April 10, 2006

Bill of Health

by Arnold Kling

Arnold Kling is an adjunct scholar and author of Crisis of Abundance: Rethinking How We Pay for Health Care.

The elected leaders of Massachusetts have come up with a novel solution for the vexing problem of having to pay for health care: abolish the laws of arithmetic. Their new plan is a perfect illustration of what happens when politicians approach a problem unconstrained by reality.

The plan includes tax incentives and penalties for employers and individuals to get everyone covered by a health-care policy. It also promises affordable health insurance for people with modest incomes, under a program yet to be negotiated between the state and private insurance companies. Nevertheless, three numbers stand out: $295, the annual penalty per worker a company must pay to the state if it does not provide health insurance; $0, the deductible on the typical state-subsidized health-insurance policy under the plan; and $6,000, the average annual expenditure on health care for a Massachusetts resident. Each of these numbers represents one of the irreconcilable goals of health-care policy:

• $295 represents the goal of affordability. We would like to be able to purchase health-care coverage for $295 a year. If that's what it actually cost, my guess is that the problem of the uninsured would pretty much disappear.
• $0 represents the goal of insulation. As individuals, we would like to be insulated from health-care costs. That is why, instead of real insurance -- which would have us pay for at least the first $10,000 of health care out of pocket -- most of us have health-care policies with much lower deductibles.
• $6,000 represents the goal of accessibility. We want access to the best care that modern medicine can provide, whatever the expense.

The question is this: What insurance company will provide coverage with $0 deductible, at an annual premium of $295, for someone whose health care costs on average $6,000 a year? The numbers imply losses of over $5,700, not counting administrative costs. To subsidize zero-deductible health insurance, state taxpayers might have to pay out about $6,000 per recipient.

There is no reason to expect firms to rush to offer a policy to uninsured employees. It makes more sense for them to pay their $295 penalty and hand the health-insurance problem back to the individual -- and ultimately to the taxpayers of Massachusetts. Economically, consumers who face deductibles of $0 have no incentive to restrain health-care spending. They are only constrained by the time and discomfort involved in obtaining medical care.

If more Massachusetts consumers enjoy coverage without any deductible, then the average per-person expenditure on health care of $6,000 seems likely to go up. Health insurance companies will not write policies that lose them money. Policies with deductibles of $0 in a state where spending per person on health care is on average $6,000 a year will have very high annual premiums -- presumably over $6,000 a year.

The Massachusetts health plan promises to provide health-insurance companies with subsidies in order to induce them to offer these low-deductible insurance plans. The arithmetic suggests that these subsidies will have to be large -- thousands of dollars larger than the $295 per worker that the state plans to collect from employers that do not provide health insurance.

The problem of paying for health-care coverage, which politicians are declaring they have "solved," is really just beginning. The only way to make zero-deductible health insurance available at low cost is with a large subsidy; how much will depend on negotiations with insurance companies. Only when the size of the necessary tax increase becomes clear will Massachusetts's leaders learn the laws of arithmetic.

This article appeared in the Wall Street Journal, April 7, 2006.