Think About a Different Society

In discussions about welfare and health care reform it’s common to hear progressives insist, “I want to live in the kind of society where the poor are taken care of.” Common variants include, “Don’t you want to live in a society where the poor are taken care of?” “What kind of society allows the poor to suffer without taking care of them?” and “What does it say about a society that it would allow the poor to suffer?”

A common claim is that either we are part of a society that cares for the poor or we are not, with no middle ground. This is true in the sense that any society we are a part of either allows the poor to suffer or it does not, but we absolutely can be part of both societies which do and do not allow the poor to suffer.

The reason is that people are simultaneously part of many different societies. I’m a citizen of the United States, a voter in the State of Virginia, an inhabitant of the town of Charlottesville, an alumnus of Harvard University, a law student at the University of Virginia, and a member of Aetna’s University of Virginia Student Health Insurance Plan. All of these things could reasonably be described as “societies.”

Want to be part of a society that makes sure its sick are taken care of? Well you could push for legislation that requires all Americans to sign up for health insurance, like the ACA. Or you could sign up for an Aetna health plan, or enroll in the University of Virginia, which requires all of its students to have health insurance. Or you could start some new “society” with the relevant desired traits. In any of these situations, you would literally become part a society that ensures care for its sick members.

People who say “I want to be part of a society that takes care of its sick” overwhelmingly mean something like the ACA. They would probably be unimpressed by the incidence of insurance within the UVA community and sneer openly at the idea that Aetna represents a mutual insurance “society.” When they say they want to be part of a “society” they really mean that they want to be part of a “nation.”

But what’s so important about a nation? It’s just a geographically bounded institution with a monopoly on the scope of accepted violence. Is it really important to have your societal preferences represented by a geographical entity? Or do the smaller constituent societies not satisfy our ambitions of ideal society membership? Is it psychologically dissatisfying to be part of a small ideal society rather than a large ideal society? I don’t really think any of these hypotheses explains our preferences for national legislation. Instead I offer two further thoughts:

1. People don’t really care what sort of society they are a member of. Instead, they have preferences of universal applicability. Advocates for the ACA probably don’t really want just members of their society to be taken care of. They would also and for the same basic reasons want poor people in a totally separate society to be taken care of by their own society (people, for example, in New Guinea, or on Mars). The nation just happens to be the largest arena in which they can hope to see their preferences advanced.

2. When people focus on national society, they are often choosing not only for themselves, but also for everyone else. They determine what sort of society everyone else must be a part of, and what kind of societies they may not be a part of. The ACA does not merely allow us to live in a society where we are forced to care for the poor. It requires us to do so, and forbids us to do otherwise. The supporters of the ACA chose not merely for themselves, but for everyone else. While they could have taken part voluntarily in any number of charitable mutual insurance societies, they instead opted to coerce the participation of people who did not share their vision. I suggest that while it is entirely appropriate to work to shape a society for ourselves that suits our preferences, it is morally inappropriate to claim authority to prescribe the terms by which all of others’ societies must function.

People Who Aren’t Poor Shouldn’t Expect Free Stuff

In my health care class today we discussed the CLASS Act, a part of the health care reform legislation that attempted to create an affordable benefit program for long-term (nursing) care. The program was scrapped after actuaries determined that it could not operate within the financial limits allowed. This should not have been such a surprise, as long-term care can be really, really expensive.

Our professor noted that, in the absence of some federal long-term care entitlement, many people struggle to pay for long-term care. Medicare does not cover nursing services, though Medicaid does. However, in order to qualify for long-term coverage under Medicaid, seniors have to spend through their earnings and, in effect, impoverish themselves. “This,” our professor noted, “poses quite a dilemma.”

My response: huh?

Sure, it is quite a dilemma for the person who must decide between spending through their savings and foregoing long-term care, but how is it a dilemma for society or policy-makers? A person who values nursing services should buy them! Why, though, should the government pay for services of those who live above the level of wealth that society seems to have determined actually merits assistance (i.e. the level at which Medicaid and welfare are provided)?

