Obama’s Dilemma: Ten Degrees of Separation
Consider this:
| Proposition One: | No health insurance company should be able to turn down any applicant or charge a higher premium because of health status. |
| Proposition Two: | The federal government should tell you what health insurance you must have, where you will get it and what price you must pay and levy steep fines on you and your employer if you fail to comply. |
Proposition One is what people thought they heard Barack Obama say during the election, and they voted for it. Proposition Two is what they are now hearing from Congress and they’re not buying it. Yet what has never been said publicly is that Two follows from One. That is, it is almost impossible to have One (which people seem to want) without Two (which they don’t want).
Can Barack Obama (with all his oratorical skills) convince people that One and Two are related and that they have to accept Two in order to have One? I doubt it.
As I have said many times, almost no one on Capitol Hill or in the Obama Administration understands health care as a complex system. Invariably, they think they can enact ideas that are popular and avoid ideas that are unpopular without understanding that they are all linked. It is only when politicians sit down with economists who are trained to analyze complex systems that it dawns on them that they are in a very unpleasant trap. They have been in that trap for the past eight months, and no one seems to know how to get out of it. The only thing worse would be for the Republicans to jump in the same trap with them.
Here’s how we get from Prop One to Prop Two in 10 hard-to-disconnect steps:
- If we know we can buy health insurance after we get sick with no increase in premiums, none of us will want to pay premiums for insurance while we are healthy. Yet, if only the sick are paying premiums, the entire insurance system will collapse.
- So to prevent collapse, there must be a requirement that people buy in when they are healthy.
- Now if the requirement is a general mandate — with lots of coverage options — we are back to a variation of the problem in 1. People will choose scaled down, inexpensive insurance when they are healthy and then switch to comprehensive, expensive insurance after they get sick.
- So to prevent a meltdown similar to the one described in 1, choices must be eliminated and there must be a standard (government-defined) benefit package which all individuals are required to buy and all insurers are required to sell. People won’t be allowed to buy anything less generous and no insurer would be foolish enough to offer anything more generous.
- Now suppose there is a health insurance Exchange where people get their insurance, but insurance can also be sold outside the Exchange. In particular, imagine a special deal offered to the Iron Man’s Club (requirement: swim a mile, run 10 miles and bicycle 20 miles). Soon, word would get out that anyone who can qualify for Iron Man membership can get the standard benefit package for a really cheap price. In this, and in other ways, insurers outside the Exchange would siphon away the healthiest people leaving the Exchange with the sickest, most costly enrollees.
- So to prevent the death spiral the conditions in 5 would lead to, insurance outside the Exchange would have to be outlawed and insurance within the Exchange highly regulated. (See below.)
- How can you force people to buy insurance? Since cattle prods are too impractical and prison cells are too expensive, about the only practical tool is a fine. And if you want it to work, the fine needs to be near (and maybe even above) the premium people have to pay.
- Of course, there is this problem: How can we know whether anyone has insurance? The easiest way — without a new bureaucracy — is to rely on the income tax system. Make people show proof of insurance at the time they file their income taxes.
- Trouble is: People file tax returns once a year and most people who are currently uninsured are uninsured for less than a year. So a logical way to get to people with greater regularity is to use the employers as an enforcement mechanism.
- Once employers are involved, however, we run into the unfortunate fact that most people believe that premium payments are an addition to wages, not a substitute for them. So to the question, “should we mandate that you buy insurance or that your employer buy it for you,” the employer tends to win hands down. Result: both an individual mandate and an employer mandate seem inevitable.
Notice the cyclical pattern in all of this. You distort incentives in a complex system and you get perverse behavior. To prevent that, you distort incentives some more and you get other kinds of perverse behavior. The more you intervene, the greater the need for even more intervention.
So what’s the answer? We need to reject Proposition One and find a better way of solving that problem.
Are you asking if Obama can explain the 10 steps to the American people? No.
Amen!
And thanks as always for the great post, John.
A couple of points:
The ‘basic package’ debate will rage. People will want more than the general population can afford. Will it be okay for people to pay for additional services? Does that run counter to #6? Of does that in fact, create the consumer in the market that affects prices over the long term?
Second point, not everyone works (particularly in a recession) how do we regulate that people are ‘buying’ their insurance when they can least afford it.
Third point, and this is the one that troubles me most. Telling someone that they must pay for something they don’t want is bad enough, but when that causes them to choose between health insurance, food and shelter that gives me agita.
John’s 10-step analysis is right on the mark. The dynamics of mandates are just like that.
I wish, though, that he had gone all the way to tell us perecisely what he means by “We need to reject Proposition One and find a better way of solving that problem.”
Practically, how would he do it?
Uwe Reinhardt
Number one is easy, and you CAN have it without two. If you increase EVERYONE’s premium by 400%, you will no longer have to charge sick people “more”
John. BHO has no oratorical skills. I was there in Chicago and have wasted many minutes observing his “skills”. He can only READ a speech. When he goes off text he is totally a babbling #@+(). Jay
Dr. Goodman, This article is the most suscinct analysis of the never ending “do loop” concerning health insurance that I have seen. It clearly outlines the fallacy of both premises, that people must not ever be refused coverage, yet must not be charged much for high level coverage. And shows the end result – we will all pay a lot more, either through our employers or personally. The next statement would be the additional aspect – that if this required, mandated coverage is then managed by the federal government – the costs will go even higher, as they take their cut off the top.
