• Health Care

    Free Riding as Coverage

    A few posts ago I talked about the free rider problem in Obama’s healthcare plan.

    I’m not sure whether Obama understands the potential impact of that problem.   But he clearly embraces its basic mechanism as a positive feature.

    In the Democratic debates, Obama slammed Hillary for proposing a health care plan that included mandates – a requirement that everyone buy health care for themselves.

    OBAMA: … Let’s take health care. About 95 percent of our plans are similar. We both set up a government plan that would allow people who otherwise don’t have health insurance because of a preexisting condition, like my mother had, or at least what the insurance said was a preexisting condition, let them get health insurance. We both want to emphasize prevention, because we’ve got to do something about ever escalating costs and we don’t want children, who I meet all the time, going to emergency rooms for treatable illnesses like asthma….

    What [people are] struggling with is they can’t afford the health care. And so I emphasize reducing costs. My belief is that if we make it affordable, if we provide subsidies to those who can’t afford it, they will buy it.  Senator Clinton has a different approach. She believes that we have to force people who don’t have health insurance to buy it. Otherwise, there will be a lot of people who don’t get it.  I don’t see those folks.

    And I think that it is important for us to recognize that if, in fact, you are going to mandate the purchase of insurance and it’s not affordable, then there’s going to have to be some enforcement mechanism that the government uses. And they may charge people who already don’t have health care fines, or have to take it out of their paychecks. And that, I don’t think, is helping those without health insurance. That is a genuine difference.

    Obama recognizes the obvious: if you force people to buy health care, they are going to have to pay for it (and you will probably need fines to prevent people from dodging costs).  So he glosses his lack of mandates as a charitable feature.  It is unkind to force everyone to pay for health care – but people who don’t want to pay for it should get it anyway.  And Obama makes it clear that they will:

    CUMMINGS: … the truth is that most Democrats really do want full coverage, everybody covered. Now, Senator Obama, this is a question for you. Under your plan, which is voluntary, it creates incentives for people to buy, but still is voluntary. There would be around — about 15 million people who would still not be covered….

    OBAMA: Well, understand who we’re talking about here. Every expert who looks at it says anybody who wants health care will be able to get health care under my plan. There won’t be anybody out there who wants health care who will not be able to get it. That’s point number one….

    So Obama recognizes the fundamental aspects of free riding.  It’s a feature – not a bug.

    At one point, Blitzer forced Obama to acknowledge the problem.  Here’s the exchange:

    BLITZER: Senator Obama, let me just fine-tune the question, because I know you want to respond. On this issue of mandates, those who don’t, whether it’s 10 million or 15 million, those who could afford it but don’t wind up buying health insurance for one reason or another, they wind up getting sick, they go to an emergency room, all of us wind up paying for their health care. That’s the biggest criticism that’s been leveled at your plan.

    OBAMA: If people are gaming the system, there are ways we can address that. By, for example, making them pay some of the back premiums for not having gotten it in the first place. But understand that, number one, Hillary says that she’s got enough subsidies. Well, we priced out both our plan and Senator Clinton’s plan, and some of the subsidies are not going to be sufficient. Point number one.

    Obama is speaking out of both sides of his mouth.  On the one hand, he makes a vague promise to maybe deal with the problem by something that sounds suspiciously like a fine.  On the other, he trashes Clinton for proposing fines.  What distinguishes those who don’t make voluntary health care payments for legitimate reasons from those who refrain because they are “gaming the system” (i.e. behaving rationally)?  Likely their income: if you are rich, Obama reserves the right to force you to pay both for your health care and that of people who don’t pay into the plan (the poor).

    Either Obama genuinely intends to let people choose to defect from health care premiums (thus creating a free rider problem), or he is offering false choice (people can choose to defect, but if they “choose wrong” the choice will be taken away).  His plan is either incompetent or dishonest.  Either way, Obama is selling income redistribution, colorfully repackaged into free rider problems and surreptitiously targeted mandates.  Do Americans understand what they are buying?

    NOTE: I’ve added emphasis to the quotes throughout.

    UPDATE:  Oops.  I originally misidentified the economic problem as moral hazard, when it is actually a free rider problem.  This doesn’t change the analysis, just the terminology.  Moral hazard is a different, more traditional problem caused by insurance.

  • Uncategorized

    Question on a Job Application

    62. Have you successfully done work that required you to live with others 24 hours a day while working with them toward a common goal (for example, completed a tour of duty on a submarine, worked on a wilderness trail-building team or scientific expedition, etc.)?

    Sort of like a submarine…

  • Health Care

    Obama’s Redistributive Healthcare Plan

    It’s already clear that Obama’s tax plan is redistributive.  How about his healthcare plan? 

    What is the Obama platform on this issue?  You can read what his campaign website describes as the full plan here.

