I never had much hope that Senator Max Baucus’ Finance Committee would bring forth a sensible anodyne to the House’s fatally toxic Affordable Health Choices Act, although I admit that his earlier markup had some promising features. While it didn’t have anything that would ever bend the cost curve in any direction but skyward, there were some aspects of his approach to the insurance exchange that showed at least a modicum of respect for market realities—unlike Speaker Pelosi’s risible public option. But all that vanished yesterday with the Senator’s new markup.
I’m still wading through the bill, but one conclusion stands out: the insurance exchange, as described in the bill, will fail. Or more accurately, any private insurer or member-owned co-op that offers individual health insurance through the exchange will be quickly bankrupted unless it can get massive subsidies from the government.
The dilemma lies in Senator Baucus’ failure to recognize and deal with the fundamental problem in health insurance: adverse selection. Stated simply, adverse selection is the tendency of sick people to buy and hold on to their health insurance more readily than healthy people. Without proper rules to prevent it, adverse selection will always deprive the insurance pool of the necessary premiums from the 80% who are healthy to pay for the medical costs of the 20% who are really sick.
Because of this, any come-one-come-all health insurance exchange without proper rules to control adverse selection will quickly fill up with sick people. Healthy people will stay away until they get sick. Then there will be only two possible outcomes: either the exchange and its insurers will go broke, or the government will step in to assume their liabilities in the form of massive, permanent subsidies that ultimately become indistinguishable from a single-payer system. Actually, there is a third option called The American Choice Health Plan, but that’s another story for another time.
A Penalty in Name Only
The various congresspeople working on health reform know all this. Their solution to the adverse selection problem is to require all Americans to buy health insurance starting in 2013. That way, savvy consumers won’t be able to game the system to its destruction. But such a mandate can only be as effective as its penalties for nonparticipation.
What grievous punishment does the Baucus bill propose to inflict on America’s uninsured scofflaws to force them into the exchange? According to the markup, “The consequence for not maintaining insurance would be an excise tax of $750 per adult in the household. This per adult penalty would be phased in as follows: For 2013, $0; $200 for 2014; $400 for 2015; $600 in 2016 and $750 in 2017.” Also, these penalties will be waived for people without insurance when purchasing it would have cost them more than 8% of their income.
The implications are clear. If you’re a healthy American who doesn’t want to spend thousands of dollars a year on health insurance, all you’ll have to do—at most—is pay a modest penalty that rises from zero in year one to $62.50 per month in year five. You can think of it as the cost of a cheap option to buy health insurance when you get sick.
Let’s say it’s late 2017 and Amy’s friend Bob is 45, self-employed, and disgustingly healthy—except for a bum knee from an old high school football injury. It has long bothered him, but not enough to require surgery. He has consistently declined to buy insurance through the Max Baucus Memorial Health Insurance Exchange and instead pays a penalty that has averaged $32.50 per month since the exchange’s inception in 2013. Lately, however, Bob’s knee pain has become intense, and his doctor is recommending knee-replacement surgery costing $125,000 (up from $60,000 in 2009).
Fortunately, it’s late November, so Bob is able to immediately sign up for health insurance on the Baucus Exchange during the annual year-end open-enrollment period. Unrestrained medical costs have driven the premiums to a vertiginous $2,500 per month. Bob quickly undergoes the surgery and, after a three-month recovery period, gets a clean bill of health from his doctor. He then immediately drops his health insurance and returns to paying the modest tax penalty until something else goes wrong with him. Bob now boasts about gaming the system and getting $125,000 in medical care for a mere $7,500 in premiums. “Is this a great country or what?” Bob crows.
Bob’s friend Amy, on the other hand, is more than a tad annoyed at Bob, because she realizes that millions of people just like him have driven her own insurance premiums from a few hundred dollars a month for her old high-deductible HSA plan to $2,500 in 2017 for a government-mandated plan that covers wigs, drug-rehab, acupuncture, weight-reduction surgery, massage therapy, smoking-cessation drugs, and hundreds of other things she doesn’t want and will never need.