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.

Tuesday, March 28, 2017

Observations on the failure of AHCA

In the wake of the failure of the Paul Ryan's AHCA, there's been some very interesting commentary, some of it excellent, so of it execrable.  Here's a sample that I've found interesting.

Michael Hamilton and Justin Haskins of Heartland Institute argue in the Washington Examiner that the failure of AHCA is a triumph for the Freedom Caucus and opens an opportunity for real repeal and reform.  They also point out that the Republicans must use the nuclear option, and need to do this now.  I fully agree... unsurprisingly, given that I made a similar point in my Heartland press release comments.  (See the March 9 post below.)

Bob Laszewski, who also opposed the AHCA and who knows as well as anyone why ACA is a catastrophe, disagrees.  He thinks the only way forward is to modify ACA, and that the GOP leadership is closer to the Democrats than to conservative Republicans on this.  Hence he thinks Ryan and McConnell and Co. will appeal to Schumer and Pelosi.  I don't agree with Laszewski's analysis of the conservatives, but he may well have the big picture right.

John Goodman, arguably the leading thinker on free market health care (and the inventor of HSA's) has a great piece in Forbes that explains clearly why Obamacare is destroying health insurance, and why the AHCA was much worse.  Must reading!

Mark Levin has torn the AHCA to shreds on his radio program with careful and discerning criticism.  but for reasons I can't fathom radio talk show hosts Hugh Hewitt and Dennis Praeger seem to have lost their minds over the issue.  Hugh Hewitt rambles about how the Freedom Caucus members are "Area 51 Republicans" waiting for a flying saucer to carry them away to Roswell.  Dennis Praeger simply calls them "purists."  I guess that's what you do in lieu of rational argumentation, but I'm unsure why ad hominem arguments are supposed to be convincing.  Both of them claim that opposition to the AHCA was an example of "letting the perfect be the enemy of the good."  Yet as Goodman and Laszewski clearly explain, the AHCA was worse than Obamacare.  I make the same point in my previous post.

As I suggested in my previous post, it's possible Ryan & Co. understood what a mess they were proposing, and had ulterior and nefarious reasons it.  Hewitt and Praeger?  I'll be charitable.  I'll assume Hewitt and Praeger aren't disingenuous and malicious but simply have no idea of how insurance works or what adverse selection is... in which case they are ignorant and should simply remain silent.  Or as the late Murray Rothbard put it, “It is no crime to be ignorant of economics, which is, after all, a specialized discipline and one that most people consider to be a ‘dismal science.’ But it is totally irresponsible to have a loud and vociferous opinion on economic subjects while remaining in this state of ignorance.”

What was wrong with the AHCA -- why it was worse than Obamacare

Thank heavens the American Health Care Act (AHCA, a.k.a. Ryancare/RINOcare) was withdrawn.  It was worse than the Affordable Care Act (ACA, Obamacare).  Obamacare is unsustainable and is rapidly destroying the individual market in health insurance (this is the market where individuals purchase their own insurance, as opposed to the employer market where firms buy insurance for employees as part of their compensation.)  The AHCA would have accelerated the destruction of the individual insurance market through adverse selection, i.e. encouraging only the sickest people to sign up for insurance.  Here's why.

ACA has "guaranteed issue" provision for all health insurance, that is, an insurer may not take pre-existing conditions into account in selling insurance or determining premiums.  For example, if a potential customer shows up and has advanced cancer requiring expensive treatment, not only must the insurer sell this person "insurance," the insurer can charge no more than it would charge a perfectly healthy individual.  Needless to say, this means a healthy person has little incentive to buy insurance; waiting until one is sick is the financially responsible policy.

But that, of course, means that the people in the insurance pool, those buying insurance, will tend to be sick people. This means, in turn, insurance premiums will begin going upwards to cover the insurers' costs, and there'll be increasing use of cost-reduction methods such as higher deductibles and narrower and lower quality provider networks. Add to this Obamacare's rules of no cap on lifetime and annual payouts, and the requirement of comprehensive coverage, and insurance becomes extremely expensive.  The people who tend to drop out of the market first will be the healthier/less sick, inducing even higher costs and a death spiral of rising premiums and shrinking pool.  Adverse selection becomes a self-feeding cycle.

To try to prevent this, Obamacare also included a mandate -- people are required to have insurance, and if they don't must pay a fine tax.  This was supposed to provide an incentive to keep healthy people in the pool and thus prevent the death spiral.  Insurance expert Bob Laszewski says an insurance pool must have 75% of eligible people sign up to be sustainable.  Obamacare had 30%.  The mandate proved ineffective, as people either paid it or ignored it and it wasn't enforced (I know people who fall into each category), and adverse selection began destroying the individual insurance market.

