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November 13, 2002

Well... sometimes the right is

Well... sometimes the right is almost as wrong as the left. I am reminded of this every time I read conservative articles on health insurance, or when I contemplate early retirement.

The subject is health care. The problem is universal coverage (a political goal that will grow much stronger as baby boomers age and retire early).

Conservatives believe they can solve "the health care problem" by introducing market incentives to the market. They propose reforms such as personal health care accounts (similar to IRA's) where health insurance money goes into a pool that the consumer can spend only on health care. They claim this will introduce market incentives in health care shopping that will reduce health care costs, leading to less expensive health insurance, which will lead to more coverage. Another proposal is to provide tax deductibility to individually purchased health insurance.

These proposals are helpful, more or less, but they will have almost no impact on those unable to purchase insurance, who fall into the following categories:

1. Those who are too poor to buy insurance but make too much money to qualify for Medicaid. These people will gain only marginally. A few will be able to afford less expensive insurance, and the costs of some care may go down. They don't pay enough taxes for the tax assistance to make any difference.
2. Those with pre-existing conditions who cannot buy insurance at any price, or who can only buy insurance that covers areas that are least likely to lead to great expense. This group includes many who have paid insurance premiums throughout their lives, which is clearly unfair. These people cannot take advantage of either reform because they can't get the insurance at any price.

   
   Pre-existing conditions either prevent the purchase of insurance, or cause a whole host of diseases to not be covered. For example, if you have ever had high blood pressure, you might find that your insurance doesn't pay for your heart attack.

The latter are increasing in number. The solution to this problem is *not* free market, because health insurers simply have no market incentive to offer this insurance. The reason is what is called "adverse selection" - an insurance term referring to the tendency of people to not pay until they get sick. Because insurance is based on shared risk, adverse selection destroys its fundamental statistics. Thus the free market will always lead to the exclusion of those with pre-existing conditions. I call this practice "perverse selection."

In an ideal world, one would purchase health insurance when young and healthy, and have that coverage last through life. But insurance is not sold this way. It is not portable (even with the COBRA rules). It lasts for the duration of a job plus at most 18 months, and can then be converted to perrsonal insurance (at potentially prohibitive rates). Personal insurance lasts until the insurance company decides to cancel it, or rearranges risk pools to put high risk people into ever higher cost policies (a distressingly common practice).

What this means is that "health insurance" in the US is not insurance... it is prepaid health care that expires under unresonable conditions.

One step in the right direction would be to force insurance to be separate from employment. This would cause all health insurance to be personal, and would put dramatically different incentives on the insurance issuers.

But, without further steps, it would significantly increase the uninsured, for two reasons:

1. Many of the young would simply opt out, greatly increasing the cost of insurance to those who are left. The hidden secret of all health insurance schemes is that the young subsidize the old. This is not as unfair as it seems, since one day the young will be old.
2. The "perverse selection" of the insurance companies would disqualify a huge number of people from purchasing adequate insurance.

A better solution is to *require* people to purchase insurance, and to do away with medical underwriting (perverse selection). Also, the reform should make insurance universally portable. Of course, this is a big government intervention which conservatives (including this author) hate.

The left's approach is to create a giant bureaucracy and try to force all decisions, in minute detail, by government. This will lead ultimately to huge costs tied to the sort of poor service that socialized medicine is known for: the British National Health System disaster; the Canadian system which has affluent Canadians purchasing their care in the US because their system can't provide it; the New Zealand system which simply will not provide expensive care to anyone over 60 - effectively sentencing them to death.

The American people must decide: If we want universal coverage, we must recognize that the current system only works by historical accident (insurance is mandatory for most employees), and that it excludes a large number of people (about 15% of the population). We must also recognize that achieving universal coverage will not be achieved by market forces alone, so this political goal is one which requires government intervention.

Conservatives need to recognize the strong political demand for health care security. This demand can only grow as boomers age. Without adequate and realistic conservative programs, Hillarycare will ultimate win the political battle.

Conservatives should also realize that the current practice of perverse selection is a drag on the economy, and provides a counter-incentive to savings and investment (why save and invest if the first illness will leave you destitute anyway?). Why form a creative company if you lose your health insurance to do so - putting all of your assets at risk?

And finally, if this problem is ever solved, this author, who has paid for health insurance through employment for decades, will finally be able to retire without risking his entire savings on medical bad luck.

The author can be reached at:

blog AT tinyvital.com

(replace the AT with @ - I post it this way to discourage spam)

Posted by John Moore at November 13, 2002 08:30 AM

Comments

Posted by: can at February 6, 2004 02:51 AM

Posted by: can at February 6, 2004 02:57 AM

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