September 20, 2009
Opinion
A lesson on how health insurance really works
Americans have expressed displeasure with House Bill 3200, “America’s Affordable Health Choices Act of 2009,” as well as a proposed Senate version still in process, because both contain bad economics and bad ideas.
Yet, one cannot beat something with nothing.
Republicans, Independents, and Democrats with courage need to enunciate a logically sound alternative that extends good insurance coverage to all Americans without socializing our medicine or reducing doctors to having the state look over their shoulders.
Economists and the public are dismayed. Congress has had years to consider what it would do with respect to health care, yet lawmakers still do not show a comprehensive understanding of the subject, even of its most basic features.
For instance, an Aug. 14 Wall Street Journal article criticized lawmakers for not knowing the difference between health insurance and reclassification risk insurance, also known as health status insurance. The latter insures against a change in an insured’s risk classification that carries over into later periods. Health insurance insures against treatable events in the coming coverage year.
The Senate plan also shows ignorance of the importance of homogeneous risk pooling when it requires by law that men and women be grouped together for insurance. A risk pool is homogenous if every member of it has equal probability of receiving payout benefits as anyone else.
Why should a man pay for breast cancer, or a woman for prostate cancer? What if the treatment costs are radically different? Are teenage women required to pay the same for car insurance as teenage men who are known to have more accidents?
Among other misdirections in HR 3200 are the sheer number of proposed interventions and oversight committees. The number of interventions alone precludes any meaningful summary.
However, we should not try to fix fundamentally flawed bills but rather should replace them with sound ones.
Lawmakers must realize that some people do not buy insurance because they truly cannot afford it. Others can afford insurance but do not buy it because they do not have a strong motivation to do so.
To extend insurance coverage to all without damaging those portions of Americans’ health care that are among the best in the world, Congress should incorporate three basic fundamentals into a new bill:
* Fundamental I: Lack of earnings is not a health care problem. It is an income problem. The solution to too little income is provision of income. This can be done for those who qualify through some appropriate mechanism such as an augmented earned income tax credit.
An augmented EITC makes sure that everyone has enough income to buy insurance suitable to their circumstances.
One way to fund this could be medical malpractice reform. PriceWaterhouseCooper estimates that defensive medicine costs $210 billion annually. Saving this through medical malpractice reform could pay for the amount needed for EITC transfers four times over.
* Fundamental II: There must be a stronger reason for Americans to want to buy health insurance. This, too, is not a health care problem but a motivational problem.
Studies show that 25 percent of uninsured Americans qualify for Medicare or SCHIP, the states children insurance program, but do not bother to complete the application forms.
Does motivation always require spending government money?
To motivate folks to recycle and reduce littering, for instance, many states require deposits on glass bottles, plastic containers and aluminum cans. In California, consumers pay deposits of 4 cents to 8 cents per bottle or can, and they receive the money back in refund when the items are turned in. The state boasts an overall success rate of 74 percent with this program, according to the California-based Container Recycling Institute.
The deposit creates the same incentive as paying out a subsidy to picking up, or not littering, cans and bottles. No government outlay is needed and anyone who does not litter pays nothing extra for their purchase because the deposit is returned. Only those who litter or fail to recycle pay a higher price for their bottles and cans.
What would the economic equivalent be of asking for a deposit on buying health insurance?
The answer is that we could raise all prices through a uniform tax but rebate it to those who have health insurance, or alternatively lower the price at the point of purchase for those who have health insurance. Those with health insurance pay nothing extra — similar to the non-litterers— but those without health insurance do not get the rebate, just as those who do not recycle bottle and cans do not receive their deposits back.
* Fundamental III: There are alternative health care insurance reforms that have not become part of the legislative discussion and these points should be brought in. Homogeneous risk pooling by age, sex and location is one, but there are others which lead to individuals’ ability to buy portable insurance at any time, switch companies at will, and pay the same premiums as others of their age and sex without threatening companies’ ability to offer insurance.
Congress should have figured out by now that the only known, reliable, self-enforcing mechanism to keep costs low is robust competition. There are a number of pro-competitive initiatives for health insurance and health care that could be adopted.
For starters, health care providers should be allowed to charge whatever price they want, but Congress should require them to show transparency and publicly post these prices, perhaps on the Internet.
In addition, providers should be required to charge all buyers the same price, based on similar services and terms.
Overall, a well-designed program would get everybody covered by insurance and keep the national costs down to a fraction of the numbers associated with Washington’s current proposals.
There are workable ideas out there. Perhaps Congress should take the time to learn what they are.
Earl L. Grinols is an economics professor at Baylor University. From 1987-1988 he was a senior economist for the President’s Council of Economic Advisors. His most recent book, co-authored with Baylor professor Jim Henderson, is Health Care for Us All, published by Cambridge University Press.
http://www.wacotrib.com/opin/content/news/opinion/stories/2009/09/20/09202009wacgrinols.html
