Wednesday, March 29, 2017

Adverse Selection: Flaw or Feature?

"We" at Unforeseen Contingencies seem to be on a health insurance jag these days.

You can't have an insurance program that says "people can forgo buying insurance until an insured risk occurs, and then if one does they can buy insurance at the regular rate and receive complete coverage for the risk that has already occurred."  No healthy person would ever have any reason to buy insurance under such a scheme.  That's why Obamacare, with its "guaranteed issue regardless of pre-existing conditions" rule also contains another rule, a mandate requiring everyone to buy insurance.  The Ryan-Trump AHCA left the first rule intact but would have abolished the second, the mandate.  This would have guaranteed the more rapid destruction of the individual insurance markets.

This isn't a matter of opinion, conjecture, ideology, politics, or anything else -- it's basic economics of insurance.  It's also not difficult to understand -- anyone with basic understanding of insurance knows this.  So that has me wondering -- why did the Republican leadership propose a bill that would destroy the private market for individual insurance?  I don't have an answer.  I can see at least three possible explanations.

1.  Ignorance and Stupidity: never underestimate the power of stupidity or the pervasiveness of ignorance.  It could be that the Ryan, Trump, and Co. didn't know or couldn't understand what they were doing.  Given President Trump's infamous retort to the Freedom Caucus that their concerns were about "small  #@!*," I suspect this at least explains Trump's position.  But as soon as the bill was rolled out, numerous experts pointed out this flaw, and no attempt was made to fix it.  So I find this explanation unsatisfactory, although I can't rule it out.

2.  The Republicans wanted the bill to pass and for the individual market to collapse.  Very possible, since they were apparently trying to get the bill through both houses without having to attack the Senate filibuster; that is they seemed serious about passing it in the Senate, where certainly zero Democrats would have supported it.  OK, but why?  In this scenario, adverse selection is a design feature.  But what purpose would be served by hastening the collapse of the individual markets and getting the blame placed on Republicans?  I can conjecture, but frankly have no idea.  So maybe...

3. The Republican leadership wanted the bill to fail in the House, and adverse selection is again a design feature.  That's a very strange possibility, and it's hard to know what to make of it.  But it isn't implausible; there's circumstantial evidence, at least.  On the day of the rollout, Hugh Hewitt (a supporter of AHCA) was beside himself on his radio program over the fact that the GOP leadership was completely unavailable for comment and did nothing to promote or explain the bill.  Similarly, the secret meetings in which the bill was developed seemed almost staged to offend the House Freedom Caucus and its fellow travelers in the Senate.  So explanation #3 also seems possible.  But why would they do this?

Steve McCann, a writer for American Thinker, argues that Trump and the GOP leadership in fact support nationalized health care; his article makes a good case for this with respect to Trump.  I have often argued that the GOP leadership has no desire to tackle Obamacare or propose serious reform because of the difficulty; it's unclear how they benefit personally from fixing the mess, and they aren't harmed if the system collapses.  This is true of everyone in the political elite, regardless of party.  So for #3 I can tell what seems the most plausible story -- but again, it's conjecture.

In fact, for all three there's not much other than conjecture.  Perhaps there are other explanations, or a complex mix of all three explanations apply to different players.  (If any readers have explanations, please comment!)

I think it matters.  If #1 is the explanation, then the Hamilton/Haskins argument that this opens the door for real reform seems very likely.  But if #2 or #3 hold, then the McCann argument seems more likely.  And I  really don't know, I can only conjecture.

"Enough already, make a conjecture" cries the exasperated (and perhaps hypothetical) reader.  OK.  While #3 is the most plausible story, or perhaps #2 and #3 together since either one seems to take us towards nationalized "single payer" health care, my guess is that #1 holds.  I've personally observed many instances of intelligent, well-educated, well-read people making bone-headed errors in fields they should understand (arguably I've done this myself...but I won't make that argument!)  The best description of Congressmen isn't necessarily "intelligent, well-educated, well-read," and political processes are not particularly prone to procedural rationality -- in fact, they tend to generate incoherence.  (Did anyone actually read the bill?  If they did, did they think about what it said?)

In the end, I don't know if adverse selection was a flaw or feature.  But never underestimate the power of stupidity.

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