Private Sector Socialism

Here we are at the eleventh hour, about to enact Obama/Baucus/Kennedy/Waxman Care and no one other than the insurance industry executives seems to be aware of how genuinely foolish this reform is likely to be.

At the top of my list of foolish things is the idea that no one should ever have to pay the real cost of his own health insurance. The most popular alternative is having everyone pay the same premium although, as previously reported at this site, community-rated premiums are not even good for sick people.

We do not as a rule find this attitude in the market for other important goods. For example, most of us think people should pay the market price for the food they eat, the clothes they wear and the house they live in. We also don’t seem to have a problem with people paying market prices for life insurance or disability insurance.

So what’s so different about health care? There is always the possibility that someone cannot afford to pay an actuarially fair premium. But there are also people who cannot afford to pay for food, clothing and shelter. We solve these problems through public and private programs to help people out. No one is seriously proposing to socialize the food, clothing and housing industries. And if people can’t afford — or otherwise neglect — to buy life or disability insurance, we have programs to deal with the sympathetic cases there as well.

I have often said (and each time it provokes a reaction from Uwe Reinhardt) that everyone’s I.Q. falls about one standard deviation when thinking about the health care system. With same-premium-for-all life insurance, we all seem to grasp the problems very quickly. With health insurance, the mental wheels grind more slowly.

Take a healthy 20-year-old for whom the actuarially fair premium is, say, $1,000. Under community rating, he will have to pay, say, $3,000. But suppose he refuses and remains uninsured. What fine should he be assessed? Answer: $1,000. If we are going to allow him to obtain insurance even after he has a medical event (no pre-existing condition limitations), then society is effectively insuring him anyway and the social cost of that insurance is $1,000. So, a $1,000 fine forces the youth to pay the social cost of his decision.

Now in the insurance industry there is much worry and gnashing of teeth over the very real possibility that the youth will pay the fine and remain uninsured. (And, why not? It appears to be a sensible option.) Problem is, the $3,000 is the needed premium assuming lots of young (and overcharged) people are participating. If they opt out, then the community-rated premium will have to be $4,000 or $5,000 — thus encouraging even more people to pay the fine and opt out.

So the industry is apoplectic over the fact that the fine isn’t high enough. What they really want, in the above example, is a fine of $3,000 for anyone uninsured. In their words, “in order for insurance pools to work, we need healthy people.” This, of course, is poppycock (but remember, the mental wheels are still grinding slowly).

Private sector, same-premium-for-all plans do not need healthy people. They need healthy people’s money. More precisely, they need somebody to gouge in order to offset the people they are undercharging. A healthy person who pays a fair premium does nothing to help the finances of a health insurance pool.

But why pick on young, healthy people? If all we are doing is scrounging for money to subsidize the care of older, sicker people, does it matter where the money comes from? Why not levy a tax on the Physicians for a National Health Program? They seem to be gung ho for self-immolation and self-sacrifice in the name of wooly-headed schemes.

Ironically, both capitalism and socialism would seem to work better than the private sector socialism described above. Under socialism, everyone is enrolled and “premiums” are actually taxes — which are not optional and which are nowhere near the same for everybody. Under capitalism, premiums would reflect real expected costs. Our 20-year-old would either pay the $1,000 or self-insure. Neither system victimizes the young and the healthy, however.

Comments (31)

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  1. Charlie says:

    As a younger person ($2,000 age instead of $1,000 age) I couldn’t agree more. I am paying Soc. Sec. and not planning on receiving any back. I am watching the budget deficit skyrocket, and thinking about the tax increases that will almost necessarily follow. Now, according to all of the health care proposals, I am supposed to pay for the health care of the baby-boomers that largely got us in this position.

    We should go on strike.

  2. Larry C. says:

    The vast majority of people in health policy are open socialists or closet socialilsts, John. You are one of the few (maybe the only one) brazen enough to point it out.

  3. Bruce says:

    IQ does not drop by one standard deviation when most people start thinking about health care. It drops by two standard deviations.

  4. Devon Herrick says:

    I’ve probably heard liberals say it a million times… “health coverage will only be affordable when everyone has coverage!” What on Earth does that mean? I assume it means health coverage for middle-aged people, with pre-existing conditions, will be less-expensive when they finally succeed in forcing young people to subsidize their medical bills.