So how was AHCA worse than this nightmare?  AHCA retained "guaranteed issue," co cap on lifetime or annual benefits, and the mandate that insurance be comprehensive, but abolished the mandate that people buy insurance.  That increased the incentive for healthy people to stay out of the insurance market, which would have accelerated adverse selection and the death spiral.  AHCA substituted a one-time one-year 30% surcharge on any uninsured person who decided to buy insurance.  So, for example, if insurance costs $10,000/yr, a healthy person could avoid buying insurance for every year they were healthy, saving $10,000/yr.  Then, when they finally became sick and needed insurance because of, say, expected medical bills of $100,000, they could spend $13,000 for full insurance.  What a deal!  No healthy person should ever buy insurance under that scheme!

Needless to say, this would destroy individual insurance quickly, more quickly than Obamacare is doing.  That's why Bob Laszewski called AHCA "mind-boggling;" to anyone who understands insurance it's so obviously destructive that it is hard to imagine its a real proposal.  Mark Levin argued this evening that the Ryan and Co. never really meant for it to pass; they simply wanted to make a gesture so that they could pretend to have tried to repeal Obamacare while actually never doing anything, since fixing this mess will be difficult and risky.  That's very likely right... although one should never underestimate stupidity as the explanation.  Maybe they really imagined this crazy scheme could work.

Regardless of the motives of supporters of Ryancare, as a system, it was a catastrophe that would have destroyed individual insurance and likely had negative effects on employer insurance.  I expect that my premium increases would have accelerated under Ryancare (Ryan himself argued the growth rate would slow -- "higher insurance premiums! but could have been worse so success!")  There were other aspects of the bill that were desirable, such as higher caps for HSA's (tax-free health savings accounts) and repeal of the Obamacare subsidies and replacement with the Rynocare subsidies tax credits.  But here's the bottom line:

If we destroy the private sector insurance market with government intervention, what follows will be nationalized health insurance and national health care -- socialized medicine.  And that's where the AHCA was taking us.  Good riddance.

Sunday, March 26, 2017

On the failure of AHCA

The American Health Care Act (AHCA) was pulled from consideration by Paul Ryan.  When Ryan announced he was pulling it, Heartland Institute immediately asked for comments from its experts for a press release.  I'm on the list and had a free moment to send some comments.

Here's the press release.  It contains my thoughts, as well as those of four others, and all are worth reading.  Mine are the last. (They saved the best for last? Buried the worst at the bottom? Either way, at least I'm not mediocre... hahaha!)

However, they did cut my submission, perhaps for length, or relevance, or to help me avoid mediocrity, or for some other reason.  Probably length.  Regardless, here is my original set of comments...unexpurgated!  (It's the penultimate paragraph that was cut.)
Comment from Steele:

The decision by Paul Ryan to pull the AHCA bill is a good one, but it must be followed by developing a much better bill.  The AHCA really is not a repeal of the ACA but a modification, and not a very deep one.  It left untouched some of the deepest flaws of ACA.  For example, there's the prohibition on taking pre-existing conditions into account  when an uninsured person decides to buy insurance.  There's also the absence of annual and lifetime caps on payouts.  Never mind whether these are "fair" or liked by the many among the public, together these guarantee that insurance costs will rise uncontrollably and that insurance programs will eventually collapse from adverse selection.  The comprehensive nature of coverage simply adds to the problem.

One of the main drivers of increasing health care costs is insurance.  Having all purchases of health care handled through insurance means patients have no way to make decisions about the benefits and costs of care, and no way to shop for good deals in health care.  Decision making must be returned to the patient, on a free market for health care services.  This cannot happen under schemes like ACA and AHCA, and requires that the Republicans rethink the entire approach to reform.

The notion that AHCA is just the first of three phases is specious.  The Phase 2 regulatory changes from HHS are at best temporary stopgaps.  Phase 3, additional changes made in a bill that can garner 60 Senate votes, is a pipe dream, given the current Senate.   And none of this addresses the growing crises with Medicaid and Medicare.  Speaker Ryan and the GOP need to simply get one good bill together that  genuinely repeals ACA and gets us to a free market in health care.  This will take careful thought and great determination, and they should simply get on with it.

One thing that I find disturbing is that the Republican leadership seems more beholden to the Senate filibuster rule than to the liberty of the American people, the Constitution, or the quality and affordability of our health care.  The Democrats are behaving as complete obstructionists, and should they return to power with the basic framework of Obamacare in place, they'll use it to take us all the way to fully socialized medicine. The Republicans should simply acknowledge this and get to work dismantling government intervention in health care.

