Health Insurance Part 3: How Universal Coverage Fails, And Possible Ways To Mitigate The Failure

(A continuation of How The Free Market Fails At Health Insurance)

The are some of the ways universal coverage fails:

1) Moral Hazard
2) Rationing Of Care
3) Stifled Innovation
: (3b) How Americans Are Getting Screwed By Other Countries’ Price Controls
4) Subsidies For The Poor
5) Wasteful Government Bureaucracy
6) Curtailing Of Liberty

1) Moral Hazard. One of the greatest downsides of universal coverage for opponents of it is what is sometimes called the moral hazard. This is the problem that occurs when a person engages in more costly behavior when they don’t have to pay the costs than they would if they did have to pay the costs.

This would be a problem in universal coverage if everyone’s premium was based only on their income, as it is in many countries, or even if it was based on income and age. In a system like this, people cannot be grouped according to risk so that people with a higher risk of needing expensive health care could in principle pay more for their insurance than people with a lower risk, as is done for other types of insurance, such as that for cars and houses. Many people think that for a system to be fair it must include such provisions.

There would also be no financial discouragement from leading an unhealthy lifestyle and therefore costing the system more money, whereas in private insurance the insurance company can raise the premium if you are a heavy smoker, or make you buy add-ons to your policy to be covered for things like rock climbing, or whatever else the insurance company decides it needs to do to stay competitive and profitable and properly apportion higher premiums to those who are costing the system more money. This way others aren’t penalized for your choices.

I wrote in the second section of Part 1 about how incentives operate differently in health insurance than in other markets; nonetheless, this issue may still be a problem, and I agree that people should in principle pay for their own risky behavior rather than foisting the costs off onto others.

Another effect though seems to be even more important: when people demand more health care services when they don’t have to pay per visit or pay per service than they would if they did have to pay. As an extreme example, this can be the difference between someone going to the hospital for a runny nose or staying home and taking an over-the-counter cold remedy, or between someone demanding a test whose great expense is not justified by the doctor’s opinion of its likelihood of finding something wrong. If the patient had to pay the full cost of a hospital visit or the test, then they would consider the cost-to-benefit calculus for themselves and make a legitimate and informed decision about how much it was worth to them (for example, whether a test that had, say, a 0.1% chance of diagnosing their condition was worth, say, $5,000 to them), thus inadvertently serving the system as a whole. When both are free, they only have to consider the benefit, not the cost, which results in great overuse.

This overuse might grow indefinitely if left unchecked, as more and more services are demanded and then become the norm, which results in even more services beyond the norm being demanded, in a situation of spiraling costs resembling the problem with spiraling premiums in individual insurance markets that I laid down as the foundation of my reasoning on health insurance in Part 1. Without the effects of the free market and people making decisions based on what a trip to the doctor or a procedure is worth to them in monetary terms, the only check on usage has to come by fiat from above, whether by private insurance companies dictating limits of coverage and adjudicating unique situations as it does in the U.S., or by government bureaucrats doing the same, as happens in some other countries.

This is a real issue, and I would certainly be in support of measures that include additional costs for risky behavior and include some per-use costs, such as co-pays, where any visit to the doctor or any test done incurs some cost for the patient, even if it is only a small percentage of the actual cost of a visit or procedure.

The problem many opponents of universal coverage have is that they know very clearly how politically unpopular a co-pay would be in a government-run system. It bursts the fairytale bubble that politicians sometimes try to spin that they are going to be magically providing health care to everyone for free. Many people I suspect would never accept it, and would never understand why they have to pay a premium (in the forms of a tax) every month and pay to see a doctor, and many people would not be interested in hearing or understanding the systemic reasons for this but would instead try to vote for politicians who promised to make health care free, even though such a thing is impossible. Some people will never be aware that things need to be paid for.

