What Needs to Be Done
It’s easy for an economist to describe health-status insurance contracts coupled with a health-status insurance account. Allowing them to emerge in the real world, on the other hand, will require changes to the legal and regulatory framework of health insurance markets. As usual, removing current regulations is more important than adding new ones.
Encourage Risk-Based Premiums
In an attempt to force the healthy to cross-subsidize the sick, regulations frequently restricts insurers’ freedom to adjust premiums according to new or current customers’ health or to exclude pre-existing conditions. Even when those measures are not explicitly forbidden, insurers rightly fear that publication of a premium schedule explicitly based on health status would draw all sorts of political and regulatory ire.
Regulators need instead to encourage explicit risk-rating, so that anyone can get coverage (albeit at a price) and so that healthy people will not try to defect. Regulators need to encourage the publication of explicit premium schedules based on health risk, so that so that health-status payments can be calculated. It would help if insurance companies were to standardize somewhat the health levels that trigger premium changes, which might require some regulatory coordination.
Tax Reform and Employer-Based Plans
The tax-deductibility of employer-provided pooled health insurance, along with other regulatory and legal pressure in its favor, is one of the major distortions in the health-insurance market, and to blame for many of its problems. It is the reason that “insurance” pays for perfectly forecastable events such as annual checkups and shots, yet often does not provide true insurance. Employers have much less incentive to pick plans that take care of small-probability disasters for employees who will leave anyway in those events. Employers’ incentive is to attract and retain good workers. That is a much weaker mechanism for guaranteeing quality than people directly buying things that they need and will still need after they leave that job. The current dominance of employer-provided plans means that the individual market, where people buy their own insurance, is much smaller, more expensive, and consists of worse risks (many people too sick to get jobs). There is no more reason that everyone at your job should have the same health insurer than that they should have the same home or auto insurer. Insurance will be much better tailored to individual’s needs if that is not the case.
Where most policy proposals want to strengthen the unnatural link between employment and insurance, as a way to force people into pools, true long-term insurance will emerge more quickly if instead the tax-deductibility of employer-provided insurance and other regulation in its favor is eliminated. At a minimum, individually-purchased health insurance should receive exactly the same tax treatment, even for the increasing number of taxpayers snagged by the AMT, so that individual insurance can compete. Employees need to be able to direct employer contributions to the plan of their choice as well.
The Process
Once these policy paths are in place, long-term insurance can emerge naturally. No policy-maker needs to design the contracts and impose them on anyone. Once individual and group employer-based insurance are on an equal footing, the individual market will be revitalized, and employer-based pools will start to unravel, since healthy people will be more likely to leave. Employers will therefore be happier to fund individual insurance rather than try to operate pools. Once price competition is allowed, there will be pressure for contracts to adopt the “incentive-compatible” structure, to keep healthy people from defecting to competing insurers. Price competition and risk-rating of medical-insurance contracts also will give rise to a natural demand for health-status insurance. Neither feature exists now, because government largely forbids private insurers to compete for the business of sick people, and thereby forces insurers to avoid the sick by denying them coverage instead.
Candidates’ Plans
As I write in the Fall of 2008, the most relevant health plans to contrast with free-market health-status insurance are those provided by the presidential candidates.
Both candidates recognize that Americans lack the sort of health insurance that provides long-term security, and they recognize that this is an important, if not the most important problem with current health insurance. They both promise to fix it, but neither really has any idea how to do so. Senator Obama introduces a national health plan and grossly restricts competition among private insurers through a government-run “exchange.” Both candidates favor requiring insurers to cover pre-existing conditions. These steps go in exactly the wrong direction.
Clearly, neither campaign has ever heard of health-status insurance, or have any vision that a free and deregulated insurance market could provide long-term insurance, so neither is really for it or against it in any meaningful sense. It’s time that they did hear of it.
Barack Obama’s Health Plan
Sen. Barack Obama promises “portability and choice.” Americans “will be able to move from job to job without changing or jeopardizing their health care coverage.” He calls for “stable premiums that will not depend on how healthy you are,” and promises “No American will be turned away FROM ANY INSURANCE PLAN because of illness or pre-existing conditions.”[1] These are important goals, and exactly what medical insurance plus health-status insurance would accomplish. Unfortunately, Sen. Obama’s proposals would not deliver the promised results, would prevent the market from doing so, and would undermine the competition on which quality and cost depend.
