out in the long run. Sometimes you don’t really want something until you really need it.

Andrew_FL writes:

We don't count the voluntarily non working as unemployed, why do we count the voluntarily non insured as uninsured?

BC writes:

As John Thacker points out, it's not even a matter of losing something that you didn't want so much as not being predicted to start buying something that you didn't want. The CBO counts as a "loss" someone who doesn't have insurance now but that the CBO predicted would buy insurance in the future with a strong enough mandate but that the CBO predicts will continue to not buy in the future without a mandate.

Thaomas writes:

Prof. Henderson has again discovered the Mediterranean. As a general rule, any policy no matter how good has some people who are harmed (eg minimum wages) and no matter how bad does not have some people who benefit (the "Obamacare Lite" reform of ACA). So it is that there ARE some young healthy non-poor folks who will correctly conclude that they are better off without even subsidized insurance than they were with insurance purchased as a result of the tax penalty. I do not begrudge them their decision so long as it is embedded in a reform that does not make coverage unaffordable or more costly for older less healthy and older folks.

Bill Huber writes:

Last December we decided to drop our health insurance. Our reasoning was pretty simple. Which would make us feel more financially secure, health insurance or an extra $7,500 per year in a savings account?

We did think it through. My wife and I have not filed an insurance claim in over twenty years. We are the perfect health insurance customers so why not take advantage of our good health?

1. Since 2011 our health insurance has increased 13% annually. Medical cost inflation was around 5% annually over the same time period. It sure looks like the health insurance companies were raising rates because they thought they could get away with it.

2. The lowest cost bronze plan for my wife and I exceeds 8.13% of our income. It also was considerably more expensive than our grandfathered health insurance plan which also failed the affordability test. Even though the lack of affordable health insurance makes us exempt from the individual mandate, we are reminded that the ACA failed at its most important mission, affordable health care. When will the ACA or the AHCA start working on this problem?

3. For most of my life, I thought that health insurance was a no-brainer. The ACA completely reversed my position. I no longer believe that giving more money to the healthcare industry is beneficial or compassionate. Although some people maintain that health insurance is the same thing as healthcare, this insularity to healthcare costs bothers me. The politics of the situation has made it easier for the healthcare industry to ignore better-valued healthcare options. As an example when I asked my insurance company for a lower price, they said, "we do not do that". They could not seem to grasp that healthy people do not want health insurance the same way unhealthy people do. Healthy people tolerate the cost of health insurance up to a point and then they start looking at alternatives in the same way they might change auto insurance. Healthy people are different and the health insurance exchanges are not sustainable without them.

4. How do we send a message to the healthcare industry? Our choice has been to hit them in the pocketbook. We are not trying to be heroes. Their loss is our gain. Every month my wife and I get by without a major medical expense, we win and they lose. It takes only a few months of savings to cover the AHCA pre-existing illness penalty. After a year or so we are in pretty good shape to cover most major medical expenses outside of cancer. At some point, the insurance companies will realize that chasing away their best customers is bad for business.

Rob writes:

Jerry,

For years prior to the ACA I had insurance on the individual market (I was self-employed). It worked great.

Not for everyone, probably not for you I am guessing, and not for my wife-to-be, but there were very good market reasons (at least in her case, I obviously don't know your situation) for that.

So, in that sense, it did work. The thing about the free market (not that we ever had that in health care) is that it provides what it provides, which isn't necessarily what we want.

Jerry Brown writes:

Rob, I was too harsh to say that the individual market could never work. I know my brother who is an attorney was quite happy with his health insurance previous to ACA. He was able to get insurance through a pool offered by the Bar Association. I am glad it worked for you as well.


The thing is, such associations are not always open to everyone, so the employee at a small firm that doesn't offer insurance may not be in any kind of pool where a high percentage of members get and are covered by insurance. That is the kind of situation where insurance companies can estimate costs of the entire pool and provide the actual function of insurance, which is to spread those costs among all members.


This can break down in a situation where those average costs become a significant percentage of the income of the membership of the pool. Now the healthier members have an incentive to drop coverage while less healthy continue to keep coverage because they need it. And so the average costs go up and the premiums must go up also. This is what Bill Huber is talking about, and is the exact same analysis I did prior to the ACA for myself.

Throw in some reasonable doubts about how likely an insurance company is to pay up when you actually need them to, and reasonable doubts on the part of insurance companies about the status of an applicant's health to begin with, and you end up with a difficult market situation for individual health insurance plans.


Jim Glass writes:

If most of the reductions in coverage stem from repealing the penalties associated with the individual mandate, why would some of these people forgo insurance in response to the higher premiums?

I doubt many would. One of the fundamental political-economic defects of the Obamacare is that the penalties are trivially low and the politicians have no will to make them as punitively large as necessary to make them work -- which is why the enactors kicked that task into the future. A very bad sign from the start. (Like deferring the critical Cadillac tax far into the future to get the plan passed. Red lights were flashing then to any who looked.) Thus too few young healthy people enrolling.

Maybe the CBO has in mind that some people find the lower premiums attractive and would buy it even without the mandate, but that with higher premiums, the only way they would buy it is if there is a mandate. That seems like the most likely explanation.

Agree.

notice that presumably a few million of the 14 million who would lose health insurance are people who would want to lose health insurance even if the premiums weren't higher. So for people who value the well-being of those people, this counts as a win, not a loss. [When You Lose Something You Don't Want, Is that Really a Loss?]

Well, that's not clear to me in all cases.

Say when the government bought General Motors it mandated that everybody buy a new car or pay a tax penalty equal to the price of a new Chevy. Lifting that mandate later so people could keep cash to them worth more than a new car would be a clear win for them, with nobody losing.

But say that the government instead mandated that everybody who owns a car buy auto insurance, to protect self and others from loss and injury caused in auto accidents. Then the government lifted that mandate, so car owners no longer had to do so. Who wins? Sample possibilities...

* Rich people, like Warren Buffett, who can fully afford to self-insure any loss are better off doing so since they no longer have to pay the operating costs and profits of insurance companies, like Geico, to do so. Clear win for them, nobody loses. (Except Warren Buffett, as a shareholder of Geico.)

* Middling-wealth people with conflicting claims on their money face a calculated choice. They'd like having insurance, since paying a major loss out of pocket would wreck them, but might calculate the odds of that are so low they'd rather spend the money on something else. Sounds like a rational wager. Yet remember that there is a major cognitive bias towards underestimating the risk of voluntary actions - one particular notorious example being that a big majority of drivers consider themselves "better than average". (As people notoriously under-buy long-term care insurance since *they* will never need nursing home care. And obese people munch pork rinds worrying about how terrorists and nuclear plants might kill them. But I digress...) Do they win?

* Rational 'players of the system' will ignore insurance confident that if anything happens to them the other guy's insurance will cover it, or our kind-hearted society will, paying their medical costs and forgiving their debts, because we don't just let people die from lack of health care or send them to debtor's prison. Do they win? Maybe, but a lot of others lose. Do they count too?

So if a new law revoked all the requirements to buy it, would millions of people voluntarily choosing to no longer pay for auto insurance produce only winners?

https://en.wikipedia.org/wiki/Vehicle_insurance_in_the_United_States#
The_compulsory_insurance_debate


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