Contact
Subscribe

Government Finally Understands Incentives

Oct 16, 2009
Economics

I’m a libertarian and my general stance is that we should try free market solutions first and then, if those don’t work, look to the government. The  main problem I have with government is that when they change the rules of the game, they change the way people behave and that creates new problems — which invariably call for more government intervention (spend more on education because we’re not getting good outcomes!) instead of less. For example, taxing high incomes but not bonuses caused Wall Street to change their whole pay structure so that now executives get huge bonuses. The government didn’t like that, so they tried forcing companies to offer stock instead of cash, so that executives have a stake in company performance. But that just increases the reward for cooking the books to make the stock overvalued. So now they have to have new accounting rules and other ways of trying to fix that problem, using “clawback” features and trying to base bonus pay on long-term stock performance instead of short-term performance. That will invariably cause another problem they’ll try to fix. It’s not that the goverment TRIES to screw things up — it’s just that they end up doing that because they fail to account for how people will respond to changes in laws that change their incentives.

Now this from the bill in the Senate Finance Committee makes me reconsider the notion that nobody in Washington understands incentives:

Under current regulation, incentives based on health factors can be no larger than 20 percent of the premium paid by employer and employee combined. The legislation passed by the Health and Finance committees would increase the limit to 30 percent, and it would give government officials the power to raise it to 50 percent.

and

Douglas J. Short, BeniComp’s chief executive, said the incentives he uses focus on outcomes, not conditions.

“I can’t give you an incentive based on being a diabetic or not being a diabetic, but whether you’re managing your blood glucose level — I can give you an incentive based on that,” Short said.

I understand the concern that people wil pre-existing conditions have, but I also understand the perspective of health insurance companies. If insurance is supposed to be for things beyond your control (like flood insurance, for example, which is completely beyond my control as a homeowner), then insurance companies base rates on observable characteristics and statistics. If I live in a flood plain, they charge me higher rates — not because of anything I did but because the risk is higher.

And in some cases, that’s what health insurance is. I could get cancer, fall down and crack my skull open or any number of things. And the premiums I have paid will cover the cost of the treatment — I use health insurance to smooth my payments for medical care over my entire life rather than have massive expenditures every once in a while. But when I have a pre-existing condition, the risks and expected costs are higher. Granted, there may be nothing I can do about it, but forcing health insurance companies to take people with pre-existing conditions at the same rates as everyone else is forcing health insurance companies to pay for something that will make them lose money overall on that person. How is that fair to them?

Back to the story, and my main conclusion: I love this. We’ve become a society of people that mostly eat too much and exercise too little because, well, we can. I like the compromise the Finance bill makes: force insurance companies to take everyone but allow them to charge higher rates to people whose behaviors are resulting in higher costs. If you are overweight and eat fast food 5 times a week, and put yourself at higher risk for heart disease, why should your insurance company bear that risk? They shouldn’t — you should. Many companies have tried incentivizing good behaviors, like paying for part of a subscriber’s gym membership fees if the person exercises at least twice a week. That’s all well and good. But in addition to carrots, sometimes you need sticks.

As a libertarian, I believe you have the right to do whatever you want with your body and your property, as long as nobody else has to bear the costs of your actions. If we legislate a health insurance system where insurance companies are forced to take you regardless of your condition, there should still be a way of making you pay for the poor health choices you make from that point on. The Finance bill seems to recognize this.

4 Comments
Tags

4 Comments

  1. Benjamin Seghers  •  Oct 16, 2009 @10:09 pm

    So when something unpreventable happens to someone, we just say to them, “tough luck”?

  2. ProfSwitzer  •  Oct 17, 2009 @12:46 am

    Wow. I write a post about how this bill requires that insurance agencies cover everyone, regardless of pre-existing conditions, yet allows them to reward healthy behavior, including a quote from an insurance agency executive about rewarding proper management of health conditions — a pretty good compromise by both sides here, and something that will increase health insurance coverage and hopefully also reduce costs… and you come up with “when something unpreventable happens to someone, we just say to them, ‘tough luck?’” How in the world could you get that from what I wrote? That is the exact OPPOSITE conclusion I was trying to make.

