Against Salam and Winship’s ‘Citizen Benefits’ for Health Insurance

There is nothing better about living on the north side of the Golden Gate Bridge than receiving my printed copy of National Review, taking it to my Marin County hot tub (not the one criticized by George H. W. Bush), and reading it aloud to chardonnay-sipping liberal friends.

Unfortunately, I nearly dropped my brie when I found a fundamental flaw in Reihan Salam and Scott Winship’s proposal for a “Leaner Welfare State” in last week’s issue.

Salam and Winship propose replacing the welfare state with “citizen benefits.” Their conclusion that the welfare state needs dramatic reform is solid. I also agree (as do all conservative health-policy analysts) with their recommendation to amend the tax code to give individuals command of our health-care dollars, instead of allowing employers to have monopolistic control over them.

Unfortunately, the authors also give the government too much power over the alternative, and their proposal violates fundamental principles of effective regulation of insurance. Although Salam and Winship would repeal Obamacare’s individual mandate that everyone must buy health insurance:

. . . one or more public insurance pools would be open to everyone.  Private insurers would offer different coverage options and benefit packages in the pool and compete on price.  Plans participating in the pool would be subject to guaranteed-issue and renewal rules, and they would be community rated.  Insurers could still offer coverage outside the exchanges without facing these federal requirements. . . . A federal reinsurance program would help offset insurers’ costs for the most expensive subscribers they cover.

A thought experiment explains why this cannot result in a satisfactory equilibrium. Today, the government attempts to pool health risks by forcing all employees into their employers’ plans. It’s a ridiculous system that we don’t use for any other type of personal insurance, and Salam and Winship are right to condemn it. Most people believe that this pools the medical costs of healthy and sick people, but that is not correct. Economic analysis strongly suggests that sicker and older employees pay more for coverage than healthier or younger people do, but it’s not monetized in insurance premiums (which are largely hidden from employees). Instead, they pay via reduced wages, as I’ve discussed previously in a scholarly analysis).

Consider the first step in Salam and Winship’s reform: the government equalizes the tax treatment so everyone is free to buy his or her own health plan. In the “public insurance pools” (a.k.a. “exchanges,” in Obama-speak), insurers must issue policies to all applicants at the same price, regardless of prior continuous coverage.

Sick applicants would clearly go to the “public pool” for coverage. Healthy applicants would be tempted to apply for coverage outside the “pools” but would quickly learn that this would be unnecessary, because once they become ill or suffer an accident, they can enter a “pool.” Both the number of uninsured people and premiums in the “pools” would skyrocket. This is what economists who study insurance call a “death-spiral.”

According to Salam and Winship, “A federal re-insurance program would help offset insurers’ costs for the most expensive subscribers they cover.” Unfortunately, the “death-spiral” will ensure that all their subscribers will be the most expensive. The insurers’ begging bowls will never be full, no matter how much taxpayer-funded “re-insurance” they get.

A more appropriate alternative is guaranteed renewable, incentive-compatible, individual insurance, a.k.a. health-status insurance, as described by Prof. Mark Pauly or Prof. John Cochrane.

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