Carnival of Adverse Selection

A Canadian friend once told me that he did not understand the American political system and asked if I could explain it to him. I told him that it was basically an exercise in pest management. On the one hand you have your smarmy rats (Democratic politicians) and on the other you have your vicious rats (Republican politicians). The first kind you don’t even want near you, the second kind you just want to stomp. Either way you’ve got an intractable rat problem, so mostly you just try to ignore them as best you can and get on with your life.

Sometimes though, they crawl across the kitchen counter in broad daylight and then you have to pay attention to them. That happened to me during the last Presidential debate. I was doing my best to ignore it, but we have a radio in the garage with a power switch stuck in the ‘on’ position and the debate was playing in the background. I had it successfully tuned out until they started talking about health care and Romney, who’s turning out to be a particularly nasty little ankle-biter, came with the crazy talk.

Here’s what he wants to do about health insurance:

  • Block grant Medicaid and other payments to states, limit federal standards and requirements on both private insurance and Medicaid coverage. The state can structure a cost-share program however it wants?  It can still shift costs to the Emergency Rooms of Medicare-participating hospitals and to the Medicaid programs of richer states (a kind of internal ‘self deportation’ which already happens to a limited extent)? I can’t imagine what the states might do? These changes are supposed to lead to innovation, and they will – just more the sort of innovation that financial system deregulation allowed.
  • Unshackle Health Savings Accounts by eliminating the minimum deduction requirement and allowing people to use the account funds to pay premiums. HSA’s are a nice product for a very limited income range. If you make too much money or too little to make the tax savings worthwhile, a HSA makes no sense. The proposed changes won’t change that. So, why make the changes? Hang on a minute, I’ll get to that.
  • Allow consumers to purchase insurance across state lines. Recall this is the now minimally regulated insurance product. Watch the insurance companies gobble each other up as they try to recruit all those newly available good risks. Watch high risk people get filtered out of the broader  insurance pool as the generous benefit plans become increasingly burdened with these individuals, and the prices for those plans go up and up, in turn prompting lower risk people to leave for cheaper, less generous benefit plans. Will Romney & Co. adequately fund a reinsurance plan to keep this from happening? Not to worry, people with chronic problems can still go to the ER, right? People can preemptively accomplish this adverse selection themselves via purchasing pools, right?
  • Medicare will become a premium support program. The premium support and benefit requirements will be fixed at the current levels in Medicare. If costs go up, the market will determine how people make up the difference. And in time, like gravity takes care of shoddy construction projects (who really needs architects or building codes), the market will take care of things by channeling the high risk people into the more generous plans (Medicare), driving those plans’ costs out of sight and eventually, driving those plans and high risk  people out of the market. I can almost hear the invisible hand slapping – see adverse selection and cost shifting above. (It’s actually worse than that – Medicare has a normative effect that goes beyond its simple economic effects but that is a story too long and tangential for the moment.)

So, why make the changes if they entail all these predictable distortions? Free market fundamentalism is the answer. Markets aren’t a highly effective tool for these guys, they are a moral imperative. So in their view, markets must be good for every application. Just set up a market and have faith; it will solve any problem. Regulation and critical analysis aren’t caution, they’re apostacy. I’d usually ignore this crap, like I ignore people praying for rain, but this is more like praying that your kid gets better from leukemia in lieu of consulting an oncologist. I feel like I’ve at least got to say something.

So, for all who wondered what could be worse than Obamacare – it’s this happy horse shit. These two rats are scampering across the counter in broad daylight with this mess, and they need stomping, (metaphorically of course).

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