    The platform promises to do a lot of different things.  I have no particular expertise in healthcare policy, so I won’t attempt to comment on all of them.  I just want to point out two general ways in which Obama’s plan makes America’s healthcare significantly more redistributive, or, as we are saying nowadays, “socialist“.

    First, Obama openly promises to expand government-subsidized and government-provided healthcare.  In point 6 of the second section of his plan, he promises to expand SCHIP and Medicaid.  These are unambiguously redistributive welfare programs that provide healthcare funds to low income individuals (Medicaid) or low and middle-income children (SCHIP).  In point 4 of the first section of his plan, he promises to subsidize the costs of catastrophic illness.  Because the costs of catastrophic illness are evenly distributed (let’s imagine) among the various income brackets, but the funds come disproportionately from the higher income brackets (because of income taxation), government catastrophic coverage will certainly redistribute and might fairly be called socialism.

    Second, Obama’s creation of government insurance that covers pre-existing conditions creates a massive loophole and accomplishes an underhanded establishment of universal (socialist) healthcare.  How does it do this?  In three steps:

    • The plan assumes the creation of a new public healthcare policy.  I can’t find an actual explanation of the new public insurance policy that will be offered anywhere in the Obama healthcare platform (perhaps the document is intentionally vague?), but numerous sections assume it, perhaps most importantly, point 2 of the second section:

      Through the Exchange, any American will have the opportunity to
      enroll in the new public plan or an approved private plan…

    • The Obama platform requires private insurers to provide coverage to pre-existing conditions in point 1 of the second section. Because the platform does not explain the new public plan, it is unclear whether it will also cover pre-existing conditions.  It seems a fair assumption that it would; it is unlikely that Obama would offer a public plan that was less comprehensive than private plans could legally be.
    • The plan would almost certainly be government-subsidized.  Subscribers to the public plan would not be paying as much in premiums, altogether, as they would be receiving from it in insurance payments. Again, Obama does not describe the plan explicitly, so it is impossible to be sure, but on at least two occasions he describes the plan in such a way as to suggest it will be subsidized (though the words subsidy and subsidize never appear in the platform).  The new public policy would be funded by fines of certain businesses:

      The Obama-Biden plan provides new affordable health insurance options by… requiring all large employers to contribute towards health coverage for their employees or towards the cost of the public plan…

      And the new plan is referred to as a “federally supported” one and grouped together with Medicare and Medicaid:

      …federally supported health plans, including Medicare, Medicaid,
      SCHIP and the new public plan…

      In any event, the mere supposition that the public plan would be “affordable” would demand that there be some sort of subsidy, as I discuss below.

    So how do these three steps create de facto universalized healthcare?  By creating a free rider problem and patching it over with subsidies.

    By covering pre-existing conditions, the public plan removes most of the incentive Americans have to actually buy health insurance.  If you can sign up for public insurance once you get sick, you have little reason to sign up while still healthy.  Rather, you have a strong disincentive, because you would have to pay a monthly insurance premium, a premium that buys you nothing that you couldn’t sign up for later.

    If people approached the system (economically) rationally, they would not sign up unless they were sick.  If all the policy holders were sick, the average cost to the insurer (the United States) would become very high because there would be no healthy policy holders to help pay the bills of the unhealthy.  The insurer (the United States) could get money to pay these costs in two different ways.  It could get it from the policy holders (a premium), or it could get it from the citizens of the United States (a tax).

    Barack Obama’s goal in setting up the public plan seems to be to offer an “affordable alternative” to private healthcare plans – or at least, sentiments about the unaffordability of the private system litter his proposal, and it is a fair inference that he means his own plan to be cheaper.

    Thus, Obama is precluded from raising the funds for healthcare through premiums.  Premiums for a policy held only by sick people must be higher than premiums for a policy held by a mix of healthy and sick people.  His public plan will have to be supported by a massive subsidy – and a subsidy implies a tax.

    A plan with these characteristics becomes de facto univeral healthcare.  You don’t have to pay for it (or you pay very little, i.e. only when sick – but one could think of this as almost a high deductible), it is funded by taxpayer money, and it is available to all citizens.  Because the taxpayer money will likely come from the payroll tax, there will necessarily be a redistribution of wealth from rich to poor.  True, it’s a messy system, and leaves open plenty of ways for irrational actors to punish themselves if they don’t understand how to game the system (i.e. if they are responsible and buy healthcare while healthy), but it is nonetheless universal.

    I’m unsure whether or not Obama realizes the significance of the free rider problem in this plan.  My guess is that he is aware.  He probably views it as a politically feasible way of tacitly enacting a universal system.  I oppose universalized healthcare in any case, but it is particularly to Obama’s discredit that he would surreptitiously advance it through a misunderstood free rider problem.

