About Those Insurance "Free Riders"

When I was in graduate school, I became friendly with the grand economist James Tobin. When Newt Gingrich's Republicans took over Congress, Jim and I published op-eds in the Los Angeles Times and some other papers criticizing what became the 1996 welfare reform. We cited the available research, which suggested that proposed measures were too harsh, and that welfare reform would not do what its supporters said it would.

I'm proud to have written those essays. Many of these proposed policies were too harsh. Yet in hindsight, we grossly underestimated the impact of welfare reform, which we believed would be much more harmful than it turned out to be. We weren't stupid or uninformed. Like most policy wonks of the time, we drew upon the experience of various incremental state and local policy experiments. These turned out to provide a poor guide to a massive change in national policy.

The 2008 health reform debate is different from the poisonous debates that culminated in welfare reform. Welfare was an underfunded $20 billion program that served a small, stigmatized minority. Health reform would fundamentally alter a $2.1 trillion system that affects every patient and taxpayer, and pretty much every interest group in America. It's about us this time, not some stereotyped other.

Yet some similarities bear notice. Based on the best available data, policy shops run speculative simulations to project the number of people covered, the likely savings and costs. If the assumed Clinton plan posits a 95% perfect individual mandate, and the assumed Obama plan posits a wholly undisciplined system of subsidies, the computer printouts will say that Senator Clinton's plan covers more people. Citing these results, there is something amiss in Senator Clinton's formulation that Obama "leaves people out" by failing to compel them to buy coverage. More to the point, these analyses assume precisely what is most in dispute: the political and administrative feasibility of the enforcement measures required for such a stringent mandate to work. The experience we have, such as the fascinating effort in Massachusetts, suggests more serious political and practical limitations of a mandate, even within an affluent liberal state.

One must run the numbers; what else can you do? Yet the false precision of an Excel spreadsheet shouldn't obscure how difficult it is to make any reliable prediction about the ultimate consequences of health reform.

The Clinton and Obama plans are both opening bids in a legislative process that will not leave either one in their present form. Moreover, individual patients, doctors, hospitals, and other providers would operate differently in the wake of the largest change in American healthcare since the enactment of Medicare and Medicaid forty years ago. Health reform will bring huge changes in public regulation, in the prices paid for health services, in the expectations placed on patients and providers, in the detailed arrangements through which public dollars flow from the federal governments down to states, localities, and individual providers.

With so much in the mix, it is fairly insane confidently predict the ultimate consequences of health reform. We know that many plausible predictions will turn out embarrassingly wrong. We know a second thing, too. Whatever health reform passes, we'll be back again for refinement and a tune up. Oh, and we know a third thing, too. The human toll of our current healthcare system is unacceptable. People should not go medically bankrupt. People should not forgo essential care because they are uninsured. Inner-city clinics, hospitals, and emergency departments now in danger of closure require proper financing to stay open.

As health reform proceeds, we will debate the proper responsibility of individuals to buy coverage. Senator Clinton would impose as-yet unspecified penalties on adults who do not buy health insurance. Senator Obama does not take this step. Nobody is bashing apocryphal welfare queens showing up in Cadillacs to buy steaks at Safeway with food stamps. Yet many people are concerned about people -- often young and healthy -- who "free-ride" by avoiding coverage.

Concern about free-riding is appropriate, but it is easily overstated. An NPR reporter this morning implied that free-riders cost the rest of us a lot of money. I don't see it. Under the proposed Clinton and Obama plans, low-income "free-riders" might even save taxpayer money by declining the offer of highly subsidized care.

Consider the situation of a single woman with no kids earning $30,000 who decides to turn down the impressively subsidized coverage that an Obama or Clinton plan would likely offer. Presumably, her decision reflects a belief that she will not much use medical services, or at least not much more than she can pay for herself.

To the extent that she expects to sign up when she gets older and sicker, or if she gets hit by a bus, she is definitely free-riding. There are lots of reasons to discourage this. Most of these reasons concern her own health, her willingness and ability to access care that could help her. I'm not convinced this person is costing the rest of us much at all.

Of course, we lose the premiums she would otherwise pay. Yet mandate advocates themselves insist that these premiums must be small to remain affordable. So by definition there is not a lot of money lost there. If she chooses to stay uninsured, she is presumably less likely than she would otherwise be to seek costly services--services for which she herself would pay only a fraction of the true cost. So there may even be offsetting savings, from the taxpayers' point of view.

I should say straight-up that things are different for the $90,000 computer engineer who never buys coverage and then shows up at my hospital seeking costly care. Senator Obama has stated as much. These high-earners have many more reasons to want coverage in the first place. An improved health insurance market could presumably entice many of these men and women to sign up.

