UBI and Health Care: What's Wrong With Murray's Approach
How would a Universal Basic Income handle health care? Normally, UBI advocates just say, “separate issue” and move on. But not the great Charles Murray. His In Our Hands: A Plan to Replace the Welfare State proposes two regulations to tackle the problem head on.
Regulation #1. UBI recipients must purchase health insurance.
Regulation #2. “Legally obligate medical insurers to treat the population, of all ages, as a single pool.” Health insurance is still private and competitive. But if an insurer wants to cut its price, it must cut it for everyone.
On the surface, it’s ingenious. Most UBI advocates exclude health care because health insurance premiums vary tremendously from person to person. But if health insurers have to charge a uniform premium, this problem seems to go away. Averaging over everyone, premiums would be well below Murray’s proposed UBI of $10,000 per year. Everyone could therefore afford to comply with the mandate. Maybe you shouldn’t even call it a “mandate”; it’s just a rule you have to follow to collect your UBI.
The problem: As long as health insurance remains private and competitive, health insurers compete on quality as well as price.* Since their elderly and sick customers are losing ventures, there’s an obvious incentive to selectively cut their quality so they take their business elsewhere. In Murray’s world, no insurer wants to be known as a geriatric specialist. Instead, prudence urges them to lavish services on the young and healthy. Physical fitness programs. Free contraception, delivered by drone for no extra charge. That kind of thing.
How severe would the problem be? Very. The cost of insuring a 91-year-old is far higher than the cost of insuring a 21-year-old. If the law forces firms to charge both the same rate, firms will desperately search for ways to repel the aged and attract the young. Blasting “today’s hottest music” over the P.A. system is only the beginning.
Of course, the government could impose a comprehensive system of quality regulation to prevent this kind of thing. But given the immense cross-subsidies, enforcement would have to be both encyclopedic and draconian. The UBI aspires to simplify the welfare state, but ends up piling a whole new strata of regulation on top of the status quo. What’s the point?
I’m a huge Charles Murray fan. In Our Hands is my favorite book on the UBI. But his elegant effort to fold health care into the UBI fails.
* This is a key part of Murray’s vision: Like me, he advocates supply-side health-care reforms like ending medical licensing and allowing contractual limits on medical liability.
The post appeared first on Econlib.
The fundamental issue with health insurance is that it isn't insurance; if it was, then getting liver cancer on insurance would mean that the insurance company would "own" that liver cancer, regardless of whether I continued being on their plan or not; they'd pay out for the treatment as long as it was necessary / I continued to survive.
It's a mechanism for spreading cost amongst its pool, rather than a mechanism for spreading risk amongst its pool.
And the better an insurance company is able to distinguish between high-cost and low-cost individuals, the less well it will perform this function; if all the high-cost individuals are in a pool, then you haven't actually spread the cost around at all. But since all the low-cost individuals would prefer not to pay for high-cost individuals, even if an insurance company -wanted- to spread costs around, it could not actually do so; their customers would vote with their wallets to go with the plan that costs them, personally, less money.
Imagine, for a moment, that some ingenious individual at a property insurance company creates an oracular AI that can, within a 5% margin of error, calculate exactly how much money it would cost the insurance company to insure a specific house; if it will get hit with a hurricane next year, the AI knows this, and calculates the damage. This insurance company then tailors every policy to guarantee a margin of 5%. The AI spreads, and property insurance companies all begin using it.
Property insurance becomes impossible - nobody who would be taken as a customer should agree to be taken as a customer, because whatever their premium is, they should just put that in a savings account and cover the costs themselves, and save themselves the profit margin of the insurance company. You'd need regulations prohibiting property insurers from using this information, in order for property insurers to have a job to do - which would become spreading cost, instead of risk.
If our regulation was too heavy-handed, and forbade insurers from using -any- information - costs would skyrocket, because properties now regarded as uninsurable, because the risks are too high, become mandatorily insurable. People would buy properties they wouldn't otherwise buy; the insurance company, after all, has to pick up the tab.
So now you're in an uncomfortable position. Imagine yourself the regulator of the industry, seeing these problems. You decide you have to do something; so you decide that "Imminent collapse" can now be used as a reason not to insure a building. Costs go down.
Now you have regulators doing the job that the market is supposed to be doing - and doing exactly as bad a job as you'd expect, because, in truth - there is little to be seen of a free market here. The companies role-playing as participants in a free market will, in the end, have to compete mostly on the costs (of many kinds, including how difficult it is to actually get a claim filed) of their relative bureaucracies, which, granted, isn't nothing, but it's quite far removed from having much at all to do with property itself.
Meanwhile, the most important things, in terms of cost, all happen at the regulatory level. Whether or not you can move people who smoke in bed into their own risk pool. Whether or not insurance companies are allowed to force homeowners to pay for upgrades to their home to prevent electrical fires. Whether or not insurance companies are allowed to force homeowners to pay to replace their roof, or separate roofing out into risk pools. Odds are, the actual way it would work out is that insurance companies have to pay for all the incidental costs - they pay for your roof to be repaired, they pay to have your foundation shored up, they pay to repair your electrical system. And probably they have to pay for whatever the homeowner chooses to do on their own cognizance, as opposed to the insurer acting by fiat - and if it is the homeowner making the decision, costs go up, because, beyond whatever deductible we employ, the insurance company is footing the bill anyways, so might as well choose the roof that lasts twice as long and costs ten times as much, since they're already maxing out their deductible anyways, and that's the economically rational thing for the consumer to do.
And if you're not behaving that way, well, better not get property insurance, because you're paying for everybody else who does, and it'd be cheaper to just go without. Which drives costs higher still, so now the government, considering the catastrophe, mandates that everybody buy property insurance, to spread the costs around.
That's more or less where health insurance is.
It seems like it would be pretty easy to mandate a pool for each combination of sex and birth year, and then to vary the UBI by combination of sex and birth year. Would such a change overcome your objection?