Explaining our new Health Care System
By Arnold Kling
1. The intent was to leave Medicare and employer-provided health care largely intact. The main effects are supposed to be on the health insurance market for individuals.
2. A major goal is to enable people with pre-existing conditions who fall outside of Medicare and the employer-provided system to obtain health insurance at premiums that are below the expected cost of their care.
3. The legislation tries to solve the pre-existing condition problem by fiat, that is by making it illegal for health insurance companies to discriminate against people on the basis of health status.
4. The anti-discrimination provision alone reduces the incentive for healthy people to obtain insurance. Instead, they may prefer to wait until they get sick. To the extent that they do so, premiums will rise to reflect the average cost of health care for a sick person.
5. To counter this incentive, the legislation includes what is called a “mandate” to purchase health insurance. What this amounts to is a small tax on those who do not purchase health insurance. In practice, the tax appears to be low relative to health insurance premiums. If you were “close” to being willing to obtain health insurance at existing premiums, the tax would be enough to persuade you to buy it. However, if you were not close, the tax would not be enough.
Overall, this looks to me like a clumsy way to redistribute wealth from the healthy to the sick. The Republicans proposed a less complicated alternative approach, which is to subsidize the high-risk pools that many states have set up to help people with pre-existing conditions purchase insurance. (Note that Tyler Cowen disagrees that Republicans offered anything serious on health care.)
Will subsidies for high-risk pools work? I can think of reasons why they might not. Will the approach embodied in the legislation work? I can think of reasons why it might not. I wish we had tried different approaches in different states. (This would require states to make rules about what happens when somebody moves across state lines.) But given that we do not know what is the best solution, taking one approach, carving it in stone, and applying it nationwide strikes me as unwise.