This is a problem that may never be solved permanently, as even if a co-pay were instituted there would always be a risk of it being repealed someday for the reasons above, and so some feel this is too bad a thing and therefore universal coverage should just be avoided altogether. There is no clear cut answer, but rather simply a judgment to be made by each individual in the way they think and vote, balancing this downside of universal coverage against the problems with insuring individuals in a free market that I described in Part 1.

2) Rationing Of Care. Another downside of universal coverage is rationing of care. This has been a hot political issue for a long time, with one side claiming it is a rampant problem in countries with universal coverage and the other side practically claiming it doesn’t exist.

As at the end of section 2 of Part 2, I can first give my own firsthand experience (and thus emotional response): of all the people I’ve ever known living in countries with universal coverage, including all the Japanese people I’ve met in my 9 years in Japan and the many people from around the world I’ve met here as well, I’ve never once heard a story from anyone living in these countries who experienced rationing firsthand in a way that damaged their health or otherwise had a severe negative impact on their life, or from anyone who knew someone who did. In contrast, I do personally know of many Americans who have gone into great debt or gone without essential health services completely because they were stuck on the individual insurance market, and many Americans who were forced to make life decisions (such as about a job or place to live) that they would have otherwise had no moral or economic reason to make if not for the utterly arbitrary criteria for getting health insurance in the U.S. and the lack of bridges between two situations.

I think every non-American I’ve ever spoken to about this would rather accept a limited amount of rationing of care such as they have in their own country than accept the possibility of being shut out of the health insurance market altogether for arbitrary reasons.

Still though, this is an opinion gathered from anecdotal evidence of my own limited experience, and I don’t make greater claims for it than that.  Rationing does occur in countries with universal coverage, and sometimes this rationing does result in severe detriment to a person’s health or otherwise negatively impacts their life in a severe way. I don’t have official statistics on which system more often has the bad outcome, but merely this anecdotal evidence that in my experience the U.S. system more often seems to go wrong for people, and the anecdotal evidence from my experience that most people outside of the U.S. would prefer their problems to our problems.

The main point though is that rationing is probably a fundamental part of any universal coverage system and that it is a real downside of universal coverage that has to again be weighed against the downsides for private insurance markets by each individual.

The reason that rationing of care might logically be endemic to universal coverage is, first, in concert with what was said above, if there is no co-pay there is no financial incentive for people to decide how much a procedure is worth to them, so there may be more people lining up for it than would be in a free market system. This is a greater demand for services. In addition, with universal coverage often times the pay for doctors is kept artificially low, so there is less incentive for people to become doctors and therefore there are fewer doctors than the free market would provide. This is a lower supply of services. As in Soviet Russia, the only way to deal with greater demand and lower supply when prices are fixed is to make people wait in line, whether it’s for a loaf of bread or open-heart surgery.

The truth of course is that rationing of health care services happens everywhere, including the U.S. The U.S. just largely rations based on ability to pay, as occurs in all other markets, which some may argue is not ethical for this particular market, but at least it’s rational. Of all the ways to ration care, this seems to make the most sense, considering that any kind of rationing is cruel, but that rationing is an inevitable part of life. But remember that the U.S. also rations based on the very arbitrary reason of whether or not someone works at a company that provides health insurance, regardless of their contribution to the economy otherwise. And further, it should be noted that private health insurance companies are just as able to deny coverage for expensive and therefore (by definition) scarce treatments as a government is.

Rationing of health services ties in with another problem with universal coverage that, like rationing, is also a problem in any market on which a government puts restrictions:

3) Stifled Innovation. Another problem with universal coverage is a possible stifling of innovation, and the closely related problem of having fewer state-of-the-art facilities at hospitals nationwide. I don’t know whether this is an absolutely demonstrable fact or not, but many claim that the U.S. leads the world in medical innovation because we are the only country who allows medical services to be sold on the free market, and I’ll accept this as true for this argument. On the free market, the cost of research and development is included in the price of anything sold, whether it is a drug, a machine, or a procedure. If a government mandates artificially low prices for medicines and medical procedures, then the cost of research and development for new medicines and procedures will not be being paid, and no one will front the money for new medicines and procedures to be developed. Thus, a slowing or halting of innovation.

