The Market for Healthcare Risk: How the Current System Biases Against Patients with Pre-existing Conditions
By John C. Goodman • Monday August 6, 2012 11:50 AM PDT • 15 Comments
In 1980, Census Bureau statistics showed that less than 1 percent of the population had been denied health insurance because of a health condition. Moreover, this was a period of time when there were few legislative remedies. Even so, this 1 percent was a politically vocal group and, in many cases, they evoked understandable sympathy. However, rather than deal with this group directly (for instance, by creating risk pools or offering direct subsidies), politicians through the years have imposed unwise restrictions on the other 99 percent of the people.
Destroying the Market for Risk
As is discussed in my new book Priceless: Curing the Healthcare Crisis, a proliferation of state laws has made it increasingly easy for people to obtain insurance after they get sick. Guaranteed issue regulations (requiring insurers to take all applicants, regardless of health status) and community rating regulations (requiring insurers to charge the same premium to all enrollees, regardless of health status) are a free rider’s heaven.
They encourage everyone to remain uninsured while healthy, confident they will always be able to obtain insurance once they get sick. Moreover, as healthy people respond to these incentives by electing to be uninsured, the premium that must be charged to cover costs for those who remain in insurance pools rises. These higher premiums, in turn, encourage even more healthy people to drop their coverage.
Federal legislation has also made it increasingly easy to obtain insurance after one gets sick. The Health Insurance Portability and Accountability Act (HIPAA) of 1996 had a noble intent: to guarantee that people who have been paying premiums into the private insurance system do not lose coverage simply because they change jobs. However, a side effect of pursuing this desirable goal is a provision that allows any small business to obtain insurance regardless of the health status of its employees. This means that a small mom-and-pop operation can save money by remaining uninsured until a family member gets sick.
Individuals also can opt out of an employer’s plan and re-enroll after they get sick. They are entitled to full coverage for a pre-existing condition after an 18-month waiting period. A group health plan can apply pre-existing condition exclusions for no more than 12 months, except in the case of late enrollees, to whom exclusions can apply for 18 months.
Under ACA (“ObamaCare”), the perverse incentives to remain uninsured until you get sick will intensify. Basically, anyone who is uninsured will be able to obtain insurance for the same premium as a healthy individual, regardless of how long or why the person is uninsured. As in Massachusetts today, there will be fines for being uninsured, but the tax penalty will be small compared to the cost of insurance. And it may be weakly enforced, even at that.
Consequences of Unwise Regulation
By far, the worst consequence of government regulation of the market for risk is the unintended harm done to the very people the laws were intended to help. Precisely because the premium attached to high-risk individuals is much lower than their expected healthcare costs, insurers seek to avoid enrolling them in the first place. Precisely because payments to providers also do not reflect expected costs, they, too, have an incentive to avoid attracting the hard cases, especially among the chronically ill.
If healthcare markets worked the way normal markets do, health insurers and providers would vigorously compete for the business of the sick. In normal markets, entrepreneurs make profits by figuring out how to better solve other people’s problems. In healthcare, by contrast, entrepreneurs run from other people’s problems.
Note: Cross-posted at Psychology Today blog, “Curing the Healthcare Crisis.”
Tags: Budget and Tax Policy, Business, Economics, Healthcare, Insurance, Nationalization, Regulation, Welfare 
The normal supply and demand model is insufficient with respect to healthcare, where demand for services remains high, no matter price. To repeal regulations would only “ensure” that doctors’ fees would rise competitively between hospitals, whose functional medical equipment would be replaced by expensive medical innovations:
http://whatdirectdemocracymightbe.wordpress.com/2012/07/28/healthcare-reform-a-model-for-reason-and-common-sense/
Daryl Davis | Aug 6, 2012 | Reply
Daryl, The view that economics does not apply to healthcare is a myth. Indeed, the regulations you defend are precisely what are creating the cartels and moral hazard responsible for higher healthcare costs. Government policies are restricting supply and subsidizing demand, and in the process shifting costs and liability from interest groups onto the general public. It is competition that drives down costs and drives up innovation, and economic liberalization of healthcare is exactly what is needed. As a result and contrary to “Progressive” collectivism/authoritarianism, we would recommend the analysis and answers in the following new, peer-reviewed book:
Priceless: Curing the Healthcare Crisis, by John C. Goodman
David J. Theroux | Aug 6, 2012 | Reply
“... a proliferation of state laws has made it increasingly easy for people to obtain insurance after they get sick...”
