Thursday, November 12, 2009

Charles Murray ...

has a blog.

Here he is on the shambles of US healthcare reform :

There is a sound argument for treating health insurance the way we treat life insurance. We can buy life insurance at a constant affordable payment when we are young because our young unlikely-to-die-soon selves subsidize our old certain-to-die-soon selves. Similarly: If we were to go to a health insurance company at age 21 and say, “I will commit to a policy from now until I die,” the health insurance company could give us an affordable rate because our young healthy selves would subsidize our old unhealthy selves. We haven’t treated health insurance that way, but there’s no economic reason we couldn’t.

The bill the Finance Committee passed originally applied a variant of that principle, requiring young people to buy insurance, thereby subsidizing the costs of requiring insurance companies to accept everyone, including those with pre-existing conditions.

Then, for political reasons, the Finance Committee gutted the requirement for young people to buy insurance, making the penalties so low that it destroys the coherence of the bill. Of course large numbers of young people won’t buy insurance if the penalties are a few hundred dollars. Of course large numbers of them will wait, knowing that they can apply once they’ve got a health problem and the insurance companies will have to accept them. This is not a “plausible possibility.” It is 100 percent sure to happen. And because it will happen, health insurance premiums will rise dramatically—because the legal requirement that health insurance companies accept everyone will not be modified no matter what. And then the whole system will break down, and Congress will come back in to try to repair a program that was transparently, obviously unworkable from the outset.

I’m not writing as a libertarian who doesn’t think government should run healthcare. I’m writing as a citizen who is sick unto death of politicians being stupid.


Bill said...

Unsurprisingly, the blog does not permit comments. He says of people committing to health insurance-for-life from the same insurer at age 21:

there’s no economic reason we couldn’t.

Actually, there is. If you commit at age 21 to lifetime insurance, you are committing to about 60 years of insurance. Do you and the insurer agree, at age 21, to what your price for insurance will be at age 70 and etc?

If so, the insurer is taking on huge, systematic risk which insurance companies are not suited to take on. A systematic risk is a risk which affects all insureds at once --- insurers are in the business of insuring risks which are independent among the insured (someone is going to get hit by lightning, but not everyone). How do they know whether some new, hyper-expensive treatments will be invented 15 years from now? How do they know what health provider salaries (and hence the cost of providing care) will be 20 years from now? This is not like, say, life insurance, where the liability is limited to the face value of the policy and there are usually exceptions for war and other big systematic risks.

It's hard to get around this by explicitly limiting liability or by making exceptions for new treatments. Two of the points of having health insurance are to get access to new treatments and to get treatment even if you get an expensive dread disease.

If you don't agree on a price with your insurer (but you commit to buying from them for life) then the insurer has an easy way to screw you over: raise the price after you are locked in for life.

A better free-market strategy is to use what everyone but John Cochrane calls Cochrane accounts.

wildgoose said...

Thanks for that Bill, that was genuinely interesting. "Cochrane accounts" do seem to be the way forward.