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Posts Tagged ‘Adverse Selection’

I don’t want to give anyone indigestion, but The Hill is reporting that GOPers on Capitol Hill want to require insurance companies to cover pre-existing conditions, which is one of the key provisions of Obamacare.

Speaking to more than 100 students at American University, Cantor said, “What you will see us do is to push for repeal of the healthcare bill, and at the same time, contemporaneously, submit our replacement bill, that has in it the provisions [barring discrimination due to pre-existing conditions and offering young people affordable care options].” Cantor stressed that while he supports full repeal of the current law, Republicans share some of the same goals as Democrats, although they propose different ways of achieving them. “We too don’t want to accept any insurance company’s denial of someone and coverage for that person because he or she may have pre-existing condition,” Cantor said, addressing a young woman in the audience who noted that she had a pre-existing health condition.

This story initially was seen as a sign that House Republicans were planning to keep certain provisions of Obamacare, but Cantor’s office claims he was misquoted and the story now includes a correction indicating that “House Republicans are pursuing a full repeal of healthcare reform while addressing issues in the law, such as pre-existing conditions.”

It doesn’t matter to me, though, whether Republicans violate free markets and ignore the laws of economics by keeping an Obamacare provision or by doing the same thing in a different way with a brand new provision. The bottom line is that private insurance markets will be seriously damaged if the government imposes a mandate requiring companies to provide policies (with no price adjustment) that cover pre-existing conditions.

Such an approach leads to a couple of problems. First, such a mandate will create a bad incentive structure since consumers will be tempted to wait until they’re sick before purchasing insurance. Second, regardless of when they obtain insurance, the mandate would result in higher premiums for everybody else, contributing to what is sometimes referred to as adverse selection, which occurs when relatively healthy people decide to leave the system because government rules push up prices by forcing them to subsidize other consumers. Insurance companies are then left with consumers that are more expensive to cover, which leads to even higher rates, which leads even more consumers to opt out of insurance (which is why this process sometimes is referred to as the health insurance death spiral).

Ironically, the Democrats supposedly solved this problem in Obamacare by imposing the insurance mandate, which helps explain why the big companies were supportive of the legislation.

So what’s the answer? I’ve been around the political system long enough that I actually can sympathize with GOPers who don’t want to appear heartless when dealing with tough issues such as pre-existing conditions, but they better figure out an approach that doesn’t lead to an especially destructive version of “Mitchell’s Law,” which is when one bad government policy (such as a mandate to cover pre-existing conditions) leads to even worse government policy (a health insurance mandate or a single-payer system).

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