If you’ve been following my Twitter feed, you may have gathered that I decided to drive down to Atlanta from Boston for the AEA meetings. You’re probably not surprised that I realized that this was not the best idea I’ve ever had somewhere around Washington D.C., but by that point it was too late to change course. To add insult to injury, my best option throughout much of Virginia and North Carolina was to tune into Rush Limbaugh’s show. To give you some background…Rush and I have relationship that is rocky at best. (See here and here for some previous Rush-themed posts.) I think this stems back to my freshman year of high school when a classmate kept pushing the feminism chapter of Rush’s book into my face (choice quote: “Feminism was established to allow unattractive women easier access to the mainstream.”) as if it were the bible or something. I think I got my classmates to pretend that this person didn’t exist, and he switched to another school the next year. (Full disclosure: I am friends with this person now, and I know better than to assume a causal relationship between the two aforementioned events.)
I figured I should listen for a while, if for no other reason than I should be knowledgeable about those things that I mock. The show started out with a choice quote that was pretty much what I would have expected:
“…a quarter of an inch…no, not even…0.4 inches.”
Way to go with the mad math skillz. Apparently Rush also thinks that the US can raise $30B for health insurance by giving each taxpayer the option to donate $1 on their tax returns. Last time I checked, there were 100 millon or so households, so that calculation is only off by a factor of…at least 300?
I found this all to be very entertaining, so I refrained from changing the station. (I was also amused by the parody commercials that are on during the show, mainly because it’s often unclear in which direction the parody goes. For example, there is a public service announcement advising people against getting married since monogamy leads to weght gain…but I can’t really tell whether the sarcasm means that I should heed the advice or ignore it!) The first thing Rush did was go on a rant about how health insurance isn’t actually insurance if it covers pre-existing conditions. He explained that insurance, by definition, is protection against future uncertain negative events, and he used analogies to other types of insurance to make his point- it would be a bit absurd for people to purchase automobile insurance AFTER they’ve already crashed their cars, right? Therefore, according to Rush, the health care reform proposals are absurd since they have clauses limiting discrimination based on pre-existing conditions.
I really hate it when people dislike are right, and, while I don’t necessarily agree with the prescriptive conclusion that he reaches, Rush is right in that it’s important to distinguish between “health insurance” and (potentially subsidized) “health care coverage.” Granted, there are reasons why an individual would want to purchase health insurance before they have anything that would be classified as a pre-existing condition, but let’s think about the incentives in play in a non-discriminatory system. Say a person who doesn’t have health insurance develops a condition that would cost $20,000 per year out of pocket to treat. If this person can’t be charged differently because of his pre-existing condition, his health “insurance” might cost somewhere in the neighborhood of $300 per month, or $3,600 per year. This means that, in order for the insurance company to remain solvent, the extra $16,400 has to come from somewhere. Maybe the insurance company has a special deal with healthcare providers that lowers the $20,000 cost somewhat. However, even if they only pay, say, 60% of the sticker price (or $12,000) for treatment, this still leaves a gap of $8,400. This gap can be made up for in one of two ways: either the premiums are calculated such that individuals without pre-existing conditions are greatly subsidizing other patients, or the government subsidizes the patients with pre-existing conditions directly. Either way, healthy patients end up subsidizing unhealthy patients.
Let me be clear about something- even if individuals with pre-existing conditions are denied health insurance, the patients who turn out to be healthy end up subsidizing those who don’t. This is arguably fair – if diseases are largely unpredictable, then the health insurance system works the same as auto or home insurance. (Yes, there are issues with adverse selection and moral hazard, in that people don’t always act as healthily as they could, but similar problems haven’t yet crippled other types of insurance markets.) Put simply, it’s something along the lines of “The bad news is that you are subsidizing other individuals. The good news is that you are subsidizing others because you don’t have cancer and they do.” I don’t know about you, but I’m happy to take that trade. I think I would be less happy about a situation such as “The good news is that you don’t have cancer. The bad news is that other people do and they specifically signed up to have you, at least in part, pay for their treatment.”
I am not trying to imply here that health insurance *should* be denied to people with pre-existing conditions. I am merely pointing out that we should understand the consequences of choices like these in order to form informed opinions and make informed decisions, and I’ve written before about the need to examine our values as a society and use those to decide what’s reasonable and what’s not. In this instance, we have a number of options, each with its own pros and cons:
- Option 1: Disallow insurance pricing discrimination based on pre-existing conditions. This basically guarantees that rampant adverse selection is present, since it’s basically akin to letting people buy retroactive fire insurance once their houses have burned down. However, there is a fairness argument to be made in favor of this plan, at least in certain circumstances. Logically speaking, exceptions should be considered for people who had health insurance before their condition was diagnosed and are just trying to switch from one plan to another, possibly because they switched jobs or lost a job or whatever. If you wanted to get really creative, you could design a system whereby the old insurance company provides some sort of compensation to the new insurance company, since the old insurance company is getting a “bad” customer off its books and the new company is taking him on knowing he’s not going to be profitable.
- Option 2: Allow pricing discrimination based on pre-existing conditions, but disallow overall rejection of coverage. In the preceding numerical example, the customer had a condition that cost the insurance company a guaranteed $12,000 per year to treat. Why not allow this customer to get an insurance policy that costs this $12,000 per year plus whatever the premium for a similar person without a pre-existing condition is? In this way, the customer is benefitting from the purchasing power of the insurance company (in that he is paying $12,000 rather than $20,000), and now others don’t have to subsidize his sorry “I bought insurance because my house burned down” butt. This gives people an incentive to purchase insurance before things go wrong but doesn’t totally leave them out of luck if they don’t plan ahead. The downside here is that even the $12,000 per year is likely out of reach financially for a lot of households, so we still have the open question of whether everyone is entitled to affordable health coverage.
- Option 3: Allow refusal of coverage based on pre-existing conditions: In some insurance markets, adverse selection and moral hazard are strong enough that there is no finite price that is advantageous to both the consumer and the insurance company. Furthermore, it could be the case that, even once a condition is diagnosed, there is the potential for the costs to treat the condition to spiral completely out of control. That said, the negotiating power of the insurance companies should make it so there is a price where both the insurance company and the individual are better off entering into an insurance contract than going it alone. If this is the case, then refusal of coverage *should* be a non-issue. (Refusal of coverage happens currently because companies either aren’t allowed or don’t know how to price properly for these types of customers. But doesn’t it seem a little absurd to live in a world where access to insurance for your car but not for yourself is guaranteed?)
In general, I am agnostic as to where the debate on health care comes out, but I do strongly hope that people (read, politicians and opinion-makers, as Rush claims to be) actually take the time and effort to understand the mechanics and consequences of what they propose and debate rather than just latch onto choices that sound superficially appealing.
Coming back to Rush specifically, I will paraphrase The Big Lebowski and summarize the previous discussion by saying “you’re not wrong, Rush, you’re just an asshole.”
P.S. Happy birthday Rush! =D