Surely the strangers who will be taxed to provide for these services derive little benefit for these services. Why should they be forced to pay for them, while the assets of the person who receives the benefits are shielded? The demand for long-term entitlement is a self-serving cry for distributive relief.

Imagine a middle-class retiree with $2 million in the bank, and a lower-class retiree with only a few hundred thousand. Neither one is poor enough to qualify for Medicaid and welfare. In other words, they are not so poor that society has determined that they should receive financial assistance, forcibly obtained from wealthier people.

If the lower-class retiree needs long-term care, he may quickly become poor enough to qualify for Medicaid. The middle-class retiree, on the other hand, may spend a million dollars, on long-term care, and still have savings well-above the level of the lower-class retiree. If society pays for his long-term care needs, they have in effect protected his financial status from erosion, while at the same time ignoring and giving no assistance to the poorer lower-class retiree.

What possible principle could justify this? How about, “I deserve to be about as rich as I am now, even if other people are poorer.” Isn’t that a rather unprincipled assertion of privilege? My suggestion is that, at least regarding long-term care, society cannot justify paying for the entitlements of people who live above the level required for general government assistance.

Here are the responses I received from the other members of the class.

1. Long-term care needs can be unexpected.

So what? Why should we favor richer people with unexpected expenses over poorer people without them?

2. Medicaid provides access only to awful long-term care.

Maybe true, but a separate issue. The premise that poorer people need better long-term care does not yield the conclusion that the finances of richer people should be subsidized.

3. The bar for Medicaid is set too low.

Then it should be raised.

4. A married couple may have to liquidate both of their earnings to pay for care for one of them.

This is a poignant objection. A wife might not really assign much value to the long-term care that her husband receives, but there may not be a realistic way for her to protect her portion of the couple’s assets. She is “locked in” to his health care expenses.

But my same argument holds here too, I think. Surely a spouse values the long-term care of their partner more than the strangers who would otherwise be forced to pay. Why should strangers be forced to pay to maintain a spouse’s lifestyle when other poorer people receive no assistance?

Cato Public Speaking Worshop

The Cato interns had a public speaking workshop today.  Each intern was asked to give a four minute speech on a non-frivolous topic.  I chose to speak on the difficulty of moderate health care reform:

People often accuse libertarians of being radical idealogues, of abstracting a generally appropriate principle of freedom to unacceptable extremes.  Hayek complained in the Road to Serfdom that, “Probably nothing has done so much harm to the liberal cause as the wooden insistence of some liberals on certain rules of thumb, above all the principle of laissez faire.”  Practical, reasonable people will shy away from extremes.  But often there is no middle ground between defending ones principles and abandoning them completely

This, I suggest, is what many people discover when they try to compromise in health care policy.  The Patient Protection and Affordable Care Act, otherwise known as “Obamacare” contains 5 important provisions

  • Subsidies for the poor
  • An individual mandate to buy insurance
  • Community Rating for premiums
  • Guaranteed Issue of insurance
  • The pre-existing conditions fix

To many practical, reasonable people, this program all together looks like a serious government invasion of the health care sector.  The individual mandate is an obvious affront to freedom and subsidies may seem to unjustly redistribute wealth.  But many people would like to compromise and pick the most carefully targeted of the five previous reforms.  They will likely pick the pre-existing conditions fix.

Insurers usually refuse to cover illnesses that began before a person purchased his insurance – so called pre-existing conditions.  This creates a serious problem for the uninsured sick.  Many illnesses, such as cancer, require extremely expensive treatment. Most people cannot pay for treatment on their own, and if they are not treated, the illness will kill them.  The fix, forcing insurers to cover pre-existing conditions, seems like a narrowly targeted reform that will help the neediest people without significantly infringing on the liberties of others.

