Monthly Archive for September, 2009

It’s explained here:

Let’s start with basics: Insurance protects against the risk of something bad happening. When your house is on fire you no longer need protection against risk. You need a fireman and cash to rebuild your home. But suppose the government requires insurers to sell you fire “insurance” while your house is on fire and says you can pay the same premium as people whose houses are not on fire. The result would be that few homeowners would buy insurance until their houses were on fire.

The same could happen under health insurance reform. Here’s how: President Obama proposes to require insurers to sell policies to everyone no matter what their health status. By itself this requirement, called “guaranteed issue,” would just mean that insurers would charge predictably sick people the extremely high insurance premiums that reflect their future expected costs. But if Congress adds another requirement, called “community rating,” insurers’ ability to charge higher premiums for higher risks will be sharply limited.

Thus a healthy 25-year-old and a 55-year-old with cancer would pay nearly the same premium for a health policy. Mr. Obama and his allies emphasize the benefits for the 55-year old. But the 25-year-old, who may also have a lower income, would pay significantly more than needed to cover his expected costs.

Like the homeowner who waits until his house is on fire to buy insurance, younger, poorer, healthier workers will rationally choose to avoid paying high premiums now to subsidize insurance for someone else. After all, they can always get a policy if they get sick.

To avoid this outcome, most congressional Democrats and some Republicans would combine guaranteed issue and community rating with the requirement that all workers buy health insurance—that is, an “individual mandate.” This solves the incentive problem, and guarantees that both the healthy poor 25-year-old and the sick higher-income 55-year-old have heath insurance.

But the combination of a guaranteed issue, community rating and an individual mandate means that younger, healthier, lower-income earners would be forced to subsidize older, sicker, higher-income earners. And because these subsidies are buried within health-insurance premiums, the massive income redistribution is hidden from public view and not debated.

The full article can be found here.

This plan laid out by Brad DeLong and endorsed by Mathew Yglesias is a healthcare plan I could support:

— 1. Taxes on public health hazards (booze, sweeteners, etc.)

— 2. An army of publicly employed doctors and nurses working in clinics and vans and such roaming the country dispensing preventive care and lifestyle advice to all and sundry.

— 3. 15 percent of your income is automatically plunked into a Health Savings Account.

— 4. When you want health care services that aren’t covered by the clinics, you pay out of your HSA.

— 5. If there’s money left in your HSA at the end of the year, it gets plunked into your IRA unless you specifically fill in an opt-out form.

— 6. If you run out of money in your HSA and need more health care, the government pays for it.

— 7. On top of the 15 percent HSA deduction, there’s a 5 percent tax to pay for 6.

This plan, unlike the ones before congress, actually addresses the main driving force behind continued healthcare costs: shielding the consumer from prices. If only congress could adopt such a plan, I’d be for it and I’d bet a majority of Republicans would be too.

Brad DeLong explains the plan in greater detail here. Matthew Yglesias makes valuable comments here and here.

Update: Clive Crook has more.