I must not have lived in any of the states where such laws cover non-employment related health insurance. My family lost health insurance coverage when I quit my job a few years ago. Each of us has a different pre-existing health condition, and no company will sell us health insurance, not even a high-deductible catastrophic coverage policy. This isn’t a disaster for us because we have sufficient assets to pay for hospitalizations, but it would be nice to have the option of purchasing insurance. I don’t blame the insurance companies for this situation. I blame decades of government meddling that ties insurance to employment and prevents insurers from seeking out-of-state customers.
MingoV | Aug 6, 2012 | Reply
I know you’re not going to like my suggestion but, if the Govt. were to require everyone to have health insurance if they want a Drivers License. Just like if you were to register a car. Simple. It would drive compliance up, you most likely will need a car to earn a living. Na, Na, Na!
terango.lf | Aug 6, 2012 | Reply
You misread my admittedly short comment: I don’t defend regulations at all. I just don’t believe that ONLY ending them is required to restore a normal supply/demand functionality to the healthcare market.
Healthcare has been and always will be a sellers market. But increasing the supply of medical providers and medical treatments by making licensing of professionals optional WOULD shift the supply curve, and thus the price curve as well.
If you actually read my linked article carefully, you must know I’m not advocating any collective, authoritarian takeover of healthcare.
http://whatdirectdemocracymightbe.wordpress.com/2012/07/28/healthcare-reform-a-model-for-reason-and-common-sense/
I’m only making explicit the strings attached to state licensing of professionals and the effects of those strings in distorting the market–in any industry.
Daryl Davis | Aug 7, 2012 | Reply
Daryl, You apparently assume that government licensing is needed, which it is not. Restricting healthcare professionals through government cartelization is unwarranted: private performance standards are a superior way to protect people from quacks and charlatans. Please see the following:
“Quality-and-Safety Assurance: How Voluntary Social Processes Remedy Their Own Shortcomings,” by Daniel B. Klein (The Independent Review, Spring 1998)
“Does Physician Licensing Serve a Useful Purpose?”, by Shirley Svorny
David J. Theroux | Aug 7, 2012 | Reply
For the second time now, you’ve ignored the gist of my comment. I explicitly stated that I support ending mandated state licensing–instead making it optional. Please don’t attempt to correct me again if you don’t have the time, or the inclination, to read the proffered post.
http://whatdirectdemocracymightbe.wordpress.com/2012/07/28/healthcare-reform-a-model-for-reason-and-common-sense/
Daryl Davis | Aug 7, 2012 | Reply
Daryl, As I have noted, you erroneously claim that “the demand for healthcare would remain inelastically high at any price,” and then ask “why not make explicit the link between state licensing and state price controls?” You admirably support making state licensing optional but you believe that technological competition and the demand for life-saving remedies means that healthcare costs can only rise. And hence your support for price controls since caregivers outside of state licensing would have “fees that only the most affluent could afford.”
The evidence shows that your claims are mistaken and that economic principles apply in healthcare and universally, as is is discussed in detail in our new book, Priceless: Curing the Healthcare Crisis.
David J. Theroux | Aug 7, 2012 | Reply
David:
The demand for an expensive, life-saving procedure does not diminish in the patient as the price rises: therefore, it is inelastic with respect to price. Very few dying people will say, “Geez, if you could just knock off another hundred dollars, I’d take that treatment.”
You then supposedly quote me–actually use quotation marks–only to once again completely mangle my position. I did not contend that only the affluent could afford non-licensed care. To the contrary, I posit that the proliferation of medical providers will undoubtedly ameliorate some of the market price distortion; but that high-end medical providers will still compete between themselves sufficiently to advance the field of medical technology.
The ACTUAL relevant quote: “The more the merrier, as this greater number of providers would better meet the constant high consumer demand, in this case for medical care, thus lowering the price for the average healthcare consumer.”
Your quote distorts my point: Yes, there would be private hospitals freed to charge the highest rates to only the most affluent for the finest care in the world. I was not contending that all private, or non-licensed, hospitals would do so.
I’m sure your book is very well researched and presents innovative solutions. But you ought find a different means of promoting it than trying to distort the proposal I put forth. One wonders how sound your proposals truly are, when you use none of them to counter mine.
Incidentally, I realize that regulatory and legal reforms are also very necessary, in order to mitigate regional insurance monopolies, malpractice insurance rates, and third-party decision models–just as a starting point. But these are not the stuff of constitutional reform.
But if you doubt my commitment to regulatory reform, please read this as well–carefully:
http://whatdirectdemocracymightbe.wordpress.com/2012/07/26/liberty-human-nature-and-regulation/
Daryl Davis | Aug 8, 2012 | Reply
Daryl, You began this exchange claiming the following:
“The normal supply and demand model is insufficient with respect to healthcare, where demand for services remains high, no matter price. To repeal regulations would only “ensure” that doctors’ fees would rise competitively between hospitals, whose functional medical equipment would be replaced by expensive medical innovations:”
However, this is known to be completely wrong as has been shown in Priceless, which you have clearly not consulted. I have further accurately quoted from your article and there is no “market failure” in healthcare, despite your repeated statements to the contrary. Indeed, the fact that markets work in healthcare is a major theme of the book and where the book’s title comes from.
