Wednesday, August 19, 2009

Tax on the Healthy, or Single Payer Trojan Horse?

President Obama documented the framework and key themes of his health insurance reforms in an OpEd piece in this weekends NYT, and its a very interesting read.

After citing the need for a public option and some vague claims that we can save money by becoming more efficient and cutting waste in Medicare and Medicaid, President Obama turns to the insurance companies with guns blazing claiming they take advantage of their policyholders, make too much money and their profits are the root cause of health care’s escalating costs:

“Lastly, reform will provide every American with some basic consumer protections that will finally hold insurance companies accountable. A 2007 national survey actually shows that insurance companies discriminated against more than 12 million Americans in the previous three years because they had a pre-existing illness or condition. The companies either refused to cover the person, refused to cover a specific illness or condition or charged a higher premium.

We will put an end to these practices. Our reform will prohibit insurance companies from denying coverage because of your medical history. Nor will they be allowed to drop your coverage if you get sick. They will not be able to water down your coverage when you need it most. They will no longer be able to place some arbitrary cap on the amount of coverage you can receive in a given year or in a lifetime. And we will place a limit on how much you can be charged for out-of-pocket expenses. No one in America should go broke because they get sick.”

If the above restrictions are placed on the insurance companies, it’s clear one of two things will happen:
  1. Insurance companies will either give up on their health insurance business, or go bankrupt trying to comply with a set of restrictions that make it impossible to remain profitable. It is not possible to make money covering those with pre-existing conditions at the same premium levels currently paid by those without pre-existing conditions. These restrictions are nothing more than a blatant Trojan Horse for government run health insurance – forcing insurers (both for profit and non-profit) to either give up, or go bankrupt - leading the way for government to save the day.
  2. Insurance premiums will rise significantly to capture the increased risk of accepting patients with pre-existing conditions at the same premium level as one without a pre-existing condition. As the overall risk in the pool of insured individuals increases due to the forced inclusion of those with pre-existing conditions, premiums must also increase to cover that extra risk. Therefore, if the insurance company cannot charge a higher premium to the individuals with pre-existing conditions, the premiums of those without pre-existing conditions will increase. All Obama has done is removed the “w” from his usual income redistribution mechanism, and replaced it with an “h”. Instead of taxing the wealthy through the tax code, he will tax the healthy through insurance regulations.

The arguments against a public option are well known and have already been covered in this space. I’d like to focus on the less obvious, but more likely, impact of the tax on the healthy.

Under Obama’s proposal, an insurance company would be required to charge Moe - a 40-year old, 350lbs diabetic smoker with a family history of heart disease and a soft spot for super-sized value meals at McDonalds - the same amount as it does Larry – a marathon running, 40-year old organic vegetarian with four grandparents alive and well at 95.

The insurance company’s sophisticated risk model (based on projections of future health care expenditures) suggests Moe and Larry, based on their individual health profile, should pay premiums of $25,000 and $5,000/year, respectively. If the Obama plan does not permit the insurance company to differentiate between these two individuals, in order to remain profitable and stay in business, the insurance company must charge each person $15,000/year to cover the combined required premiums of $30,000.

Therefore, Larry, who works hard and eats well to keep his body in top shape is subsidising Moe, who’s most strenuous activity is getting up from the couch to get another Twinkie and a 2 liter of Coke, to the tune of $10,000 per year.

There is a better solution.

The key that will unlock health care reform is to make private insurance portable so people can buy and keep health insurance for life, regardless of where they live, or where they work.

The first step is to remove the state-by-state regulatory structure around health insurance, permitting individuals to shop around for the best plan, regardless of where that plan resides.

The next step is to remove the linkage between employer and insurer and let people buy health insurance directly in a free and open market – just as they would buy car insurance. This would also remove the numerous governmental subsidies provided to employers through the tax code, saving the taxpayer a fortune.

The bottom line is that it’s important for individuals to be in control of their health care, and to pay premiums directly (as opposed to just being taken out of a paycheck) as this is the only way in which costs can truly be controlled.

After these changes, once a young adult drops off of their parents insurance plan, they would shop around for the best deal and have the ability to purchase a life-long health insurance contract (a new product that the insurance companies would be more than happy to provide).

Buying insurance for life at an early age will effectively make the pre-existing issue immaterial. When insurance is purchased at such a young age, the narrow gap between high risk individuals and low risk individuals, and the premiums collected during the younger years, will be reflected in a more narrow range of premiums. Instead of the $25,000-$5,000 cost in the example above, it might be something more like $12,000 – $8,000. Therefore, it’s much less likely to have one portion of the population substantially subsidising the other as they are all relatively equal risks early in life. This type of coverage would likely be slightly more expensive than current plans, but it’s a small price to pay for guaranteed coverage for the rest of your life.

Insurance companies will love this as they gain access to customers across the country and for life. Consumers will love this as it guarantees them insurance for life, regardless of where they live, their job, or future health conditions. Lastly the government should love this because it will reduce the burden on Medicare/Medicaid and there will be fewer uninsured.

Reforming something as large as health care should be done with incremental, logical changes over time, not with drastic, half-baked reform that is rushed through Congress before it can be read, much less analysed, by the voting public.


  1. Looks like the Wall Street Journal agrees -