The government cannot take up this slack completely, as it has been demonstrated time and time again that the free market is vastly superior to any government enterprise in rate of innovation. This was of course demonstrated amply in the much slower rate of innovation in almost every type of product and procedure in communist countries in the 20th century vs. capitalist countries, and can be seen today in the difference between North and South Korea.

This may also be an insurmountable problem, and may be the most serious trade-off to consider. It may just be worth paying the cost of a slower rate of innovation for the benefit of universal coverage. Or it may not.

However, there is an aspect of this issue that rarely gets explicitly discussed, and that could be used to formulate a reason in favor of the U.S. adopting price controls:

(3b) How Americans Are Getting Screwed By Other Countries’ Price Controls

It is clear that, when there is a free market such as the U.S. and many socialized or price regulated markets such as most other advanced countries, the free market will come out ahead in innovation. Many people use this fact as evidence that if the U.S. goes to a universal coverage system then innovation worldwide will be severely stifled. However, I want to submit that a situation of no free markets is very different from a situation of one free market, and that the switch from one to none would be a game changer and that the results of this for a market as essential to humanity as health care would be less predictable than may seem at first glance.

To state it more concretely: the U.S. with our free market has actually been carrying and propping up the price controls and market restrictions of other countries for many years. If we remove that prop, the rate of innovation and the costs paid for that innovation is affected for everyone, and if everyone notices rising costs and slower innovation, then it is possible that something would be done about it to mitigate that effect, something in which everyone finally shares the costs equally.

In Applied Economics, Thomas Sowell describes the current situation with prescription medications:

The United States is the only major industrial nation without price controls on pharmaceutical drugs. In other words, politicians in other countries have already sacrificed the long-run medical benefits of pharmaceutical drug research and reaped immediate political benefits [by lowering the costs for existing drugs], leaving their countries to depend on the American pharmaceutical industry to supply a wholly disproportionate share of the new medications in the world. If a similar policy is followed by the United States, the resulting drying up of American pharmaceutical research would affect not only the American population, but also the populations of other countries that have been able to rely on the creation of new drugs in the United States and on being able to buy these drugs by paying prices that cover only the manufacturing costs, while Americans pay prices that cover the far larger costs of developing such drugs.

As was pointed out by a Commissioner of the Food and Drug Administration, the U.S. is paying the lion’s share of the cost of developing drugs. Americans pay in two different ways. As Business Week magazine pointed out, “it’s not just that the higher prices Americans pay for drugs fund half of the industry’s research efforts. U.S. taxpayers also support most of the world’s government-funded basic biomedical research—as much as 80%, by some estimates.”

The difference between research and development costs and manufacturing costs can be huge. You may be able to manufacture a drug for 25 cents a pill, but all of the research that went into finding the exact correct chemical combination for that pill, including all of the failed combinations that had to be tested before the correct one was found, and all of the clinical trials that had to be gone through before the drug was approved, which in the U.S. can take ten years or more, combine to set the cost of developing a new prescription drug at anywhere between $250 million to $800 million (according to the Wall Street Journal in 2002). That puts the cost of each individual pill at much higher than just the 25-cent manufacturing cost.

Essentially, the American free market is what makes price controls for drugs possible in other countries in the first place. This would explain why there is not just a disparity in price, but a huge disparity. For every drop in prices due to price controls in Canada, for example, there is an increase in price in America, so that the two prices move in opposite directions at the same time. Americans are breaking our backs to provide cheap drugs abroad while reaping no cost benefits ourselves.

