Patients' Choice Act: "Exchanges"

Yesterday, I wrote critically about the "auto-enrollment" feature that the federal government would require states to institute if it passed the Patients' Choice Act, a proposal by four outstanding Congressional Republicans. I concluded that the requirement would not be effective.

Another feature of the PCA is the requirement that states establish "exchanges", from which residents could buy health insurance. Once again, I believe that the proposal would be ineffective. Worse, it reflects a fundamental misunderstanding of the risk-pooling function of health insurance. (Unfortunately, it's the same misunderstanding that most people have.)
Congressman Ryan carefully distinguishes an "exchange" from a Massachusetts-style "connector" by the fact that participation in an exchange would be voluntary, whereas a "connector" requires every one to buy health insurance. Well, fair enough, but his Q&A's also show that the "exchanges" would not work as advertised, unfortunately.

First, let's note one of the reasons for the exchange: The Q&A states that "a single patient venturing into the individual market does not have the benefit of spreading risk (and costs) in a broader risk pool." This is almost completely untrue, as demonstrated by Professor Mark Pauly and colleagues (which I discussed in a recent briefing paper, especially pp. 30-31). And it would be even less true if the government reformed the tax code so that we could buy guaranteed renewable, health-status insurance, that lasted our whole lives (as described by Professor Cochrane.)

Second, the PCA promotes states' instituting "voluntary" exchanges, but health plans within the exchange will guarantee issue policies. I.e., people who are already sick will enter the exchanges to buy insurance and those who are healthy will avoid the exchanges. Obviously, this will result in death spirals within the exchanges.

The PCA anticipates that insurers within the exchanges will re-insure each other, as occurs in Switzerland and the Netherlands. However, participation in those countries is mandatory. There's no point re-insuring risk in the exchanges if only sick people buy policies via the exchanges!

The Patients' Choice Act is a serious, good-faith effort to reform health care with minimum government, but it needs a serious make-over.

Patients' Choice Act & "Auto-Enrollment"

On May 20, the insightful policy analysts Joe Antos and Grace-Marie Turner editorialized in favor of the "Patients' Choice Act" in the Wall Street Journal, where they labelled it the "GOP's health-care alternative."

Produced by U.S. Senator Coburn (R-OK), Senator Burr (R-NC), Congressman Ryan (R-WI), and Congressman Nunes (R-CA), the PCA immediately drew some heavy criticism by freedom-loving policy analysts Michael Cannon and Michael Tanner (a.k.a. "the two Mikes") over at the Cato blog.

The PCA would compels states to institute a number of policies. The first one that I found questionable is "auto-enrollment". This means that when you get a job, or a driver's license, or show up at the ER, you are "auto-enrolled" in a health plan. The Congressional authors cite the experience of auto-enrollment in 401(k) plans as an example of how it overcomes eligible beneficiaries' inertia in the face of complex choices.

Well, maybe so, but health insurance is quite different. First, suppose I move to Florida to start a new job and get a new driver's license when I arrive there. I am just about dumb enough to "auto-enroll" in both the default plan that my new employer offers me and the default plan offered by the DMV.

Also, if the hospital ER also offers auto-enrollment (which I suppose would happen if I went to Florida without a job and did not get a driver's license), that procedure misses the whole point of health insurance. It's kind of like the auto-body shop auto-enrollling you in car insurance when you show up after an accident! What kind of a self-destructive car-insurer would sign on to such a program?!?!

The other big difference between health insurance and a 401(k) is that if I stop contributing to my 401(k), the balance just sits at Fidelity (or Vanguard or Merrill Lynch,or wherever) until I roll it over. If I stop paying health-insurance premiums, I obviously auto-disenroll from the plan, defeating the whole purpose. Because nobody seriously proposes that a tax credit alone will fully fund a health policy, but that working people will pay some of their wages in premium, this will result in significant drop out.

Which brings us back where we begun: uninsured people. We either believe in individual choice, which will result in a certain number of uninsured under any scenario, or we believe in mandatory health insurance.

There really is no middle way.