November 11, 2009

Will You Go to Jail If You Don’t Have Insurance?

Filed under: Health Care — Tags: , , ,

Jack Balkin says that the answer is no.

Balkin is correct that, technically, anyone who does not buy insurance under the new set of laws will only have to pay a tax (or as I prefer to think of it, a fine).  Only if they refuse to pay the fine will they then, eventually, be sent to jail as a tax evader.  Fair enough.  But the general point still remains.  If you do not comply with this new law – you will be sent to jail.  Being sent to jail for refusing to pay the fine is only morally different if the fine has some particular justification.

Balkin argues that the fine (or as he prefers to think of it, tax) is justified by free-rider problems:

If lots of people (and especially young and mostly healthy people) don’t buy health insurance, the cost of insurance goes up for everyone, and it is passed on to others in the form of higher premiums. In addition, people who don’t buy health insurance tend to wait until their health problems are severe and then use emergency services; they may contract communicable diseases (which they may pass on to others) or they may become disabled. All of these costs get passed along to others–in the form of higher premiums and higher costs for hospitals and insurers–or they have to be absorbed by federal and state governments through programs for the poor or the disabled.

So if you don’t buy health insurance, you are increasing costs for other people. The federal government is taxing you to recoup some of those costs. An analogy would be taxes on alcohol or tobacco, although these taxes are usually worked into the retail price of the goods so that people don’t even have the opportunity to refuse to pay them. Another example would be taxes on an enterprise that is creating additional costs to the environment through pollution; the government taxes you if you don’t purchase and install anti-pollution equipment.

Balkin skips more than a few steps with this analysis.  In significant part, health care free riding is only possible because there are laws that legalize free riding.  For example, the laws requiring hospitals to treat all emergency room visitors, regardless of their capacity/intent to pay, are an invitation for free riding.  The costs of treating any of these patients who do not pay will be passed on to all of the hospital’s paying patients.  If we really wanted to eliminate this free rider problem, we would just make people pay for their emergency room visits – or we would at least not require hospitals to receive people without insurance.

The current health care reform is not a brilliant scheme to end free riding.  In large part, it is an attempt to write more free riding into law.  It requires insurance companies to transfer health care costs from sick to healthy patients.  It enacts massive subsidies that transfer costs from the poor to the wealthy.  These transfers are very much like actual free riding, and they would not occur in an efficient insurance market that had no free riding.

Balkin shrugs and says that “tax policy does this all the time”.  And so it does.  And opponents of these subsidies are right to remind the rest of the electorate that their participation is not voluntary, but enacted through threat of imprisonment.  Health care reform is commonly assumed to be in everyone’s benefit, but this is of course not the case.  The threat of jail time lies behind every government “charity”.

said Wallace Forman @ 10:12 AM. Comments (0)

October 31, 2008

Free Riding as Coverage

Filed under: Health Care — Tags: , , ,

A few posts ago I talked about the free rider problem in Obama’s healthcare plan.

I’m not sure whether Obama understands the potential impact of that problem.   But he clearly embraces its basic mechanism as a positive feature.

In the Democratic debates, Obama slammed Hillary for proposing a health care plan that included mandates – a requirement that everyone buy health care for themselves.

OBAMA: … Let’s take health care. About 95 percent of our plans are similar. We both set up a government plan that would allow people who otherwise don’t have health insurance because of a preexisting condition, like my mother had, or at least what the insurance said was a preexisting condition, let them get health insurance. We both want to emphasize prevention, because we’ve got to do something about ever escalating costs and we don’t want children, who I meet all the time, going to emergency rooms for treatable illnesses like asthma….

What [people are] struggling with is they can’t afford the health care. And so I emphasize reducing costs. My belief is that if we make it affordable, if we provide subsidies to those who can’t afford it, they will buy it.  Senator Clinton has a different approach. She believes that we have to force people who don’t have health insurance to buy it. Otherwise, there will be a lot of people who don’t get it.  I don’t see those folks.

And I think that it is important for us to recognize that if, in fact, you are going to mandate the purchase of insurance and it’s not affordable, then there’s going to have to be some enforcement mechanism that the government uses. And they may charge people who already don’t have health care fines, or have to take it out of their paychecks. And that, I don’t think, is helping those without health insurance. That is a genuine difference.

