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Keep Your Friends Close, And Your Enemies Closer (Yeah, I’m Talking To You, Rush)…

January 12th, 2010 · 11 Comments
Policy

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

Tags: Policy

11 responses so far ↓

  • 1 mike // Jan 12, 2010 at 7:36 pm

    how often do you actually listen to rush? if you’d give him a full week you’d discover much of his “arrogance” is tongue in cheek. part of his shtick is deliberately tweaking those on the left who think he’s so full of himself by … acting like he’s full of himself. i guess my point is don’t form an opinion about him via one chapter of a book he wrote 17 years ago and what those in the media say about him. give him a chance.

  • 2 Scott Seward // Jan 12, 2010 at 8:22 pm

    I’ve listened to Rush on and off for about 12 years. I’ll agree that he’s an asshole in that he claims to be pro limited government, yet promotes Neo-Cons and other big government republicans during each election cycle. He’s also excellent at spinning the necessity of big government republican’s bills that continue to erode any presence left of freedom and liberty in this country (i.e. “Patriot Act). Further, he like many commentators, are quick to act is if they understand economics, finance, and the like, and thus create their discussions based upon their supposed understandings; all the while, doing a great injustice to those listeners that have little or no education in such topics. So goes the same for John & Ken, Lou Dobbs, etc.

  • 3 Dan L // Jan 12, 2010 at 8:50 pm

    econgirl, very disappointed by this post.

    I find it very strange that you mention the adverse selection problem that arises from Option 1 (banning price discrimination for pre-existing conditions) without mentioning the standard cure for this problem: health insurance mandates. ANY credible health insurance reform plan that includes Option 1 also includes mandates of some form. Omitting this fact from your exposition makes it sound as if some simpleton’s version of Option 1 is on the table, which is just not true.

    In short, Rush IS wrong in this case, because under the proposed health care reforms, you can’t get cancer and then start buying insurance, because you are mandated to *already have* insurance. Now, there are valid arguments that can be made against mandates (imho, weak ones), so one could theoretically have a reasonable debate over whether it’s worth having mandates to make Option 1 viable, but of course, this is NOT the debate Rush is having. By your account, Rush is debating a proposal that simply does not exist. (And this semantic issue over whether the definition of “insurance” is beside the point.)

    @mike: You’re an idiot. His “arrogance” might be tongue-in-cheek, but his stupidity and is not. Btw, when I said you were an idiot, I was actually just trying to “tweak” you. Hardy har har. My point? Is there much of a difference between *acting* like an asshole and *being* an asshole?

  • 4 Altereggo // Jan 12, 2010 at 9:27 pm

    @ Dan.

    No, the “mandates” suggested allow you to pay a (relatively) small fine if you choose to remain uninsured.
    Essentially, you are paying a small fee to force the already insured to pay for you when you get sick (and demand coverage).

  • 5 econgirl // Jan 13, 2010 at 3:44 am

    Let me clarify a few things:

    1. Regardless of what Rush thinks his schtick is, a lot of people take most of what he says very seriously, and he knows that. Therefore, to act the way he does when he knows full well that people largely take it in a way other than what was “intended” still makes him an ass. That said, just because he’s an ass doesn’t mean that he is always wrong.

    2. The point I was going to make about the mandate issue was basically made above by others, and I apologize for not explicitly including it in the original post. Any implementation of a mandate is going to suffer from an initial conditions problem, given that there is no current mandate in place. So, by definition, option 1 would lead to guaranteed subsidation of a lot of people, since a lot of people are currently denied health insurance because of pre-existing conditions. Furthermore, Altereggo describes a situation similar to what we are seeing in Masaachusetts with the health insurance mandate, and this example shows that a mandate is not a cure-all for adverse selection. But I do agree that it’s better than nothing.

  • 6 David // Jan 13, 2010 at 4:25 am

    Instead of a fine, people without insurance could be automatically signed-up for the cheapest health insurance plan available to them. This is what happens in Switzerland, which also has a mandate. Although this is really only a problem for people who immigrate to the country: you cannot cancel your health insurance with one company until your new insurer confirms that you are now covered by them.

    You still deal with the problems of option 1 initially, but I don’t think this is a big issue in the long term. At some point, Medicare would have to deal with those pre-existing conditions anyway. So we end up paying for it either through higher insurance premiums or through taxes. Then again, the effect on premiums might not be that big: do we know if people without insurance are less healthy as a group than people with insurance? The influx of young people might mitigate the cost of treating pre-existing conditions.

