David R. Henderson  

About That Loss of Health Insurance

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Someone tells you that you have to buy something, and levies a penalty if you don't. So you buy it. Then someone else countermands the first person's order. You no longer have to buy it. So, assuming it's not because the price of what you had to buy rose, you don't buy it. Are you worse off?

Various media outlets have reported on the loss of health insurance that the Congressional Budget Office thinks will come about if Congress gets rid of the mandate that requires individuals to buy health insurance. Estimating the effects of changes in laws is always tricky, of course. What's not tricky is to explain to readers something that many of the reports don't do a good job of.

Are you ready?

Many of the people who will "lose" health insurance if the mandate is repealed are people who want to lose health insurance. That is, according to the CBO, what is causing them to get health insurance now is the mandate. So, by their standards, even if we, observing them paternalistically, might think different, they would be better off.

How many of the millions who lose health insurance are people who want to lose it? We can't tell exactly but we can probably come close.

Let's take the number that many people are focusing on--the number of people who will be without health insurance in 2027 who would otherwise have it: 13 million. Of these, we know, if the CBO is correct, that fully 5 million people want to be without health insurance. How do we know? Because they would otherwise be on Medicaid. They would choose to be without Medicaid even though they could be on it. And it's not because the price to them of Medicaid would change. The price, excluding their time cost to apply and qualify, is zero with or without the mandate.

Another 5 million would drop their non-group coverage, according to the CBO. Some of these would be healthier people willing to do without health insurance who don't find the current rates attractive. Let's guesstimate that this would be half of the five million, or 2.5 million. I think that's probably an underestimate. Why would the other half drop their insurance? Because, estimates the CBO, with fewer healthy people in the pool, insurance rates for non-group coverage would rise by about 10%.

So arguably over half of the 13 million without health insurance in 2027 would choose not to have it, not because the premiums would go up, but because the coercion would be gone.

Check the CBO's Table 1 for a breakdown that shows why the CBO estimates a multi-billion dollar saving in government subsidies in each year, adding to over $300 billion for the 10-year time period.


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COMMENTS (24 to date)
Fred Foldvary writes:

The main problem with the US medical system is employer-provided medical care and insurance, which creates the "previous condition" problem when one loses employment. Cure this by taxing employee medical benefits while making all medical costs tax-deductible.

Steve R writes:

We know more than that. We know that people at low risk will underestimate their need for insurance and so will under-buy. I guess correcting for this is what you consider "paternalistic."

But what do we do about the 20-something who doesn't buy insurance (low risk), gets into a motorcycle accident and incurs hundreds of thousands in medical bills? The hospital will treat him (as it should) and will raise rates to cover people like him. Those costs will be paid by the insured, raising their rates and leading to fewer people "choosing" to be insured at the higher rate and rates going higher because of the worse risk pool.

Without the mandate, the healthy impose costs on the sick.

Alan Goldhammer writes:

Steve R's comment above is exactly why the libertarian argument against mandating health insurance coverage fails. I'm on the BOD of a non-profit educational organization that provides support for scientific fellows. One of those benefits is health insurance and the organization self-insures. All it takes is to have a couple of babies born who require NICU care and bingo, costs go through the roof. If this happens to non-insured folks, the babies still get treated but someone out there has to pay the multiple $100K costs.

I know that a lot of authors and readers of this blog don't like universal health insurance but in it's absence costs will continue to climb regardless of the type of coverage that one has.

Ted writes:

David, c'mon. Your posts often lack nuance and bash strawmen but these seems more egregious than most. Here is how your logic applies to a parallel scenario:

Suppose a government wants you to buy government services by paying taxes. Later, the government decides you don't have to buy the services but you will still receive them. Are you better off?

In the short run? Yes. You get services and you don't pay for them.

But in the long run? No. You bankrupt the government by not allowing them to cover their costs.

RPLong writes:

Steve R writes:

We know that people at low risk will underestimate their need for insurance and so will under-buy.
Actually, we know that some number of them will. We do not know whom, and we do not know to what extent their doing so positively impacts your health care. For example, a number of them will choose not to see a doctor for minor ailments if they don't have insurance, thus shortening your wait times and relieving the system of a congestion burden. If we're going to track their impact on the system, we ought to track all of it.

But this kind of accounting feels emotionally deflating to me. I don't like the idea of holding people personally accountable for their marginal impact on a complex national market equilibrium.

