What is the point of health insurance? (Part 1)

When discussing the politics and ethics of health care policy and reform, one often hears claims or suspicions about the “special importance” of health care. To my mind, the strongest suspicion can be expressed thus: health care is of special importance because of the special importance of health; health is important because of all the important goals it enables us to pursue; but if health is instrumentally important in this way, it must sometimes be rational to trade health off against the other goods and goals that give health its value in the first place; but if such trade-offs are rational, what business is it of the government to require individuals to pay some bureaucratically-determined amount for health, when this has opportunity costs for the other goals individuals can pursue?

This is a strong argument. But there are also strong rebuttals. It is widely understood, for example, that if you enable individuals to choose their own coverage levels, those with high risks or perceived high risks will gravitate to generous coverage, which will drive up the price of that coverage, which in turn will give those with low risks an incentive to buy other, less generous coverage. This drives up the price of the generous coverage even more, since such a high proportion of individuals with that coverage will end up needing to draw on it to pay for medical care. To avoid this so-called “death spiral,” laws are needed to keep healthy people’s dollars in the same insurance pool as sick people’s dollars, so the former can be drawn upon when the latter are not enough to pay for the care the sick need.

This is a successful rebuttal to the conservative argument only if it is indeed justifiable to force those with low health risks to subsidize, out of their income, the medical care of those with higher health risks. This is a values question par excellence. Answering it requires us to explain why certain groups of people have legally enforceable duties to certain others. It may also require us to subject the prevailing income distribution to moral scrutiny, since those with higher risks might not need the assistance if their income were higher. Providing health insurance may therefore be an instance of using one policy arena to compensate for imperfections in another. Answering the values question would also require us to explicitly address the restriction of liberty entailed by a system that forces one group to subsidize the medical care of another. These are perennially nettlesome issues.

Some health care commentators seek to side-step these questions by having us focus not on the special importance of health or health care, but rather on the “point” of health insurance. Here is a recent example from the only health policy blog I read religiously:

In today’s Wall Street Journal, Holman Jenkins offers an idea for improving the [Affordable Care Act]:

[L]et’s permit insurers to design their policies free of ObamaCare’s mandated benefit levels and free of state regulation [...]

What’s the first thing the new nationally-chartered insurers would do? Rush out cheap, high-deductible policies, allaying some of the resentment that the mandate provokes among the young, healthy and footloose affluent. [...]

[T]hese folks could buy the minimalist coverage that (for various reasons) actually makes sense for them. They wouldn’t be forced to buy gold-plated coverage they don’t need so the money can subsidize the old and sick (the hidden tax logic of ObamaCare).

This goes the wrong way in two respects…[...]

Second, what is it that people think they’re buying when they purchase insurance? If it’s not a vehicle for the healthy to subsidize the sick, then what’s the point?

Did you catch it? Here’s the argument (as I understand it) set out more explicitly:

1. Opponents of government intervention in health care markets object to measures forcing some to subsidize the medical care of others.

2. But virtually everyone, including these opponents, wishes to purchase health insurance in some form.

3. But insurance just is a vehicle for the healthy to subsidize the sick.

4. So to be consistent, opponents should either withdraw their objection to redistributive health care policies, or else refuse to buy insurance.

Is this a good argument? I will return shortly to examine it more closely. For now, let me leave you to ponder an argument that strikes me as intriguingly similar :

1. Opponents of income maintenance policies maintain that they should not be forced to pay for another’s wages/income.

2. But opponents of income maintenance policies buy televisions without complaining.

3. But the purchase of televisions just is a vehicle for some (namely, those who buy TVs) to pay the wages of others (namely, those who labor to make televisions).

4. So to be consistent, the opponents should either withdraw their objection to income maintenance policies, or refuse to buy televisions.

What say you? Do these two arguments stand or fall together? Or is it possible to reject the Television Argument while continuing to embrace the Point of Insurance Argument?

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6 Responses to What is the point of health insurance? (Part 1)

  1. ACA expands coverage in two ways — (1) by forcing people that are now uninsured to get coverage, and creating the mechanism of an insurance exchange and some subsidies to make it easier to get covered (2) by simply expanding Medicaid coverage to people that could not afford coverage even with the exchange and subsidies. The argument here can be interpreted as addressed to some person affected by (1) who argues that they would be better off uninsured (or poorly insured) than compelled to participate in an exchange. But this argument has less to do with the special importance of health care then on self-interested reasons people have to avoid an implicit tax (this is roughly your point, I think). So far as this goes, it only shows that people don’t like to subsidize transfers to other people.

    The more interesting case to me is (2). I often wonder to what extent Medicaid recipients would rather get some of the cash instead of the medical care. Imagine the government cut a deal with all the diabetics on Medicaid: “we spend on average $7,000 a year on your medical treatments, so we will give you a health savings account with $6,000 in it. If you have a major emergency that costs more than $6,000 we won’t refuse to treat you. At the end of the year, any money left in the HSA will be split evenly between you and the government.” Some poor people (even sick ones) might rationally prefer to find ways to cut back their health spending in order to pocket some of the health savings, which would be a financial gain for both the patient and the government, while those who value medical care very much would use their full allotment. Would this in principle be permissible? (abstracting away from the very large problems of less than full information and bounded rationality)

