Wednesday, June 24, 2009

Trouble Indemnity 4


One of the most unusual, and most troublesome, aspects of our current health insurance system is that, for many Americans, health insurance is provided through our employer. This causes many problems. If you lose your job, you will eventually lose your health insurance coverage (the COBRE program provides limited extension). If workers are satisfied with their current insurance, it is likely to make them hesitate before changing jobs, particularly if they are in a period in which they are receiving benefits for ongoing health problems. It means that workers often have few choices as employers prefer to negotiate “one size fits all” packages with insurers. Natural diversity among consumers puts a great deal of competitive pressure on automobile insurance companies to innovate, to compete on rates, and to discover what customers prefer in terms of non-price attributes such as service. This competitive force is largely not in play in the health insurance market.

How did we get to this point? The starting point would be my last post on adverse selection. One alternative for insurers to avoid problems of adverse selection is to provide group insurance at group insurance rates to a large collection of customers who, on average, are unlikely to exhibit enough adverse selection to make the group plan unprofitable to the insurer. The move towards group insurance began with fraternal organizations and then picked up steam with Blue Cross and Blue Shield programs in the 1930s.

Recall that Double Indemnity was released in 1944 (

Neff: Back in my office there was a phone message from Mrs. Dietrichson about the renewals. She didn’t want me to come tomorrow evening. She wanted me to come Thursday afternoon at three-thirty instead. I had a lot of stuff lined up for that Thursday afternoon, including a trip down to Santa Monica to see a couple of live prospects about some group insurance.

The transforming event in group insurance in the United States was World War II. The Roosevelt administration imposed wage and price controls throughout the economy. Expanding defense plants had difficulty attracting workers form other cities, and they could not compete on wages. So, some of the companies began advertising “fringe benefits” such as group health insurance, and were, for whatever reason, able to avoid prosecution under the wage controls. As these fringe benefits became more common, they were awarded the various tax exemptions they now enjoy (and thus are distinct from wages for tax purposes).

John McCain proposed moving shifting the tax exemption for health insurance from the employer to the employee (either as a tax deduction or as a refundable tax credit). The incentives to engage in careful consideration of what would be an individual’s optimal insurance policy would likewise move to the employee. If individuals owned their policies, they could take them with them if they changed jobs. Recall that the Obama campaign launched a blistering advertising campaign against the McCain plan calling it a tax increase. (It did increase taxes on firms, but it offset them with tax reductions for individuals). Now, advisers to the Obama administration and to the Congress admit that the idea of increasing the tax on employers is being seriously considered (that is, at least the tax increase part of the McCain plan).

I believe that there are a lot of advantages to plans similar to those proposed by Sen. McCain. I see the biggest difficulty in the McCain-type plans being in retaining group insurance pools so as to avoid adverse selection problems. As I have discussed with students interested in market-based reforms of health insurance, a big problem is what to do, during such a transition, with people who are obviously high-risk or even very sick.

A series of polls over the past couple of days have shown that somewhere in the range of 70 – 90 percent of Americans are happy with their current health insurance. Christianity is neither majoritarianism nor utilitarianism, so this is not a mandate to do nothing. But it is a signal that the size of the “crisis” we are supposedly fixing may not be as large as advertised, and it is also a signal about utilizing all of our virtues of wisdom and prudence in how to proceed.

So, what would I do if I could design the new health insurance legislation? I would follow with something like the McCain plan, relying on greater competition and flexibility in private health insurance plans. I would restrict the ability of state governments to mandate special provisions that many individuals don’t want. I would have the government (federal or states) playing some kind of role to deal with high-risk individuals in a manner similar to what some states do with regards to automobile insurance. For people whose current medical condition makes obtaining health insurance a non-starter, there are a couple of choices. These people could be folded into the various state Medicaid programs, or the government could act as an assigned risk agent, conducting a random process to assign high-risk individuals to existing pools.

I think the hardest question I wrestle with is whether the government ought to require people to purchase health insurance. I’m more comfortable with such a requirement in automobile insurance because a) it only applies to liability insurance, that is, with regard to our harm to others, and b) many states have an opt-out provision based upon a driver’s ability to demonstrate that he has enough capital that could be attached in a successful tort suit. Reason a) does not apply in health insurance. Here is the moral question I will put on the table for people to think about. Suppose a reform such as I have outlined, together with Medicare and Medicaid, makes health insurance practically available, for purposes of this discussion, to everyone. Consider the following admittedly extreme case. Mr. X makes $170,000 per year in a self employment situation. He could purchase a catastrophic expense private health insurance policy for a couple of hundred dollars per month. He chooses not to, because he spends all of his paycheck on expensive cars, clothes, and entertainment. This means that he has no savings. One day, he realizes that he has developed a debilitating, perhaps even fatal disease that eliminates his ability to earn an income, but this disease can be cured for $1,000,000 in health care expenses.

As Christians, how should we answer the following questions? Should he be treated, or should he be turned away? If he is to be treated, who should pay for it? Is there anything that should be required from Mr. X in return? If the decision is to treat him, what incentive do any of us have to act any differently than Mr. X.

This hypothetical is not as far-fetched as it seems, because currently there are many people in the United States who choose not to purchase health insurance even though it is available to them. (Although few of these non-insurers are in the extreme situation I created for this example, not all of them are by any measure “poor”). Eventually, I suppose that if Mr. X lives long enough and is destitute for long enough he might pass the eligibility screens for the taxpayers to pay his treatment through Medicaid. After all, he has paid taxes to his state government. Is that fair? What if everyone behaved the same way as Mr. X?

One answer to these questions that doesn't involve the government is, as Doug has been discussing in his previous posts, a Christian sense of obligation, based upon love of neighbors. I think of my grandfather who, in the midst of about 10 years of unemployment during the Great Depression, had to deal with medical bills for my grandmother who died from a lingering bout of cancer somewhere around 1940. My grandfather and I used to get into lively political discussions; his beliefs were somewhere between those of a liberal Democrat and a conservative socialist. He was a Christian (a member of the Church of the Nazarene) and quite literally a card-carrying member of the AFL-CIO (somewhere in my files I have his card). I am sure that if he were alive today he would be lecturing me on the need for a single payer, government operated health care monopoly. But one of the things he was proudest of was that he worked out a repayment plan with my grandmothers' doctors, never accepted a penny of governments handouts, and clearly remembered the very date on which he paid off the last of those bills, about 15 years after my grandmother died.

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