28 September 2009 
Mike Leavitt, Al Hubbard and I have an op-ed about health care reform in today’s Wall Street Journal.
Health “Reform” Is Income Redistribution
Let’s have an honest debate before we transfer more money from young to old.
By Michael O. Leavitt, Al Hubbard and Keith Hennessey
While many Americans are upset by ObamaCare’s $1 trillion price tag, Congress is contemplating other changes with little analysis or debate. These changes would create a massively unfair form of income redistribution and create incentives for many not to buy health insurance at all.
Let’s start with basics: Insurance protects against the risk of something bad happening. When your house is on fire you no longer need protection against risk. You need a fireman and cash to rebuild your home. But suppose the government requires insurers to sell you fire “insurance” while your house is on fire and says you can pay the same premium as people whose houses are not on fire. The result would be that few homeowners would buy insurance until their houses were on fire.
The same could happen under health insurance reform. Here’s how: President Obama proposes to require insurers to sell policies to everyone no matter what their health status. By itself this requirement, called “guaranteed issue,” would just mean that insurers would charge predictably sick people the extremely high insurance premiums that reflect their future expected costs. But if Congress adds another requirement, called “community rating,” insurers’ ability to charge higher premiums for higher risks will be sharply limited.
Thus a healthy 25-year-old and a 55-year-old with cancer would pay nearly the same premium for a health policy. Mr. Obama and his allies emphasize the benefits for the 55-year old. But the 25-year-old, who may also have a lower income, would pay significantly more than needed to cover his expected costs.
Like the homeowner who waits until his house is on fire to buy insurance, younger, poorer, healthier workers will rationally choose to avoid paying high premiums now to subsidize insurance for someone else. After all, they can always get a policy if they get sick.
To avoid this outcome, most congressional Democrats and some Republicans would combine guaranteed issue and community rating with the requirement that all workers buy health insurance—that is, an “individual mandate.” This solves the incentive problem, and guarantees that both the healthy poor 25-year-old and the sick higher-income 55-year-old have heath insurance.
But the combination of a guaranteed issue, community rating and an individual mandate means that younger, healthier, lower-income earners would be forced to subsidize older, sicker, higher-income earners. And because these subsidies are buried within health-insurance premiums, the massive income redistribution is hidden from public view and not debated.
If Congress goes down this road, health insurance premiums will increase dramatically for the overwhelming majority of people. Even if Congress mandates that everyone have health insurance, many will choose to go without and pay the tax penalty. If you think people are dissatisfied with health care now, wait until they understand that Congress voted to mandate hidden premium increases and lower wages.
There are wiser and more equitable ways to ensure that every American has access to affordable health insurance. Policy experts and state policy makers have experimented with different solutions, including high risk pools and taxpayer-funded vouchers subsidized for those who are both poor and sick. Medicaid, charity care, and uncompensated care provided by hospitals cover some of these costs today.
These solutions are imperfect, but so are the reforms being proposed in Congress. Congress should be explicit about who will pay more under its plans.
Mr. Leavitt, former secretary of Health and Human Services (2005-2009), has served as the administrator of the Environmental Protection Agency and a governor of Utah (1993-2003). Mr. Hubbard (2005-2007) and Mr. Hennessey (2008) served as directors of the White House National Economic Council.
(photo credit: MarkKelley)
I saw this last night, it was great.
I have debated this on a couple other sites, including Keith Hennesey's. If the guaranteed issue framework uses modified community rating and includes adjustments for both age and geography, we would eradicate the subsidy of young to old. It is true that the bills in Congress limit the ratios of young-to-old premiums, and this should be adjusted to true rating based on age and geography (probably county).
I also agree that the guaranteed-issue framework establishes some bad incentives, such as the house-on-fire example above. However, I think that if insurers were allowed to charge 2 years premiums for individuals who were previously uninsured, it would not only drive folks toward buying insurance, but it would drive folks toward higher-deducitble policies (since both the premium and then penalty would be lower).