    Community-rating doesn’t lower costs; rather it shifts costs. Moreover, it will probably increase costs when young people begin seeing their doctor more often in an attempt to derive some value from their costly premiums.

    As John said, it will also increase premiums when young people refuse to participate, resulting in an adverse selection death spiral.

  5. John R. Graham says:

    I think that a key reason peoples’ IQ drops so dramatically when discussing health care is that they muddle together 3 very different things and call it health “insurance.” First, there’s real insurance: people pooling funds to protect against a future event that will happen to some in the pool, but they cannot predict which. Second, there’s monopsony purchasing power, which exists in co-ops and/or is one reason for mega-firms to arise at a certain point in a value chain’s evolution (such as Wal-Mart’s ability to drive down suppliers’ prices), but has nothing to do with “insurance.” (Prices of automobiles have not dropped because of the purchasing power of Geico or Progressive.) Third, there’s transfer payments from high earners to low earners, which will likely always be a characteristic of mass democracy, but also has nothing to do with “insurance.” I suspect that one reason for Medicare’s popularity amongst seniors is that most beneficiaries receive more than they paid in. But a voucher or refundable tax credit for Medicare would have the same effect without the other negative consequences of the government actually running the Medicare program.

  6. Richard says:

    Real insurance and “predictability” tell us that we know there will be loss but we do not know to whom this event will befall. Health insurance lacks this controlling feature. Health insurance is priced more as a maintenance plan. Only with health insurance do we expect to take up the time of a doctor and pay a 20.00 copay. Third party insurance and a lack of transparancy in the cost of the service means we do not view this as INSURANCE. We view it as a employee benefit. We have outsourced the design and pricing to our employer and government and we wonder why we are confused and upset about the cost. We can be trusted to buy auto insurance; not health insurance. I would require everyone to have a HSA and HDHI and I would afford refundable tax credits to help the poor buy INSURANCE and not stay as a ward of the state. At the rate we are going, we will all be wards of the state.

  7. Paul Nachtwey says:

    I can’t imagine you and Uwe Reinhardt agree on much. How does anyone take him seriously, anyway? He strikes me as an angry intellectual elitist. I would like to remind Uwe and the rest that between Medicare, Medicaid, federal employees benefit plan, military medical benefits, funding for medical education and research, and coverage mandates in private plans, among many, many other means, that the federal government already controls the majority of health care spending. If government controls the majority of the spending in the industry, shouldn’t gov’t be considered the source of the problem? Shouldn’t gov’t already have the ability to “reform” the industry that they control? And yet we are ready to turn over even more control to the feds? It’s kind of like the fox is in the hen house, he eats all of the hens, and then complains that there are no hens on the farm. Who’s to blame? The farm, of course, for not having enough chickens. What’s the solution? Appoint the fox as chicken procurer czar. A similar irony is the democrats bemoaning their inability to get a “reform” bill passed when they control the legislature and executive branches. Who’s to blame?

  8. Don Levit says:

    I agree with Richard’s assessment of the cause for overpriced insurance: too much coverage.
    What I find to be a real disconnect with the liberal mindset is their passionate belief regarding low deductibles and out of pocket expenses.
    If these are excessive, then people will not get the necessary care.
    They don’t seem to get it that all this comprehensive first dollar coverage is what is driving the premiums skyward.
    I have not been following the details of all these bills, but I would doubt that high deductible coverage is an option.
    And, why should it be if the premiums are subsidized?
    With group family premiums averageing $13,000 per year, and median household income at $50,000-$60,000 per year, we are going to have to subsidize probably 90% of the families.
    Doesn’t that necessity tell you we have a service priced as a luxury?
    Don Levit

  9. Chad Harris says:

    John, “Private sector socialism” is the worst of all worlds you nailed it! We would be better off to stop kidding ourselves and just call it like it is and tax accordingly because a market based option seems to be in the wings for another generation because this one seems to want to throw up their arms and say “Who is John Galt?” Private sector socialism is a fence sitters nightmare. We need to attack or retreat but not wait to get killed.

  10. beverly says:

    So much common sense here. How refreshing!