So, correct me if I am wrong…wouldn’t it make more sense to take health insurance back to pre-HIPAA days and couple with state run high risk pools for those that fall through the cracks??? Less regulation
= lower cost. High risk pools are a safety net, and not an entitlement program….and may not encourage long term dependence. Seems like there are good fiscally conservative solutions available.
John,
A really good column. I am forwarding it to many colleagues and contacts.
I completely concur with your analysis and would add that as price goes up for premiums in general (since there will undoubtedly be an elimination of HDHPs, such has been the case with the state subsidized programs), the government will justify a need for more tax dollars to subsidize those that can no longer afford health insurance.
Yes!
Uwi:
One answer that still delivers universal care:
http://www.plan.bipartisanhealthcare.com
Reply to Uwe Reinhardt.
You do it by paying the underwritten premium. If that is not an option, ask for help, public or private. That is the purpose of welfare (charity). American people are recognized as the most generous (charitable) of any.
Sorry!
http://www.bipartisanhealthplan.com
Uwe,
It seems to me that almost all government intervention in the health market has nothing to do with fixing either moral hazard problems or adverse selection problems, the classic reasons for such interventions. It also seems to me that most of the problems with health care that figure in today’s political debates arise from inappropriate government intervention in the health care market. Thus it also seems to me that almost all government health care market interventions should be ended, thus fixing most of our problems. The remaining major problem is providing health care for poor people. If we want to do tackle that one, which seems reasonable to me, why can’t we just give the poor “health care stamps” like food stamps? The food stamp program does not require the government telling farmers how or what to produce or what to charge (though the agriculture department sometimes does those things for other reasons), nor does it require the government telling grocery stores what to sell and what to charge, nor does it require “public options” in farming or grocery retailing. The same was true with the post-WWII GI bill that subsidized college education for veterans. No price controls, no government restrictions on the way colleges ran their operations, just money for the veterans. What is different about health care that requires the kinds of government intervention Obama proposes or that we already have or that makes “health stamps” insufficient?
You know more about this stuff than I do, so I look forward to your reply.
Hi John,
One possible solution to the entire problem is to require insurance companies to cover an entire “course” of treatment for a condition which arises while coverage occurs – regardless of whether the customer continues to pay premiums.
This would be like life insurance.
I’d like you to explain the pros and cons of that in some future column if possible.
James
God, I just want to cry… our government is pure evil and there is no way out of Washington DC using all of this to exact tighter control and regulation of our lives.
John, I am an insurance professional, and you have to be one of the clearest thinkers that I have read discussing the dynamics of any insurance market.
Supposedly the big O was to put together a panel of experts who would get together and come up with the best ideas on how to proceed to fix our very screwed-up healthcare system. My question: Did anyone ever invite you to any of the gatherings of experts? If they did not, they missed the boat big time.
I believe there were some very informal meetings in the early days of the big O administration. If they believe this was enough to come up with fixes to such a complex system, they are even more naive than I already thought them to be.
Sadly our healthcare guru in chief does not seem to know what is meant by adverse selection.
Expand Medicare to include everyone, make everyone pay for it (like we already do) and get rid of this whole mess. The system is already in place and doesn’t need to be “created”, the House Resolution is already written, and the health insurance industry will get the spanking it deserves. It works for law enforcement, education and public safety. It will work for healthcare too.
Medicare is insolvent.
Expanding it is not an option unless one wants to force people to accept a promise of “coverage” that will not result in the provision of actual medical care.
The private health insurance industry serves the people who contract with it. If they don’t like it they don’t have to purchase its products. As most people say they like the product they have, it is rather arrogant to applaud government interference in private arrangements out of some misplaced desire for revenge.
As an aside, the House of Representatives does not control public education, public safety, or most law enforcement. These are controlled by local governments.
Medicare is NOT insolvent.
If your premise is false, then if your conclusion is true, it’s only coincidence.
John, you always have great analysis. Maybe you can focus a future email on the “Green Healthcare” built into the Senate HELP bill. Watch closely if it makes its way into the final Senate or House bill. Has anyone asked what “Built environment” means???
Some initiatives go frighteningly beyond traditional health care and into areas of city planning, home construction and transportation systems. The level of centralized power over individual rights seems far beyond anything most citizens would expect in their daily lives on the grounds of health insurance reform. Here is what is in the bill:
Wide-sweeping “Health Impact Assessments” are proposed on “the potential health effects of the built environment.”
“The term ‘built environment’ means an environment consisting of building, spaces and products that are created or modified by individuals and entities, including homes, schools, workplaces, greenways, business areas, transportation systems, and parks and recreation areas, electrical transmission lines, waste disposal sites, and land-use planning and policies that impact urban, rural and suburban communities.”
For proponents, these proposals do a terrific job of centralizing power into the hands of government. They include health environmentalism, green impact assessments and added bureaucratic oversight and restrictions on American business. The ability to award grants seems unlimited and ideologically oriented to an expanded role of government in citizens’ lives, well beyond health and health care.
John, I wish that you could come up with exact quotes about prop I and II. We will never achieve a doable health care plan when all one side does is ridicule the other and vice-versa. What has happened to that elusive phrase “collaboration”? We need to stop the acerbic rhetoric and work together.
I guess the government could dictate price and coverage for a public option plan.
It has no business doing so for private insurance, aside from minimum coverage requirements.
Regarding a public option plan like Medicare, how is the government going to ensure that reserves are used to pay for medical claims, rather than for battleships?
Don Levit
[…] readers will recall that I made a similar point here and Uwe Reinhardt agreed with me. But I wasn’t arguing for ObamaCare. I was arguing against […]