But once insurers are forced to cover pre-existing conditions they will change their behavior.  Instead of selling sick people insurance only for future illnesses, they will refuse to sell them insurance at all.  So a reasonable legislator trying to pass a targeted fix must pass a second reform – Guaranteed Issue.  This reform forces insurers to “guarantee” that they will offer to sell insurance to anyone who asks for it.

This still does not fix the problem.  Insurers may simply offer sick people insurance at premiums they can’t afford – say, $10 million dollars a year.  If legislators are unwilling to allow the uninsured sick to simply remain uninsured, they must lower prices.  So they must support community rating, which forces insurers to sell insurance to all comers at the same price.

Now, legislators have passed drastic reforms that will affect all people – this is not merely targeted legislation affecting only the uninsured sick.  But they still cannot stop here.  There is a new problem that must be solved.  If the community rating is passed, healthy people know they will be able to purchase insurance at the average rate of the insurance.  They will drop out of the market, and only sick people will remain.  The price of insurance will rise.

To prevent people from “gaming the system” legislators must pass the individual mandate – which forces the healthy back into the market with everyone else.  Although each of the previous reforms limited freedom, an individual mandate does so in a much more conspicuous way.  And it isn’t the end.

If you order people to buy insurance, you must decide how to treat the poor.  It is unreasonable to order people with no income to pay premiums of thousands of dollars a year.  The health care of poor people must be paid for, either by programs like Medicaid, or by subsidies of private insurance purchases.

The reasonable person who insists on helping the uninsured sick finds himself forced to embrace the whole set of reforms.  This has been hard to understand for people as highly placed as Barack Obama, who attacked Hillary Clinton for including an individual mandate in her health care plan in the Presidential primary campaign before adopting it himself.  And it was probably hard to understand for Mitt Romney and The Heritage Foundation when they tried to craft a middle ground in Massachusetts and ended up with a nearly identical bill.  And it may still be hard for Republicans to understand, some of whom have already promised not to overturn the pre-existing conditions fix, and I predict therefore, will not – and cannot – overturn any of the legislation. Sometimes, there is no middle ground, and compromise is more harmful than a radical defense of principle in extreme circumstances.

Reasons for Pessimism

Some of my conservative friends have suggested a couple of reasons not to be utterly depressed by the passage of health care reform:

  1. Voters will angrily sweep Republicans into power.
  2. Republicans will rally the country around repealing health care reform.
  3. We now have an actual bill that voters can evaluate, and the bill will create its own opposition.

I always have to ask my friends whether they are being sarcastic, or actually delusional.

Republican resurgence is miserably insufficient to comfort anyone who opposed health care reform on principle, so we can breeze on to the second point. Though, I am generally skeptical that Americans really oppose these reforms, or that conservatives will control government in 2014!

Republicans don’t actually oppose health care reform. They pretend to. But ask them why they dislike Obamacare, and they generally recite something incomprehensible about big government or socialism. Then they advocate something identical – like the conservative Heritage Foundation, which sponsored the same reforms in Massachusetts alongside Republican Governor Mitt Romney. Damningly, most conservatives – notice Republican Senator John Cornyn– still consider prohibitting insurers from denying coverage to already sick patients to be “uncontroversial”. Yet this “reasonable reform” inevitably leads to every major item in the Democrats’ health care legislation. More on this anon.

Which brings us to the final argument. How, exactly, are people supposed to be able to evaluate the effects of this bill? As far as I can tell, they can’t. Most people today get their health care through their employer. This cuts into their wages, but they don’t know how much it costs because their employer never tells them. The reforms will not change this. People will continue to mainly receive insurance through their employer. Insurers will now be forced to cross-subsidize and offer more strictly defined plans. This could increase price and decrease choice, but employees will never see these changes. Their employer will still make the major choices for them.

Low income individuals who will be offered subsidized insurance through pseudo-market health care “exchanges” will see a fairly large change. But why should they complain? They lose a bit of freedom by being forced to buy insurance, but likely gain from the subsidies. Do we really expect them to revolt against another quasi-welfare program? Hardly – the fact that Democrats have built a party around buying votes with entitlement programs suggests that it is a successful political strategy.

