When discussing government involvement in the health sector, I usually focus on the budgetary implications. Which makes sense since I’m a fiscal wonk and programs such as Medicare, Medicaid, and Obamacare are diverting ever-larger amounts of money from the economy’s productive sector.
I also look at the tax side of the fiscal equation and complain about how the healthcare exclusion mucks up the tax code.
Though it’s important to understand that government involvement doesn’t just cause fiscal damage. All these programs and policies contribute to the “third-party payer” problem, which exists when people make purchases with other people’s money. Such a system is a recipe for inefficiency and rising prices since consumers generally don’t care about cost and providers have no incentive to be efficient. And since government figures show that nearly 90 percent of health care expenditures are financed by someone other than the consumer, this is a major problem. One that I’ve written about many, many times.
But there’s another economic problem caused by government – price controls on insurance – that is very important. Indeed, the fights over “community rating” and “pre-existing conditions” are actually fights about whether politicians or competition should determine prices.
Simply stated, politicians want insurance companies to ignore risk when selling insurance. They want artificially low premiums for old people, so they restrict differences in premiums based on age (i.e., a community rating, enforced by a guaranteed-issue mandate), even though older people are statistically far more likely to incur health-related expenses. They also want artificially low premiums for sick people, so the crowd in Washington requires that they pay the same or similar premiums as healthy people (i.e., a pre-existing conditions mandate), even though they are statistically far more likely to incur health-related expenses.
Set aside that the entire purpose of insurance is to guard against risk. Instead, let’s focus on what happens when these types of price controls are imposed. For all intents and purposes, insurance companies are in a position where they have to over-charge young and healthy people in order to subsidize the premiums of old and sick people. That’s sounds great if you’re old and sick, but young and healthy people respond by choosing not to purchase insurance. And as fewer and fewer young and healthy people are in the system, that forces premiums ever higher. This is what is meant by a “death spiral.”
The pro-intervention crowd has a supposed solution to this problem. Just impose a mandate that requires the young and healthy people to buy insurance. Which is part of Obamacare, so there is a method to that bit of madness. But since the penalties are not sufficiently punitive (and also because the government simply isn’t very competent), the system hasn’t worked. And to make matters worse, Obamacare exacerbated the third-party payer problem, thus leading to higher costs, which ultimately leads to higher premiums, which further discourages people from buying health insurance.
So how do we solve this problem?
One of my colleagues at the Cato Institute, Michael Cannon, is a leading expert on these issues. And he’s also a leading pessimist. Here’s some of what he wrote a week ago as part of a column on the Senate bill to modify Obamacare.
ObamaCare’s “community rating” price controls are causing premiums to rise, coverage to get worse for the sick and insurance markets to collapse across the country. The Senate bill would modify those government price controls somewhat, allowing insurers to charge 64-year-olds five times what they charge 18-year-olds (as opposed to three times, under current law). But these price controls would continue to make a mess of markets and cause insurers to flee.
But he wasn’t enamored with the House proposal, either. Here are some excerpts from his analysis earlier this year of that proposal.
The House leadership bill retains the very ObamaCare regulations that are threatening to destroy health insurance markets and leave millions with no coverage at all. ObamaCare’s community-rating price controls literally penalize insurers who offer quality coverage to patients with expensive conditions, creating a race to the bottom in insurance quality. Even worse, they have sparked a death spiral that has caused insurers to flee ObamaCare’s Exchanges nationwide… The leadership bill would modify ObamaCare’s community-rating price controls by expanding the age-rating bands (from 3:1 to 5:1) and allowing insurers to charge enrollees who wait until they are sick to purchase coverage an extra 30 percent (but only for one year). It is because the House leadership would retain the community-rating price controls that they also end up retaining many other features of the law.
Though existing law also is terrible, largely because of Obamacare. Here are passages from Michael’s column in the Hill.
