In a letter appearing in today’s Wall Street Journal, Dr. Charles Jackson criticizes Democratic proposals to mandate individual insurance purchases. An obviously ardent opponent of regulation, Dr. Jackson states, “I thought insurance was a voluntary exchange in which I and an insurance provider estimate my risk” and goes on to state that mandates are not insurance but “a tax and a transfer.”
Mandates are indeed a transfer. So too is insurance. And both transfers serve the same purpose, to help individuals cover the cost of illness. They are two very different sides of the same stone. The key to understanding their similarities and differences is to consider timing.
Dr. Jackson takes a remarkably short term perspective. It is true that in any given year, individuals can contract with insurers and if they fall ill in that year, their insurer will cover the cost. This would represent a transfer from healthy enrollees to sick enrollees. So far, so good. Now consider what happens at the end of the year. In an unfettered market, the insurer would raise the premium. If the illness is serious and chronic, the individual may face a lifetime of higher premiums. But these high premiums are just as much a cost of illness as the expenses born during the first year. If free market insurance is supposed to limit individual exposure to financial risk, then free market insurance has surely failed.
Lifetime insurance contracts would solve this problem by essentially creating an intergenerational transfer between our young and old selves. Mark Pauly and others have shown, however, that adverse selection might make impossible for an insurer to turn a profit, which may explain why private lifetime health insurance does not exist. Government lifetime insurance does exist, on the other hand – just ask any Canadian. The purchase mandate (combined with other insurance market reforms) offers an alternative way to obtain lifetime insurance. Just like lifetime insurance, the mandate would be an intergenerational transfer. Much like Social Security, today’s young and healthy lose money but make it back as they age. As long as the system endures, everyone ultimately benefits. No one is penalized for getting diabetes or cancer or just growing old.
Without some insurance regulations, those who are ill through no fault of their own will continue to pay higher insurance premiums, thereby making a mockery of the notion of insurance. Or they will go without insurance altogether and, once ill, throw themselves on the mercy of providers (and, eventually all of us.) Of course, regulation is no panacea. We will have to raise taxes to subsidize purchases by low income individuals and we may have to impose steep penalties to insure that everyone participates. Will we actually enforce them?
No one knows if a regulated insurance markets will prove worse than the status quo. But there is no use pretending that free market health insurance achieves some sort of textbook ideal. That position and does an injustice to the serious issues in hand. (Though it is no worse than some of the rhetoric spewed forth by single payer supporters.) The fact is that the market screws things up and the government screws things up. Let’s try to understand exactly what gets screwed up and find realistic ways to make things less screwed up. Let the ideologues fight it out on cable and the op-ed pages of the Journal and the Times. Maybe that will keep them out of the way while deeper thinkers find real answers to our problems. There is too much important work still left to be done.