Thursday, March 25, 2010

Health Care "Reform" Passes: Will it Reform Anything?

If the major goals of this bill were to allow coverage for all citizens, and simultaneously reduce the price of that coverage, my prediction is that this bill will fail spectacularly on both counts, and indeed could make things considerably worse than they are now. There are two key parts of the bill that turn the current system on its head:

The first part requires insurance companies to cover pre-existing conditions. This means, for example, that someone who has smoked two packs a day for thirty years cannot be denied health insurance for his newly discovered lung cancer, even if he has never paid a dime into the insurance system previously. This is obviously very bad for insurance companies, since the incentive to buy insurance before a major health crisis hits is effectively removed. With everybody signing up to take money out of the system, but no one signing up to put money in, insurance companies would be unable to operate.

To attempt to fix this problem, the bill introduces a new "individual mandate" that requires all citizens to buy health insurance or face a fine (to be filed with your tax return each year). This fine starts at 1% of your income, or $90, whichever is higher. By 2016, the fine will be 2.5% of your income, or $695, whichever is higher. The goal, of course, is to force healthy people into paying into the system so their insurance premiums can subsidize the sick people taking money out of the system.

There is a huge practical problem with this plan (not including any philosophical, moral, or constitutional objections, which abound as well). The problem is incentive; the fine is too low. First, it should be said that I make a pretty good living as a software engineer and that I get group discount health insurance through my employer, so when I say that 2.5% of my income is less than I spend on health insurance currently, the next question that should pop into your head is "Then why wouldn't you just drop your coverage and pay the fine each year?" That's an excellent question, and given that most people make less than me and pay more for coverage, it's a question that's going to be going through many peoples' minds. The second issue with the fine is that it is not currently enforceable. If I don't pay up at tax time, I'm not subject to any penalty.

What's the practical upshot of all this? It will make more sense to just pay the government fine each year (or not), and only get insurance right when you need it. The result of this is that less people will be covered. And what happens when fewer healthy people are paying into the system? The people who do get insurance will pay a much higher premium. And when premiums go up, what happens? It makes dropping coverage and just paying the government fine a more attractive option for many people. Notice the self-perpetuating cycle here; the more people opt out, the more it makes sense to opt out.

Only time will tell, of course, but it seems to me that the system is unsustainable, even in the short term.

1 comment:

  1. Shit.
    Sorry, shouldn't curse on your blog. I've watched the news every morning through this whole thing with increasing numbness. Watched the wrangling and the misinformation from both parties. And now here we are. "This is a big fucking deal, Mr President!" says Biden.
    Yes. It is.