Friday, March 24, 2017

Common Ground!

Why do people claim that Congressional Democrats and Republicans can't work together?  The Nancy Pelosi Gang and the House Freedom Caucus agreed not to support AHCA, and Paul Ryan withdrew it (thank heavens).  Cooperation at its best!

I will have comments on health care reform very soon.

Friday, March 17, 2017

Steele auf Deutsch

Was bedeutet der Sieg von Donald Trump hinsichtlich Energie? 

A quick note: my comment for Heartland on what Donald Trump's electoral victory might mean for energy policy was picked up and translated by a German website devoted to climate and energy.  I just came across this.  All readers of Unforeseen Contingencies are strongly urged to go to the page immediately and read.  What better time than now to work on one's German?

Thursday, March 09, 2017

Heartland press release: Steele's comments on AHCA

I promised I would post my comments that were included in the Heartland Institute press release on the House Republicans' AHCA.  Here it is, and link to whole press release:

“I’m skeptical of the House Republican plan. It seems to be a modification of the ACA, keeping some of the Obamacare features and replacing the subsidies with tax credits. But the tax credits seem less than the likely premium increases, at least for older purchasers of insurance. It replaces the penalty for being uninsured with a penalty surcharge for the uninsured who eventually take up insurance. This seems like an incentive not to purchase insurance until one needs health care. I’m not sure why this plan would be more sustainable than the ACA.

“In my view, the real problem with all the plans cooked up by Washington D.C. are that they focus almost entirely on the demand side, on how to help people pay for health care. They also impose complex schemes, rather than market-based approaches. While the health insurance market is a mess that needs fixing, the real gains that might be made are on the supply side. These insurance fixes – the ACA and the Republican proposal – do nothing for the supply of health care. At best what they can do is increase demand for health care services while doing little to promote innovation and entrepreneurship in health care, pushing prices up. The entire approach is wrong. What’s called for is a free market in health care.”

I am measured and polite and guarded in the above comments.  But come on.  The more I hear and read about this plan, the more outrageous it seems.  Here is a major problem: it creates an obvious incentive for adverse selection, which will destroy insurance markets.  Under the ACA (Obamacare), the exchanges were to provide insurance to people without coverage.  Under the "pre-existing conditions" provision, no one can be refused insurance, and there's no limit to how much an insurance company might be compelled to pay out.  So, for example, if one asks to buy a policy costing $6,000 and has a health problem that will cost $100,000 to treat, the insurance company must sell it, at a guaranteed loss of $94,000.

Given this, no healthy person has any incentive to buy insurance, only sick people enter the pool, and insurance prices begin soaring to the heavens.  To avoid this, Obamacare mandated insurance; everyone was required to buy it.  The mandate involved a small fine, errr, "tax," that proved to be ineffective.  The Obamacare pools consist of sick people and are collapsing as premiums skyrocket.

The Republican solution is to eliminate the mandate.

Good lord!  This reduces the incentive for healthy people to buy insurance.  This proposal will accelerate adverse selection.  It will accelerate the skyrocketing of premiums.  It is not sustainable.  It will lead to increasing premiums,higher deductibles, and shrinking networks for everyone.

There's plenty more wrong with it, but this is enough to make AHCA worse than the dreadful Obamacare. It accelerates the wrecking of health insurance and does nothing at all to move us toward a free market, and nothing at all to expand the supply of healthcare.  GOP needs to retract this dishonest and destructive plan and repeal Obamacare, not tweak it.  They need to get a new Speaker while they are at it.

Tuesday, March 07, 2017

Republican Congress lies

The House Republicans have revealed their proposal for "repealing the ACA, "Obamacare."  It is not a repeal at all, but rather a tweaking of the basic framework.  So far as I can tell, the main features are these: it replaces the subsidies with tax credits, which are effectively the same thing.  It keeps the "pre-existing conditions" provision and replaces the mandate with a premium surcharge for those who go without insurance but then buy it later.  This should worsen, not reduce, adverse selection, in which the sick have incentive to buy insurance and the healthy don't.  It retains the comprehensive coverage of everything from pregnancy in men to prostate problems in women, and it retains the infinite dollar coverage provision.  It has a number of other bad features, but most importantly it is another convoluted bureaucratic monstrosity that does nothing to advance us to a free market, nor to good incentives for consumers, health care providers, and insurers.

