Unintended Consequences: How a Popular Reform Would Lead to Unpopular Results

Proposition One: No health insurance company should be able to turn down any applicant or charge a higher premium because of health status.
Proposition Two: The federal government should tell you what health insurance you must have, where you will get it and what price you must pay and levy steep fines on you and your employer if you fail to comply.

John Goodman lays out how these two propositions – the first a popular reform proposal and the second an option that Americans just aren’t willing to support – are linked through the complexities of the health care system.

  1. If we know we can buy health insurance after we get sick with no increase in premiums, none of us will want to pay premiums for insurance while we are healthy. Yet, if only the sick are paying premiums, the entire insurance system will collapse.
  2. So to prevent collapse, there must be a requirement that people buy in when they are healthy.
  3. Now if the requirement is a general mandate — with lots of coverage options — we are back to a variation of the problem in 1. People will choose scaled down, inexpensive insurance when they are healthy and then switch to comprehensive, expensive insurance after they get sick.
  4. So to prevent a meltdown similar to the one described in 1, choices must be eliminated and there must be a standard (government-defined) benefit package which all individuals are required to buy and all insurers are required to sell. People won’t be allowed to buy anything less generous and no insurer would be foolish enough to offer anything more generous.
  5. Now suppose there is a health insurance Exchange where people get their insurance, but insurance can also be sold outside the Exchange. In particular, imagine a special deal offered to the Iron Man’s Club (requirement: swim a mile, run 10 miles and bicycle 20 miles). Soon, word would get out that anyone who can qualify for Iron Man membership can get the standard benefit package for a really cheap price. In this, and in other ways, insurers outside the Exchange would siphon away the healthiest people leaving the Exchange with the sickest, most costly enrollees.
  6. So to prevent the death spiral the conditions in 5 would lead to, insurance outside the Exchange would have to be outlawed and insurance within the Exchange highly regulated. (See below.)
  7. How can you force people to buy insurance? Since cattle prods are too impractical and prison cells are too expensive, about the only practical tool is a fine. And if you want it to work, the fine needs to be near (and maybe even above) the premium people have to pay.
  8. Of course, there is this problem: How can we know whether anyone has insurance? The easiest way — without a new bureaucracy — is to rely on the income tax system. Make people show proof of insurance at the time they file their income taxes.
  9. Trouble is: People file tax returns once a year and most people who are currently uninsured are uninsured for less than a year. So a logical way to get to people with greater regularity is to use the employers as an enforcement mechanism.
  10. Once employers are involved, however, we run into the unfortunate fact that most people believe that premium payments are an addition to wages, not asubstitute for them. So to the question, “should we mandate that you buy insurance or that your employer buy it for you,” the employer tends to win hands down. Result: both an individual mandate and an employer mandate seem inevitable.

It isn’t realistic to expect the majority of Americans to understand how these two propositions are connected, but it is more than reasonable to expect that lawmakers hire experts who can predict the consequences of all the nice ideas floating around in public debate before writing or passing laws.


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