  • 7 ELTrain // Jan 13, 2010 at 10:21 am

    Dan’s last point is an important one. As a currently uninsured (not by choice), young, healthy person, tossing me back in the system isn’t really going to cost anyone anything, save a couple bucks for a yearly physical that is a few years overdue. Plus, I’d have the peace of mind of finally being insured again, which makes it likely I’d be healthier in the long run (less stress).

    I love business and profits and all that (I’d like to make a profit of some sort some day!), but why does our health have to be a profitable business? Seems to me that if you are going to go the ethics route, the “greatest good for the most” is a non-profit approach to health insurance. Insurers would still keep the majority of their employees (jobs are good), because the same functions would be performed, and none of us would be paying for someone else’s profit margin.

    Though this is likely a pipe dream here in the States, coupling coverage-for-all mandates with insurance companies that are non-profit NGO’s (who would still have purchasing power based on the numbers of members) seems like a no-brainer.

  • 8 Dan L // Jan 13, 2010 at 11:30 am

    @Altereggo: One can certainly have a reasoned debate over the details of the mandate scheme (e.g. you are arguing that the penalties are too low), and whether “Option 1 + mandate scheme” is actually desirable. But again, my immediate point here is not that Congress’s plan is wonderful; my point was that Rush’s framing of the debate (and econgirl’s implicit framing) is just flat-out wrong.

    @econgirl: The “initial condition” issue is annoying, but is it really a big deal? People also got a “free ride” when social security first started. I guess some people get upset about these things. Anyway, given that our initial conditions here = ridiculously absurd health care system, any improvement will require the breaking of some eggs.

  • 9 holmegm // Jan 13, 2010 at 2:45 pm

    So, let me summarize:

    1. Rush is right that “coverage” for pre-existing conditions isn’t really insurance as normally understood.

    2. You still hate Rush and think he’s an @#%.

    Gotcha.

  • 10 econgirl // Jan 13, 2010 at 3:32 pm

    Hate is such a strong word. =P I merely do not approve of the fact that he uses propaganda, hyperbole and bombast to market himself and his (supposed) beliefs, which prevents people from (read, gives people an excuse not to) actually analyzing issues and thinking for themselves.

  • 11 Tim Cullen // Jan 15, 2010 at 1:46 am

    I have to love it when people talk about breaking some eggs or the greater good, utilitarianism is just such a wonderful ideology. Presuming of course that we actually get some good out of the breaking of the eggs which isn’t clear.

    The problem with most advocated government solutions to health reform is that government is incapable of accurately setting prices for medical services which they will do and already do to a degree with Medicare, and that most plans do not have individuals paying significant amounts out of pocket which leads to the kind of overconsumption of often frivolous services that prompts the price controls. I though the debate about price controls was over, boy was I mistaken. If you think government can do this well, look at what the states do now with coverage mandates, underwriting restrictions, and the reaction to the whole mammogram issue.

    I saw a rather rational single payer type system in the Atlantic a while back, where everyone had to buy some national catastrophic insurance plan that covered expenses over like 50k and the rest was paid for out of mandatory savings in health savings accounts where poor people would get some sort of defined contribution.

    I don’t buy into the health care as an entitlement line, how can anyone be entitled to another’s labor? However, there is certainly an argument that every one could benefit from assuring a basic level of care for actual poor people. However if we give transfer payments to those not poor, we merely allow them to purchase more luxury goods and any social benefits are rendered nil and instead we are just pursuing some politician or political party’s arbitrary conception of social justice.

    Back to the single payer plan, at least in the case I mentioned individuals would have the ability and incentive to control costs working with their own doctor; rather than trusting that function to a bunch of bureaucrats who cannot possibly gather all the decentralized local knowledge that can be communicated through a price system, and which by necessity relegates us all to a one size fits all policy which most certainly won’t fit us all. Those are the eggs that must be broken though right?

    I’d favor a national free market for the insurance plan aspect, but I find that the most important things to do now is to decouple insurance from employment, get people paying more at the point of service, and institute loser pays tort reform. Anything that gets us more in that direction though, even if it explicitly redistributes a bit more income will likely be an improvement. It doesn’t however seem that progressives want to go in that direction, because they think people are too stupid to take care of themselves and might not buy the set of services the average progressive want; while there is a kind of fatal conceit that a handful of super smart health bureaucrats can better meet the complex and diverse set of human desires with regards to health care better than the market, where the main issue is not largely non existent market failures of moral hazard and adverse selection often largely due to coverage mandates, community rating, and underwriting restrictions but rather just that some people can’t afford health insurance.

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