Quick thought on Pauly, Leive, and Harrington

9/23/2015 07:55:00 AM
Tyler Cowen points us to a study of the welfare effects of the ACA mandate.

Obviously, most people under the ACA are going to pay more most months than they would without insurance--that's how insurance works: you pay a premium that is equal to the average monthly payouts, plus a bit extra to compensate the insurer. But, this is still supposed to make you better off, as the decrease in risk and/or increased access to healthcare increases your well-being by more than the monthly premium, on average. And Pauly, Leive, and Harrington do find that
"Subsidy-eligible persons with incomes below 250 percent of the poverty threshold likely experience welfare improvements that offset the higher financial burden."
However, close to half of the people affected by the mandate weren't better off:
"even under the most optimistic assumptions, close to half of the formerly uninsured (especially those with higher incomes) experience both higher financial burden and lower estimated welfare."
That's not quite what was supposed to happen. The argument for the mandate was adverse selection; under a basic adverse selection the optimal level of coverage is not 100 percent but rather the proportion for whom willingness-to-pay for insurance exceeded the marginal cost of insuring them.

It has always seemed to me that much of the ACA is about redistribution rather than strict pareto-improvements. Broadly speaking, the goal of redistribution is to take from the well-off and give to the less fortunate. "Well-being" is a multi-dimensional beast but two of the most important dimensions are income and health--you want to redistribute from rich to poor, and from healthy to sick. Every developed country, to varying degrees, engages in redistribution along both of these dimensions.

The desire to redistribute explains some of the key features of the ACA. For example, we didn't merely impose a mandate to buy health insurance, which by itself would address the narrow efficiency problem of adverse selection, but also imposed a "community rating" rule which by itself has the opposite effect as the mandate, increasing the welfare costs of adverse selection. This policy choice can only be explained by a widespread desire to redistribute from the healthy who would otherwise have faced lower premiums to the sick who would have had much higher premiums. But we didn't just redistribute along the health dimension--the ACA also provides huge income-based subsidies to buy health insurance. Partly, the subsidies are there to further reduce the problem of adverse selection, but that alone can't explain why the subsidies are strictly income-based. In fact, the ACA engages in quite a bit of income-based redistribution as well as health-based.

In a redistribution scheme, it is not unreasonable to have a situation where a majority of people are somewhat worse off. Once you've exhausted the potential for pareto-improvements, the only way to help the neediest members of society is to make others a little worse off. However, forcing the well-off to buy themselves health insurance is a rather goofy way to help either the sick or the poor--why not just take the money and give it to the sick and let everyone decide for themselves if they want insurance? A lot of this comes down to the fact that the US doesn't have a very robust income-based redistribution regime, so for political reasons much of that has to happen in a less efficient form through healthcare markets.

But as Cowen highlights, the ACA is especially goofy in that much of the redistribution is confined to within the new individual market--even though people with employer-sponsored coverage are generally both wealthier and healthier. We have community rating within large employers and within the new individual market, but there's no mechanism to redistribute between each of these pools. Once again, we are hard up against another political constraint--any measure to redistribute must not redistribute from the politically powerful classes, mostly those who have employer-based coverage or Medicare. The "Cadillac tax" on high-end employer-sponsored health plans is one of the few ways in which the ACA does redistribute from these classes, but it keeps looking less and less likely that the tax will ever come to pass--most recently, Hillary Clinton has endorsed repeal of the tax.

Cowen closes with a plea for improvements from within the system (as opposed to another ideological "repeal" of the whole thing). I have a couple ideas here, but will leave those for future posts. In the mean time, submit your ideas in the comments!