Thursday, January 12, 2012

Aaron Carroll of The Incidental Economist Destroys Mitt Romney’s Argument on Health Insurance

Not That It Matters – This is About Ideology and Elections, Not Rationale Analysis of  Problem

The now famous quote from Mitt Romney that he likes to be able to fire people, meaning he likes to be able to fire service providers that don’t provide him with good service is a vivid illustration of what Mr. Romney does not understand.  The context of the quote is that by having private individual insurance instead of mandated group insurance the individuals would compel the insurance companies to good service and good value. 

The ridiculousness of this claim is explained in just a few paragraphs by the excellent Aaron Carroll of the equally excellent health economics forum, The Incidental Economist.

First of all, let’s unpack the idea that if individuals have their own insurance, the “insurance company will have an incentive to keep [them] healthy”. That’s totally backwards. The idea that people might fire their insurance companies is exactly why they don’t have an incentive to keep you healthy. Insurance companies preferentially cover healthy people, and they want those who are ill to leave, or, better yet, not enroll in the first place. . . ., but the types of plans Gov. Romney seems to have in mind don’t do the very thing he is saying they do. Insurance companies have a vested interest in keeping you healthy when you can’t or won’t leave.

But that’s the least of his problems. The real issue, unfortunately, is that very, very few people have the luxury that Gov. Romney is endorsing. Let’s say that you are self-employed, and lucky enough to have found a company to provide you with health insurance. Then, let’s say you develop cancer. You suddenly find out that your insurance company stinks. So you fire them, right?

Of course not. You’re screwed. Now you have a pre-existing condition. There’s not an insurance company out there that wants to cover you. So you don’t fire them. You scream, and curse, and cry, but you’re stuck. Only healthy people have the luxury of picking and choosing.

Of course in Mr. Romney’s world the reality of choosing a carrier can take place.  Since Mr. Romney can afford any premium and since he does appear to be healthy, insurance companies will want to cover him.  This assumes of course that Mr. Romney does not have health insurance for life from Bain Capital, his private sector employer or from the state of Massachusetts, his public sector employer.

Health insurance is a unique good, it is not like buying a car or getting a hotel room.  Mr. Carroll explains the difference in this excellent paragraph.

Let’s also not forget that most people don’t find out that they’re not getting “good service” until they’re sick. Healthy people don’t make much use of their insurance, so they don’t know how bad it is. They only find out after they’re ill, and then it’s too late. It’s only fun to fire the insurance company if you’re sure you can go to another company to get what you need. Almost no one can.

One other important point must be made.  People like Mr. Romney confuse the requirement of having to have insurance with a lack of ability to choose or face competitive markets.  Auto insurance nicely counters this.  Auto insurance is required and the fact that it is required means a lot of entrants in the market, because they know a market is there.  And motorists have a great choice in auto insurance and can fire the carrier (as The Dismal Political Economist just did when his carrier raised his rates after paying a claim).

If only Mr. Romney were a person with experience in the business world he might understand this.

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