This strikes me as an utterly fraudulent "plan."  If ACA doesn't work (and it doesn't, it's collapsing) why should this work better?  I suspect that when CBO scores it, it will look very bad.  Robert Laszewski calls it "mind-boggling" and explains why it won't work.  He also links to Sarah Kliff's clear and non-partisan summary of the proposal on Vox.  And here's something a little more partisan, Daniel Horowitz' scathing analysis on Conservative Review.  All agree, this is a bad proposal.

As I wrote to a colleague, this is just what I was afraid of.  I'd repeatedly said I didn't believe the Republicans wanted to get rid of Obamacare, that they'd always have an excuse..."we can't do anything until we control the Senate,"... "yes, we now have the Senate but can't do anything until we have the presidency".  Now it's, "yes, we can't do anything."

This monstrosity is possibly worse than the current ACA; it is probably less financially sound (yikes!) and might do even more to encourage adverse selection.  I hope this asinine proposal doesn't pass, but if it does the wrecking of private health insurance seems assured.

This is just what I expected of the GOP leadership, of course.  I remember all these GOP *^@$^#*(! excoriating Ted Cruz for trying to defund Obamacare..."terrible strategy, Ted, you must wait until we have both houses and the presidency.  You are a traitor who will sabotage our clever PRACTICAL strategy for repealing Obamacare."

There were also the phony repeal votes, which Cruz characterized this way: "We'll have a vote on repealing Obamacare," he said. "The Republicans will all vote yes; the Democrats will all vote no. It will be at a 60-vote threshold. It will fail. It will be an exercise in meaningless political theater."

And now that Republicans have both houses and the presidency, we see that, as Cruz warned us and Horowitz now puts it, "they lied all along."

I made a few comments on all this for a Heartland Institute release.  Once they are up I will link to them or post here.

Thursday, March 02, 2017

Murray Rothbard's Birthday!

His 91st.  And as part of the celebration, I did a podcast for Heartland Institute with Sterling Burnett, and had a piece in American Spectator.  Both have the stamp of approval of the entire staff of Unforeseen Contingencies and are highly recommended.

Happy Rothbard's Birthday to all of "our" readers!
P.S. (Note: modified from original to be more polite.  I did not like my previous tone.  I've also added some additional thoughts.)

The comments section on the American Spectator piece attracted the anarcho-capitalists who treat the ideas as a religion, as expected.  I find this somewhat entertaining because it is so predictable, but it's also instructive.  In my piece I pointed out, correctly, that the primary argument in economics for a state is the public goods argument and that Rothbard didn't refute it but sidestepped it.  I did not say the public goods argument is correct (I think it isn't).  But one of the earliest commenters labelled my statement "false" and began making a claim that the free market can solve free rider problems via "dominant assurance contracts," (DAC) a hypothetical non-existent kind of contract.

The DAC is an interesting idea.  It's almost certainly wrong to say it solves the public goods problem. It does not eliminate the free rider problem, although it might reduce it should it ever exist somewhere besides an academic blackboard (it's a hypothetical), but that's irrelevant to my point.  This idea is not Rothbard's theory, and Rothbard fails to seriously address the public goods problem -- that's my point.

But even better, I point out it's silly when Rothbard claims that private defense agencies would never behave in predatory fashion or fight with each other.  (I'm more polite than this in the piece, but it really is a silly point.)  I use Al Capone and the St. Valentine's Day massacre as one example, and Hitler invading Poland as another.  People with armed might who are in an anarchic situation will use it if they think the benefits outweigh the costs.  The same commenter objects to my argument because Al Capone's gang gained its wealth during guvamint Prohibition and Hitler was a politician.  I see... so the state made Al Capone commit murders, but in an anarchic society he and his gang would never even think of killing competitors?  This is not a rational argument.  I expected it and prepared.  When the commenter "explains" Hitler by saying he was a "politician," commenter falls into the trap I set: "There’s nothing special about whether we call an organization a “state” or not that changes the benefit-cost analyses of the leaders in these matters."

I included that line precisely because whenever one points to how people in anarchic relations actually behave, a standard anarcho-capitalist response is that the state currently exists so this can't be considered anything like the way people would behave in anarchic relations if there were no state -- people would behave entirely differently.  I.e. they simply repeat Rothbard's claim.  They add to the silliness of the argument by saying that certain people's behavior can't be counted, because they are statists, politicians, criminals, etc.  These "answers" make no sense as responses to logical arguments from critics.  They make more sense if one realizes they are affirmations of faith made in the face of nonbelief.

The anarcho-capitalism of most Rothbardians I've encountered is not political theory, it's religion.

This page is powered by Blogger. Isn't yours?