Obama recognizes the obvious: if you force people to buy health care, they are going to have to pay for it (and you will probably need fines to prevent people from dodging costs).  So he glosses his lack of mandates as a charitable feature.  It is unkind to force everyone to pay for health care – but people who don’t want to pay for it should get it anyway.  And Obama makes it clear that they will:

CUMMINGS: … the truth is that most Democrats really do want full coverage, everybody covered. Now, Senator Obama, this is a question for you. Under your plan, which is voluntary, it creates incentives for people to buy, but still is voluntary. There would be around — about 15 million people who would still not be covered….

OBAMA: Well, understand who we’re talking about here. Every expert who looks at it says anybody who wants health care will be able to get health care under my plan. There won’t be anybody out there who wants health care who will not be able to get it. That’s point number one….

So Obama recognizes the fundamental aspects of free riding.  It’s a feature – not a bug.

At one point, Blitzer forced Obama to acknowledge the problem.  Here’s the exchange:

BLITZER: Senator Obama, let me just fine-tune the question, because I know you want to respond. On this issue of mandates, those who don’t, whether it’s 10 million or 15 million, those who could afford it but don’t wind up buying health insurance for one reason or another, they wind up getting sick, they go to an emergency room, all of us wind up paying for their health care. That’s the biggest criticism that’s been leveled at your plan.

OBAMA: If people are gaming the system, there are ways we can address that. By, for example, making them pay some of the back premiums for not having gotten it in the first place. But understand that, number one, Hillary says that she’s got enough subsidies. Well, we priced out both our plan and Senator Clinton’s plan, and some of the subsidies are not going to be sufficient. Point number one.

Obama is speaking out of both sides of his mouth.  On the one hand, he makes a vague promise to maybe deal with the problem by something that sounds suspiciously like a fine.  On the other, he trashes Clinton for proposing fines.  What distinguishes those who don’t make voluntary health care payments for legitimate reasons from those who refrain because they are “gaming the system” (i.e. behaving rationally)?  Likely their income: if you are rich, Obama reserves the right to force you to pay both for your health care and that of people who don’t pay into the plan (the poor).

Either Obama genuinely intends to let people choose to defect from health care premiums (thus creating a free rider problem), or he is offering false choice (people can choose to defect, but if they “choose wrong” the choice will be taken away).  His plan is either incompetent or dishonest.  Either way, Obama is selling income redistribution, colorfully repackaged into free rider problems and surreptitiously targeted mandates.  Do Americans understand what they are buying?

NOTE: I’ve added emphasis to the quotes throughout.

UPDATE:  Oops.  I originally misidentified the economic problem as moral hazard, when it is actually a free rider problem.  This doesn’t change the analysis, just the terminology.  Moral hazard is a different, more traditional problem caused by insurance.

said Wallace Forman @ 1:05 PM. Comments (0)

October 21, 2008

Obama’s Redistributive Healthcare Plan

Filed under: Health Care — Tags: , , ,

It’s already clear that Obama’s tax plan is redistributive.  How about his healthcare plan? 

What is the Obama platform on this issue?  You can read what his campaign website describes as the full plan here.

The platform promises to do a lot of different things.  I have no particular expertise in healthcare policy, so I won’t attempt to comment on all of them.  I just want to point out two general ways in which Obama’s plan makes America’s healthcare significantly more redistributive, or, as we are saying nowadays, “socialist“.

First, Obama openly promises to expand government-subsidized and government-provided healthcare.  In point 6 of the second section of his plan, he promises to expand SCHIP and Medicaid.  These are unambiguously redistributive welfare programs that provide healthcare funds to low income individuals (Medicaid) or low and middle-income children (SCHIP).  In point 4 of the first section of his plan, he promises to subsidize the costs of catastrophic illness.  Because the costs of catastrophic illness are evenly distributed (let’s imagine) among the various income brackets, but the funds come disproportionately from the higher income brackets (because of income taxation), government catastrophic coverage will certainly redistribute and might fairly be called socialism.