There would be no end to it. Today I chose to drink a diet soda with my lunch instead of a glass of filtered water, thus possibly increasing my risk of future medical problems and raising your medical costs. A soda tax for me, then. Shall we test all women of child-bearing age for their risk of complications during pregnancy, and then use laws to discourage all those who have a higher risk of having an "expensive baby?" What if the pregnancy is accidental? Mandatory abortion, or just make her pay an excise?

And consider people with good intentions. They who choose to conserve fuel, for example, reduce its demand and thus increase the price I pay at the pump. Shall we address this with public policy, too?

I think there's value in debating to what extent the healthy "should" buy insurance, but the choice ought to be left up to the individual. It seems too dicey otherwise, in my opinion.

Mark writes:

@Steve R:

It seems the simple solution is to make the guy pay for his own medical bills, and if he can't, garnish his wages for awhile.

And yet, under that circumstance, apologists will do a 180, and our motorcyclist goes from being a freeloader who benefits from others' sensible choices while he makes poor ones to being a sympathetic victim who we're supposed feel sorry for for going massively into debt. But it can't be both. If it's true that not buying insurance was a bad decision, then we should be fine with him going into debt for much of his life. It's a consequence of a very bad decision. So you're not selling me on the mandate; rather you're convincing me that others shouldn't be required to pick up the tab for the uninsured in the first place.

And if we're going to treat healthcare like a paternalistic public service (I definitely think we shouldn't) them the tax that pays for it should be regressive: force people to pay for the cost of providing them with the service. Of course, the reality is, most who support state healthcare aren't just being paternalistic: they want redistributive cross subsidies. They want to do the equivalent of forcing people who own BMWs to buy Toyotas to drive down the cost of the latter (or rather, justify driving down price controls on the latter by reducing cost per unit) for the sake of poorer people.

Yaakov Schatz writes:

@RPLong - thanks. I enjoyed your response.

David R Henderson writes:

@Ted,
Suppose a government wants you to buy government services by paying taxes. Later, the government decides you don't have to buy the services but you will still receive those services. Are you better off?
I don’t know why you’re supposing that. The CBO doesn’t. It supposes that millions of people freed from the mandate will not receive them and that, therefore, the government won’t need to pay for them. That’s why I said that you should look at their Table 1.

Ted, you criticized me for attacking straw men, without, I notice, giving any examples that you claim I do so “often.” While we’re on the issue of straw men, I challenge you to take another look at your own comment.

Hazel Meade writes:

Steve R and Alan G:

But part of the problem is that the insurance mandated under the ACA is far more extensive, and thus much more expensive, than the kind of minimal catestrophic backstop insurance that would cover the costs of NICU babies and motorcycle accidents. Why is mental health and substance abuse treatment coverage mandatory? Why mandate $0 co-pays for preventive care? These arent costs that people fail to predict and dont pay for. Why not only cover hospital treatment? Moreover, if the costs of uncompensated medical care were driving up premiums, then why did premiums RISE when these people got coverage? By your argument, once those costs were covered by insurance those cost should no longer be imposed on others, no?

Steve R writes:

@RPLong - You're right that there's a lot we don't know, and I really shouldn't have put in the part about underpaying because it really doesn't matter. Anyone who chooses not to buy insurance is socializing the risk that they incur a health event that they will never be able to pay for - and we all have some risk along those lines.

@Mark - garnishing wages doesn't work, since, with catastrophic health events, lifetime earnings could easily be less than the cost of the single event (particularly if the event is disabling). And, in any case, I don't consider the motorcyclist a freeloader - just a normal 20-something human who thinks he's invincible. If he does recover his health, I don't see any need to punish him further by subjecting him to a life of poverty.

David Seltzer writes:

I prefer paying for my medical care as needed.
While the AMA and monopolistic medical boards limit licensing, veterinarians face much less restriction and competition among them is more robust. In my small Georgia town of 16,000 there are no less than 15 animal clinics. They don't take insurance, list service prices and compare them openly to their competitors. I served in SE Asia during the Vietnam war. Corpsman and medics performed triage in country before the wounded were treated by a doctor in a rear area.