    The point is we give people insurance so that when something “unpreventable” happens to them, they are covered. And we allow insurance companies to reward healthy behavior by increasing the potential spread between, for example, smokers and non-smokers. That way, the illnesses that are preventable by responsible behavior are prevented, reducing the costs of health care.

    If what you got from my post is that I’m saying “tough luck” to anyone who has an accident, you need to try reading it again, Benjamin. You’re completely missing the point.

  3. Benjamin Seghers  •  Oct 18, 2009 @11:26 am

    Okay, because that isn’t what I got out of your post.

    I agree completely with your point about incentivizing good behaviors. I also agree with your point about allowing to “charge higher rates to people whose behaviors are resulting in higher costs.” That’s all well and good. But what I’m confused about specifically is non-behavior related costs. Just raise their prices? I thought that’s how it already worked (if the insurers didn’t just drop them altogether). And I thought the idea of these reforms was affordability, even for people who happen to have unpreventable conditions or that do eventually develop them. If you price someone out of the market because of something they couldn’t control, then I think that would be tantamount to telling them “though luck.”

  4. ProfSwitzer  •  Oct 18, 2009 @12:07 pm

    Therein lies the difficulty with trying to accomplish so many different goals at the same time. If you want insurance companies to charge the same prices to everyone regardless of pre-existing conditions, then you can end up having people whose behaviors have caused those conditions forcing someone else to pay for them — either the insurance companies, the other customers of the insurance companies who will see higher rates through no fault of their own, or the taxpayer through increased government spending. And if you allow insurance companies to charge different prices to customers based on different expectations of payouts (as my life insurance company does for me, basing my premiums on my behavior, medical history, and blood tests), then there will of course be those people who pay higher prices because they have pre-existing conditions just because they were unlucky. A very good friend of mine in college came down with cancer of the mouth — she never smoked or drank anything — and passed at the age of 22. Do you treat her differently than someone who has lung cancer because they smoked for 50 years? And how do you monitor these things?

    So either you start regulating behaviors, which I hope this government will never do (but fear they might, since they try to tax everything that might possibly be bad for you, even if it is only bad when overused) and allow insurance companies to charge different prices. Or in the interest of “fairness” you use “community rates” and force insurance companies to charge everyone in the same area the same price — and you incur the same moral hazard problem you have with insurance now, where people make bad lifestyle choices because they know someone else will pay for it. Or you have a government solution whereby everybody pays the same price but some just use more health care than others — socialized medicine — and suffer the drawbacks that come with that.

    There’s no perfect solution — as in any market, there must be some allocation mechanism, and someone always winds up short because we live in a world of scarcity. Design for me a system that wil reward incentives for people to make good lifestyle/health decisions, will not charge people with pre-existing conditions that were no fault of their own more than others (without regulating behaviors), and will also not end up raising prices for everybody else or put insurance companies out of business. You can’t.

    In one paragraph of my post, I mentioned that I don’t really think it’s exactly fair that an insurance company should be forced to bear the burden of someone else’s previous condition. You obviously disagree with me. What I like about this bill, and why I wrote the post, is that if you are going to make health insurance companies take everybody then they’ll lose money on those people. So you balance that out by allowing them to increase the prices they charge to people who are clearly making behaviorial choices that have costs. That way, my college friend who had cancer pays the same prices as others, and the people who are smoking pay higher prices to help offset those costs. I think that’s a pretty good set-up. Not perfect, but good.

    One more thing: the point of these reforms is not just affordability. There are actually several stated goals: increased quality, increased access, increased affordability, and no increase in costs. THAT is what is truly impossible. Obama and Baucus and everyone pushing these plans need to be straight with the American people and tell them straight up that there are TRADE-OFFS. They pretend they don’t exist and they can increase care, decrease payments to those who provide that care, increase access, increase quality, and have no impact on the budget deficit. And whenever anyone points out that they can’t do one of these things, they tweak their plan to accomplish that goal and a previously-met goal falls away. The plans under consideration cover less than half of the currently uninsured. If your goal is affordability, you can impose price controls (or limit payments to doctors, which is what they’re going to do), just don’t pretend that won’t impact quality or accessibility.

Leave a Reply