The strongest arguments for or against health care reform have always been the long run counterfactuals. Progressives argue that the reforms will “bend the curve” of health care cost increases by taxing insurance into submission (other even more mystical-sounding claims are also made). Reform opponents counter that the bill will slow innovation in medicine and delivery systems by further delinking consumers from the costs of health care. I side with the opponents, of course, but the general public can’t appraise these arguments merely by watching the legislation work its magic. That’s why the arguments are counterfactuals. There is no alternative reality that we can compare our world to.

Finally, there are the taxes. Nobody likes them. But every spending program has come with new taxes. Social Security and Medicare have much more visible taxes linked to them. Yet no major spending program, to the best of my knowledge, has ever been repealed because of taxes. Occasionally the taxes themselves have been lowered. Then they have been raised again. But the spending remains. The taxes, in this case, aren’t even that important: health care reform does most of its damage through regulations and cross-subsidies born directly by the insurance companies and their customers.

In the end, no bill ever gets a careful examination after its passage. People have too much going on in their real lives to waste their time figuring out whether any particular piece of legislation is good (or just). Even if they did, there is little or no information with which to make a “practical” judgment. Expect even the “experts” to be debating the effects of this bill a decade from now. The only people who will care are those that derive a large benefit from the program – like the senior citizens who defend Medicare tooth and nail. 2014, the earliest the bill could be repealed by Republican lawmakers, is a lifetime away for our rationally apolitical electorate. If voters still remember health care reform, even if they still dislike it, they probably just won’t care that much. But reform comes with a built in interest group – the medical profession – that stands to gain access to new, paying patients. We can expect them – doctors, insurers, and hospitals – to loudly defend this legislation with the false moral clarity of other people’s money.

Will You Go to Jail If You Don’t Have Insurance?

Jack Balkin says that the answer is no.

Balkin is correct that, technically, anyone who does not buy insurance under the new set of laws will only have to pay a tax (or as I prefer to think of it, a fine).  Only if they refuse to pay the fine will they then, eventually, be sent to jail as a tax evader.  Fair enough.  But the general point still remains.  If you do not comply with this new law – you will be sent to jail.  Being sent to jail for refusing to pay the fine is only morally different if the fine has some particular justification.

Balkin argues that the fine (or as he prefers to think of it, tax) is justified by free-rider problems:

If lots of people (and especially young and mostly healthy people) don’t buy health insurance, the cost of insurance goes up for everyone, and it is passed on to others in the form of higher premiums. In addition, people who don’t buy health insurance tend to wait until their health problems are severe and then use emergency services; they may contract communicable diseases (which they may pass on to others) or they may become disabled. All of these costs get passed along to others–in the form of higher premiums and higher costs for hospitals and insurers–or they have to be absorbed by federal and state governments through programs for the poor or the disabled.

So if you don’t buy health insurance, you are increasing costs for other people. The federal government is taxing you to recoup some of those costs. An analogy would be taxes on alcohol or tobacco, although these taxes are usually worked into the retail price of the goods so that people don’t even have the opportunity to refuse to pay them. Another example would be taxes on an enterprise that is creating additional costs to the environment through pollution; the government taxes you if you don’t purchase and install anti-pollution equipment.

Balkin skips more than a few steps with this analysis.  In significant part, health care free riding is only possible because there are laws that legalize free riding.  For example, the laws requiring hospitals to treat all emergency room visitors, regardless of their capacity/intent to pay, are an invitation for free riding.  The costs of treating any of these patients who do not pay will be passed on to all of the hospital’s paying patients.  If we really wanted to eliminate this free rider problem, we would just make people pay for their emergency room visits – or we would at least not require hospitals to receive people without insurance.