    UPDATE: As a final note, consider that Obama’s healthcare plan would do much to socialize insurance in the academic sense of the word.  It is unclear whether private insurance carriers will be able to compete with the public plan.  We can take as given that the public plan will be as cheap or cheaper than current insurance plans (given Obama’s stated intention of providing an “affordable” alternative).  Surely private insurers won’t have access to the same subsidies as the government, so they won’t be able to compete in pricing.  At the same time, their costs will be driven up by the loss of healthy customers – their break-even premium will be higher than in today’s market, while Obama promises insurance with a cheaper premium.  It is more than feasible that ObamaCare would drive a large part of the insurance industry out of the market, leaving it firmly in the government’s hands.

    UPDATE II:  Oops.  I originally misidentified the economic problem as moral hazard, when it is actually a free rider problem.  This doesn’t change the analysis, just the terminology.  Moral hazard is a different, more traditional problem caused by insurance.

    Also, I have more about Obama’s healthcare plan here.

  • Socialism

    What does Socialism Mean?

    Well let’s check at www.dictionary.com.

    The first few definitions run something like this (from the Random House definition):

    1. a theory or system of social organization that advocates the vesting of the ownership and control of the means of production and distribution, of capital, land, etc., in the community as a whole.

    My sense is that this definition is used often in economic or academic circles, in which socialism is the antonym of capitalism, the privatized or free-market controlled means of production and distribution.  This is the definition that Ilya Somin uses when he talks about socialism on the Volokh Conspiracy.

    But this doesn’t seem to be the sense in which some conservatives today use the term.

    Here’s another definition from dictionary.com (Webster’s):

    A theory or system of social reform which contemplates a complete reconstruction of society, with a more just and equitable distribution of property and labor

    The words “just” and “equitable” are certainly contentious, but the definition at least captures the sentiment that socialism isn’t just concerned with who controls industry. Control of industry is a means to the ends of creating an “equitable” distribution of goods, more even than would exist in the free market.

    Since socialism as state control of resources, as Ilya Somin notes above, has become a largely discredited method of achieving class equity, the significance of the proper definition has diminished. Outside academia, the word socialism lost its unuseful connotations of state control, but retained its association with class redistribution of wealth.

    It seems to me that in modern usage, the word socialism is meant to describe government policies that distribute resources and wealth from richer to poorer people as a matter of distributive justice.  In the United States, the word is used this way by conservatives, especially, who intend a pejorative connotation.  Again from Webster’s:

    The general tendency is to regard as socialistic any interference undertaken by society on behalf of the poor

    This is fine.  Language is a constantly shifting thing, and words have always adopted their meaning from societal consensus, not their definitions in archaic texts by centuries-dead German revolutionaries.  It is useful to have a word that specifies policies that fight class inequality as an injustice in of itself, or that redistribute income and goods out of convictions about class justice.  No other word usefully fills this spot – redistributionism is too technical, liberalism and progressivism too vague and all-encompassing.

    And in any event, the distinction between a government which controls industry directly, and one that effectually controls all wealth in society, to distribute as it wills, is a thin one indeed.

    So, let’s call it socialism, because we already do.

    Why am I posting this?  Well, I’m going to be calling Obama a socialist.  I just want to be clear that I prefer the term in its commonly-understood definition, even when its academic one is also appropriate.

  • Uncategorized

    What are the Candidates’ Tax Policies?

    There was a lot of talk about tax policy in the third debate, but much of it vague.  Curious what the tax policies are?  Well here is an apparently respectable summary by the Brookings Institute.

     The takeaway point:

    The two candidates’ tax plans would have sharply different distributional effects. Senator McCain’s tax cuts would primarily benefit those with very high incomes, almost all of whom would receive large tax cuts that would, on average, raise their after-tax incomes by more than twice the average for all households. Many fewer households at the bottom of the income distribution would get tax cuts and those tax cuts would be small as a share of after-tax income. In marked contrast, Senator Obama offers much larger tax breaks to low- and middle-income taxpayers and would increase taxes on high-income taxpayers. The largest tax cuts, as a share of income, would go to those at the bottom of the income distribution, while taxpayers with the highest income would see their taxes rise significantly.

    It’s a hard sell for Republicans.  Because the Republican goal for the income tax is a flat tax (a single percentage of income regardless of income) and the current income tax is progressive (higher rates for higher income levels), Republican proposals are inevitably exposed to the charge that they primarily benefit the wealthy.

    And how does the Republican party recover from Obama’s proposed entrenching of the progressive system of taxation?  Does the next Republican administration simply reverse the tax hike for those affected?  Imagine the outroar if a tax cut were to benefit only the wealthiest 5% of Americans.  The desire to avoid this is probably why McCain has tacked on meager tax cuts for middle and lower class Americans as well.  The most straightforward way, of course, to flatten the tax rate would be to drastically lower the rate for the wealth while increasing  the tax rate for the middle/lower class.  Where does that lie on the impossibility spectrum?

    A fair tax policy is a hard sell, and Obama’s inevitable victory will make it harder.  Yet another reason for me to be depressed by the Obama victory.