This is a bit like a situation in game theory. If every country agrees to let pharmaceutical drugs be sold on a free market in their country, then everyone will share equally in repaying the costs of research and development and manufacturing. But there is a great incentive for someone to defect from this agreement, especially if they can count on the others not cooperating well together. If you are the first to defect and set price controls for your country, then you can secure lower prices for your populace by forging an agreement to pay a price to the pharmaceutical company that essentially only covers manufacturing costs, and therefore foisting research and development costs off on all the other countries. A pharmaceutical company might agree to this because some money from your country is better than none. But the price for all of the other countries will rise slightly. This can be repeated, with many other countries defecting and instituting price controls, so long as there is still a free market in existence on which to foist the research and development costs. If there is at least one country with a free market that is large enough to absorb all of the research and development costs, as is the case for the U.S., then every other country can defect without destroying the system altogether.

So the problem in America is that we are the last to defect. We’ve allowed the rest of the world to piggyback on us. Much like the horse Boxer who worked himself to death in Orwell’s Animal Farm, we are bravely but rather thick-headedly sticking to our noble principles (that, *gasp*, we should pay for what we get) and carrying the rest of the world on our ample shoulders, supporting their socialism with our hard work; we pay the costs, they reap they benefits.

We could try to demand that all other countries roll back price controls and play fair. But not only would that be laborious and probably nearly impossible, this agreement would once again be unstable, because the incentive to defect from it is so great. At this point, the easiest way to equalize the playing field, because it can be done in one move, is to defect also. By joining them we can beat them. Get our own government involved in price controls. This one move would reset the entire game; since America would no longer be subsidizing other countries’ price controls, this move could force all countries to come together to agree to pay fair market prices for drugs and share in the research and development costs equally. An economic lesson on a grand scale, demonstrating that prices cannot be kept low unless there is someone on whom to foist the costs. Prices would drop in the U.S., where they are unnaturally high, and increase everywhere else, where they are unnaturally low.

Of course, another thing that could happen would be that the U.S. defects, and no agreements are made, and so innovation into new drugs grinds to a halt. Maybe this is just me, but personally I’d rather spite everyone including myself rather than subsidize them while enduring their disdain. I believe such orneriness is in keeping with the ol’ American spirit. I’m frankly a little surprised we’ve put up with it for so long.

(Okay, so this probably isn’t the only possible solution. Maybe the U.S. government could make it illegal for U.S.-based pharmaceutical companies to sell their drugs in other countries for less than they do in the U.S., at least in countries that clearly could pay the same price. In Canada, but not in Kenya, for example.)

I tend to be an optimist though, and I think that the world will figure out a way to continue creating medical innovations even if medicine is socialized. One method I’ve heard suggested is to continue to allow free market competition in the development and pricing of drugs and procedures, but then having a government program of purchasing the patents at full market price of any that are deemed essential to public health or well-being, so that they can be sold at below market price to those in need. Viagra would remain in the free market, while heart medication would not, for example. I’m sure there is some great analysis of the pros and cons of this idea out there, but I won’t use this space to research and report on it. I merely give it as an example of a strategy that could be used to overcome stifled innovation.

What is clear though, is that whatever is done Americans should not continue subsidizing the drugs of other countries with comparable per capita GDP. At least not until they start using their presses to praise us for how awesome we are.

But the underlying issue, a stifling of growth, may never go away. It may indeed be the case that there will be less innovation, and fewer state-of-the-art procedures and pieces of equipment in hospitals across the country, if the U.S. adopts a universal coverage system. This is another judgment that must be made by each individual, weighing this downside against the downside of not having universal coverage.

4) Subsidies For The Poor. Another downside is that universal coverage mandates coverage for people who cannot pay their fair share of the costs of health care. Some people put this forward as the primary argument in favor of universal coverage, that we have a moral responsibility to provide health care to everyone no matter if they themselves are willing or able to do the work to earn the money to pay for it. But I want to note that it is possible to remain neutral on that question, and find that we have mandated coverage for the poor as an unintended consequence of providing universal coverage for the reasons I gave in the first section.

