Dr Alan Blinder demonstrates an amazing lack of understanding of insurance and of welfare for a Princeton professor and erstwhile vice-chairman of the Fed. “Health-care reform,” he writes, “the impossible dream that seemed to become a reality in 2010, is now in mortal danger.”
As he acknowledges, this is no small matter, impacting as it impacts one-sixth of our nation’s economy. He also correctly recalls a bit of history: “our country was founded on the idea that the rights to life, liberty and the pursuit of happiness are inalienable.”
Then he demonstrates his lack of understanding of any of this by adding this false premise to his argument:
Access to affordable health care is surely essential to two of these three rights, maybe to all three.
Then he conflates the Patient Protection and Affordable Care Act—a mandated health “insurance” program that’s much broader in its sweep than just the Individual Mandate—with affordable health care itself.
As John Adams so rightly put it, Happiness is this:
All men are born free and independent, and have certain natural, essential, and unalienable rights, among which may be reckoned the right of enjoying and defending their lives and liberties; that of acquiring, possessing, and protecting property; in fine, that of seeking and obtaining their safety and happiness.
There’s nothing in there that puts government at the forefront of doing for us—we’re responsible for our own outcomes. Of course there’s also nothing in there that prevents government from helping, either, and there is a proper role for government in this arena.
Let’s look at Blinder’s view of that role.
We are…the only rich country that fails to insure all its citizens. The Patient Protection and Affordable Care Act of 2010 seeks to end that.
Aside from the fact that it isn’t government’s role to inure us from the exigencies of life, this position confuses insurance with welfare. Insurance is a voluntary contract between two parties: one with a risk he wishes to mitigate and the other willing to accept some or all of that risk for a fee. But the exchange doesn’t work unless the fee charged actually is commensurate with the risk—that is, the insurer must be able at least to break even over time and across many such contracts for the exchanges to be feasible. To make a business of this, the insurer must be able to make an actual profit. This applies even to governments as “insurer.” Adam Smith understood this.
…the tax code incents employer…. For another, we have somehow decided that the state should provide anyone age 65 or older with health insurance, while everyone younger should fend for themselves. I’d hate to have to explain either of those choices to the proverbial man from Mars.
So the right answer to this is to increase taxes and other costs in order to force us all into a program that not all of us want. Interesting, that. Another answer would be simply to flatten the tax code and to remove the incentives, health-related subsidies, deductions, et al., from the code for both employer and employee. Of course, to best work, this also would require government to get out of the way of the health insurance and health care providing industries (mind, these are separate industries), and place them into actually competitive environments, for instance, allowing health insurance policies to be sold across state boundaries. There are other pro-competitive moves needed, also, but they’re outside the scope of this post.
The “everyone younger fending for themselves” bit is a distortion of the actual situation. I’ll come back to that. We may have thought it a good idea for government to provide seniors with health insurance 50 years ago, when there were 5, 6, and 7 workers for each senior/retiree, but as we’re learning today, we cannot afford it any longer (if we ever should have tried to) either economically or demographically. That’s because, like Social Security, the senior health insurance programs—Medicare and Medicaid—are not programs where those seniors’ Federal Medicare (and Medicaid) taxes were sequestered against their eventual attainment of senior-ness for their own use, but were paid out to current seniors in a pay-as-you-go manner.
Which brings me back to “everyone younger.” Today’s far fewer younger (there are only a bit over 3 workers per retiree today) are not allowed to fend for themselves—they’d be better off if they were. Instead, their take-home pay is reduced by those medical payroll taxes, which are immediately transferred to others; these younger are not allowed to put that money into their own retirement health program. Indeed, the government limits who is allowed to have their own Health Savings Accounts to those wealthy enough to afford Very High Deductibles in their insurance policies, and this same government caps how much “everyone younger” is allowed to put into one of those accounts in any given year. Blinder’s precious health care reform does nothing to redress this.
Finally, metaphor aside, I care not a farthing for what the man from Mars might wonder—my business is mine, not his. Nor is it the business of any earthly government.
Why does the law require people to purchase health insurance?