He proposes a National Health Insurance Exchange through which the federal government would ban pre-existing condition clauses and would force insurance companies to take everyone at the same price. As we have seen, this can’t work. Forced to pool, insurance companies still have strong incentives to avoid, get rid of, and “cost-contain” sick people, and to try to steal healthy ones away from competitors. Many healthy people would rather forego insurance than cross-subsidize sick people. Down this path, we have to force people to have insurance and force employers to provide it, and we have to eliminate consumer choice and competition between insurers. All of these steps appear in various health-care policy proposals. This path is a never-ending race of intrusive regulation against powerful financial incentives, to the detriment of competition.
The natural end of this race is to throw your hands in the air and adopt a national health-insurance system. Sen. Obama basically proposes this ultimate step:
Obama will make available a new national health plan [for] all Americans… The plan will cover all essential medical services, including preventive, maternity and mental health care [with] affordable premiums, co-pays and deductibles…The new public plan will be simple to enroll in and provide ready access to coverage… Individuals and families who…need financial assistance will receive an income-related federal subsidy to buy into the new public plan…[2]
It is not mentioned how expanded coverage will be paid for by “affordable premiums,” and how an anti-competitive “exchange” and national health plan will achieve miracles of efficiency not matched by private industry, to say nothing of any government-provided service.
John McCain’s Health Plan
Sen. John McCain echoes the same goals. Some of Sen. McCain’s rhetoric and proposed reforms are somewhat more encouraging, and consonant with health-status insurance and the merits of competition. For example, the McCain campaign web site[3] explains:
John McCain believes the key to health care reform is to restore control to the patients themselves… An important part of his plan is to use competition to improve the quality of health insurance with greater variety to match people's needs, lower prices, and portability… Families will be able to choose the insurance provider that suits them best… John McCain proposes making insurance more portable. Americans need insurance that follows them from job to job. They want insurance that is still there if they retire early and does not change if they take a few years off to raise the kids.
Some of Sen. McCain’s proposals could facilitate the development of health-status insurance. He proposes to replace the current tax break for employer-sponsored health insurance with a uniform tax credit for all health-insurance purchasers, as I advocated above. If an individual plan that combined medical and health-status insurance existed, at least people could choose it without penalty. He proposes to allow individuals to purchase health insurance across state lines. This proposal will increase competition, which helps to undermine forced pooling efforts. It would also increase regulatory competition between states to provide a consumer-friendly regulatory environment, which could include the regulatory innovations needed for rate discrimination and health-status insurance to emerge. It would also make the regulatory changes easier, since only one state need make the necessary changes for all Americans to have access to health-status insurance.
Unfortunately, Sen. McCain also supports insurance-pricing restrictions that preclude the development of health-status or other long-term health insurance. His campaign web site boasts, “FACT: John McCain supported the Health Insurance Portability and Accountability Act in 1996 that took the important step of providing some protection against exclusion of pre-existing conditions.” This goes in the wrong direction, towards forced pooling and away from a market solution. More generally, the McCain plan does not articulate a clear strategy that can achieve the admirable goals. Hint: here is one.
Conclusion
Any good economist looks for market failure before regulating something. Where is the market failure behind banning risk-based premiums and pre-existing condition clauses, and subsidizing employer-provided health insurance? No one has credibly documented something like natural monopoly, missing property rights, adverse selection, asymmetric information, or any conventional source of market failure motivating these interventions, or preventing the emergence of private long-term health insurance. At a minimum, we learn from the possibility of health-status insurance that they are none; that these are needless regulations rather than responses to a genuine market deficiency.
A completely private insurance market can solve the central problem of health insurance in
At a minimum, free-market economists no longer need to hem and haw, saying, “Well you have a point there, but do we have to make the regulation quite so intrusive?” We can instead say with confidence, “We can have long-term insurance with a completely deregulated health-insurance market, and here’s how.”
Of course, we can also hope that it actually happens: that our government takes the simple steps necessary to let long-term free-market health insurance emerge in place of highly regulated pooling systems. We could then watch with delight as the resulting competition does its usual magic of raising quality, lowering costs, and spurring innovation in both the medical and financial aspects of health care.
[1] All quotes are from Obama ‘08, “Barack Obama’s Plan for a Healthy America: Lowering Health Care Costs and Ensuring Affordable, High-Quality Health Care for All,” p. 7, http://www.barackobama.com/pdf/HealthPlanFull.pdf (accessed September 2, 2008).
[2] Obama ‘08, “Barack Obama’s Plan for a Healthy America: Lowering Health Care Costs and Ensuring Affordable, High-Quality Health Care for All,” p. 7, http://www.barackobama.com/pdf/HealthPlanFull.pdf (accessed September 2, 2008).
[3] “Straight Talk on Health System Reform,” www.johnmccain.com, http://www.johnmccain.com/Informing/Issues/19ba2f1c-c03f-4ac2-8cd5-5cf2edb527cf.htm.
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