Getting Frank with Frank

This is Robert Frank in The New York Times:

We must ask those who would repeal ObamaCare how they propose to solve the adverse-selection problem. That problem is not an abstraction invented by economists to justify trampling individual liberties. As experience in most countries around the world has confirmed, it is a profound source of market failure that renders unregulated insurance markets a catastrophically ineffective way of providing access to health care.

And what is the problem of adverse selection?

Uninsured people with pre-existing conditions often face tens or even hundreds of thousands of dollars in out-of-pocket medical costs annually. If insurers charged everyone the same rate, buying coverage would be far more attractive financially for people with chronic illnesses than for healthy people. And as healthy policyholders began dropping out of the insured pool, it would become increasingly composed of sick people, forcing insurers to raise their rates.

And all this is under the heading, “For ObamaCare to Work, Everyone Must Be In.”

The answer to Frank is surely obvious: don’t charge everyone the same rate or put everyone in the same insurance pool. For the past several years, federally sponsored risk pools all over the country have allowed people with pre-existing conditions to pay the same premiums as healthy people and obtain health insurance. And about 107,000 people have been able to do this without interfering with the premiums of anyone else.

Voilà! We solved the problems of 107,000 without requiring anything (other than about $6 billion in taxes) from the other 330 million.

Amazing what a little common sense can accomplish.

Comments (27)

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  1. Qwerty says:

    “without interfering with the premiums of anyone else”

    except for that $330M in taxes.

  2. William says:

    It is possible there is no stable equilibrium where everyone has health insurance. What would happen in that case?

    • Wallace says:

      Economic models of insurance are not perfect, so even talking about “stable equilibrium” can be difficult.

    • August says:

      If it is proven that there is no standard equilibrium under one set of assumptions or rules (very difficult) then I would recommend a change in the rules.

  3. Baker says:

    “For ObamaCare to Work, Everyone Must Be In”

    This may be true

  4. Howard says:

    Really love how we are just supposed to pay for everyone else. Who cares what is going on with our own health, right?!…

  5. Don Levit says:

    I can see how Frank would be concerned about adverse selecton.
    Milliman, our actuary was, too, and we were showing fully community-rated premiums, not 3 to 1, but 1 to 1.
    What this does is build reserves quicker, while allowing the healthier to build up monthly paid-up benefits.
    Each month, the high community-rated premium goes down, if claims are not made.
    Eventually, the healthy will be fully rewarded, by paying 60-80% less than the community-rated premiums.
    Don Levit

  6. Linda Gorman says:

    Why don’t people try to understand how something works before making inane comments? The only excuse I can think of is that he’s been reading the “are you in for Barak” campaign literature and it has distorted his thinking.

    People with very expensive pre-existing conditions are taken care of all the time under individual and employer health insurance policies.

    Finally, ObamaCare won’t “work” even if everyone in the country signs up, at least if by “work” one means that it delivers high quality medical care to those who want it when they want it. The current private system manages this even though it is hampered by all kinds of government obstruction. ObamaCare? Think NHS or Canadian provincial plans.

    What part of central planning fail is so difficult to understand?

    • John Fembup says:

      Linda you say “ObamaCare won’t “work” even if everyone in the country signs up”

      I think you are correct and I would only add that the underlying reason Obamacare won’t “work” is that it’s an insurance contraption not a means to reduce the cost of delivering medical care.

      Medical care will continue to become more expensive, and perhaps faster than before because of the massive additional federal subsidies available thru . . . Obamacare.

      As medical care becomes more expensive medical insurance will become more expensive.

      Those are the same problems we have now, not the solution we have been promised.

  7. Erik says:

    Here is my point of view. I had cancer 4 years ago and now I am uninsurable unless I enroll under an employer sponsored plan (which I am).

    I am considered cured at this point by my oncologist but the insurance companies still see me as having a pre-existing condition and uninsurable.

    That is a contradiction many people find themselves in. At this point I do not believe I should pay a higher premium than any other person my age as I am very healthy at this point yet to an insurance company I am an adverse selection.

    Who is correct, my oncologist or the insurance company? Shouldn’t I be able to buy my own insurance and not have to rely on my employer?

  8. Bob Hertz says:

    I have instinctively supported Dr Goodman for years on the value of high risk pools. In fact, I obtained health insurance from the Minnesota high risk pool, one of the best in the country for many years.

    The goal of the ACA is to dissolve these pools, and to squeeze high-risk persons into the general insured population. This is a classic example of ‘private sector socialism’, and it will probably backfire big time.

    By contrast, a high risk pool is closer to real sociailsm. The young and healthy get to have their low premiums, but they must yield a very small percent of their incomes to help those less fortunate.

    High risk pools have a couple of problems that would have to be addressed however:

    1. There must be stable federal funding. When high risk pools depended on state legislatures, over 20 states had no pools and several others were very limited.