  11. Jeff B Steele says:

    I appreciate all the discussion that goes on in this website, and everyone here is perfectly rational in setting forth views which express alarm at the galloping socialism of the present administration. But how do we who are “in the choir”, so to speak, get the message accross to the people. Or maybe it’s just the denizens of Washington we need to get through to. This administration’s every move has been one series of redistribution schemes, we all know this doesn’t work, and has never worked, yet it seems we are going to have it forced upon us! So how is it that our “representatives” feel so immune to our retribution?

  12. Jennie Fiedler says:

    If you go back in time to just before the Great Depression, you will find that history has repeated itself. There were the very rich, and there were the very poor, and not many in between. Home ownership, job security, good health or retirement were not in the grasp of most working people. The New Deal brought about the rise of the middle class, until “Reaganomics” hit in the 80’s. Decent, liveable wages, affordable homes, financial security, and yes, retirement, are disappearing right along with our middle class. If you ask people what they fear most, they will probably say “becoming sick, injured, or unemployed”. It baffles me how the concept of universal health care is considered “socialist”, but we have education, public safety and law enforcement, all in the public sector. We all pay for these, and we all have access to them. Soon, unless we do something now, Social Security and Medicare will also bite the dust, wealth will be concentrated into the hands of a ruling corporate elite while everyone else sinks into serfdom. From 2002 to 2004 a CEO’s average pay went up from $7.8 million to $9.6 million. Meanwhile the median annual household income went down from about $46,000 to about $44,000. What is that telling us? The rich are once again getting richer while the poor are once again getting poorer, and our democracy will die with our middle class. And at the center, leading this corporate coup are health insurance companies. Almost makes me wish I was much older and closer to death than I am.

  13. Bret says:

    Jennie, what a depressing view of life you have. And almost everything you say is factually wrong. Over the past year or so “the rich” have taken the biggest hits of all. Don’t you ever read the business page of the newspaper?

  14. Dave Racer says:

    Many of our allies sacrificed candor to win a seat at the table. Now that the table is hidden behind doors, will these organizations realize they were duped? Will they have the courage to speak out?

    We were told it was about protecting against the public option. Trade guarantee issue for individual mandate (never mind its unconstitutional nature), no pre-ex. But now the insurance industry speaks out. Does that open the door for others? Employer groups? Agent groups? Consumer groups?

    Are there groups representing the young healthy Americans who are about to see their premiums double and triple?

    Speak up or forever hold your peace.

  15. John W. says:

    I’ve seen some really, really ‘narrow’ (un-intelligent) comments about healthcare reform, but nothing matches what I’ve just read in the attached as sent under your name. To compare ‘dealing with cancer’ (the need for insurance) at the same level as food/shelter (But there are also people who cannot afford to pay for food, clothing and shelter) is really insulting. To indicate that “no one other than the insurance industry executives seems to be aware of how genuinely foolish this reform is likely to be” is truly beyond comprehension – and I’m pretty dumb…
    I only hope that no one in your family ever comes down with a serious illness that allows ‘those insurance industry executives’ the ability to refuse insurance to one of your loved ones. I’ll bet that you’re in a position that you could likely pay, from your financial resources, for a lot of illnesses – but likely not all of them .
    I’ll pray for the health of you/your family so you can avoid that possibility…

  16. Don Levit says:

    Bret, you say everything Jennie says is factually wrong.
    Would you agree that the top 5% of households hold more assets than the bottom 95%.
    If so, do you see that as a problem, or just simply reality?

    John writes that there will always be people who cannot afford an actuarially fair premium.
    How do you define what is actuarially fair?
    As long as we have a defined-benefits type insurance policy, where the benefits are fixed, and the premiums increase, there will be a point where the premiums become prohobitively expensive.
    Just look at yearly renewable term life premiums.
    If a person starts a policy young enough, he will come to a point where the current premium is higher than the death benefit.
    According to the insurance industry, that is an actuarially fair premium.
    Don Levit