The current health care reform is not a brilliant scheme to end free riding.  In large part, it is an attempt to write more free riding into law.  It requires insurance companies to transfer health care costs from sick to healthy patients.  It enacts massive subsidies that transfer costs from the poor to the wealthy.  These transfers are very much like actual free riding, and they would not occur in an efficient insurance market that had no free riding.

Balkin shrugs and says that “tax policy does this all the time”.  And so it does.  And opponents of these subsidies are right to remind the rest of the electorate that their participation is not voluntary, but enacted through threat of imprisonment.  Health care reform is commonly assumed to be in everyone’s benefit, but this is of course not the case.  The threat of jail time lies behind every government “charity”.

Inside the Twisted Mind of a Government Tax Planner

This post was originally written for Americans for Tax Reform, where I was an Associate (intern):

Title 1, Subtitle D of the Senate Finance Committee’s Chairman’s Mark establishes “Shared Responsibility” requirements for individuals and employers. For employers, this requirement entails a tax linked to the number of their employees receiving subsidies in the General Fund.

For each full time employee (defined as working 30 hours or more each week) enrolled in a state exchange and receiving a tax credit, the employer would be required to pay a flat dollar amount… equal to the average tax credit in the state exchanges.

The tax is no doubt intended to strong-arm employers into providing insurance. But what does it actually do? In essence, the fine punishes employers who hire low-wage employees. The value of subsidized employee’s productivity decreases by the amount of the tax the employer is expected to play – so their market wage will drop by the same amount. If this wage falls below the minimum wage – likely, because their wages are already low – then many employers will simply fire them.

Realizing this dilemma, the tax planners attempt to “fix” this problem with an arcane tax cap:

The assessment is capped for all employers at an amount equal to $400 multiplied by the total number of employees at the firm (regardless of how many are receiving the state exchange credit).

Baucus’s planners provide a helpful scenario to demonstrate how the cap will affect incentives:

For example, Employer A, who does not offer health coverage, has 100 employees, 30 of whom receive a tax credit for enrolling in a state exchange offered plan. If the flat dollar amount set by the Secretary of HHS for that year is $3,000, Employer A should owe $90,000. Since the maximum amount an employer must pay per year is limited to $400 multiplied by the total number of employees (for Employer A, 100), however, Employer A must pay only $40,000 (the lesser of the $40,000 maximum and the $90,000 calculated fee).

Because the employer is paying a $400 penalty per employee, rather than a $3000 penalty per subsidized employee, the employer has no specific incentive to decrease the wages of subsidized workers. Problem solved, right? Wrong.

Now the employer has an incentive to lower the wages of all of his workers (or fire them if they are already at minimum wage). Instead of “fixing” the costs created by the original tax, the government planners have spread it across a new group of employees. The tax penalty is of course lower – but this simply means it will be less successful in achieving its questionable objective.

And what if the company in the above example had only 13 workers receiving subsidies? Then the penalty paid would be $39,000 (13 subsidized employees times the $3000 average tax credit, which is less than the $40,000 cap). Now of course, the incentive is to decrease the wages or fire only the subsidized workers. And because the tax is higher, it affects each of these subsidized (and therefore “low-wage”) workers more strongly.

Other costs abound. Because the fee is applied only to subsidized employees working for more than 30 hours a week, companies can dodge the fee by reducing these employees’ hours. Only companies with more than 50 employees are subject to fees, so companies have an incentive to reduce the scale of their operations, or to spin off part of their business as a smaller subsidiary. Seeking these new arrangements bears a cost on the company and the economy at large. Even determining what arrangement is most efficient bears a cost on a company – even if it ultimately decides the best option is to provide health insurance!

The tax planners have attempted to “fix the market’s behavior, and then fix the perverse consequences of their original intervention. Inevitably a new perverse consequence is created. All of this for what? Wages are determined by productivity – this measure only strong-arms employers into offering compensation in a less liquid form than cash. However undesirable the other health care goals of central planners may be, none of them require an employee mandate. Planners could just as easily force citizens to buy health care with an individual mandate – then consumers would have at least the option of directly picking their preferred level of insurance. Community rating, guaranteed issue, pre-existing coverage, and deductible caps do not rely in any important sense on an employer mandate. Only Baucus’s arbitrary desire that employer insurance dominate the market is satisfied by this harmful web of byzantine regulations. Employers, workers, and taxpayers, as usual, are left with the bill.