David J. Theroux | Aug 8, 2012 | Reply
We have a fundamental difference with respect to our faith in the free market. For me, it is a basic truth that private enterprise will seek to capture market share through special regulatory protections for themselves, restrictive licensing requirements for their competitors, and outright price collusion. I salute your optimism, with respect to the integrity of HMO’s, pharmaceutical companies, and giant insurance companies, to put the consumer first, in spite of all evidence to the contrary. I felt it was wiser to resort to constitutional restrictions–within a direct democracy.
When I posted the initial comment, I was attempting to point out that deregulation alone would not eliminate competition between hospitals for the best doctors and the latest equipment–two major elements in the cost of healthcare. One might refer to the high consumer demand for spectator sports and the need in the NFL and the NBA to institute salary caps in order to counter the out of control rises in player salaries. In industries of high demand and limited, specialized suppliers, competition between enterprises does not always lead to lower prices for the consumer, or lower costs for the enterprises themselves.
You seem to be arguing that the competition for patients would force down the price of healthcare to such an extent that doctors would be forced to work for less, and hospitals be forced to use existing technologies longer, thereby lowering prices for consumers. Perhaps somewhat it would. But this would not translate into the same or better care than we see today; though removing state licensing requirements would provide more people who could have afforded no care at all a low quality care.
I felt it would be immoral to risk that the old invisible hand would turn a different way.
But implicit in your article is a plan to dump “free riders” onto their own financial feet. For surely you aren’t arguing that “free-rider” patients would receive the same or better care, when the taxpayer no longer covers their bills.
If by “there is no ‘market failure’” you mean that the market would work just fine if government would just get out of the way, then I would point out that it depends upon the definition of market success. I don’t believe for a minute that free market forces would bring prices down to affordable levels for most Americans–not for critical care procedures–or at least not for a long time, since innovations are constantly revolutionizing over medical treatments by virtue of expensive R & D. I would refer you to Apple’s constant introduction of new, expensive products that consumers feel they must have–as though their lives depended upon it.
The proposed constitutional price controls are intended to smooth out the transition from our current evolving understanding of medicine to a time when inexpensive technologies might treat and cure everyone for virtually nothing.
Daryl Davis | Aug 8, 2012 | Reply
Daryl, You continue to recite a litany of “neoclassical” (i.e., comparative statics) economic and “Progressive” fallacies that have been shown to be erroneous regarding healthcare and all fields. Competition for example is a process not a static arrangement of firms, and there is no basis for the belief that free-rider effects are lessened through government bureaucracies or edicts. Indeed, your proposals would encourage free riding. At this point, I would recommend the following book on the fallacy of the welfare-economics notion of “market failures.”
Beyond Politics: The Roots of Government Failure, by Randy T. Simmons
Incidentally, HMOs were created as a result of government regulations and precious few small pharmaceutical firms can exist as a result of the cartels created by the FDA.
David J. Theroux | Aug 8, 2012 | Reply
We’ll have to agree to disagree. I’m tired of your compulsive mischaracterizations:
There was nothing “static” about my NFL and Apple examples, which you failed to address. Those are real-world dynamics; yours are theoretical extrapolations.
And I never claimed that free rider effects were lessened “...through government bureaucracies or edicts.” That would be self-evidently false. Yet another straw man.
Your weak, unsupported assertion that my proposals would encourage free riding–when I actually eliminate regulation, make optional state licensing and require all fiscal programs to be reauthorized yearly–betrays your willful ignorance of them.
HMO’s, by the way, are just a stand-in for whatever multi-national healthcare behemoth would rise in a free market, destroying “mom and pop” providers as economies of scale led to increasing market share. Dynamic Markets 101.
Don’t bother to reply to me again. I’m giving up on your grasp of human nature and free markets.
Daryl Davis | Aug 9, 2012 | Reply
Daryl, Your problem is that you are clearly not familiar with the scholarship that critiques neoclassical comparative statics and the “welfare economics” fallacies of “market failure.” In fact, you have apparently not even heard of this work.
I have given you a sampling of key references but it is up to you to pursue them. It is a sad fact that “Progressives” are not just uninformed but that this creates an arrogant fideism in support of collectivism and statism, which has produced in healthcare and so many other fields the current corporatism, oligarchy, and authoritarianism.
David J. Theroux | Aug 9, 2012 | Reply