  2. Paul Kelleher says:

    Thanks for the comment, B. What I called the “conservative argument” points to the importance of health to a person and demands to know why the government gets to make that judgment call for any particular person. One way to respond is to claim that the health of each has special moral importance, and that that it’s the job of the well-off to promote the health of those who are too poor to promote it on their own. One of my points is that proving that the health of each has some special moral importance can be only part of a fully successful argument: one has also to justify the liberty-limiting measures that must be in place in order to raise the funds needed to promote the health of the poor and the high risk. Since all of these issues are implicated in a program that would provide subsidies for those not-poor-enough to qualify for Medicaid, I disagree with your statement that “this argument has less to do with the special importance of health care than on self-interested reasons people have to avoid an implicit tax.” To my mind, thinking about it in the way I present shows not only that “people don’t like to subsidize transfers to other people,” but also that if we’re going to force people to subsidize such transfers, we’d better have a good reason and we’d better be prepared for the the argumentative burden to be shifted back on us.

    Despite all that, I am inclined to agree that your case (2) is more interesting, and I have to think more about it. (As an aside, I brought up a case like this in class a couple of weeks ago. I got that case from a post by conservative health economist John Goodman, whose arguments I’ll be writing more about anon.) I do not as yet have an answer to your question, which is whether your hypothetical Medicaid HSA scheme is permissible. But here is one possible way to think about it, especially since you put information limitations and bounded rationality to one side. Imagine that the HSA scheme is just as you describe it, except that the beneficiary need not wait until the end of the year to spend half of what’s left in the HSA. So s/he can remove $3,000 right away to use on non-medical expeditures. Already we have an interesting question about the HSA scheme itself, which is why the government would be justified in withdrawing “its” $3,000 after the beneficiary withdrew his or hers. After all, if the point of the HSA scheme is to refrain from passing judgment on how the beleaugered beneficiary should spend funds he or she has available to her, then what business does the government have to create disincentives to spend on non-medical care by permitting its $3,000 to go toward medical spending but not toward non-medical spending? Here the best response will make use of some claim about how the “point” of this form of government spending is to promote health. But if that is the point, then the HSA scheme you describe seems to miss the mark.

    A second point that comes to mind is the timing of permissible withdrawals. If the point is to permit the poor to use funds available to them in ways they deem most useful, why require that they wait until the end of the year? One possible answer comes from research on the EITC: 1/5 of EITC benefits are spent within the first month, and “50 percent of the EITC is spent on investments in social mobility, such as transportation or a residential move” (William N. Evans, Craig L. Garthwaite, “Giving Mom a Break,” NBER Working Paper No. 16296, August 2010). My guess is that we’re worried individuals would be too impulsive and waste (?) their HSA funds on non-medical spending. But if bounded rationality is not a concern, on what grounds would we flag certain non-medical spending as imprudent?

    One might conclude from all this that there is something fishy about serving two masters at once. If we want to give the poor health benefits, then we should give them health benefits. But if want to give them a more fungible resource that can be spent on other things too, then we should do that. But we should not try to do each at the same time with a scheme that is promoted in the first instance as a health benefit scheme but which is in reality just a vehicle for increasing the amount of fungible resources the poor can use.

    But I admit that I need to think much, much more about this. Thanks for the case.

  3. Chris says:

    I find this subject interesting. I agree with Paul that the point-of-health-care argument is bogus – even insurance is correctly characterized as a subsidy, there is a difference between choosing to participate in a scheme that may in some sense subsidize others and being forced to participate in such a scheme.

    One argument for having a compelled subsidy is that the lack of at least minimal health care results in externalities (e.g., loss in labor productivity, lower quality child care, poverty, increased risk of spread of disease) that are best internalized by requiring everyone to purchase health care (and paying for health care for those who cannot afford it). One interesting thing that one might characterize as a “moral externality” is emergency or life-saving care. Because we as a society are unwilling to refuse life-saving emergency care to people that cannot afford it, doctors are required to provide emergency care regardless of ability to pay. The cost of this care is quite high and would (1) be reduced significantly, and (2) be distributed more fairly, if everyone were required to purchase health care.

    I am not sure if requiring everyone to purchase health care is the best or only feasible way to internalize or otherwise address the externalities produced by reduced health in the population, but fixing these externalities at least goes some of way toward reducing the amount of wealth transfer/redistribution that the conservative is asked to swallow.

  4. Paul Kelleher says:

    Chris, you bring up an important point re: “moral externalities.” I’m not sure how far one can take that argument, though. After all, the ACA is at least right about the fact that we cannot require people to carry insurance if they cannot afford that insurance. So a mandate has to be coupled with subsidies. And subsidies will be financed by those who can pay them (in the form of tax-financed transfers). But then the “cost-shifting” that some people point to as a key externality of the pre-ACA(-implementation) system is similar in this respect. That is, it basically is a way for those who can pay (in the form of higher premiums or in the form of higher hospital bills or the form of hospitals picking up the tab) to pay for those who cannot. So if the main issue is a concern about cost-shifting, it is hard to see how a system that shifts *more* costs onto those who currently bear them (i.e. the healthy and well-off) can be the the answer. Of course, now we might be concerned about the side-effect that hospitals in certain areas will shut down because costs simply *can’t* be shifted enough to keep the hospital in business. That is something to be concerned about, but it is a different externality than the one in which some are forced to pay for the ER care of others who receive care but cannot pay.

  5. Pingback: Is health insurance like a television? (or, What is the point of health insurance?–Part 2) | Inequalities

  6. Pingback: Highlights so far… | Inequalities

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