Second, Obama’s creation of government insurance that covers pre-existing conditions creates a massive loophole and accomplishes an underhanded establishment of universal (socialist) healthcare.  How does it do this?  In three steps:

  • The plan assumes the creation of a new public healthcare policy.  I can’t find an actual explanation of the new public insurance policy that will be offered anywhere in the Obama healthcare platform (perhaps the document is intentionally vague?), but numerous sections assume it, perhaps most importantly, point 2 of the second section:

    Through the Exchange, any American will have the opportunity to
    enroll in the new public plan or an approved private plan…

  • The Obama platform requires private insurers to provide coverage to pre-existing conditions in point 1 of the second section. Because the platform does not explain the new public plan, it is unclear whether it will also cover pre-existing conditions.  It seems a fair assumption that it would; it is unlikely that Obama would offer a public plan that was less comprehensive than private plans could legally be.
  • The plan would almost certainly be government-subsidized.  Subscribers to the public plan would not be paying as much in premiums, altogether, as they would be receiving from it in insurance payments. Again, Obama does not describe the plan explicitly, so it is impossible to be sure, but on at least two occasions he describes the plan in such a way as to suggest it will be subsidized (though the words subsidy and subsidize never appear in the platform).  The new public policy would be funded by fines of certain businesses:

    The Obama-Biden plan provides new affordable health insurance options by… requiring all large employers to contribute towards health coverage for their employees or towards the cost of the public plan…

    And the new plan is referred to as a “federally supported” one and grouped together with Medicare and Medicaid:

    …federally supported health plans, including Medicare, Medicaid,
    SCHIP and the new public plan…

    In any event, the mere supposition that the public plan would be “affordable” would demand that there be some sort of subsidy, as I discuss below.

So how do these three steps create de facto universalized healthcare?  By creating a free rider problem and patching it over with subsidies.

By covering pre-existing conditions, the public plan removes most of the incentive Americans have to actually buy health insurance.  If you can sign up for public insurance once you get sick, you have little reason to sign up while still healthy.  Rather, you have a strong disincentive, because you would have to pay a monthly insurance premium, a premium that buys you nothing that you couldn’t sign up for later.

If people approached the system (economically) rationally, they would not sign up unless they were sick.  If all the policy holders were sick, the average cost to the insurer (the United States) would become very high because there would be no healthy policy holders to help pay the bills of the unhealthy.  The insurer (the United States) could get money to pay these costs in two different ways.  It could get it from the policy holders (a premium), or it could get it from the citizens of the United States (a tax).

Barack Obama’s goal in setting up the public plan seems to be to offer an “affordable alternative” to private healthcare plans – or at least, sentiments about the unaffordability of the private system litter his proposal, and it is a fair inference that he means his own plan to be cheaper.

Thus, Obama is precluded from raising the funds for healthcare through premiums.  Premiums for a policy held only by sick people must be higher than premiums for a policy held by a mix of healthy and sick people.  His public plan will have to be supported by a massive subsidy – and a subsidy implies a tax.

A plan with these characteristics becomes de facto univeral healthcare.  You don’t have to pay for it (or you pay very little, i.e. only when sick – but one could think of this as almost a high deductible), it is funded by taxpayer money, and it is available to all citizens.  Because the taxpayer money will likely come from the payroll tax, there will necessarily be a redistribution of wealth from rich to poor.  True, it’s a messy system, and leaves open plenty of ways for irrational actors to punish themselves if they don’t understand how to game the system (i.e. if they are responsible and buy healthcare while healthy), but it is nonetheless universal.

I’m unsure whether or not Obama realizes the significance of the free rider problem in this plan.  My guess is that he is aware.  He probably views it as a politically feasible way of tacitly enacting a universal system.  I oppose universalized healthcare in any case, but it is particularly to Obama’s discredit that he would surreptitiously advance it through a misunderstood free rider problem.

UPDATE: As a final note, consider that Obama’s healthcare plan would do much to socialize insurance in the academic sense of the word.  It is unclear whether private insurance carriers will be able to compete with the public plan.  We can take as given that the public plan will be as cheap or cheaper than current insurance plans (given Obama’s stated intention of providing an “affordable” alternative).  Surely private insurers won’t have access to the same subsidies as the government, so they won’t be able to compete in pricing.  At the same time, their costs will be driven up by the loss of healthy customers – their break-even premium will be higher than in today’s market, while Obama promises insurance with a cheaper premium.  It is more than feasible that ObamaCare would drive a large part of the insurance industry out of the market, leaving it firmly in the government’s hands.

UPDATE II:  Oops.  I originally misidentified the economic problem as moral hazard, when it is actually a free rider problem.  This doesn’t change the analysis, just the terminology.  Moral hazard is a different, more traditional problem caused by insurance.

Also, I have more about Obama’s healthcare plan here.

said Wallace Forman @ 3:48 PM. Comments (0)