Setting aside the moral argument altogether, it would in practice be very difficult to keep out people who can’t afford to pay their full health insurance premium and deny them health care altogether, because if we did that there would have to be a line drawn, an income amount below which people didn’t have to buy in and above which people did, and many people near that line who could afford it but didn’t want to pay it, who were for example otherwise healthy and decided the premium wasn’t worth it to them, would also claim poverty, hide some of their income, or otherwise be incentivized to officially stay below the poverty line to avoid the premium. Since the system is built precisely on the foundation of not allowing people to not pay in when they know they will pay in more than they will get out, any such line will cause a breakdown in the system. The only workable solution is to have graduated premiums based at least partly on people’s ability to pay, so that some people are paying premiums that are much less than their cost to the system, but still paying nonetheless.

There is also the question of whether American society would have the will to allow people to die in the streets or otherwise not receive necessary medical care because they couldn’t pay for it. People tend to have a strong emotional response to situations like that, and tend to vote to give care even when someone can’t pay for it (as is the case with Medicaid now). Would it not be better to have the poor paying something into the system from the start and then receiving treatment, rather than paying nothing into it and receiving treatment anyway?

Subsidizing the poor like this is an unavoidable outcome of such a system, and while I actually believe it is a good thing for a society that can afford it to have such a safety net, so that hospitals don’t have to turn people away who cannot at that moment pay or risk taking on an unpaid debt that the rest of us will pay for eventually anyway, I also think it is a legitimate position to believe that it is morally wrong for the government to subsidize the poor. This is a well-argued libertarian position. It is another clear downside that must be weighed against the downsides of the free insurance market, and those who feel it is too great a price to pay may decide for this reason to come out against universal coverage.

5) Wasteful Government Bureaucracy. Another very real problem with universal coverage is that at least portions of it will be run by government bureaucrats rather than competing private companies. The free market provides much quicker and more accurate and precise feedback about how money is being wasted in a given enterprise than does the government, and forces private companies to operate as cheaply and efficiently as possible, giving the best service for the lowest price. They have to do this in order to stay in business; if they don’t, another company will take their place. The net effect for consumers (in this case, users of health care services) is that no matter who is in business, they are the top of the heap of a lot of businesses that failed, and consumers get better service.

In contrast, a government bureaucracy can become very inefficient before sufficient pressure is put on it to turn around. A government bureaucracy can be run in a way that would never survive in the business world. This is evidence of the irony that often adding a profit to a good or service makes it cheaper than it would be without a profit.

In relating this to health care, I want to first point out that the so-called public option and universal coverage are not synonymous. The public option would be non-profit government-run health insurance competing with the for-profit private health insurers, much like the U.S. Postal Service competes with UPS and FedEx. But it is possible to get universal coverage (which is the primary goal) without any government-run health insurance company at all. And this in fact appears to be the direction the U.S. is headed, if there is any health care reform at all. The plan seems to be to simply regulate private insurers so that they cannot deny people with pre-existing conditions, and also to force people to buy health insurance policies whether they want to or not. This would achieve the goals I set out in part 1 just as much as a government-run health insurer would.

It seems to me that this system has the potential to be better than many of the government-run insurance schemes worldwide. By maintaining private insurance companies, we’d be maintaining healthy competition among them to provide the best service at the lowest price within the rules set out by the government, and this would also lead to innovations among those companies for providing service within those ground rules. Such a system would be much quicker to evolve to meet new needs than an all-government system, and would not fossilize in backward ways. I am optimistic that the U.S. may be on the road to truly having the best health care system in the world (rather than only being best by some measures but failing by others), maintaining much of the efficiency of the free market that so many other systems lack while avoiding the arbitrary exclusions from coverage that are the heart of the problem with the system as it stands now.

Nevertheless, even if health insurance remained private (not including Medicare and Medicaid, of course) while universal coverage was mandated, there would still be more bureaucracy applied to it to support the much heavier regulations that will come with mandated universal coverage. As with all bureaucracies, this one is bound to become inefficient and problematic. Ultimately, a decision will have to be made whether this is a price worth paying to do away with the arbitrary exclusions the system has now.