Now all we have to do is get federal legislation that does not outlaw high-deductible policies (as most of the bills in Congress do) and does not skew community rating to damage the young folks.
Another way to think about where insurance fits and where it doesn't is that insurance is something where you are happy to pay premiums and never make a claim (collect payments).
In relation to the analogy with property insurance for your home, imagine how satisfying it would be if the residential insurance policies had to cover (pay for) every manner of home maintenance that a broad cross section of the population might find necessary?
Medical services will be meager under "health reform", with rationing and slow delivery for everyone. The government has promised $88.6 trillion in unfunded services ($88,600 billion, not a typo), including Medicare, Medicaid, Drug benefits, and Social Security. Politicians now find that just $1 trillion in increased cost during the next 10 years is politically unacceptable. That is the center of the healthcare debate. So, $88 trillion in "needed" services are not going to be delivered in the next 75 years, more than $1 trillion per year. This would also kill any progress in medical care, as we all stew in the rationed system that covers over the fraud of the mostly Democratic politicians.
The government has made promises for 30 years to the now-old that it can't keep, and the now-old did not save enough for their own care or retirement, relying on the wishful-thinking or lies of the government. Without "reform", they will get care corresponding to the minimal amounts that they have saved or that can be raised with current taxation.
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Healthcare "reform" by Democrats is really a scheme to raise more money from the younger and healthier population, then ration care for everyone so that people feel equally treated. To paraphrase an old Soviet saying: The government will pretend to pay, and doctors will pretend to treat.
Obamacare Bails Out Medicare
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I think Democratic politicians know that they can't raise taxes enough to fund their Medicare/Medicaid promises, and want a way to hide their responsibility for the coming denial of services in Medicare, Medicaid, drug benefits, and social security. These <del>plans</del> promises are empty.
The "solution" for Democratic politicians is to put everyone into one medical care pot. We then all get equal amounts of services at whatever high tax rate the government can levy. The young must be coerced into this system, to extract as much money as possible to serve the old.
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KBH: Saw the editiorial, read it, regreattably I disagreed with the young versus old premise.____All insurance is a subsidy from those who do not make claims to those who do make claims. That's the whole purpose. Your house on fire example fails to consider that for the one house that burns the insurance company collects premiums from another 10,000 homeowners whose property does not burn. One could be "Clintonian" (technically accurate but not helpful) and state that those other 10,000 homeowners are subsidizing the one whose house burned. But the whole idea of insurance is to charge the many so that the few will benefit. In turn, there is the promise to the many that if one of them requires a benefit it too will be provided. The young may "subsidize" the old but in turn a few of them will be subsized by the healthy old and healthy young. Of course this can all be avoided by not having a government option or co-op and restricting the number and content of the various insurance mandates.____I am in much more agreement on your other issues . Community rating clearly needs to have adjustments for existing health, age, possibly geography (I'm not so sure about that) and so forth. Further, if guaranteed issue is mandated then purchase of insurance must also be mandated. They cannot be separated without giving everyone the extremely strong disincentive to purchase insurance. Last I am also in strong agreement that routine care should be paid with the consumers first dollar just like every other aspect of adult life.
Rats. SB "regrettably" not "regreattably"
You're confusing sharing risk with subsidizing.
Actuarially fair insurance is priced so consumer pays the _expected cost_ of what he's being insured for. Expected cost is the cost of something bad happening multiplied by the probability of it occurring: You pay your fair share. If there is a 10% chance of "something bad" happening, and the cost of "something bad" is $100, you pay $10 to be covered. Not everybody is the same, though.
Say you have 100 people, 50 of them have a 50% chance to suffer $100 worth of harm and 50 of them have a 10% chance to suffer $100 worth of harm. Actuarially fair premiums would charge 50 people $50 each and 50 people $10 each for a total of $3,000 in premiums. 83% of the premiums were paid by the high risk group. When payments are passed out, 25 of the high risk people get paid $100 each and 10 of the low risk people get paid $100, again 83% of the payments go out to the high risk group. Risk was shared, everyone was covered for $100 worth of damages but nobody had to set aside $100 themselves.
