Wednesday, June 3, 2009

Preview of Republican-style health care reform

The local News & Record has a poignant story about the cold reality of private, go-it-alone health insurance--the kind of "choice" that Republican lawmakers like Sen. Burr are advocating.
In his mid-50s, George Kretchun was finally living the dream: After years of working for someone else, the Reidsville man opened his own catering business.

But when he went looking for health insurance, the dream dimmed.

At his age and with a pre-existing condition, he faced paying more than $25,000 a year in premiums.
Mr. Kretchun's problem was that he developed a liver condition several years ago. As part of a larger risk pool, such as a large employer, Mr. Kretchun's bad health draw would have been balanced by better health draws, making affordable insurance possible. However, as a self-employed person, Mr. Kretchun constituted a pool of exactly one. Insurance companies seeing his pre-existing condition would only offer him unaffordable policies. Mr. Kretchun's experience illustrates a well-known market failure that can arise in the presence of adverse selection.

The Republican plan, which calls for ending end tax subsidies to companies for providing health care and replacing them with individual subsidies, would lead to the further dismantling of employer-provided care. The plan hails itself as providing "choice," but choice in the insurance market is a two-way street--insurers also get to choose how much they will charge each customer based on that customer's health.

Mr. Kretchun was eventually helped through one of those supposedly awful government-established and subsidized programs, Inclusive Health, North Carolina's high-risk health insurance pool. The pool is administered by a non-profit that was established by North Carolina with strict rules regarding how much it can charge and who can be admitted. The plan is targeted toward people who are unhealthy and who lack access to employer-based plans. Because insurance for these folks would be unaffordable to them, the plan is subsidized by the state. Inclusive Health is still much more expensive than the insurance available to currently health people, but it's premiums are nevertheless within reach of most people.

The Republican plan rules out "new government spending." However, individually-affordable high-risk health insurance requires some type of subsidy. The Republicans also criticize "public plans," like Inclusive Health thusly
Patients should be able to choose from a variety of private insurance plans. The federal government would run a health care system—or a public plan option—with the compassion of the IRS, the efficiency of the post office, and the incompetence of Katrina.
Mr. Kretchun had his choice of market-based private insurance plans--the private insurance market failed him. As he put it "I don’t mind if they tell me you’ve got to pay double. But don’t tell me I’m not allowed to get any insurance." His experience shows that government intervention can be compassionate, socially efficient, and competent, "a God-send" in his words.

7 comments:

Pino said...

Dave,

While I am not yet sure where I stand on this, it seems that the industry has agreed to cover folks with pre-existing conditions if, IF, it is required that ALL people carry health insurance.

Much like it is required to carry auto insurance to drive, it seems that we may be required to carry insurance to, well, live.

Dave Ribar said...

Pino:

Agreeing to cover people and agreeing to cover them at a price that makes sense are two different things.

As the story indicated, Mr. Kretchun was offered insurance, but the price was unaffordable.

Pino said...

Dave,

The idea is that low risk people intuit they are low risk [or perhaps the low risk are also less able to pay because they are young and have not built up wealth] and don't purchase insurance. This results in higher risk spread around a skewed high risk population.

By forcing the population, all of the population, to purchase health insurance, the corporations would be virtually "lifting money" from the young healthy people that they didn't have as clients before.

This would reduce the group risk and lower payments to the sick.

Dave Ribar said...

Pino:

You've identified some of the cost of the policy but not the benefit.

Yes, some people are currently low-risk and would currently prefer less insurance. Pooling (by providing policies through an employer, restricting the ways that policies can be rated, or by mandating insurance) forces some people to purchase more insurance than would obtain privately.

So, a pooling intervention makes some people worse off. Pooling also increases "moral hazard" whereby some people more benefits than they would in a completely competitive situation.

However, absent pooling, the market failures associated with "adverse selection" could mean that no insurance is provided, even though it might be individually and socially desireable.

There is also a dynamic issue. People may be currently healthy, but injuries, aging and chronic conditions mean that those same people could subsequently be unhealthy. Pooling forces people to contribute now, so that coverage is available later.

Forcing additional insurance might also be justified on externality grounds (e.g., one person's health impacts others' well-being), if people are known to make time-inconsistent decisions, or if people are uninformed or fail to understand risk.

In many circumstances, fully free markets work better than other arrangements for allocating goods. However, insurance is an area where free markets are likely to fail. 46 million uninsured Americans and stories like Mr. Kretchun's are symptomatic of such a failure.

Pino said...

Dave,

Right. The cost of the program is that some folks would be forced into buying insurance when they normally wouldn’t. The benefit is that insurance companies would no longer price policies on pre-existing conditions. The companies themselves have come forward with this plan; yet it sounds like the government isn’t going to like this. I’m not sure why. The cynic in me says it’s because then service would remain in private hands, not the government’s.
Another problem I have with this administration’s proposed solutions is that NONE of them address why medical care [not health insurance] is so expensive to begin with. For example, why is it so expensive to drop in a see a doctor? Why are simple procedures priced well above reach for many people? I suspect it’s the regulation of the industry that creates cost resulting in those costs past down to us. In fact, going back for a bit, it’s regulation itself that contributes to the high cost if insurance itself.

Last, you quote 46 million folks as being uninsured. Some time ago I addressed this here .

In short:
1.7 million are parents that make more that 300% of the FPL
5.9 million are non-parent adults who make more than 300% of the FPL
3.1 million are parents who are eligible for financial assistance
2.0 million are non-parent adults who are eligible for assistance

Further, the largest group of uninsured people are non-parent adults making less than 300% FPL. It was my contention that a good number of THOSE people are young and may not feel that they need insurance.

Dave Ribar said...

Pino:

You've described an industry offer to cover people with pre-existing conditions, if there is a mandatory purchase requirement. Can you supply a reference? The industry letter to the White House doesn't describe this.

If such an offer exists, the rational empiricist (=cynic) in me says this is only happening because of the threat of a public option. The insurance companies have had, well, forever to implement or offer such a plan, but they haven't.

The President has said that he is open to different options so long as they provide coverage. Let's see his (and Congress') reaction to an actual proposal.

Pino said...

Dave,

Here is the quote:

In the letter, the two insurance industry groups said their members are willing to “phase out the practice of varying premiums based on health status in the individual market” if all Americans are required to get coverage.

Here is the link

I suspect that they have not proposed this in the past because most people don't like having to pay for something that they don't want. Or, most likely, they correctly determined that this is bad for business. In the free market, taking on a higher risk for less compensation is no bueno. Only government theft could force someone to take on that risk.