Like most forms of insurance, health insurance is plagued by potential adverse selection. Pick any price, and riskier customers—the people more likely to file claims—will find the insurance policy more attractive than less-risky customers. So in health insurance, in particular, insurance companies expend huge resources trying to screen the bad risks out and the good risks in. One obvious way is to exclude people with pre-existing conditions, but there are others. All this effort adds to national health expenditures, improves insurers’ profits, and hurts the bad risks (e.g., sick people).
The essential bargain made in 2010 starts by using the individual mandate to create a huge pool consisting of (almost) all Americans under age 65—just as Medicare now does for the 65-and-over population. With that pool created, the law can then require private insurers to cover (almost) everyone, including those with pre-existing conditions. In return, insurers get a lot more customers and a lot less adverse selection. They also save a ton of money on screening.
Here is Blinder’s misunderstanding of insurance made manifest. I’ll leave aside the sophistry in his claim of a bargain in 2010, unique in its utter rejection by the American people. It’s certainly true that customers with risks will seek to lay them off, for a fee, onto an entity willing to accept that fee for assuming that risk. But as I said above, for the exchange to work, the fee must be commensurate with the risk. Moreover, both the customers and the insurers must be able to enter freely into their own agreements, without government mandates of premiums or coverages. Both parties must be free to exercise their own pursuits. This necessarily pushes the risks into homogeneous groups—like risks are accepted for like fees. This is not “adverse selection,” but economically sound segregation of the risks and the fees that are economically sound for transferring those risks.
The effort about which Binder worries is driven by the need to find ways to fund risk assumptions when those risks are mixed, which means the insurers must find ways to get low risk customers to pay higher fees than warranted in order to pay for the losses to higher risks that are getting too-small fees. A properly free market will inevitably result in higher fees for higher risks, but then coverage will exist for those higher risks. Moreover, were consumers able to buy their own health insurance policies in the interstate commerce of a free market, so that they could take their policies with them from job to job, the incidence of Binder’s pre-existing conditions would be greatly mitigated. And the ability of an insurer to claim a fee commensurate with the realized risk of a real pre-existing condition would produce policies for these conditions, rather than a blanket effort not to cover at all.
But this demands that customers be allowed to exercise their own choices under their inalienable rights, not those choices convenient to government. See below.
Thus, the answer to Blinder’s question of “Why does the law require…?” is, “Because the law requires it. There is no economic reason.”
“Rights are nice, but…,” he wrote early on in his op-ed. This is the key; this is the truth behind Blinder’s argument. Individual rights are nice to have, but when they become inconvenient to government, he says, it’s entirely appropriate for government to limit—even abrogate—them. It’s entirely permissible, too, Blinder holds, because rights flow from government; they are not inherent in our being. Our rights to life, liberty and the pursuit of happiness are conveniences of government, inalienable only for so long as government permits it. This is how government is able to arrogate to itself what is inextricably bound up in those rights—our obligations to be the primary source of our own welfare so as not to present ourselves as burdens on others’ rights to their lives, liberties, and pursuit of their happinesses.
The result is that, under the present “reform,” under PPACA, people with low risk—those young and healthy, who also have other uses for their money and so do not want health coverage—are forced, in a loss of their individual freedom, to subsidize the insurance of those with high risk. PPACA in essence, by forcing an inherently uneconomic mixing of risk pools, converts what should be a free market risk transfer industry into a privately funded, Federally mandated welfare program. This is another aspect of the erosion of our individual liberties.
No. Our rights are not “nice;” that’s a non sequitur. Our rights simply are. They are as bound up in our existence as are our very lives.
There is a legitimate argument to be made for improving our nation’s health care industry as it stood ante 2010. It is cynical, if not outright dishonest, to insist that PPACA is the only way to achieve this. This is particularly so with the empirically demonstrated destructiveness of the program these last couple of years as it starts to come on line—even before its taxes start to come on line.
In the meantime, the proper role for government is to create an environment within which we are free to pursue our own ends, our own happiness. This requires a free market, not a centrally managed one.