Alan Goldhammer writes:

@Hazel Meade - I'll confess to being a proponent of universal coverage whether it is government provided (disclaimer - I'm now on Medicare with a nice Medigap policy from my former employer that I also pay for) or provided by a private insurer the same way plans run in Switzerland, Holland and Germany. It's ridiculous to me that this country with all its wealth cannot provide for all of the citizens. Why should we lucky seniors get the benefit of negotiated low prices (and mind you I have to pay a monthly Medicare Part B premium that is means tested and I am in one of the higher brackets)?

You are right about the coverage breadth of Obamacare. But what if it didn't cover mental health and substance abuse? Both of these are huge health problems in this country today. If they were not covered do you really think people are going to pay out of pocket? There is lots of health care that is delivered outside the hospital setting that you argue should be the only coverage. Most policies have penalties if you go to the ER and don't have a record of a visit to a local urgent care facility. This clause alone is saving money for the aggregate system.

Personally, having followed healthcare policy discussion since the first Jackson Hole meetings that Paul Ellwood convened some decades ago now, I've grown pessimistic about whether and how the system can be corrected. Obamacare was always a kludge and focused on a small but important marketplace (both of my daughters had such policies when they were independent contractors and did not have employer insurance; their income was too high to qualify for a subsidy). Most other nations seem to have figured out how to provide for their citizens. I know this is not the libertarian ideal but countries do have an obligation to provide for the health and welfare of their citizens. We can debate what the breadth of that ought to be.

Alan Goldhammer writes:

With respect to the mandate, Paul Starr had a very good piece several years ago in The New Republic. He thought the penalties would not work all that well and had this proposal:

My preferred alternative has two parts-one to make the law more forgiving, the other to make it more tough-minded. First, the government would allow individuals to opt out of the new insurance system without any penalty; people would do so by signing a form on their tax return acknowledging that they would be ineligible for benefits under the law for a fixed period—say, five years. Second, the government would raise the annual penalties for neither buying insurance nor taking the opt-out.

Those opting out would be free to purchase what ever form of insurance they felt right for them.

Floccina writes:

Steve R wrote:

But what do we do about the 20-something who doesn't buy insurance (low risk), gets into a motorcycle accident and incurs hundreds of thousands in medical bills?

If the 20-something is restored to health he very well may be able to amortize the bill. That is a good motivation for the hospitals to avoid attempting expensive quixotic treatments.

Also after the initial emergency care the young man might opt to get care in Mexico, like the Amish often do. Being a risk taker, as we know from the fact that he was driving a motorcycle, he might be fine with going to Mexico or elsewhere for care.

I don't mind help those in need I just wanted to show that there are options.

David Seltzer writes:

David Henderson,
Sorry for the multiple posts! Thick fingers you know!

[duplicates removed--Econlib Ed.]

Mark writes:

Steve,

“@Mark - garnishing wages doesn't work, since, with catastrophic health events, lifetime earnings could easily be less than the cost of the single event (particularly if the event is disabling).”

If this is actually common, then this is the fundamental problem, and cross subsidies will only obscure, rather than solve, that problem. It goes without saying that the average person can’t consume >100% of what they produce in a lifetime in a sustainable system. Playing around with who foots the bill does nothing to remedy that. One way to reduce costs would be for people to incur fewer injuries and be more risk averse. Of course, people having to pay the actual cost of health care is a great way to incentivize them to behave accordingly.

“And, in any case, I don't consider the motorcyclist a freeloader - just a normal 20-something human who thinks he's invincible. If he does recover his health, I don't see any need to punish him further by subjecting him to a life of poverty. “
As an insured 20-something who is acutely aware of his mortality, you’re going to have a hard time convincing me that we should have to kick in to relieve this hypothetical motorcyclist of the natural punishment for his poor choices. Those consequences are useful in that they may convince other people not to make the same poor choices, saving themselves and society a great deal.

Steve R writes:

@Mark

It goes without saying that the average person can’t consume >100% of what they produce in a lifetime

True - but with healthcare, the costs are very unevenly distributed. I hope that I overpay for my health insurance (meaning that I don't extract the value I put in) because that means I'm healthy. I want to subsidize the sick. But I can't predict the future, so maybe I'll end up losing and get good value out of my insurance payments.

As far as punishing the motorcyclist as a warning to others, we've seen plenty of people die because they don't have access to insurance (not in trauma situations like the motorcyclist - its really hard to imagine just letting him die on the street; he'll always get treatment, at least in the emergency room), but, apparently, people still make poor choices.