I am again optimistic here that the bureaucracy will never become that bad, as it will have not only the American people pushing at it but also the considerable lobbying weight of the private insurance companies pushing from the other side, both parties having a major interest in keeping it as efficient as possible. And if it ever got too bad, if it ever became impossible or even overly difficult to make a profit within the ground rules set by the government, then the insurance companies would just pull out of the market and no one would be willing to put up the capital to start new ones, and that would be a very strong incentive for the government to make changes in the rules.

I won’t argue with you though if you think my optimism is misplaced or naïve. There is not a definitive answer on that subject, only opinions.

6) Curtailing Of Liberty. The Unites States of America is a country founded on the idea of liberty, that as much as possible individuals should be allowed to lead their lives as they see fit, without the government needlessly telling them what they can and cannot do, or how they should spend their money.

I believe in this idea of liberty. I don’t like many nanny state laws. I don’t support many forms of wealth redistribution, as I think they often contradict the basic laws of economics, although I am willing to consider the pros and cons of any particular proposal on a case-by-case basis.

What I have been arguing for here so far results in pretty severe liberty curtailment, forcing people to buy health insurance whether they want to or not. As I said in the first part, this is based on the notion that for any health insurance scheme (and actually any kind of insurance scheme at all), some people will pay more in than they get out while some people will pay less in than they get out. It would be a disaster if everyone who calculated that they would pay more in than they got out decided to forego health insurance and just pay cash, or to wait to buy health insurance until they were diagnosed with something serious. This is why ALL health insurance schemes are based on insuring people by groups, and forcing everyone in that group to buy the policy, and why preexisting conditions are not covered in individual health insurance markets.

My argument then has been that people should not be grouped based on employer, as this arbitrarily excludes some people, but rather everyone should be grouped together, and everyone be forced to buy a health insurance policy. But this is a pretty severe suppression of liberty, and flies in the face of the founding principles of this country. Is this a permanent conflict?

I want to make a suggestion for avoiding this conflict: an opt-out system.

Opt-out and opt-in systems are two ways to avoid compulsory participation, which would be a curtailing of liberty. An opt-out system is when everyone is automatically enrolled in some program (such as health insurance), but has the opportunity to un-enroll themselves. An opt-in system is when a program (such as health insurance) is offered to everyone, but they must perform some action to become a part of it. Behavioral economists have long understood the difference between opting in and opting out, and it is probably obvious that more people will be a member of a program if it is an opt-out program than an opt-in program. An opt-out program would therefore achieve many of the same ends as a program of forced participation, and also preserve individual liberties.

However, even though technically an opt-out program doesn’t curtail anyone’s liberties, it is still dangerous ground to tread. Imagine if everyone were automatically enrolled in a program to donate to the Catholic Church and had to perform some action to stop that from happening. Or imagine if some new opt-out program were instituted every month, and every month you had to trudge down to your local government office and wait in line to sign a piece of paper to opt-out. This would be little different than forced participation.

For that reason there must be some ground rules for instituting opt-out programs:

1) It must be considered deeply and debated publicly every bit as much as any law that is binding on everyone.

2) The opt-out option for a public policy must be used sparingly, so that people aren’t called upon frequently to rid themselves of the shackles of some unwanted imposition.

3) The action taken for opting out must be easy to perform, requiring little time or effort, and ideally no money at all.

I believe that the logic in favor of universal coverage is sufficiently strong to warrant any system that gets as many people involved as possible, as getting most people involved is the very foundation of the system, and therefore it is worthy of an opt-out system.

