What’s Wrong with This Sentence?

[W]hat is it that people think they’re buying when they purchase insurance? If it’s not a vehicle for the healthy to subsidize the sick, then what’s the point?

The quote is from Austin Frakt at his blog.

I now know why health reform discussions tend to go nowhere. When you buy life insurance, are you trying to subsidize people who are about to die? If not why are you bothering? Give me a break!!

Comments (18)

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  1. Larry C. says:

    Right. Every morning I wake up and ask, Who can I subsidize today?

  2. Brian Williams. says:

    It is an interesting mindset, but I’m afraid it is becoming increasingly common. Not only are more and more people trying to find ways for someone else to pay for their health care, there seems to be a general trend toward socializing all risk so that taxpayers pay the cost of everyone’s poor decisions.

  3. Ken says:

    This is actually very funny until you stop to consider that Austin is supposed to be one of the top thinkers in health economics.

  4. Devon Herrick says:

    I thought that when you buy health insurance (or insurance of any kind) you are spreading risk of an unknown nature (i.e. uncertain risks) among people with similarly risk profiles. I certainly don’t scour parking lots for cars with body damage and offer to pay the cost of body work out of the goodness of my heart.

  5. Virginia says:

    Wow. What an amazing twist on the true purpose of insurance. I like the parking garage example and will ad another: by that logic, homeowner’s insurance is here so that I can pay to repair everyone else’s home.

    And here is the real acid test: why would any healthy person sign up for that? Life must be very confusing for him.

  6. Aaron says:

    Where does The Incidental Economist fall on the political spectrum and on health reform ?

  7. Ken says:

    Aaron, they are left of center.

  8. Prof. Frakt has confused insurance with the misnamed “social insurance” which muddies things up hopelessly. Obviously, nobody would “buy” (in the sense of a voluntary transaction) “social insurance,” for the reasons described by Devon Herrick and others above.

    Funds for “social insurance” must come from taxation. But even then, I believe that in a mass democracy, people think that the purpose is for high earners to subsidize low earners, not for the healthy to subsidize the sick. A universal voucher or refundable tax credit for health care addresses the former challenge.

    However, Prof. Frakt was right to criticize Holman Jenkins’ column. Mr. Jenkins believes that a Democratic Senate would not filibuster, and that President Obama would sign, a bill that would allow Americans easily to circumvent the central planning and massive wealth transfers at the very heart of Obamacare. In reality, the basic political purpose of Obamacare is to make the people increasingly dependent upon the federal government, with a final goal of single-payer, government monopoly.

    A viable private insurance market, freed from mandated benefits and allowed to serve consumer preferences, remains utterly inconsistent with that goal. Worse, a “federal charter” (unprecedented in any line of insurance) would frustrate states that are resisting Obamacare through litigation, legislation, and constitutional amendments.

    Mr. Jenkins may wish to cut the Gordian knot of Obamacare repeal but, sadly, no shortcut is available. We must accept the forthcoming struggle of funding cutoffs for implementation and the eventual defeat of this legislation. Obamacare cannot be “outsmarted.” It must be repealed and replaced with real reform.

  9. steve says:

    “I thought that when you buy health insurance (or insurance of any kind) you are spreading risk of an unknown nature (i.e. uncertain risks) among people with similarly risk profiles”

    Is that what you really think? Arent you really spreading risk among a large group of people with varying profiles? Most insurance in the US is employer based. Rates are set for the corporation. I do not pay different rates for each of my different employees, who do have widely variable profiles.

    When someone gets sick, they do use their insurance. At that point, those who are healthy still receive little benefit from their insurance. They are, in effect, paying for the needs of the sick.


  10. Bart I says:

    Steve, at least with employer based insurance participation is voluntary. The healthy aren’t really subsidizing the sick, it’s Uncle Sam doing the the subsidizing via the employer tax break.

    Despite what many seem to believe, healthy individuals who opt out of an employee plan in favor of private coverage aren’t really at a cost disadvantage. If you’re healthy enough to qualify for private coverage, you can likely find it at a price low enough to make up for the loss of the tax break.

  11. artk says:

    I don’t know where the posters on this board get their deluded viewpoints, but all insurance consists of pooling premiums where the policy holders who don’t suffer losses subsidize the policy holders who suffer losses. When your house burns down, your neighbor’s premiums subsidize you rebuilding your house. When you get into a automobile accident, other people’s premiums subsidize fixing your car. And when you get sick, the healthy subsidize your medical bills. There’s no magic, it’s not socialism, and it’s not an unconstitutional imposition on your freedom to believe that well social support than Dickinsonian England is appropriate, it’s just how insurance works.

    Oh, Bart, although for a 20 something, it might be possible to pay less than a corporation pays for the same level coverage, in general saying an individual can get a better deal than a large company gets for health insurance is simply false.

  12. Joe S. says:

    Two points:

    1. Individual insurance is often cheaper than group insurance. The reason is that group insurance is more onerously regulated. The differences vary depending on the state, however.