  17. Norris Hall says:

    The US should have a system like Taiwan
    Under this model, citizens have free range to choose hospitals and physicians without using a gateks, Chinese medicine, home nurse visits and many more. Working people do not have to worry about losing their jobs or changing jobs because they will not lose their insurance.
    Most preventive services are free such as annual checkups and maternal and child care. Regular office visits have co-payments as low as US $5 per visit. Co-payments are fixed and unvaried by the person’s income.
    Every enrollee has a Health IC smart card. This credit-card-size card only contains a kilobyte of memory that includes provider and patient profiles to identify and reduce Insurance Fraud, overcharges, duplication of services and tests. The physician puts the card into a reader and the patient’s medical history and prescriptions come up on a computer screen. The insurer is billed the medical bill and it is automatically paid.
    Patients and doctors alike are very satisfied with NHI. Satisfaction has been in the 70 percent range. However, at the beginning of 2006, satisfaction decreased to the mid-60 percent range because the program needed more money to cover its services. Since then, satisfaction has gone back to the 70 percent range.
    Taiwan has the lowest administration cost in the world of 2 percent
    Taiwan spends a little over 6 percent in GDP and less than US $900 per person…less than half what the US spends

  18. Linda Gorman says:

    So now we have to learn Chinese in order to debunk the latest in the seemingly unending string of nations with national health insurance that supposedly provide better health care than the US?

    First it was England, then it was Canada. In the Clinton years it was Germany. Switzerland has recently been popular for its supposedly wonderful system of mandated insurance, never mind the doctor strikes. At various times France, Sweden, and Norway have all been models for their wonderful this and that even though people die on their waiting lists and they are now sending people abroad for care.

    The Netherlands, it should be said, was dropped by government control enthusiasts shortly after the Remmerlink Report showed that Dutch physicians actively killed patients.

    Just one question: if Taiwanese satisfaction with government run health care is truly in the 70 percent range, why should the US, where satisfaction rates are typically in excess of that, “have a system like Taiwan?”

  19. Bart Ingles says:

    If someone is hiking on a forest path and is bitten by a snake, is it the snake’s fault, or the hiker’s? After all, the snake was only doing what snakes do, but it was in the hiker’s own interest to anticipate the hazard and veer around.

    Similarly, the Democrats in Congress are only doing what Democrats do. They’re perfectly happy with government-controlled health care, and a command economy in general. The Congressional Republicans and conservative think tanks, on the other hand, have had 15 years since the demise of Hillary-care to anticipate this outcome and plot a course which could have avoided it. But instead of seeking a pragmatic solution that most of the country could live with, they chose to plow straight ahead with an approach that would itself have been quite disruptive, and which did nothing to blunt demand for the kind of radical change we now seem to be facing.

    Given the false dichotomy of government-mandated-everything on the one hand, and the collapse of employer-sponsored group insurance (presumably with massive expansion of the risk pools) on the other, I’d have to choose neither and stay with the status quo. Not that I like the status quo either, but at least it preserves the possibility of incremental reform.

  20. Bob Geist says:

    John, a more accurate term than “private socialism” is coporate socialism–in both case the mantra is the same: Give us your money and we’ll take care of you.” if you believe that, I have a bridge over the East River for sale. When corporate socialism is welded to govenrment power, we have a cartel system that mimics the socialized government-NHS cartels abroad–this is the nature of ObmamCare. The corporate socialists are protesting because the government seems to be backing out of its promise of an absolute guaratee of coercing Americans into being corporate customers. All of this is ugly and its called “managed competition”. next, who will control the cartel? Let’s see how the corporate interest fares in the long run, not the current argumnet over the degree of coercing the public.

  21. Bruce says:

    John W: I hope you never become homeless and on the point of starvation. If it happens to you, maybe you will apppreciate that humans have many needs. Maybe it will also occur to you that you have a better chance of having all your needs met if the production of these goods and services is not socialized.