The method for opting out should be as simple as signing a piece of paper that is readily available to anyone. However, the implications of signing this piece of paper should be made very clear, both in the document and through education and publicity. The implications would be these:

1) By opting out of the universal coverage system, the signor agrees that they will receive no health care services under any circumstances unless they can pay for said services up front (with some briefly granted leeway for emergency situations, of course). It is already a problem that many people run up huge medical bills and then are unable to pay them. People can file for medical bankruptcy and have all of their medical debt ‘forgiven’.  What this really means of course is that everyone else pays the bill. (Medical bankruptcy also often has less severe consequences than other types of bankruptcy.) One of the purposes of universal coverage is to avoid this situation by having everyone paying a fair premium before they get sick, so that everyone is paying in. This is done in complete fairness to all, so that if you choose not to pay the premium, then you will also not be allowed to run up medical bills and possibly end up costing those who did choose to pay the premium a lot of money.

2) By opting out of the universal coverage system, the signor agrees that they will not be allowed back in. We can understand why this must be so by remembering Charles Wheelan’s dialogue between the doctor and the patient who needed open-heart surgery in part 1. If someone decides to opt back in after they get sick, they would have to be denied coverage for their condition. Again, this is the same principle as denying homeowners insurance for someone whose house has already burned down. In practice of course we might be persuaded to allow someone back in if they have no diagnosis of any condition. I like the Japanese government’s solution to this, in which if someone wishes to join the national health program who has been out of it for some time, they must pay a large premium up front to cover all of the time in which they were not a member. This would allow people who decided they had made a mistake to come back in.

I believe these two things must be made crystal clear to anyone who chooses to opt-out of health insurance, as I believe there are a lot of people who would demand their libertarian rights to do as they please when they are healthy, and yet expect to be taken care of if they get sick, whether they could pay for it or not. Since the risk involved is the risk of death, many people will do whatever it takes to avoid it no matter what their principles were before they had to face death. Further, there is also the consideration that if you do die, then you personally are set free from your medical bills anyway, and therefore there is virtually no incentive for someone facing death to consider the costs they will incur or whether they will ever be able to pay those costs.

So every effort must be made to make the consequences clear, and to make it clear that people will be held strictly accountable for their decision. Many people do not understand cause and effect, and strict efforts would have to be made to not let such people take advantage of the system merely through their refusal to understand its fundamental natural laws (not dictated by and thus able to be blamed on any person or government, but as unchangeable as mathematics).

I’m probably being a little too idealistic about the possibilities for such a system to work in the real world. In reality, every time someone who had opted out got very sick and couldn’t pay up front for their treatment, there would be a great outcry among some group or another about the cruelty of the system, blaming the government rather than the individual, and saying that people shouldn’t be punished eternally for the mistakes of their youth. There would also be constant pressure to lower the barriers to re-entry into the system after someone had opted out. There’s always some group or another who is willing to only look at present circumstances and ignore the larger picture of what led to those circumstances and the systemic problems that would arise if their compassionate solution to the present situation were applied universally.

Nonetheless, I am still fully in favor of maintaining individual liberty, and therefore support an opt-out program for universal coverage. If the seriousness of the consequences for opting out were made known, then I believe most people would choose not to opt out regardless of their present medical condition or future likelihood of needing costly care, and it would preserve the essence of the need for insuring a very large group all at once rather than individually.

An argument against this idea could be made, that all of those who opted out could then form a private health insurance pool that wasn’t part of the universal coverage system. Presumably, everyone who had opted would do so because they were getting less out of the universal coverage system than they were putting in, i.e., they had no preexisting conditions, and would see that their insurance would be cheaper if they were grouped only with other healthy people. It is unlikely that anyone currently receiving medical benefits from the system would choose to opt out, and unlikely that any insurance scheme outside of the universal coverage system would offer them a lower premium.

Therefore, it would have to be illegal for any insurance company to be independent of the universal coverage system. Health insurance would have to be provided universally, or not all. We would merely end up back where we started, with the problem of a never ending escalation of insurance premiums for the sick, if companies that denied coverage for preexisting conditions were allowed to compete with companies that accepted everyone. The healthy people would rush to the private policies, leaving the sick people behind in the universal coverage system with no healthy people paying in to make the scheme work, essentially excluding them from health insurance altogether.

