Perverse incentives run counter to mandated health insurance

 

Recently CNN moderator Wolf Blitzer was involved in an exchange with U.S. Rep. Ron Paul that involved primarily a misunderstanding. Later, Paul Krugman of Princeton University decided to join the discussion by increasing the misunderstanding.

 

IN OUR ATTEMPT to unravel the confusion, we stumbled upon some factors that surprisingly contributed to the current swelling of the number of uninsured, a frequently cited argument in support of the urgent passage of Obamacare. It is a pleasure to share this experience with the reader.

In a Republican presidential primary debate, Blitzer asked Paul: If a young man (say, Mr. A) opted not to purchase health insurance yet later found that he needed six months of intense care, should society let him die? Paul responded: “That’s what freedom is all about – taking risks.” Upon reflection, however, perhaps Paul should have replied “choosing your risks.”

Meanwhile, noninsured Mr. A enjoys benefits of consuming the premium that was not spent on health insurance. When this choice was made, presumably it was an optimal decision. A possible consequence of exercising his freedom to choose might be a need to pay uninsured health bills. While in hindsight Mr. A may have chosen to forgo his pleasures from consumption and purchased the policy instead, the freedom-to-choose doctrine requires that he be responsible for his decisions, including mistakes.

Prof. Krugman now wants to re-label Paul’s “freedom to choose” principle with the “free to die” notion (New York Times, Sept. 15). The emptiness of this gesture is noted when it is recognized that each individual takes that risk numerous times each day. For example, if I elect to drive my car I am accepting the risk of a fatal auto accident. In doing so, I am literally, as Prof. Krugman would put it, exercising my choice of “freedom to die.”

 

BUT WHY DO some people forgo health insurance? The overwhelming reason, it is argued, is because they cannot afford it. Hence, they turn to friends and relatives, or to charities and public welfare agencies, which Messrs. Blitzer and Krugman pretend to be unaware of, and become burdens to society. Let us examine this argument.

It is natural that individuals seek the best use of their resources. In this endeavor, they are said to economize. Should a desired object of purchase cost too much, they search for a lower-priced product, or perhaps forgo it until their resources permit its purchase.

While this sounds familiar, what does it have to do with health care? Just as we may not need a Cadillac, we may not require the most costly insurance. We can consider a less expensive policy until our resources permit a more costly one. Of course, this describes the behavior of hundreds of millions.

Consequently, when people say, “I cannot afford health insurance,” they usually mean they prefer using their resources to purchase something other than insurance.

In this context, the word “afford” certainly has become the most widely used euphemism in the English language. But since virtually everyone is attracted to acquire services or items other than health insurance, it is easily understood why about 50 million citizens have chosen the non-insurance option.

 

PEOPLE WHO rationally forgo insurance also must rationally accept the risks from being uninsured, and are intensely aware of the fallback of private charities and public welfare – which, of course, adds further incentives to the decision to forsake insurance. This increases the number of uninsured.

It is ironic that the availability of health welfare of all forms (city, county, state and federal), plus private charities, accentuates the perverse incentive to forgo health insurance, and adds to the rolls of the uninsured.

This becomes an interesting dynamic: Access to rapidly expanding public health services, such as Medicaid, leads to forgoing the purchase of health insurance, which swells the number of uninsured and, in turn, leads to the mandating of universal health insurance!

And mandating its purchase is a devastating violation of the citizen’s cherished right to choose.

 

(The writer is a professor emeritus of financial economics at the University of Georgia. he lives in Aiken, S.C.)

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