Capitalism and Socialism are Opposites, Not “Two Complementary, Good Ideas”

The following was originally written for Americans for Tax Reform, where I am an intern:

Perhaps the most frustratingly incoherent part of Obama speech Wednesday was his repeated portrayal of the market and government planning as just two possible, non-exhaustive, mutually-reinforcing “solutions” to the current health care “crisis”.

There are those on the left who believe that the only way to fix the system is through a single-payer system like Canada’s — (applause) — where we would severely restrict the private insurance market and have the government provide coverage for everybody.  On the right, there are those who argue that we should end employer-based systems and leave individuals to buy health insurance on their own…. I have to say that there are arguments to be made for both these approaches.

Obama likes to present his plan as a sort of third way between government-run health care and the market, incorporating, as he said, “the best ideas of both parties together”. This is essentially nonsense. Our health care system cannot be made “more free market” and “more government-regulated” simultaneously.

The free market and government planning are exhaustive opposites. Every health care choice is either made freely by consumers selecting their most favored option, or it is chosen for them by government mandates. Under a market system, for example, consumers can either choose to buy health insurance through their employer or on the individual market. In a planned economy, by contrast, the government may order them to buy through their employer.

President Obama leaves little doubt as to which direction he will take our health care system:

Now, even if we provide these affordable options, there may be those — especially the young and the healthy — who still want to take the risk and go without coverage.  There may still be companies that refuse to do right by their workers by giving them coverage.

And that’s why under my plan, individuals will be required to carry basic health insurance — just as most states require you to carry auto insurance.  (Applause.)  Likewise — likewise, businesses will be required to either offer their workers health care, or chip in to help cover the cost of their workers.

But we can’t have large businesses and individuals who can afford coverage game the system by avoiding responsibility to themselves or their employees.  Improving our health care system only works if everybody does their part.

Obama’s plan, at its heart, requires that consumers be deprived of their free choice, so that the government can micromanage insurance premiums based on arbitrary notions of “just cost distributions”. This is, at its heart, socialism.

Obama Punts on Cost Reductions

The following post was originally written for Americans for Tax Reform, where I am an Associate (intern):

“I understand that the politically safe move would be to kick the can further down the road — to defer reform one more year, or one more election, or one more term. “

– President Obama, September 9, 2009, in his address to Congress

In his speech last night, Obama tried to imitate a man concerned by the costs of his health care proposal. Obama promised that his bill would be deficit neutral:

I will not sign it if it adds one dime to the deficit, now or in the future, period.  And to prove that I’m serious, there will be a provision in this plan that requires us to come forward with more spending cuts if the savings we promised don’t materialize.

Obama’s “serious” promises lack substance. As previously argued, pledging “not to sign” a bill is meaningless: the President must veto a bill to block its passage. But the “promised savings” suggestion is even more insidious. Such a provision merely promises to delay any budgetary solution until a crisis has actually arrived. As Obama would say, it kicks the can further down the road to defer reform one more year, one more election, or one more term.

What faith should people have that actual budget cuts will be made at this future point, when they cannot be made now? Congress would have to actively draft specific cuts – cuts that hurt special interests eager to preserve their spot at the public trough. Congress would retain all power to break this non-binding promise. So how likely is it that Congressmen would take up arms against their campaign contributors, instead of raising taxes or taking on more debt?

If Obama were really interested in proposing a fiscally responsible bill, he would be proposing conditional spending, not conditional spending cuts. He would propose subsidies that took effect after his “savings” were realized, not unspecified spending cuts after the savings proved illusory. “Trust me” is not a cost-cutting reform worth $900 billion – or any amount.