I acknowledge though that enforcement of this law would never be easy and never be finished. This is an added cost that would have to be paid in a universal coverage system with an opt-out option. Because the reasoning leading to this law is complicated, it would from the outside look like an unreasonable curtailment of liberty for the government to be in the business of finding and breaking up private insurance pools. This is a battle that would never end, but I believe it is a price worth paying, though you may not.

A moral argument can be made here, although it is somewhat more complicated than any of the other arguments I’ve provided so far. Anyone who refused to be part of an insurance scheme that allowed access to all regardless of preexisting conditions and instead wanted to be part of an insurance scheme that denied such coverage would essentially be saying that they believed those sick people did not deserve any treatment, but instead deserved to die so as to be less of a financial burden to themselves, the healthy.

I know this seems extreme, but consider it closely. If they think the sick people should be allowed on some insurance policy and therefore to get treatment, then they should be willing to share in the costs of that treatment by buying into the policy covering the sick people. Otherwise they are merely committing the deep hypocrisy of telling other healthy people how to spend their money while reserving the right of themselves to spend as they see fit (essentially the same hypocrisy as people who complain about insurance companies making a profit).  Some healthy people somewhere must be paying premiums and not using services so as to provide the money to treat the very sick who are getting much more out of the system than they are paying in. If you think it is your right to opt out of the system serving the sick people and instead join a system where the sick people are not allowed and not costing you any money, then you are essentially saying that the sick people are someone else’s problem, and if they want any medical care then they better find some chumps willing to pay more into the universal coverage system than they get out. They are essentially saying that sick people for them are out of sight out of mind.

The better a health insurance company gets at denying coverage to people who will need expensive health care, then the cheaper the premiums for the remaining people. (This goes back to the explanation in Part 1 of why health insurance is a different market than other insurance markets.) Thus, in this case, maintaining your right to buy such cheaper insurance is casting a vote against sick people getting health care. The complexities of the intervening systems and logic don’t change the fundamental nature of the choice, nor the moral implications. Liberty is often more complicated than it seems at first.

This is complex reasoning, and will likely never catch on with a large portion of the public. There will always be many people who will be grateful for all of the healthy people paying into their insurance if they get sick and need to take out more than they put in, and bitter toward everyone on their insurance policy taking out more than they put in if they are healthy. I think anyone who takes the time to follow the reasoning closely though will see the trouble.

So an opt-out system partially solves the problem of preserving liberties, by giving everyone the choice between buying into the universal health insurance system or going solo and having no health insurance at all. It does not leave open the choice though of buying into an insurance scheme that is independent of the universal coverage system and cheaper because it is covering fewer of the sick. Therefore, liberties are still suppressed under this system, and some may still find that too dear a price to pay. I merely hope my reasoning has been sufficiently clear here that you can come away from this knowing exactly what choosing full liberty in this case will cost.

(I am indebted to the book Nudge by Cass Sunstein and Richard Thaler for some of the ideas in this section.)


MANY OF THE fixes for the the failures of universal coverage may seem convoluted and more trouble than they are worth. However, I want to emphasize that I wouldn’t argue for these fixes if the problem of arbitrary exclusion from a health insurance free market wasn’t so severe. As I’ve repeated many times, you have to choose which set of problems you want to deal with. I believe that many of the problems with universal coverage can be mitigated (though in some cases perhaps never fully solved), but that the problem of arbitrary exclusion in a health insurance free market is permanent and very undesirable, considering the costs to an individual of being excluded from that market (crushing lifelong debt, lifelong disabilities that could be avoided, and death).

Nonetheless, I am still willing to leave the decision up to you after having considered the points I’ve made. I hope you will choose carefully and with full knowledge of the consequences of each choice.

See also:

How The Free Market Fails At Health Insurance


Health Insurance Part 2: Some Consequences Of The Logic Supplied In Part 1

Published on January 18, 2010 at 4:01 am  Leave a Comment  

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