Aug 28

So What Do You Prefer?

Policy healthcare reform Comments Off

That’s inevitably the question that follows: “If you’re not a fan of the current reform proposals, what would you do?”  This is typically a veiled accusation that the dissenter is a proponent of doing nothing, perhaps because he/she doesn’t recognize that there’s a problem.

So let’s address the veiled accusation first: I’m by no stretch of the imagination an apologist for the current system.  I think it’s a deeply flawed system in many ways.  But when trying to get our hands around those flaws, and devise solutions, I think we owe it to ourselves to take a clear-eyed look at what’s actually driving the problems rather than upending the proverbial applecart in service to an ideological agenda that inexplicably regards government as a force for good, and thus almost always exalts the power of the state for the alleged common good, regardless of the cost to the individual.

Take, for example, the problems of insurance continuity and portability.  Some of the biggest complaints about the American healthcare system are that, because most of us get our health insurance through our employers, we run the risk of losing our insurance if we lose our job, and we can’t take our insurance plan with us when we change employers.  That latter complaint sounds petty until you remember the pre-existing condition problem: if John Q. Public develops a medical condition while working for Employer X, his insurance through X is going to cover it — but if he changes jobs and goes to work for Employer Y, he may well be denied coverage for that condition through Employer Y’s plan.  So John will be left to choose between continuing to work in a job he may hate to keep his insurance, or changing to a more satisfying job but having to pay potentially-ruinous medical costs out of pocket.

What’s important to recognize, here, is why most of us get our insurance through our employers.  This didn’t occur organically.  Rather, for reasons that are largely historical and no longer operative, employer-based health insurance receives favorable treatment under the U.S. tax code.  In other words: Surprise!  People respond rationally to incentives.  Alter the incentives, and you will alter the market: eliminate favorable tax treatment for employer-based health insurance and you will get a more robust market for individual insurance, which will in turn significantly ameliorate the continuity and portability issues.  If John can get insurance on his own rather than through his employer, then he can keep his policy despite changing jobs, and even through periods of unemployment.

Another major complaint about the American healthcare system is that insurance premiums are so high.  Again, though — why are they high?  Obviously there are a number of factors, but two important ones are Americans’ price insensitivity to healthcare consumption, and what’s called “community pricing.”

To understand these factors it’s helpful to think about other forms of insurance — for example, car insurance.  Most car insurance policies sold in the United States have fairly high deductibles (often $250 to $500, sometimes more) relative to the value of a typical loss.  Consequently Americans pay out of pocket for routine automobile maintenance and most minor damage; insurance is understood as a hedge against catastrophic (at least, relative to the value of the asset) loss.  Get in a fender-bender and you’ll pay for perhaps one third to one half of the loss out of pocket; but total your car and your insurer pays for nearly the full market value of the vehicle.  As a result, Americans are price-sensitive to routine car maintenance and minor vehicle repair work: we try to minimize our consumption so as to minimize our out-of-pocket expenses.  We’ll baby our cars, attend to the manufacturers’ preventative maintenance schedules, and shop around for the best deals for any work we need done.  Contrast with medical insurance, in the United States: most policies, as the result of regulatory favoritism toward an HMO/PPO insurance model, have absolutely miniscule deductibles in the form of $10 or $15 copays, which leaves the insurer on the hook for virtually every medical expense a patient incurs.  Because the consumer pays next to nothing out of pocket, he has no incentive to minimize his consumption — and so every time he runs to the doctor for the least little sniffle or ache or pain, he costs the insurer a small fortune.  The only way the insurer can recoup its expenditures is to jack up premiums for people who do, or who are likely to, consume more care, or to jack up premiums for everybody across the board.

“Community rating,” though, takes the first option off the table.  Health insurance providers are generally prohibited, in the United States, from charging different consumers different premiums based on actuarial risk.  Again, think of automobile insurance: if you’re a newly-licensed seventeen-year-old driving a $70,000 Beemer that daddy got you as a gift, your premiums are going to be much higher than a suburban housewife with fifteen years of driving experience who putters around town in an ancient minivan.  Different levels of actuarial risk justify the different rates: the suburban housewife is less likely to cost the insurer large sums of money, and so she pays less in premiums.  Health insurers can’t do this.  They are generally required to charge everybody the same rate, regardless of individualized health risks: Lance Armstrong’s premiums are the same as those of an obese alcoholic.  So what happens?  The insurer, to recoup its greater expenditures on behalf of the obese alchoholic, charges everybody more (so that, in a way, Lance ends up subsidizing somebody else’s obesity and alcoholism).

The starting point for American healthcare reform has to be clearing away this underbrush.  Changing the tax laws that incent employer-based health insurance over individual health insurance helps take a bite out of the portability and continuity problems.  Getting rid of the regulatory favoritism toward the low-deductible HMO/PPO model of health insurance, and restoring the understanding that insurance exists to finance extraordinary loss, will generate some consumer price sensitivity to routine medical costs.  Combine that with the elimination of “community pricing” rules that forbid insurers from pricing actuarial risk, and market forces will, all by themselves, guide people towards healthier living.  Take good care of yourself and you’ll pay modest out of pocket costs and low insurance premiums, while still being protected in the event of some catastrophic medical problem.  On the other hand, society will respect your choice to live hard, but not to the extent of subsidizing it.