Differing visions of health insurance

Dr. Saurabh Jha posted a very educational interview (part two) with Mark Pauly in which Pauly described what he regarded the root problem with the Affordable Care Act. Another noted health economist, Uwe Reinhardt, offered his criticism of Pauly's interview, and in doing so, offered a different vision for how health insurance should work in the US.

Both pieces are well-written and readable by non-economists. Pauly believes that the root of ACA's problems is that it makes the healthy population subsidize the unhealthy through community ratings (as opposed to allowing insurance companies to charge premiums based on individual health). Community ratings raise the price of insurance for the healthy, causing them to drop out, which in turn, causes the average cost of medical care of those who remain to rise. The cycle is thought to continue until insurers pull out of the marketplace, which some notable insurers have already done. Pauly points out that the government does not address the root of the problem and instead piles bad regulation to fix previous bad regulation. Pauly's recommendations seem to be to allow insurers to rate for actual risk (taking into account family health history), subsidize people who have chronic conditions and low-income from general taxation (not by requiring only the healthy to pay), and to even the field between employer-based insurance and individual insurance (e.g. allow people to take their employer-based plan with them when they leave their companies).

Reinhardt seems like he would be amenable with Pauly's recommendations in theory, but believe that they are light on the details and seems to suggest that they would likely fail in practice. Reinhardt's vision is to either strengthen the individual mandate (similar to how Social Security collects its revenue) or to allow individuals to opt out of the cost and benefits of insurance. The second option seems politically untenable: if someone chooses to forgo insurance and suffers a tragic accident and needs emergency medical care and cannot pay for it, will society simply allow that person to die? Probably not.

Pauly's recommendations resonate with me on some level, but having been denied insurance after leaving a job, it seems that there are too few insurers for the market to have sufficient competitive pressure to care about individuals who have pre-existing conditions. While it might be the case that in some world, the market will right itself in the absence of stifling government regulation, people live in the here and now and might not be able to weather the intervening years or decades. It also seems that one of the roles of government should be to reduce transaction costs, and universal access (for example, as implemented in the ACA) achieves that. It would be nice if the same tax incentives that are available to employers were also available to individuals buying their own insurance.