    2. The fact that insurance involves pooling does not mean that I choose to buy it in order to subsidize someone who is sick. I buy it because I value the protection more than I value the premiums. If the insurance is fairly priced, no one is subsidizing anyone else.

  13. Bart I says:

    artk, for small and medium businesses who generally have access to age-banded coverage, I think you’ll find that the best rates for individual coverage are very close to the after-tax costs for the group plans.

    For large self-insured companies, I’m inclined to see pure community rating as accounting fiction. Even if it’s carried on the books that way, salaries almost certainly compensate for the differences in cost. And this seems an awfully strong incentive for age discrimination.

    But in any case, for an average-aged employee of a large company, I would expect the situation to be similar to that of a small-company employee.

  14. steve says:

    @Bart- Not in Pennsylvania. Being good friends with our insurance broker, I did his wife’s epidurals, I called him up about this. For apples to apple coverage, individual plans cost quite a bit more. It is very difficult to get individual coverage for people in their late 50s or early 60s if they have ever been treated for anything. The one exception would is young, healthy males with no health history. For insurance companies, these guys are almost pure profit, so rates can be pretty low.

    “The fact that insurance involves pooling does not mean that I choose to buy it in order to subsidize someone who is sick. I buy it because I value the protection more than I value the premiums. If the insurance is fairly priced, no one is subsidizing anyone else.”

    If your potential benefits are more than your contributions, they almost always are any individual, you end up subsidizing those who get sick. Your intentions to subsidize or not subsidize can be met if you make sure that payouts can never exceed pay-ins.


  15. Seamus Muldoon says:

    @JoeS: “2. The fact that insurance involves pooling does not mean that I choose to buy it in order to subsidize someone who is sick. I buy it because I value the protection more than I value the premiums. If the insurance is fairly priced, no one is subsidizing anyone else.”

    I think you hit the nail on the head. As rational adults, planning for the best interests of self and family, we constantly make calculations about best use of our resources, based on our own goals and values. To call voluntary health insurance a subsidy for the sick is really a misnomer. (Technically a subsidy is public money utilized for the benefit of a private entity- see Merriam Webster.) In fact we are moving further and further from anything resembling a market based system for either insurance or actual health care. The fallacy comes in calling PPACA health insurance reform, because it really is a transitional step to elimination of the private insurance industry and institution of an involuntary system of pre-paid health “care”, with the definitions of what constitutes “care” and what payments will be allowed determined by HHS. Now THAT will be a subsidy!
    By the way, as a generally healthy person in my 50’s, I do not begrudge the use of my premium dollars to pay for the health costs of someone who got sick, because that is what I signed on for. I don’t look at it as a subsidy or as “my” money. I’d rather be in my shoes than theirs. If my perceived costs outweighed my perceived benefits (not speaking just monetarily), I would opt out of buying the insurance (oh, except for that darned individual mandate thingie!)

  16. Bart I says:

    Steve– I don’t know the exact rules in Pennsylvania for either individual or group coverage, or whether you’re comparing to a small- or large group plan. But since you mention preexisting conditions, I suspect you’re not in one of the lower-priced tiers, which is what I meant by “healthy individuals” and “best individual rates”.

    Obviously if your individual quote is for 2x the base rate, then you’d likely be better off in a group plan.

    To be more specific, what I meant was that for an individual who qualifies for the lowest individual rates in a specific age group, the individual rate should be roughly equal to the after-tax cost of age-banded group coverage.

    Emphasis on “roughly”– obviously this also depends on e.g. the individual’s tax bracket, the individual’s sex (since employer plans can’t adjust for it), and on whatever rate-banding rules exist in a given state. Unfortunately all of these variables obscure the general relationship I’m trying to describe, which is that for the healthiest individuals the employer tax break tends to compensate for the added cost of subsidizing their higher-cost peers in group coverage. In other words, a positive tax subsidy tends to cancel a negative group cross-subsidy.

    Higher-cost individuals in group coverage are obviously doubly subsidized, since both the tax subsidy and the group cross-subsidy are positive.

  17. steve says:

    @bart. I am a physician. I am president of a group. I price insurance plans every year since premiums rise very year. We have changed plans every year for about ten years now due to costs. I have also spent time trying, unsuccessfully, to get family individual coverage here in PA. Since each state seems to vary so much, perhaps my state, or just my area is an outlier.

    FTR, I would like to see total compensation taxed. I would do away with the health insurance exemption. All of that still leaves us with the problem of what to do with people who take out more in benefits than they pay in premiums.


  18. Bart I says:

    Steve, I don’t think we’re disagreeing, just talking about different things.

    Put another way, artk (and I had thought you) seemed to be making a general statement to the effect that individual coverage was more expensive than group insurance. But the folks at NCPA routinely imply the opposite– that individual is cheap, and group is expensive.

    I’m stuck in the middle. Obviously, there are people for whom individual coverage is cheaper, and others for whom it’s more expensive. All I’m saying is that for the former, those individuals with access to the cheapest individual rates, the employer tax exclusion works as a sort of equalizer, bringing the net cost of group coverage roughly in line with individual rates. This must be so, otherwise the healthiest individuals would flee the group plans and group rates would spiral out of control.