Obama’s unserious proposals force us to choose between two conclusions. Either he doesn’t know what he’s doing, or he is insincere.  Given his eloquence, education, and the vast resources of his office, the former seems precluded.

The Fundamental Incoherence of Obama’s Health Care Crisis Claims

This piece was originally written for Americans for Tax Reform’s blog, where I am an Associate (intern):

In his speech to Congress last night, President Obama grounded his health reform plans two contradictory claims. First, President Obama insisted that health insurers were increasingly denying health care to their clients. Then, he argued that America was suffering from a crisis of rising health care expenditures.

More and more Americans pay their premiums, only to discover that their insurance company has dropped their coverage when they get sick, or won’t pay the full cost of care.  It happens every day.

Then there’s the problem of rising cost.  We spend one and a half times more per person on health care than any other country, but we aren’t any healthier for it.  This is one of the reasons that insurance premiums have gone up three times faster than wages.

Obama’s argument betrays either ignorance or a willful disregard for economic reasoning. If insurers engaged in wholesale jettisoning of their most expensive customers, their costs would fall. An insurance company with lower costs would be able to capture more market share from its rivals by lowering its prices. Those rivals would be forced to compete either by matching the new lower premiums or competing in quality – i.e. by indulging in less rescission!

Health care premiums are rising, so we can safely assume that more, not less, health care is being delivered by insurers. To argue that both costs and rescissions are increasing simultaneously is to deny the basic reality of free market competition. Radical overhauls of the health care system should not be grounded in this populist fantasy.

Health Care Policy Essay

The following is an essay I wrote for the Charles G Koch Summer Fellow Program.

Public Policy Essay *
Write a 500-word essay on a major issue of public policy. Your essay should address the significance of your chosen issue, the problems with the current policies, and your public policy approach to dealing with it. Please adhere to the word limit.

Reforming America’s health insurance system – and protecting it from the wrong sort of reforms – is critical for the preservation of our welfare and freedom.  The modern health care apparatus is a crowning achievement of our era and has played a central role in our historically unparalleled standard of living.  Today, health expenditures compose as much as 17% of US GDP.  But this strength rests on an unsteady foundation.

The health care industry suffers from man-made maladies –government-induced incentives and regulations have warped the market and prohibited it from delivering its desired equilibrium.  Employer-provided health care benefits are excluded from income tax liability, a subsidy that has atrophied the individual health insurance market.  This system restricts Americans to the narrow set of options chosen by their employer – prohibiting many from selecting plans that truly match their preferences.  Because so many purchase their insurance through employers, employees who are laid off simultaneously lose health insurance – compounding the miseries of the most desperate Americans.

At the same time, the states have slowly ratcheted down the number of options available to consumers.  Insurers are required to include increasing number of procedures in their plans, even for those individuals who do not wish to buy them.  Limits on deductibles and co-pays have been widely adopted in a misguided effort to “protect” consumers.  “Community rating” rules force the young and healthy to subsidize the old and sick through redistributive premium prices.  These regulations ensure that most do not get what they want, many pay more than they have to, and some simply decide that they would be better off without insurance.

A few simple reforms could remedy these problems.  Individual states, or the federal government through its interstate commerce power, could permit Americans to buy insurance policies licensed under any states’ regulatory regime.  This would free Americans from the specific requirements of their state of residence; the states would be forced to compete to deliver a “market equilibrium” bundle of regulations that best fit the needs of consumers and insurers.

The federal government could spur competition in the individual health insurance market by extending income tax exclusion to individual health policies.  If Americans were allowed to use pre-tax health savings accounts to pay insurance premiums, they would no longer pay a tax penalty on insurance plans purchased outside their employer’s offerings.