  22. ArchM says:

    I cannot help but express the exasperation I feel. So, the author is saying that everyone’s IQ drops when talking about healthcare, except for his own? It seems more likely that he just kept writing in order to prove his point.
    1. To say that a persons access to health care is like any other commodity or market good is absurd. It is NOT!!! Health care is literally about life or death. To attach a price and conduct healing as a transaction is an assault on human decency and morals.
    2. We need a fair system for everyone, and if government can provide then by all means, give them the keys. We certainly have not gotten it from anywhere else. Do people not think it is absurd for 1 in every 7 dollars to go to the CEO of Cigna. Or that we could pay for healthcare for everysingle person in America simply by eleminating the paperwork processed through the insurance industry. There’s got to be something a better a better calling for the people that work there.
    3. “give us your money and we’ll take care of you” – you know I would really like to own a bridge over the east river; I could put a hot dog stand there! I think the problem we have is the collusion between government and the market, neither one is playing its proper role. The insurance industry is just trying to milk money from people without providing any adequate service. The government is attempting to pass a reform that says to the people, ‘we won’t let them milk you’, all the while letting the companies do exactly that just so they’ll stay in their seats.
    4. btw, jennie is only stating reality and if reality is depressing maybe you should change it and not deny it.
    5. John Galt also said reality is the ultimate judge of truth and values
    6. I hate statistics, especially the one where 80 some odd percent of people say the are satisfied with his/her healthcare. THAT SURVEY ONLY INCLUDES PEOPLE WHO HAVE NEVER USED THEIR COVERAGE FOR ANYTHING BEYOND BASIC HEALTHCARE, LIKE PHYSICALS OR CHECKUPS FOR THE COLD! People who have actually used healthcare, it’s not so high.
    7. Those people that say America has the best healthcare [anything, really] are idiots. We only have the best if each american commits to the values that lead to excellence and that is assuredly not true. That doesn’t mean we aren’t a great nation.

    ok, that should be enough even though there’s a million more things to say.

  23. hungry4food says:

    Subject: does the CBO cost Estimate on health care reform include this factor ???

    With or without a Government Option in Health Care , will the cost of Health care premiums dramatically rise as the Baby Boomer generations rapidly start to pass on and this cost burden of dealing with the last years of life as the cost of health care increases in the last years of ones life on average , shift hard onto the Middle class taxpayer as more and more revenue flows are needed by proxy as profits shrink for insurers ?

    This is a doomsday scenario for the private insurance Companies , because of the age dynamics in US population as the elderly average age at the time of death becomes more and more concentrated and costs associated rise with this phenomena .

    With this cost compounding factor in the prilimnary stages why isn’t this in the Health care reform , for the Critically ill and Terminally ill , as a supplemental ???

  24. Ron Bachman says:

    You are trying to find solutions to health, healthcare, and health insurance. That is NOT what this Congress is doing. This is about POWER and CONTROL. It is better suited to their desires to distort real economics so that they can redistribute wealth from one group to another. Overcharge the young and small businesses so that the gov’t can subsidize the overcharging to gain political advantage and support from those groups deemed acceptable to such subsidies. In the end, the majoriy of the redistribution is to the non-producers in this country who would not know a small business opportunity if it bit them.

  25. Terry Gannon says:

    In response to Adam, you are very charged up. Yes the debate is near and dear. I would offer to your rational side that the question of healthcare can be quite distinquished as either a right or a service. If it is a right, which from your arguments I can see some support in your thinking. I would in short suggest to you that it is not, and that perhaps viewing it as a service is not as bad a thing as you would suggest. Certainly healthcare is not like an oil change, but is it any different than having food or water? What about food rights? What we are seeing in Congress is more about control over the populace than real cost improvement and insurance extension to the uninsured. To cover 10 million chronically uninsured we are spending nearer $2T over not even the next 10 years, instead of buying them a policy for a total of $100-400B for the same time period.
    Adam we need to view these polocies in terms of payback, freedom and control. Obamacare fails on all counts.

  26. Gabriel says:

    “At the top of my list of foolish things is the idea that no one should ever have to pay the real cost of his own health insurance.”

    John – Fine article. And did not Frederic Bastiat point out earlier that “The state is that great fiction by which everyone tries to live at the expense of everyone else”?
    -Frédéric Bastiat, “The State,” 1848.

  27. What's Really Broken? says:

    Why not eliminate health insurance and allow patients to pay directly their providers? I’ll say it again: health insurance DRIVES COSTS UP!!!!

  28. […] healthy are overcharged so that the small percent who are sick can be undercharged. This form of private sector socialism would quickly dissolve, as the healthy sought cheaper insurance under other regulatory […]

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