If, however, insurance premiums are limited to, say, a 2 to 1 ratio between the top and bottom risk categories with the same group of people. You will need $3000 in disbursements, 2/3 of that will be paid by the high risk group and 1/3 by the low risk group to make it as fair as possible. So the 50 low risk people will pay $20 each and the 50 high risk people will pay $40 each. But the high risk people will still receive 83% of the disbursements despite paying only 66% of the premiums. In this case we have low risk people subsidizing the high risk people: A larger proportion of the premiums were paid than disbursements received by the low risk group. Rather than paying their fair share, the low risk group paid more than their fair share while the high risk group paid less.
Currently insurance premiums try to be actuarially fair. That's why you do all those questionnaires and pay more if you're a smoker and have a history of diabetes in your family etc. Under the reform plan, insurance companies would be more limited than they are today, forcing them to raise prices for lower risk people because they won't be allowed to charge high risk people a fair price. That's why it's a subsidy, rather than risk sharing.
Nice explanation.
One problem I usually see with this type of argument though is that the sick person, while perhaps paying less than their "fair share" of the subsidy, they are paying the remaining amount to the providers themselves. In your example (which again, is very nice), the $100 of damage or "health care" is actually just what the company will pay. The real cost of the health care is maybe 20% more. So the sick person will pay their $40 to the company plus the remaining $20 to the provider. Even in your equal share example, the sick will pay $50 plus the extra $20. Your example seems limited in that it assumes a 100% reimbursement rate.
My point is that to have sick people pay their "fair share" to the plan plus whatever costs that exceed the coverage limit, keeps a large financial burden on them. If I can give some extra, so that my neighbor doesn't go bankrupt, I'm ok with that. But this enters in to a different ideology. However, show me a young, rich, healthy person that is paying more than their "fair share" – and I'll show you a young, poor, sick person who would gladly switch places.
That being said, I'm in favor of having smokers, addicts, even the morbidly obese population paying extra for their health care.
Fantastic explanation, Zach.
@Redst8r: The key is that insurance is a voluntary economic transaction in which people who face similar risks agree to pool those risks. If you want low-risk people to subsidize high-risk people, then you'll have to force them to do so.
Nobody on the East Coast buys earthquakes, whereas a lot of people in California do (probably fewer than should). If you make everyone buy earthquake insurance and pay the same premium, high-risk Californians will be happy and low-risk East Coasters will be unhappy.
Keith,
I'm glad to see the article linked here to open a forum for conversation.
I'm curious as to why the bad incentives described ought to be a concern. If a bill is passed, it will contain an individual mandate. And I think that is because policymakers have conceded the existence of this very problem, and worked to solve it. If a small proportion of people (in MA its less than 3%) pay a tax penalty instead, they are hardly dangerously free riding.
And the point regarding redistribution of wealth may very well be correct. But I don't know how a serious presentation of this problem can ignore the subsidies that go to those with low incomes. Young adults make substantially less money than older adults, and so will reap a greater proportion of the subsidies. And other barriers to entry into the insurance market for young people, like entry-level jobs with poor benefits will be mitigated by reforms like the creation of insurance exchanges.
The individual mandate in the Senate Finance Committee bill is quite weak. The committee members who voted for the bill want the benefits of the mandate (more people covered and a better deal for the predictably sick), but they seriously weakened the enforcement mechanism by dialing down and delaying the penalty for non-compliance.
I oppose the individual mandate. I think a poorly-designed and only partially effective mandate might be even worse.
I've debated this subject on various sites now over the last 3 days (in my spare time, of course – I'm not a loser) and all I can say is this recession, and 'Wall Street' it terrible. The vulchars have taken a hit, and are now p******* in the wind :/
Regards