Saturday, April 27, 2013

Conservative alternative to Obamacare would create new tax on healthy people

The political website Buzzfeed (via Ramesh Ponnuru) provides an entertaining if convoluted account of how US House and Senate Republicans (or rather one particular Senator, Ted Cruz) have fallen out over what seemed like a wizard wheeze to undermine Barack Obama's healthcare law. Specifically, the House faction had come up with a scheme to divert some of the act's funding to patch a loophole relating to pre-existing conditions, whereas some true believers (i.e. Ted Cruz) maintain under the magic of the free market, there'd be no such thing as pre-existing conditions on health insurance, therefore attempting to pass laws to deal with it is sacrilegious.

The theory underpinning the idea that there'd no problem with pre-existing conditions in a free market is sourced to Paul Krugman's occasional sparring partner, Professor John Cochrane at the University of Chicago. But much as with Senator Ted Cruz's claimed knowledge of Rawlsian philosophy, his staff might want to read the original source material for Cochrane's proposal before getting too excited.

Note to Cruz staff: the Cato 2009 paper setting out these seemingly appealing contracts -- the ability to insure against not getting insurance -- dances around a key detail of these contracts. But the 1995 Journal of Political Economy article is much clearer: the scheme works because people who turn out to be healthier than expected when they first got insurance pay money to the insurance company! Now this detail is dressed up in the language of incentive-compatible contracts, but that's what it boils down to: there would be a pre-assigned pot of money for each individual to transact with health insurance companies, and that money would be drawn down from healthier-than-expected people to pay for "excess" costs associated with sicker than expected:

Every period, the consumer pays a constant amount into the account, and the account pays a premium to an insurer for one-period insurance. Competition requires that sick people pay higher premiums and healthy people pay lower premiums. If a person is diagnosed with a disease that raises his premiums, the insurer pays into the account a lump sum equal to the increase in the present value of premiums. If he gets healthier so that his premiums decline, the account pays the insurer a lump sum equal to the decline in the present value of premiums ... The account may be used only for health insurance payments because, as long as the sum paid by the insurer when a consumer got sick is located in the account, it is easy to require that the consumer pay the lump sum back to the insurer if he gets healthier. If the lump sum were paid directly to the consumer, it might be hard to get it back. The consumer might spend the money and declare bankruptcy. Finally, one hopes that courts will enforce an insurer's right to receive payments from an account that is explicitly set up for that purpose, while they may not enforce severance payments taken directly from consumers.

And one thing he doesn't discuss, but which appears to be implicit in his proposal, is that the government would have to require that everyone participate in "health status insurance," since it just shifts up one level the problem of currently healthy people convincing themselves that they'll never need health insurance.

Anyway, the point is that a favoured proposal of those advocating a "free market" approach to health insurance wouldn't stand up to about one hour of creative sloganeering: "It's your money, not the insurance company's; Why should being healthy cost you money?" There's understandable concern among liberals that the Obama healthcare reform may be complicated to implement. But getting free markets to work is no picnic either.