Opponents of Trump’s new small business healthcare plans have labeled it “junk insurance.” The truth is that the plans are economically sensible, even if not politically nor moving the system in the direction desired by some. For they make corrections (no more than mild nibbles as yet, though) to the basic problems underlying the healthcare insurance system.
To an economist, the most obviously beneficial change is that the plans don’t have to cover the 10 essential health benefits mandated by Obamacare. That is, they are more like insurance plans than they are prepayment for healthcare plans. This is the largest mistake in the current arrangements, that many things entirely unsuited to an insurance model are lumped together into the one insurance plan.
Insurance, by definition, is the pooling of risk to pay for unlikely to vanishingly rare events, which also carry costs unsupportable by the individual. Very few houses burn down each year; we pay a modest sum to share the risk that it might be ours that does, or we couldn’t survive the financial effects without the insurance.
To take an extreme position about healthcare plans, birth control has no place in them. Something that’s likely to be taken by a majority of women for the majority of their fertile lives just isn’t something that benefits from risk-pooling. Further, we’re asking nearly everyone to pay into a complex system that almost everyone will draw out of, the benefit being nothing but high administrative costs.
Limiting insurance plans to just what insurance usefully covers — high-cost and low-risk events like cancer, car crashes, and the like — is economically sensible. We should use other methods (savings plans, or out of pocket payments perhaps) to deal with more routine expenses.
The second change is that these plans can be sold across state lines. An insurance system has overhead costs, those costs being less per policy the larger the insurance pool. Having the U.S. divided into 51 separate insurance markets just increases those costs; allowing sales across state lines will reduce them. The simplest and fastest manner of getting better insurance more generally for the country would be simply to insist that any insurance policy licensed in any one state is available in all. This would be true for all insurances too, not just health.
The biggest complaint from opponents is that these policies will start to unravel the cross subsidies inside Obamacare. Healthier people paying full freight into the system are what subsidize those who are unhealthier. If those who are indeed healthy opt for plans which only pay out for catastrophic events, which is likely since they will be cheaper, then those who are less well will have to pay even more for their comprehensive plans. The more who switch as a result of higher Obamacare premiums, the more who will switch, leading into what is called a death spiral.
That may or may not be what you’d like to happen, but it can still be viewed as useful. There’s nothing wrong with arguing that there should be subsidies from richer to poorer, or from healthier to sick. We already do that with progressive taxation and a welfare system, after all. There are, though, good arguments against cross subsidy within a system like health insurance. They tend to be inefficient and require rather more corralling of the population than is consistent with a free and liberal society, for example. But quite apart from anything else hidden such subsidies, well, they’re hidden. Thus we don’t actually know whether people are happy to be making them. If we’re taxed, then we know we’re being taxed. And we can, if we wish to, find out where the money is going. Hidden cross subsidies don’t allow this. The people bearing the costs may not even know that they are – thus it’s very difficult for us to say that they’re giving informed consent, isn’t it?
Thus I’m always in favor of squirreling out such hidden cross subsidies. If you think the rich should be paying for the healthcare of the poor, then fine, argue for that. But you should be taxing people to do it, so that those being asked to pay get to signal their consent or not. That is, tax and subsidize, not hidden cross subsidies in complex systems.
These new healthcare plans are only a minor start to whole system reform. But they’re in the right direction all the same. Actual healthcare insurance, not prepayment plans, sold across state lines increasing efficiency, and the killing of those hidden subsidies bringing a little more clarity to who is being asked to pay for what. All good moves, even if they are the very reasons why those who support the status quo squealing so loudly at present.
Tim Worstall (@worstall) is a contributor to the Washington Examiner’s Beltway Confidential blog. He is a senior fellow at the Adam Smith Institute. You can read all his pieces at The Continental Telegraph.