Deciding whether a health insurance policy is a good deal is a really, really hard task. Punishing someone with a life of poverty for being on the wrong side of that decision is really cruel. Let's just punish him a bit in advance by taxing him.

john hare writes:

Addressing the actual cost of medical treatment would render many of these discussions obsolete. A doctor at a million dollar a year income would have an hourly value of $500.00. So a three hour surgery would have a surgeon specific cost of $1,500.00. Find out where the rest of the billing for the multi $100,000.00 charges comes from and work on that.

I believe the whole industry has been corrupted. Not in a legal sense of needing prosecution, but in the sense of a rusting structure or rotting plant. Surgery on the cost structure could prevent the need for ongoing treatments of the costs themselves.

Seth writes:

From Steve R:

"We know that people at low risk will underestimate their need for insurance and so will under-buy. I guess correcting for this is what you consider "paternalistic."

But what do we do about the 20-something who doesn't buy insurance (low risk), gets into a motorcycle accident and incurs hundreds of thousands in medical bills? The hospital will treat him (as it should) and will raise rates to cover people like him."

To be clear, they aren't 'underestimating their need for insurance' if they will be treated for free anyway. That's precisely why many don't buy insurance. It's a moral hazard.

People respond to incentives. If they knew they'd be on the hook for something significant, many would realize they couldn't afford not to buy insurance.

Also, another way to solve the above is to mandate that motorcycle riders have health insurance.

Ted writes:

@David: I guess the fact that we both think we're attacking strawmen indicates a mutual failure to communicate. :)

I apologize.

David R Henderson writes:

@Ted,
I apologize.
I accept your apology. Hopefully also, though, you saw why your criticism doesn’t apply. This really would save the government substantial money. Again, look at CBO’s Table 1.

Mark writes:

Steve,

Some people will always make poor choices. I don't think this proves that negative consequences have not deterrent effect, or even necessarily that their deterrent effect isn't valuable enough to warrant the cost of the consequences themselves. Maybe it isn't worth it, but I wouldn't take it for granted.

Also, the uneven distribution of costs, in this case, is due to behavioral differences (riding a motorcycle); in large part (maybe for the most part) in general it's due to age, in which case, optimally, it isn't healthy subsidizing sick; it's younger you subsidizing older you by saving over the course of your life.

Also, I would disagree that it's very cruel, because we're not punishing someone by not giving them money to get them out of a jam. But leaving aside that moral question, I'd accept mandating that people by insurance, but *only* in a relatively free insurance market that allows for more differential pricing. Our motorcyclist should have to pay a premium that reflects his risk seeking behavior. I personally don't want to subsidize others' behavior that is conducive to poor health. Nor do I even particularly want to subsidize sick old people either, because it discourages people from saving while healthy (or buying into an insurance plan before you get old/sick instead of just waiting to buy it until after), and since getting old is pretty predictable, it shouldn't really take any of us by surprise.

Of course, like with the ACA, it seems that insurance mandates are inevitably coupled with cross-subsides, because otherwise the mandatory premiums are basically regressive taxes (our hypothetical low-income motorcyclist ends up paying a bigger fraction of his income for his mandated insurance than most wealthier people), and the politicians that promote insurance mandates usually tend to dislike regressive taxation.

Dan Culley writes:

Putting aside for the moment what policies are desirable, to the extent a person would not buy insurance now simply because the law permits them to buy it later when they fall ill, the penalty simply forces that person to internalize the costs of the bar on pre-existing conditions exclusions--which isn't going away.

More difficult to believe is that the repeal of the penalty saves money. Only seems to be true if the saved amount is all subsidized, unnecessary administrative overhead and preventive care for healthy people. Otherwise the costs would just be pushed elsewhere or are just deferred. Something off about how CBO is modeling this all-around.

Tom West writes:

Mark - They want to do the equivalent of forcing people who own BMWs to buy Toyotas to drive down the cost of the latter (or rather, justify driving down price controls on the latter by reducing cost per unit) for the sake of poorer people.

Funny, that's *exactly* the argument that I use (except Lexus and Corolla). Except that's my argument in *favour* of Canadian-style medicare.

Do BMW's produce better driving outcomes? Perhaps marginally, but by forcing me to buy a Corolla, the money I spent (which now goes to the government) now buys three Corollas - two for people who could not have afforded decent medical care in the first place. Overall, *much* better outcomes for only a minimal degradation of my outcome.

I'm going to guess we have different utility functions :-).

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