    This would require a departure from ‘no new taxes’ orthodoxy.

    2. Even the recent federal high risk pool was rejected by some insureds because they could not afford the premiums. The high-risk population includes a lot of people who have lost jobs due to illness or never had a good job in the first place due to partial disabilities. This is what cancer or Crohn’s Disease or MS or lupus can do to you.

    In other words there would be have to some subsidies. This means more taxes.

    Still and all, the cost of good high risk pools would be a fraction of the costs of the ACA.

  9. John R. Graham says:

    I’m actually not a huge fan of high-risk pools, except maybe as a transition to individual insurance. They distract from the guaranteed renewable (as per Mark Pauly) or health-status (as per John Cochrane) insurance.

    They introduce unnecessary friction and most pools have waiting lists. They rely on politicians instead of markets to decide how to price health-status insurance. And they allow insurers to transfer costs to taxpayers.

    Other than that, I guess they’re better than Obamacare!

  10. Bob Hertz says:

    To John Fembup:

    Obama’s actuaries (if he had any) would beg to differ with you on the relationship of health costs and health insurance.

    They would say that the real reason for the steady increases in health insurance premiums are:

    a. demographics — most risk pools are getting older, with little or no new blood.
    That will cause a rise in premiums even if health costs are flat.

    Supposedly this will be fixed by mandates on the young.


    b. insurer greed — supposedly this will be fixed by the max loss ratios.

    I partly agree with their diagnoses, if not their solutions.

    • John Fembup says:

      Bob Hertz, you say “most risk pools are getting older, with little or no new blood. That will cause a rise in premiums even if health costs are flat”

      Yes the general population is aging. But you seem to view the problem of “health costs” as an insurance problem, rather than a medical spending problem. That is, you confuse risk pools’ expenses (medical spending) with their incomes (insurance premiums). You know expense and income are not the same. But you’re confusing the two and that doesn’t help you analyze either problem. You have a lot of company in this error – but it’s nevertheless an error.

      How does this error lead you astray? Example: You say “Supposedly this will be fixed by mandates on the young”

      Really? How can medical care spending on older people be contained or even reduced by mandates on the young? I say piffle, sir. Mandates on the young might increase the incomes of insurance pools; but they will not reduce medical spending by the pool populations (and they won’t reduce insurance payouts on account of insured medical spending, either).

      You supply another example when you say that you believe a second “real reason” for the increase in insurance premiums is “insurer greed — supposedly this will be fixed by the max loss ratios.”

      If insurer “greed” were a significant pricing factor, the MLR rule would have had a noticeable impact on insurers’ financials and (for stock companies) on their market cap. But the impact on insurers, arising from the MLR rule – and from rebates already being issued because of the max MLR rule – has been trivial, even negligible. Also, I think premiums would be a lot higher than they are now if “greed” were truly a significant factor. That’s because insurance companies still have to sell their stuff; and as medical costs rise, insurance companies have to compete harder and harder on price to make those sales.

      Besides, how realistic is it, to think that government rules can do anything about “greed”? Greed is a universal human trait, certainly not limited to insurance companies. Blaming high medical premiums on “greed” sounds like blaming plane crashes on “gravity.” It’s not totally wrong – but it’s trivial, not useful.

      I’ve seen lots of frustrated complaints, but no hard evidence, that insurance company “greed” is a significant factor. If this were really an elephant in our refrigerator, wouldn’t someone have noticed her footprints in the jello? And isn’t that the job of state regulators already? Yes, the aging population is an important factor along with technology and a rising population and advertising and a few other factors. It’s a shame that Obamacare focuses instead on bureaucratic insurance contraptions rather than the underlying medical factors driving medical cost – but that’s a discussion for another time.

      You might be interested in the National Health Expenditures data published annually by CMS. The most recent data show private health insurance premiums increased by 78% between 2001 and 2011. Private health insurance payouts over the same period increased by 77%. In the 5 years between 2006 and 2011, premiums increased by 21%, and payouts increased by 23%.

      I think the NHE data support my idea of “the relationship of health costs and health insurance.” Specifically, I say that Medical insurance is expensive because medical care is expensive; and medical insurance premiums are rising because the cost of medical care is rising.

  11. Bob Hertz says:

    Note to John Graham —

    You are kind of half right about guaranteed renewable health insurance.
    It does indeed offer protection against an illness that arises after you buy the policy. Your premium can only go up with the overall costs of your risk pool. The insurer cannot arbitrarily terminate you or raise just your premium.

    However — and here is what I think you might be missing — this only works if you buy the policy before you have the illness.

    Millions of Americans are walking around with chronic illnesses, whether diabetes or athsma or cancer in remission. In the guaranteed renewal market that I am familiar with, no insurer wants anything to do with them.

    I guess what I am saying is this:

    how do we get there from here? How can unhealthy people who have lost old insurance ever get new insurance?

