Friday, December 25, 2009


Jonathan Chait has a justly widely cited TNR post summarizing the defense of the Senate health care bill. While he frequently does a fine job of presenting the arguments, he also says this:

Young people will have to pay for insurance that is, actuarially speaking, a bad deal, so that older and sicker people can get a good deal. That’s how insurance works. Fire insurance is a terrific deal for anybody whose home burns down and a bad deal for anybody whose doesn’t. The healthy and young who must overpay can be consoled by the knowledge that one day they may become the sick and old free-riders.

There is a serious bait-and-switch going on here. These arguments apply to a national health insurance plan, run by a government. They apply to plans like Social Security and Medicare. (The fire insurance argument is just a canard. Fire insurance is a good deal even if your house doesn't burn down. Insuring yourself against catastrophic risk at low prices is always a good deal*.) These arguments do not apply to a for-profit insurance company, even when people are forced to buy the company's policies.

The correct arguments, in support of forcing people to buy health insurance they don't want from for-profit firms are

1) Adverse selection: only people at risk will buy insurance.

2) Free riders: Citizens are implicitly insured against catastrophic health events. EMT doesn't leave you in the street after an auto accident if you are uninsured.

These are much less compelling arguments than the national insurance argument above, and imply different policy regimes. For example, limiting the mandate to buying (or paying taxes toward) a government-run, high-deductible catastrophic policy does a much better job of addressing these bits of market failure than does forcing people to buy a managed care plan they don't need.

Aetna, on the other hand, does not offer the consolation that when you're 64, someone 24 will be overpaying for her insurance so that you can be covered at a lower cost. In fact, it is in Aetna's interest to find a way to get you out of their pool by the time you are 64, while continuing to sweep up the taxpayer-subsidized premiums paid by unwilling participants. In fact, it is Aetna's fiduciary responsibility to do everything they can to get you out of their pool before then.

The way the Senate bill deals with this incentive to drive people out of the pool as they age is to let insurers charge older people 3 times what they charge other people. This provision, of course, means that the young are not going to subsidize the old. They are both going to contribute to shareholder profits and senior executive compensation at Aetna.

What this bill really amounts to are large increases in insurance company revenue, through higher premiums and more policyholders, subsidized by taxpayers. In return for this revenue increase, the companies are supposed to comply with new regulations regarding the acceptance and retention of potentially high-cost policy-holders.

This is much like the finance sector bailout deal, where taxpayer funds were used to capitalize bankrupt institutions so they would lend to businesses and individuals so that the economy could be revitalized.

We know how that worked out.


*Part of what is going on here is the degradation of the meaning of the word "insurance." When "health insurance" meant "coverage of in-patient treatment" while other expenses were out-of-pocket, the definition matched the coverage. When "insurance" came to mean "managed care," the definition no longer matched the coverage.

No comments: