Tag Archives: Insurance Market

Hellerisms on Parade: Health Care Edition

And then there was this:

“The individual mandate I thought was atrocious, was wrong and shouldn’t have been in Obamacare at all,” he said. “I don’t think your government should tell you to buy something that you can’t afford. And if you can’t afford it you pay a fine. Yet 90,000 Nevadans pay the fine.” — Senator Dean Heller

Let’s start with the assumption that Senator Dean Heller is a capitalist, a firm believer in the free market system.  He’s certainly reinforced this impression given any occasion to do so.  So, why was there an “individual mandate” in the Affordable Care Act?  — The answer is capitalism.

The more precise answer is the “adverse selection” problem in free markets.  The most concise explication I’ve found for this comes from the Economist’s View:

“To explain how the adverse selection problem arises in these markets, note that people purchasing health insurance generally have better information about their health status than the people selling the insurance. If insurance is offered in this market at somewhere near the average cost of care for the group, people will use the superior information they have about their own health status to determine if this is a good deal for them. All of the people expecting to pay less for health care than the price the companies are asking for the insurance will drop out of the market (the young and healthy for the most part; all that is actually needed is that some people are willing to take a chance and go without insurance). With the relatively healthy people dropping out of the insurance pool, the price of insurance must go up, and when it does, more people drop out, the price goes up again, and the result is just like in the used car example above: The market breaks down and nobody (or hardly anybody) can purchase insurance.”

Now, if a person is reasonably conversant with capitalism and the patterns intrinsic to the operation of free markets, then the problem of  ‘adverse selection’ should be part of that person’s lexicon.  Granted it’s not an easy thing to explain, but the Economist’s View post quoted above offers the “used car” analogical example which makes the concept more accessible.   Therefore, if Senator Heller is indeed a capitalist, and if he has better that average economic knowledge base, then his explanation of his opposition to the individual mandate makes absolutely no sense whatsoever.

There’s also the political side of the issue, recall that Obama’s original plan didn’t contain an individual mandate while Secretary Clinton’s proposal did, and the result:

“Once elected, Obama quickly recognized the inescapable truth: An individual mandate was essential to make the plan work. Without that larger pool of premium-payers, there is no feasible way to require insurance companies to cover all applicants and charge the same amount, regardless of their heath status.” [WaPo]

There’s just no way to get around the problem of Adverse Selection, and still have an insurance system based on free market capitalism. 

Those still unsure about their understanding of Adverse Selection and how it operates in a free market system may want to consult some of the following sources:  Investopedia is a good source for short, concise, definitions of economic terms such as Adverse Selection. The Economic Times also has a dictionary style definition.  Risk Management specialists have a more technical definition.  Those wishing to dive a bit deeper into the weeds might want to see the World Bank’s explication.   There’s also an explanation from the National Association of Insurance Commissioners which goes into greater depth. (pdf)

Granted the individual mandate isn’t popular — that part is easy — but anyone who professes to be a free market capitalist (as does Senator Heller) can’t ignore the principle of Adverse Selection and how that concept impacts the insurance markets.

The alternatives to a purely market based insurance system in which the most people possible can obtain health insurance at relatively affordable rates are problematic for the free-marketeers.  A public option (federally sponsored insurance program operating in the general market) is one possibility.  Another alternative simply removes the free from free market — the single payer, or Medicare for All proposal, in which public insurance pays for medical services delivered in the private market.  At the furthest end of the spectrum would be nationalized medical health services such as the British or French systems. The arguments for and against each of these are ideological and political, and not necessarily relevant to the discussion of free market based health care delivery.  However, they do mitigate, from divergent directions, the issue of Adverse Selection.

The problem for Senator Heller is that he can maintain his free market positions OR he can oppose the individual mandate, but in light of the persistent and perpetual issue of Adverse Selection he can’t do both.

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Filed under Economy, Health Care, health insurance, Heller, nevada health, Nevada politics, Politics