Cognitive Dissonance

Ezra Klein comments on the Anthem Blue situation in California:

The Anthem Blue Cross saga appears to have a happy ending: After criticism from the administration, the insurer has delayed the planned 40 percent rate hike. That will give the company time to reevaluate whether it’s worth the blow-back, and I’d guess there’s a good chance it never takes effect at all.

But if this is a good outcome, it’s a not a good policy. The insured can’t depend on someone in the White House’s communications shop noticing when an insurer tries to screw its customers. What we need is an actual policy standing between the insured and the grim incentives of their insurers. That’s what health-care reform is meant to be, and the Anthem saga is a good example of how it would work.

He is, of course, correct that this is not good policy. Having politicians strong-arm businesses whenever anything happens anywhere that would go against that politician’s (or group’s) heuristic biases is ultimately a horrible way to run an economy. It reminds me of the hem-hawing from Congress over gas prices throughout 2008. They happened to be ridiculously wrong then…but there appears to be some ground to stand on here. Anthem Blue is, for all intents and purposes, part of an oligopoly designed to extract rents. Interestingly, this was the theme of last week’s episode of House.

However, I take issue here:

Finally, let’s say everything fails and the insurer decides to walk from the exchange. In the current situation, the people on Anthem’s plan have nowhere to go. They all have preexisting conditions, which means they either won’t be offered insurance or can’t afford the rates. Under health-care reform, they can go to any other insurer they please: They can’t be discriminated against, and they can’t be denied coverage. Losing their current insurance may be disruptive, in the same way that having your local grocery store close might be disruptive. But it will no longer be calamitous, or anything close.

Now, this wouldn’t be a bad statement, because it is true…but Ezra Klein also claims that the health reform bill will lower the price of health insurance. Both of these things can not be true at the same time — if insurers are forced to take on high risk, then average premiums are going to rise to compensate. Klein also believes that the bill will be deficit neutral, which is, of course, fantasy.

Bottom line: The health reform bill cements the status quo of insurers that simply exist to extract rents, and it expands coverage. Health care will be more expensive if the health reform bill is passed.

On a lighter note, Klein also has a excellent post about the British Parliamentary system.


5 thoughts on “Cognitive Dissonance

  1. I wonder if the thought process from the Ezra Klein’s of the world doesn’t follow something like this:

    “Sure excluding pre-ex clauses itself doesn’t reduce risks, and thus premium, but because we will get young people on board as well, who are much less exposed to health risks, the total risk could be reduced, while eliminating those abusive pre-ex clauses.”

    If that is the line of reasoning, there might be some validity and it becomes a matter of data. Seems to me someone with a chronic illness has a much larger positive cost magnitude than the say a typical 25 year old has a negative cost magnitude, but there is probably more of the 25 year olds. Of course, I don’t have stats on this.

    I definitely agree that the reform bill does little more than assure regulatory capture is complete.

    1. I would take that line of argument more seriously if the opt-out penalty was more severe.

      As it stands, the penalty in the Senate bill starts at $95 or .5% of gross income in 2014. So taking a median income of $38000 a year, the penalty would be $190. This rises to $700, or 2% of gross income in 2016. For that same person, the penalty would rise to $760.

      Assuming (generously) the average catastrophic health plan that an individual can by is $200 a month, the median person would be saving $1,640 by simply paying the penalty.

      The house bill would be 2.5% of gross income, up to the price of the average individual health plan. So under the house bill the penalty can never be higher than the marginal cost of buying health insurance…but, this is also being bundled with “community rating”. Which is exactly what Klein wants — you can get health insurance whenever you happen to need it.

      Where is the incentive to not free ride if you’re healthy?

  2. Oh yeah the adverse selection problem in the current bill is definitely quite pronounced. I was simply throwing a possible line of reasoning out there. I honestly don’t believe much thought was given to the bill.

    With that said, maybe they are banking on a large population paying the fees but not being in on the loophole, or not needing insurance. As such, you are creating a program like UE, but get to call it a private insurance plan. I can’t imagine a bill would be so flawed without some reasoning.

  3. The concern over paying the penalty being a more financially promising choice over simply paying for insurance is definitely something to be concerned about but three things:

    1) Including a painful penalty, one that would make it a bad personal decision to avoid being insured, would have made bad politics and, as a result, made getting support in congress to pass reform more difficult, especially since a pinch of truth would be behind partisan accusations that it’s forcing people to buy insurance for good.

    2) While it would be financially smarter to go uninsured, the moderately prudent young people will simply go ahead and pay for the insurance for those just-in-case situations instead of taking the risk AND pay the penalty for being uninsured. Whether there are enough of those moderately prudent young people around to make a big enough change to notice, I can not say.

    3) Legislation can be passed in the future to increase the penalty even though the House bill does limit how much the penalty can possibly be. The House bill as it is sets a potential limit but future legislation can change that.

    Furthermore, it seems the House, Senate and the President has come to a compromise among themselves leading into the Feb. 25 meeting with Republicans. If what’s coming out of the blogs is correct, they may already have a compromise completely done and over with and ready to ship out and go into production after the Republicans fall for the trap so blatantly laid out for them. What is in that compromise is still unknown but they did say it will be posted online for everyone to see–partly to avoid any accusations of backroom deals and lack of transparency. We don’t know what, exactly, is in the bill. Hopefully it’s stronger than what the House and Senate have wrought but since it’s a compromise, it’s probably a REASONABLE amalgamation of the two in order to appease both chambers.

    With Bayh’s retirement yesterday, I think the Democratic Party is going to be even more willing to get things done–after they stop panicking again.

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