Tuesday, December 22, 2009

The health insurance deal

So the deal is roughly -- the government will guarantee that I can buy catastrophic coverage for my family for 2% of income with a annual deductible of 8% of income? I don't think that is anything close to what Democrats intended, but maybe that's not so bad. How far would that be, really, from the libertarian preference for catastrophic insurance combined without out-of-pocket payments for normal medical expenses? -- Slocum in the comments at Marginal Revolution

The press has been focusing on the details of the health care bill, and the political deal-making and drama. The emotional, moral side of me is angry that Nebraska gets a special sweetheart deal because one of it's senators was a key vote. The rational part of me knows that in the long run that type of thing doesn't really matter, and also knows that the only way to prevent that type of thing from happening is to change the incentives, which means changing the system.

If the health care bill makes it through the House/Senate reconciliation process and becomes law, what incentives will change?

Here's a thought experiment: imagine you're a self-employed person making $60,000 per year. Under the new health plan, if you don't buy health insurance you're fined 2% of your income-- $1,200 per year.

Since you can't buy health insurance for $1,200 per year, you don't -- instead you just pay the fine and pay for any minor health expenses as the come up.

If you get something serious, you sign up for health insurance and let your insurance company pay. They have to take you because they're not allowed to exclude people with pre-existing conditions.

So: what does that do to the overall cost of health care? I think it will actually push costs down. Lots of young, healthy people will all be paying for everything but catastrophic health care costs out-of-pocket. They'll be cost-conscious.

What will that do to the health insurance companies? It will drive up their costs; we'll end up with a weird system where healthy people pay 2% of their income plus actual medical costs. And sick people pay 8% of their income in health insurance premiums, with the government subsidizes costs above that. There will be an incentive for sick people to make as little income as possible ("do I want to pay 8% of $50,000 or 8% of nothing?"). And there will be some unintended consequences; I predict you'll see a lot more sick people getting divorced (or not getting married), so their spouse's income isn't counted.

Will it be better than the system we have now? I don't know. I think it depends on what happens to the majority of people who get their health insurance through their employer. I'd like to see more details on what the employer mandate looks like; if employers have to pay up to 8% of income for a young, healthy employee, but that same young, healthy employee would only have to pay 2% of income if they were on their own, then that's an incentive for young, healthy people to work for themselves.

Maybe we'll accidentally create a whole generation of entrepreneurs...

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