Friday, September 18, 2009

Goodman's Ten Steps To Statism

John Goodman explains how requiring insurers to accept all customers for equal prices regardless of pre-existing conditions will lead to individual and employer mandates.

These are his ten steps to statism:
1. If we know we can buy health insurance after we get sick with no increase in premiums, none of us will want to pay premiums for insurance while we are healthy. Yet, if only the sick are paying premiums, the entire insurance system will collapse.

2. So to prevent collapse, there must be a requirement that people buy in when they are healthy.

3. Now if the requirement is a general mandate -- with lots of coverage options -- we are back to a variation of the problem in 1. People will choose scaled down, inexpensive insurance when they are healthy and then switch to comprehensive, expensive insurance after they get sick.

4. So to prevent a meltdown similar to the one described in 1, choices must be eliminated and there must be a standard (government-defined) benefit package which all individuals are required to buy and all insurers are required to sell. People won’t be allowed to buy anything less generous and no insurer would be foolish enough to offer anything more generous.

5. Now suppose there is a health insurance Exchange where people get their insurance, but insurance can also be sold outside the Exchange. In particular, imagine a special deal offered to the Iron Man's Club (requirement: swim a mile, run 10 miles and bicycle 20 miles). Soon, word would get out that anyone who can qualify for Iron Man membership can get the standard benefit package for a really cheap price. In this, and in other ways, insurers outside the Exchange would siphon away the healthiest people leaving the Exchange with the sickest, most costly enrollees.

6. So to prevent the death spiral the conditions in 5 would lead to, insurance outside the Exchange would have to be outlawed and insurance within the Exchange highly regulated. (See below.)

7. How can you force people to buy insurance? Since cattle prods are too impractical and prison cells are too expensive, about the only practical tool is a fine. And if you want it to work, the fine needs to be near (and maybe even above) the premium people have to pay.

8. Of course, there is this problem: How can we know whether anyone has insurance? The easiest way -- without a new bureaucracy -- is to rely on the income tax system. Make people show proof of insurance at the time they file their income taxes.

9. Trouble is: People file tax returns once a year and most people who are currently uninsured are uninsured for less than a year. So a logical way to get to people with greater regularity is to use the employers as an enforcement mechanism.

10. Once employers are involved, however, we run into the unfortunate fact that most people believe that premium payments are an addition to wages, not a substitute for them. So to the question, "should we mandate that you buy insurance or that your employer buy it for you," the employer tends to win hands down. Result: both an individual mandate and an employer mandate seem inevitable.

Notice the cyclical pattern in all of this. You distort incentives in a complex system and you get perverse behavior. To prevent that, you distort incentives some more and you get other kinds of perverse behavior. The more you intervene, the greater the need for even more intervention.
(Read his full post, "Obama's Dilemma: Ten Degrees of Separation".)

Goodman's final point echoes Ayn Rand's observation:
One of the methods used by statists to destroy capitalism consists in establishing controls that tie a given industry hand and foot, making it unable to solve its problems, then declaring that freedom has failed and stronger controls are necessary.