Thursday, August 20, 2009

The best critique of reform that no one is making

Paul Starr writes:
Some other provisions of the reform package aren't separable. For example, Congress can't tell insurers they have to cover pre-existing conditions unless there is an individual requirement (or mandate) to buy insurance. Otherwise, people would rationally not buy coverage until they get sick, and the whole insurance system would break down.
It's more problematic than this. In order to mandate health insurance, Congress must endow some administrative body with the ability to decide what exactly qualifies as "health insurance." If private insurers decide to offer coverage beyond the minimum required to qualify, they'll be saddled by customers with preexisting conditions (who they are no longer allowed to deny) seeking to take advantage of the superior coverage. This is untenable, and there is almost surely no stable equilibrium other than providing the minimum.

The effects are profound. Under this system, the economics of adverse selection imply that the level of coverage will effectively be determined by government fiat. I am not sure that this is bad; the benefits from universal care may outweigh the loss of competition and variety in the marketplace. It will represent, however, a massive shift toward government control in health care. And it means that progressives cannot respond to complaints about rationing by saying "well, you can always buy extra coverage on the private market." When a law banning discrimination against customers with preexisting conditions effectively prevents insurers from offering any extra care, this is simply not true.


The Incidental Economist said...

This is not a critique of reform, it is a critique of one specific element of one specific way of reforming. Details like this can be worked out in reasonable ways that many people would not find objectionable. Universal coverage has been achieved in many other countries with a variety of systems, including those with private plans. There is a way.

Ideas: (1) risk adjusted premiums for enhanced plans. (2) no guarantee of issue for enhanced plans.

These are just off the top of my head. I'm not worried about this type of detail. It will get worked out, if not on the first cut, very quickly afterwords. It is not a reason to oppose all forms of health reform.

Matt Rognlie said...

Thanks for the comment.

You're right that my title is not very precise; I mean "the best critique of the administration's proposed reform" rather than "the best critique of reform in general." That said, banning the denial of coverage due to preexisting conditions seems to be a commonly cited part of most attempts at reform, at least within the mainstream of the current Democratic majority.

The two ideas your propose sound about right, although I think they are really the same thing. Giving insurers the freedom to set premiums on enhanced plans effectively means allowing them to deny coverage (since they can always set premiums at a high enough rate that no customer can afford them). Alternatively, if (1) refers to a schedule of risk-adjusted premiums set by the government, I'm much more skeptical, since I cannot imagine a set of rules complicated enough that it accurately captures the risk for every possible combination of patient and coverage.

My question, then, is this: is the need to allow flexible premiums (or freedom to deny coverage) on extended plans -- as long as we want to allow coverage beyond that mandated by Washington -- recognized in any of the current political debate? I'm not deeply plugged into the discussion, but I certainly haven't heard much recognition of these issues. Since this is a mechanism by which health insurance may be effectively nationalized, it deserves much more attention than it's getting.

The cynical interpretation here is that (1) Democrats are happy to see effective nationalization of insurance and (2) Republicans are not sophisticated enough to understand the adverse selection phenomena underpinning this argument.

TIE said...

(If my comments appear twice please delete one. I had a technical problem.)

I have not read the proposals deeply enough to be able to answer your questions. A short cut would be to look at

The market will sort this problem out. If insurers are not offered protection against adverse selection they will not offer enhanced plans. This is what happened in Medicare Part D. The most generous PDP in 2006, Humana Complete, experienced severe enough adverse selection that it left the market. Later, if lack of enhanced plans is viewed as a problem, legislation will be offered to "fix" it.

There really is considerable relevant experience in public/private insurance arrangements in Medicare and Medicaid. Few commentators on health reform seem to have noticed or are deliberately ignoring it.

Anonymous said...

I enjoyed reading this post. One thought though, health insurance companies probably have market power, and are probably making positive economic profits. Wouldn't the government then have some lee-way in taking on higher costs (through accepting risky applicants) given that these costs will come out of the positive profit that a company of that size would otherwise make in the industry?

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