Health Care for the Healthy

Jon Cohn has more on Rudy Giuliani's health care plan:

A year ago, after Bush first floated an embryonic version of his proposal, economist Jason Furman wrote in the National Tax Journal that "Empirical estimates show that eliminating the tax incentive for employer-provided insurance, without creating another pooling arrangement, could increase the number of people without insurance--even in a relatively limited proposal like that of President Bush." What's more, research has suggested that those getting insurance will probably be relatively healthy, while those losing it will be relatively unhealthy.

I'm not a regular National Tax Journal reader myself, and Google unfortunately doesn't turn up a copy of that paper, but the result is pretty intuitive -- giving even a small incentive for the relatively healthy to drop out of pooling mechanisms you could have a very large effect since every time a health person drops out of the pool, the pool becomes a worse deal for the next-healthiest people. Next thing you know, pools start falling apart.

Comments

Shouldn't it be the other way around? Rudy's plan would force low-income people to do with out help insurance. Am I missing something here?

Posted by Joe Klein's conscience | August 2, 2007 10:07 AM

JKc, that is part of it - by making the pools worse off, it makes insurance companies even more reluctant to insure low-income Americans. Of course, part of this is the fact that, generally, low-income Americans are in much worse health than middle class or rich.

Posted by Joshua | August 2, 2007 10:23 AM

Pricing of health insurance is based on who is in the pool. Say you have a pool of 100 people, with 100% insurance, first dollar coverage, whose total annual health care expenses in a "healthy" year (excluding any extraordinary expenses--e.g. heart surgery, cancer treatment, etc.) are estimated at $10,000. The insurer needs to (a) account for the extraordinary expenses ("EE") and (b) make a profit ("P"). Say that the insurer estimates that the appropriate reserve* for EE is $40,000, which is disproportionately allocable to the least healthy 25% of the pool, and profit is 20% or, in this part of the example, $10,000.

So, you have per person annual costs of $100 and a pool-wide EE reserve of $40,000 and profit of $1000, for per person insurance cost of $500 ($50000/100). Now, if you take out the 20 healthiest people--those who the insurer assigns a very low risk of drawing on the EE reserve in a given year--you reduce the pool's annual base cost by $2000, but you only reduce the EE amount by, say $500 (and profit by $500).

Thus, after the 20 healthiest leave the pool, you have per person costs of ((50000-3000)/80=) $587.50--a 17.5% increase. That results in the next healthiest 20 realizing that opting out is a better deal and leaving the pool, reducing the base cost another $2000 and the EE amount by $1000 (profit by $600), thus leaving the remaining 60 to pay ((47000-3600)/60=) $723.33 or 45% more than before the healthiest 40 left the pool. Which leads to the next healthiest cohort departing the pool, until only the high risk and the actually sick remain--and have to pay for the full amount of their EE themsleves.

Sure, insurers do obtain discounts on services from the providers, so for most of the chronically ill, paying through an insurer is still likely (depending on the profit:discount ratio) to be less expensive than not, but it would be vastly more expensive than if they were in a large pool with many low-risk, generally healthy people.

*I know it's not really a reserve.

Posted by zaleriana | August 2, 2007 11:26 AM

Re: Empirical estimates show that eliminating the tax incentive for employer-provided insurance, without creating another pooling arrangement, could increase the number of people without insurance--even in a relatively limited proposal like that of President Bush."

Did Bush ever propose getting rid of the tax deductibility for employers providing health insurance? I don't recall that, unless you count the fact that he wanted to put a fairly high dollar limit on it.

Posted by Jonf | August 2, 2007 3:49 PM