ObamaCare’s core provisions are the “community rating” price controls and other regulations that (supposedly) end discrimination against patients with preexisting conditions. How badly do these government price controls fail at that task? Community rating is the reason former president Bill Clinton called ObamaCare “the craziest thing in the world” where Americans “wind up with their premiums doubled and their coverage cut in half.” Community rating is why women age 55 to 64 have seen the highest premium increases under ObamaCare. It is the principal reason ObamaCare has caused overall premiums to double in just four years. …Why? Because community rating forces insurance companies to cover the sick below cost, which simply isn’t sustainable. The only solution ObamaCare supporters offer is to keep throwing more money at the problem — which also isn’t sustainable.
Anyone who wants to really understand this issue should read all of Michael’s work on health care issues.
But if you don’t have the time or energy for that, here’s an image that I found on Reddit‘s libertarian page. Using not-so-subtle sarcasm, it tells you everything you need to know about why price controls ultimately will kill health insurance.
P.S. None of this suggests we should feel sorry for health insurance companies. They got in bed with the previous administration and endorsed Obamacare, presumably because they figured a mandate (especially with all the subsidies) would create captive customers. Now that it’s clear that the mandate isn’t working very well and that increased Medicaid dependency accounts for almost all of the additional “insurance coverage,” they’re left with an increasingly dysfunctional system. As far as I’m concerned, they deserve to lose money. And I definitely don’t want them to get bailout money.
P.P.S. Republicans aren’t doing a very good job of unwinding the Obamacare price controls, but they deserve a bit of credit for being bolder about trying to undo the fiscal damage.
Addendum: A comment from Seb reminds me that I was so fixated on criticizing price controls that I never bothered to explain how to deal with people who have pre-existing conditions and therefore cannot get health insurance. I’m guessing the answer is “high-risk pools” where the focus of policy is directly subsidizing the relatively small slice of the population that has a problem (as opposed to price controls and other interventions that distort the market for everyone). But the main goal, from my perspective, is to have states handle the issue rather than Washington. A federalist approach, after all, is more likely to give us the innovation, diversity, and competition that produces the best approaches. States may discover, after all, that insurance doesn’t make sense and choose to directly subsidize the provision of health care for affected people. In the long run, part of the solution is to get rid of the health care exclusion in the internal revenue code as part of fundamental tax reform. If that happened, it’s less likely that health insurance would be tied to employment (and losing a job is one of the main ways people wind up without insurance).
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Sovereign:
Health Status Insurance is appropriate if you have no insurance. However, you buy insurance to be covered, if an adverse event occurs. That coverage should not be voided, by an annual renewal date.
There is another solution to the pre-existing condition dilemma. It was proposed by John Cochrane. It is called Change of Health Status Insurance, a rider of sorts. https://www.cato.org/publications/policy-analysis/healthstatus-insurance-how-markets-can-provide-health-security
[…] days ago, I wrote about the market-wrecking price controls in Obamacare. And yesterday, I shared a new study exposing the […]
Reblogged this on THE SOVEREIGN PATIENT and commented:
But there’s another economic problem caused by government – price controls on insurance – that is very important. Indeed, the fights over “community rating” and “pre-existing conditions” are actually fights about whether politicians or competition should determine prices.
Simply stated, politicians want insurance companies to ignore risk when selling insurance.
Seb,
Thanks for the nice description. And also for your last paragraph. As I read your comments I was indeed wondering, “Why have these differences at $62,000?”
John
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Thanks for the addendum! This is certainly a suitable way to handle the pre-existing condition problem. However it misses out on the free market part in my opinion. I have no better idea. That’s why I was asking for some ideas and input. Thanks for that.
I live in Germany and I’d like to describe how my country is handling this problem just to give everybody who is interested a little bit of insight and maybe some more ideas. It might be lengthy. So if you are not interested, don’t read it:
Health insurance in Europe is highly diversified. Each and every country takes a different approach. In the UK you only have a centralized government run health service – the NHS. We all have heard some horror stories about it.
