Why (and what) medical insurance should be required?

Amidst all the controversy surrounding the budget confrontation between the Democrats in the Senate and Republicans in the House of Representatives, the Cato Institute hosted an event a few weeks ago to mark the first anniversary of the passage of so-called “Obamacare.” Cato scholars explained why they think key provisions of Obamacare are unconstitutional and/or unwise, and other scholars who support Obamacare responded.

Much of the controversy surrounds the “individual mandate,” the requirement that every American purchase medical insurance. Now that insurance companies are no longer permitted to deny coverage because of a preëxisting condition, the individual mandate is the flipside, designed to prevent people from waiting until they get sick to purchase coverage they cannot be denied.

I’d like to share a few recent thoughts on Obamacare and medical care in general. I’d be interested in your comments, particularly my proposal (#4).

1. I think the practical merits of Obamacare are very questionable. It’s unclear to me how essentially putting many more folks into Medicare or a Medicare-like program will help, when Medicare is bankrupting the federal government.

2. So-called “insurance” may not be the best way to pay for medical care. Insurance is supposed to be protection against rare, catastrophic events, paid for with low premiums and hopefully never used. Homeowner’s insurance is a good example. Health “insurance,” on the other hand, has high premiums, and you actually purchase it planning to use it at some point—a prescription, having a child, or regular checkups. We don’t buy insurance for other things we use regularly, because it would be expensive—for example, we don’t purchase oil-change insurance or home-remodeling insurance. If I had such insurance, I would get my oil changed every week and remodel every year because I would incur zero marginal cost. Then my premiums would skyrocket, I would cancel my insurance and just pay for an oil change every 3,000 miles, and I would wonder why I had ever signed up for insurance in the first place.

3. The constitutional argument for the individual mandate in Obamacare is based on a certain reading of the “interstate commerce” clause, which has been interpreted since the 1930s in such a way that just about any economic activity can be regulated by the federal gov’t. The idea is: because everyone will use medical services at some point in their lives, the inactivity of failing to finance those services adequately actually constitutes economic choice that produces a negative externality (i.e., the hospital has to treat you whether you can finance care or not).

I don’t want to say there’s nothing to this. Healthcare is different in many ways from other services and commodities; we want outcomes rather than services per se. I don’t want to be nickel-and-diming this or that test while my wife is in the hospital—do every test, and figure out what’s wrong with her, dangit! This is also why people pay more for cruises with unlimited “adult” drinks, tips included: they don’t want to worry about anything. We are willing to pay extra overall, in exchange for not worrying about the individual services.

(Of course, some hospitals and HMOs have experimented in the past with outcome-based payment structures, rather than fee-for-service payment structures. But the problem is that Medicare is still fee-for-service, and Medicare pays more than 40% of the medical bills. As long as that structure is in place, doctors will still have incentive to perform more services than necessary, and hospitals will fight with insurance companies over reïmbursements, and insurance companies will pass on the costs to consumers in premiums.)

4. Obamacare’s advocates point out that quite a lot of medical care is delivered inefficiently and expensively in emergency rooms, since ERs are required by legislation to provide emergency treatment regardless of ability to pay. This is then part of the rationale for requiring insurance.

Now, only the most heartless anarcho-capitalist would want to live in a country where you could be refused life-saving treatment in an emergency because you can’t pay. Seriously?!? Let’s save a life first, and argue about money later.

But…perhaps there’s a better way to deal with that scenario, rather than the federal gov’t requiring everyone to purchase insurance. (I don’t much like the idea of single-payer, which would stifle innovation and create queues for services—but even that would be better than a gov’t mandate.)

What we have in the emergency scenario is what economists call a problem of externalities. Externalities affect people other than the voluntary participants in a private transaction. Thus, externality is a theoretical rationale for gov’t intervention, either to prevent a negative externality or to promote a postitive externality. Pollution from my car is a negative externality, so the government taxes gasoline to make me use less and to clean the environment (in theory). Technological research produces positive externalities, so the government protects copyrights and patents to encourage innovation that would otherwise have no exclusive profit motive. There are of course different opinions about the sorts of externalities that provide solid ground for gov’t intervention in a private transaction, but generally externalities are such a basis.

A fire company or a local police force is an example of a service that produces positive externalities. People benefit from knowing that, in an emergency, they can count on the police or the firemen to be there. These services are usually publicly funded by tax dollars (coërcion), since citizens might refuse to pay voluntarily, knowing that the fire dep’t will respond to a fire whether they paid private dues or not.

Most states also have minimum auto insurance requirements for driving on public roads. Some libertarians oppose this, but I do not (and as a federalist, I think states can try it if their legislatures want to). If you drive a huge piece of steel at deadly speeds on government roads, you need to be insured against damages you inflict upon others. If you keep inflicting damage, your insurance premiums will go up until you just can’t drive anymore.

Now, it’s a huge leap from, “Everyone who chooses to drive a car needs to have minimal insurance against liability,” to, “Every one of the over 300 million US residents must have insurance that covers mammograms and drug rehab.” But in principle, if emergency rooms are required to treat, couldn’t the gov’t (preferably state or local) require some minimal insurance to cover that possibility? I’m thinking of:

* Baseline insurance;
* Low premiums (I’d rather not have just tax dollars from the pot, since I want people to see the amount coming out of their check);
* Not to be used for routine care or in non-emergencies; and
* Privately purchased like auto insurance.

Companies could compete for the best rates, like auto insurance companies do now; they could look at the record of your use of emergency services (not all medical treatment, so they wouldn’t know whether you had diabetes or some other expensive chronic condition) and charge accordingly. They could also offer package discounts if you bought comprehensive insurance, just like I get a discount on my auto insurance because I have a renter’s policy as well.

I think there have to be better ways of encouraging people to finance their medical care wisely. I didn’t vote for McCain, but I liked his idea of taking the tax advantage away from employer-purchased medical insurance and just giving it to the taxpayer, irrespective of workplace. Then employers would eventually offer that extra compensation as additional salary, and individual families could purchase the combination of coverage they want from whichever companies they choose. Linking insurance to employment is a dumb idea that sprang up like a weed during the WWII-era wage/price controls.

But requiring everyone to purchase insurance is not something Congress should be doing. Let states experiment and reach agreements with other states about reciprocal funding of care, etc. I wouldn’t mind seeing a baseline insurance requirement, and then lots of innovation in financing of medical services on top of that.

There’s a lot here. Thoughts, especially on #4?

About Benj

I’m a native North Jerseyan, transplanted to Pennsylvania...lived and taught in Eastern Europe for six years…Old Testament professor, ordained minister, occasional liturgist…husband to Corrie…father to Daniel and Elizabeth.
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1 Response to Why (and what) medical insurance should be required?

  1. Pingback: Best of 2011 | think hard, think well

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