Other proposals seek to “fix” health insurance through tighter government controls.  These reforms aim at turning the risk-insurance market into something resembling a privatized welfare system in which all must participate.  These reforms purport to “reduce costs”, but they can do so only by arbitrarily prohibiting Americans from seeking certain types of medical attention.  Invidiously, those who would bear the redistributive costs of care would be rewarded for their “charity” with the loss of their freedom to make insurance decisions.  In the long run, this rationing would reduce rewards to innovation, slowing the technological progress that has made health care so powerful today.  We must not institute reforms of this nature.

Government Hates Competition: Medicare Edition

This piece was originally posted on Americans for Tax Reform’s blog where I am an associate (intern).

A “public option” health insurer would create a new government sponsored enterprise in our health care market.  Government enterprises are not merely inefficient – they are the harbringer of private competition’s slow death by regulation.  Previously, we noted how the government has jealously legislated an anti-competitive zone around the US Postal Service.  But there is an equally compelling example of government’s inability to tolerate competition in the health care market itself: Medicare.

In a Cato Policy Analysis publication, Kent Brown explains how Congress and the Medicare bureaucracy have systematically limited seniors’ choices to purchase health care outside of the Medicare bureaucracy.  Through a combination of penalties for seniors who opt-out, regulations on providers, and subsidies, the government has driven private competition out of the senior health insurance market.

For most seniors, enrolling in Medicare need not be a conscious choice.  Congress automatically enrolls most eligible seniors in the program.  In order to opt out of Medicare Part A (hospital insurance), a senior must give up all Social Security benefits – an extremely painful option for low or middle income individuals who have been forced to pay payroll taxes for their entire working lives.  Medicare Part B (outpatient care) is subsidized by general tax funds.  Most seniors pay only 25% of their Medicare Part B premium.  For every year that eligible seniors opt out of the program, their premiums increase cumulatively by 10%.

Between automatic enrollment, the loss of Social Security funds for opting out of Part A, punitive premium increases for opting out of Part B, and the artificially low cost of enrollment, choosing not to enroll in Medicare has become such an unrealistic option that, by 1997, private insurers had completely left the senior health insurance market.  Only seniors rich enough to pay their own unexpected health care fees can afford to seek health care outside of Medicare.

Once seniors have enrolled in Medicare, they essentially lose the option to pay for their own health care.  This is accomplished by a rule against “private contracting” for Medicare-covered services.  This rule prohibits physicians from accepting private reimbursement for procedures that would be covered under Medicare.  If a physician wishes to receive private reimbursement for these services, he must agree not to participate in Medicare for a period of two years.  Because nearly all seniors have been herded into the program, opting out entirely would cripple most providers’ practices.  Medicare ensures that providers will not find this alternative profitable by fixing rates for coverage of its beneficiaries.

Medicare has bullied away competition at both the insurer and provider level.  The government’s freedom from competition has allowed it to act as an arbitrary monopoly.  The result is predictable.  Medicare operates inefficiently and unresponsively.  Brown points to studies showing that nearly 30% of its provided care yields no health benefits.  Medicare does not bother to provide true catastrophic coverage; as Sue Blevins has noted, Medicare does not cover the expenses of hospital visits after they exceed 150 days.  Medicare also carefully regulates the legal amount of care that patients can purchase from even those providers who have opted out of the system – subjecting them to a government rationing scheme without alternatives.

These failings are not incidental to Medicare.  They are predictable results of government entrance into the market.  Because government enterprises rely on subsidies to provide “cheap” goods, people over-consume their products.  Only by arbitrarily limiting the services it produces can Medicare control its costs.  But if it allows competitors to remain in the market, consumers will notice the arbitrariness of these rationing decisions.  Since only private, unsubsidized competitors will offer the rationed-away services, consumers will realize that the government inherently does not give them “what they want”.  Killing private competition is the government’s way of covering up its own inevitable arbitrariness.

The public option can be no different from every other government venture.  Because it has no stake in success and a government guarantee against failure, it will be run inefficiently.  Subsidies will be necessary to ensure its health.  And if these subsidies do not drive away its competitors outright, the public option will still have the same incentives for undercutting the private market as Medicare and the Postal Service: the private sector makes them look bad.