What to do with the Uninsured?

During Monday night’s CNN/Tea Party debate, Ron Paul was asked a question about the implications of people not being required to purchase health insurance.  The so-called individual mandate is a major new potential (several federal judges have struck it down as unconstitutional, yet it has not made its way to the Supreme Court yet) regulation that will take effect in 2014 if the new health care law still exists by then.  The mandate requires all United States citizens (with some exceptions for financial hardship) to purchase health insurance if they do not already have it through an employer or government program (Medicare, Medicaid, military, SCHIP).  It is an unprecedented power on the federal level, and it is understandable that many have reacted against it, but it is intended to solve a practical problem. 

Everyone, at some point in his or her life, will likely need to use medical services because of an illness or physical injury.  This is not a choice that people have; rather, it is an inevitability that can be planned on.  This goes for people who have insurance and those who do not.  For people with insurance, they pay a premium, deductible, and co-pay (some plans have different structures, but this is generally the case), and the insurance company will cover the rest, though limits may apply.  If medical care was given only to people who have insurance, the costs of care would stay relatively stable, which would also produce a stabilizing impact on insurance premiums (although this situation would likely lead to other problems, as will be discussed later).

This is not the case.  Right now, somewhere around 15% of the American public does not have health insurance.  However, the Hippocratic Oath that medical professions swear to does not allow them, on principle, to deny needed care to anyone, regardless of whether the patient can pay for it (personally or through insurance coverage) or not.  Those 15% of Americans will get care if they need it.  But who covers their costs?  This is a case of economic domino effect.  The medical groups and hospitals absorb the costs of these patients.  But whether they are for-profit or not-for-profit, these entities must remain either profitable or budget-balanced, so the costs they absorb are spread throughout the entirety of their services.  In other words, hospitals cover their additional costs by increasing their prices for services.

This presents a dilemma for insurers: do they cut coverage from medical providers that are increasing prices, or do they raise rates to cover the increases?  Sometimes they do one, and sometimes they do the other.  Dropping coverage leads to less choice for consumers.  Raising rates leaves consumers with the risk of trying to drop their coverage in favor of another plan (which may not accept them, especially if they have a pre-existing condition), or it leaves them no choice but to pay the higher premiums.  So, who pays for the uninsured?  In the end, the insured do.  That is an insanely inefficient market.  The individual mandate was a 1990s (intelligent) Republican solution to a market problem.  It requires people to take responsibility for themselves, and it keeps premiums in check.

So, with that background, let’s get back to Ron Paul.  The moderator explained the purpose of the mandate and then asked Paul, who joins all of the Republican candidates in opposing the mandate, what should happen to people without insurance who get sick.  An idiot in the audience loudly exclaimed, “Let them die!”  The person was obviously not a medical professional or compassionate human being.  Paul went on to explain that churches and other nonprofits would take care of them, and in a later interview, said that a truly free market system would take care of everyone.  I have no doubt that Paul, a medical professional, is a compassionate person.

I do have doubts about the ability of the free market to efficiently provide for the health care needs of everyone in an affordable and fair manner.  So, I mentioned above that if care was only provided to people with insurance, prices would stay pretty stable.  However, there’s another force at work here.  Insurance companies profit from managing risk.  This means that they either charge more to cover more risk, or they eliminate the risk altogether.  Many of the uninsured tried to get insurance but were deemed too risky.  Many others had insurance but were dropped because they became too risky.  Others were deemed safe enough, but their premiums went so high that they could not afford to keep the insurance.  Either way, there is ample evidence that the definition of risk is relative and inflates as a market becomes more exclusive.  In practical terms, this means that a person who was not deemed risky when 90% of people were covered suddenly becomes more risky as the pool of insured shrinks.

Insurance works best for consumers when the maximum amount of people buy into the same insurance pool.  This spreads risk and keeps premiums low.  However, insurance works best for insurance companies when risk can be purged.  This results in increased profits.  So, on the one hand, what is best for consumers in a free market system is for everyone to be insured.  Every state has realized this concept in requiring automobile insurance for every driver, which has kept rates in check and allowed the Federal government not to have to get involved with the issue.  On the other hand, what is best for insurers in the same free market system is to limit the number of the insured to the healthiest people.  This is a slippery slope that leads to the unhealthiest of the healthiest people to eventually be pushed out, and then the unhealthiest of those left to be pushed out, and so on. 

This, however, does not change the fact that the uninsured will receive care anyway and the costs will be pushed onto the insured.  So, even the healthiest of the insured will be paying exorbitant rates, pushing many out of the system until either only the healthiest and wealthiest of consumers are insured, or the whole insurance and medical system collapses. 

As much as Ron Paul is completely genuine (the most genuine of the candidates), and as much as I tend to think his ideas are very good in regards to economic development and metropolitan growth regulations, I think he is wrong in regards to health care. In reality, free markets do not always work, especially when dealing with such a universally-consumed good; there is little incentive to do it better or cheaper because there is no primary constituency or voluntary demand to focus on.  Everyone needs health care, and everyone gets it.  A company that exploits this relationship while trying to continuously maximize profit will, inherently, be economically inefficient and ruinous to a large portion of the population.