In Germany we have two parallel systems:
1. Every employee earning less than a certain amount of money (about $62,000 a year, adjusted to match inflation from year to year) has to have a compulsory public health insurance. There are a hundred or so “insurance” companies depending on the state you’re living in and your occupation. They are no private entities but government run. Employers pay 7.3 % of one’s wage and employees pay about 8 % (+/- about 1 %) depending on which “insurance” they choose). The government dictates which services are covered and which are not.
2. Employees earning more than said $62.000 a year, government workers, and the self-employed can choose to either use the state run “insurance” companies or use private insurance companies. Those private insurers can charge whatever they want, can more or less choose the coverage, and are free to exclude people with pre-existing conditions. But overall most insurers have a very good coverage. The market is competitive to some degree and prices vary. Government dictates that at least 10 % of your monthly premium goes into a retirement fund handled by the company. Changing your insurance company after like 20 years? Forget it! The fund will remain with your old insurer. So you will lose a huge amount of money if you cancel. Insurers know you will have no real chance to cancel after being with the company for ten years or more (unless you can afford doubled premiums at the new insurer).
So what about those with pre-existing conditions? People under public coverage (see 1. above) don’t have that problem. Public insurers have to insure anybody regardless of his or her health. You will pay a premium that is only based on what you earn and not your health.
People under private coverage (see 2. above) will fall back into a bad risk pool. Every private insurer has to have a bad risk pool. Premiums for this pool are limited to about $600 a month (adjusted every few years to match inflation). But coverage is limited as well (it’s about what you would get from a government run public insurer).
Lastly: If you are privately insured and cannot afford the premiums anymore (they increase with age and can reach way more than $1,000 a month when you’re older) the private insurer cannot simply cancel your contract. You will fall back in the (very) bad risk pool. Ultimately a judge will determine what you are able to pay and that will go to the insurer. Coverage is extremely limited and will only cover emergencies.
So you might ask why only the self-employed and people who make more than about $62,000 a year can use private health insurance. Well, in short: The government thinks if you earn less you are not capable of choosing for yourself what is best for you.
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In addition to the above, if after the date fixed for pre-existing conditions passes and an individual has not purchased minimal healthcare with the funds provided, they should be held accountable for all future health costs. No free riders allowed. (Charities can pick up the burden if so inclined, but better they help those who are under-covered by minimal insurance.)
There will be no mandate to buy insurance, but rather the huge risk of not having insurance.
There are two segments to the pre-existing issue. Those without coverage and a pre-existing condition, and those with coverage who develop a condition.
If someone is covered, insurance companies should not be able to jack up rates for that individual, beyond normal increases for age and general increases in health costs.
If not covered prior to a fixed date, they should go into a subsidized pool. If we can get all heathy people and their offspring covered, this pool will disappear over time.
While insurance can be sold to groups to reduce cost, all insurance should stay with individuals.
By eliminating the healthcare deduction, Medicaid as insurance, and ACA subsidies, enough money will be raised to give every citizen enough to purchase minimal healthcare in the open market.
How to deal with coverage for immigrants should be left to the states.
Reblogged this on The zombie apocalypse survival homestead.
Seb,
Here’s my two cents. First, it seems to be a reality that a significant majority of the public now wants preexisting conditions covered. Like it or not, that means that politicians are highly likely to cover preexisting conditions.
Since this can wreak havoc on actuarial and insurance principles and cause death spirals as Dan describes, the only solution can be to handle it outside of normal insurance markets. i.e., don’t poison the insurance well for 100% of the individual market just to help the 10-20% (a guess) with costly preexisting conditions. Have government ensure competition between insurers for the larger market, and then separately provide a subsidy to the smaller preexisting group in a way that least disrupts the market. I think. Something like that.
I can subscribe to everything you wrote. But I’m still wondering about what we should do about people with pre-existing conditions that would exclude them from health insurance (in a free market)? I haven’t really found a suitable answer to this questions.