    The ACA has many many flaws, but it did try to address this. High risk pools address this also.

    It is not fair to criticize you based on one clause in a sentence, but how do you get there from here?

    • Don Levit says:

      For people with chronic illnesses, you fully community rate them. You fully community rate people who are healthy, 1 to 1.
      Yes, those with chronic illnesses will be “loss leaders,” but that is part of the subsidization process of insurance.
      Particularly helpful is if the one with a chronic illness has 2 or 3 family members who have low claims. Those further serve to subsidize the one with higher claims, even within the family itself.
      In addition, with our patented paid-up benefits design, the one with the chronic illness pays $300 a month to accrue paid-up benefits.
      For those with a chronic illness, their $300 a month serves as a $3,600 first dollar deductible (in lieu of accruing paid-up benefits).
      Don Levit

  12. John R. Graham says:

    Well, I think we’ve found the dilemma. Yes, guaranteed renewability only works if people buy insurance before the insured event occurs.

    It works fine if “society” is indifferent to people who don’t take responsibility for doing so. For example, I bought term life insurance when I got married, with a fixed nominal premium that I pay every year. I’ve been healthy, but if I had fallen ill and likely to die young, my premiums would not change. If I was medically underwritten every year the life insurance would not make too much sense.

    For some reason, the government does not believe that everyone with dependents must have adequate life insurance. And if the breadwinner dies, the dependents fall onto a safety net of some sort but nothing like we expect of health care.

    Even with a $5,000 tax credit (as per Sen. McCain, which I suppose would be higher now), there are lots of people who would not step up to the plate to buy health insurance. And some who had it would let it lapse. And the guaranteed renewabiliy unravels.

    So, society will have a problem with some of its members, which high-risk pools are supposed to solve, but I assert they do so with a lot of friction.

    We also observe that every democracy ends up with community rating and guaranteed issue. Countries that were democratic in the 19th century got it in the third quarter of the 20th century. Even the U.S. got most of the way there with group benefits and Medicare. Countries that were authoritarian when they industrialized got “universal health care” within a decade or so of democratizing (e.g. South Korea, Taiwan, etc.).

    So, those of us who advocate underwriting may just be facing an impossible task. In which case, the Swiss or Dutch system is probably recommended.

  13. Bob Hertz says:

    Thanks John.


    if a breadwinner fails to buy life insurance, and dies with children under 18, the children get a monthly allowance from Social Security. Often around $600 a month until they are 18.

    The surviving spouse also gets early benefits.

    These benefits translate to a life insurance policy which would pay a lump sum.

    So we have an instance of social insurance making up for people’s failure to do the responsible thing. I think we could do something similar in health care.

    Going back to health insurance — I owned a guaranteed renewable individual policy for 8 years.

    I never got kicked off the plan or suffered a drastic rate increase.

    But I did get annual increases of 6 to 10 per cent, so over time the policy became a real economic burden to me. I am not sure that free markets will cure this.

    • John Fembup says:

      ” I am not sure that free markets will cure this.”

      Bob, you might be interested in the National Health Expenditures data published annually by CMS. The most recent data show private health insurance premiums increased by 78% between 2001 and 2011. Private health insurance payouts over the same period increased by 77%. In the 5 years between 2006 and 2011, premiums increased by 21%, and payouts increased by 23%.

      The NHE data support my idea of “the relationship of health costs and health insurance.” Specifically, I say that Medical insurance is expensive because medical care is expensive; and medical insurance premiums are rising because the cost of medical care is rising.

      I think publicly-funded insurance won’t cure this, either.

      • John R. Graham says:

        As long as we have “over insurance” or pre-paid health care, with prices fixed by central bureaucracies, I agree we won’t solve this.

        I think our group is divided generally who think that we need to focus on “insurance” as both the problem and the cure; and those who think we need to focus on how prices are formed as both the problem and the cure.

        In health care and education, prices are formed by central bureaucracies and we have seen the results over decades. In health care, it is not generally that the quality is poor, but that the quality is hard to determine and that seems to get worse every generation.

        We don’t have this problem in areas where prices are determined by markets. Anyone can explain why they prefer a car or refrigerator or television that was manufactured this year rather than one from decades ago.

  14. Bob Hertz says:

    The refrigerator and television are not only better than old models, they tend to cost the same or even less on an inflation-adjusted basis.

    In health care, new technology tends to be wildly more expensive than old versions.

    Why? Nothing that is new to readers of this blog:

    – idiot insurers and idiot Medicare have been paying the high prices without asking why. When a patient’s life seems to be at stake, all bargaining goes out the window. This is humanly understandable — as Robin Hanson says, health care is all about loyalty to the frail members of the tribe.

    – refrigerators and televisions have been offshored.
    Health care has not. This is good for the health care workforce, who as a group have had steady wage increases. It is not so good for consumers.