Where does this leave us? Health reform without a mandate will allow some free-riders. We'll have to respond down the road if too many people take this gamble.

How many is too many? Lisa Dubay and her colleagues estimate that 4.6% of uninsured parents and 9.7% of uninsured adults without children could buy coverage for less than 10% of their income. This 10% threshold may exceed what government is likely to enforce within a mandate system. Some of these adults are also young, and thus might obtain coverage on their parents' insurance under the Obama plan.

Despite such complexities, these figures provide a reasonable benchmark for the number of free-riders. Based on these definitions and results, E. Richard Brown at UCLA estimates that the Obama plan would produce approximately 2 million free-riders. Is this number airtight? My above caveats apply. It provide a useful measure.

By some standards, 2 million is a big number. The Chicago White Sox would be happy to draw 2 million fans next year. Considering that we now have 31 million uninsured adults, I'd be ecstatic if five years from now we are fighting about how a remaining kernel of obstinate uninsured people who can afford to buy coverage.

There is something misplaced about worrying so much about free-riding right now. I've seen more news accounts of free-riding and mandates than I've seen analyses of the number of sick people facing ruinous medical bills, the likely impact of health reform on safety-net providers now collapsing under the load of caring for millions of uninsured and underinsured people, or the obstacles to insuring people who are actually eligible for current insurance programs. Then there are things really below the radar, such as the president's proposed cuts to Medicaid and to public health.

As in our old search for (more mythical) welfare queens, we seem impervious to the fact that such maddening misbehavior is a small part of much larger problems. There is something about the prospect that someone might game the system or pull one over on the Man that seems to get everyone's goat. If health reform fails, free-riding won't be the reason why.

Comments

[jdm58]

The argument is backwards. If everyone is only guaranteed "affordable" healthCOVERAGE, there will always be those who must opt out simply because they can't afford it. Any program that has the words "insurance" or "coverage" involved, is nothing more than gambling. "Insurance" companies gamble that you won't die, get sick, get robbed, have a fire, have an accident, etc...in exchange for "covering" you financially if you do. Their profits come from "covering" everyone who never needs them.
But that is ludicrous when it comes to healthCARE, and the insurance companies know it. It's why they invented the "pre-existing conditions" loophole, to deny coverage to anyone who actually has needed the "coverage". Any homeowner, or car owner, who has needed to use their insurance "coverage" can attest to this fact, as their cost of "coverage" after filing a claim always goes up, or in some extreme cases they are denied renewal.
EVERYONE at one time or another, will need healthCARE. NO ONE can afford to gamble with their health. Therefore, "insurance coverage", aka gambling, needs to be removed from the healthcare equation. If we were all guaranteed free, universal healthCARE, there would be no need to worry about paying for healthCOVERAGE, aka insurance, aka gambling. These are very different animals, that the insurance lobbies would like us to believe are the same.

[drblack]

Health insurance is a big pool of public money. Why should their be profit involved in this.
As long as their is for profit health insurance Americans will be screwed, by paying too much or getting too little care.
This pool of money must be 100% untouchable for any other purpose(that is why Social security is screwed up)and anyone caught defrauding the system should have serious jail and financial penalties.
I look at the incredible waste of health insurance money my wealthy relatives commit with too many doctor visits hundreds of non-essential drugs and keeping terminal people alive for two more weeks.....that is where the money goes.

[dadw5boys]

FREE RIDERS???????

I THOUGHT THE STORY WAS ABOUT ALL THE UPPER MANAGMENT AND THEIR FAMILY'S WHO GET FREE HEALTH INSURANCE AND THE COMPANY FORCES THE WORKERS PAY FOR IT OR A HUGE PROTIONS OF IT!

[tompoe]

The premise for universal healthcare is not one that assumes insurance companies must participate. To the contrary, it is one that does NOT include insurance companies. Your discussion is moot, and misleads the readers. Utter nonsense is not a good way to gain an audience.

[HAP]

I don't understand your point. I happen to favor a singel payer system as a longterm goal. My discussion would be moot if a leading Democrat were now proposing single payer. Right now, however, we are debating the two leading plans that both include private coverage.

[ThomH]

That neither leading Democrat proposes single payer is the real healthcare scandal. They both claim that single payer is "politically impossible". Why? Most voters, when polled, favor it. But we can't have it because the insurance companies oppose it. Of course they do--it would revoke their license to steal.

I would love to see Barack and Hillary asked: "The health insurance companies keep 31% of health care premiums for their expenses and profits. What value do they deliver to justify this?"

The answer of course is that they deliver primarily the negative value of the confusion and uncertainty of patients facing payment demials and of the phone calls and forms-filling of hospitals and doctors trying to get paid.

Can you believe it? They deliver huge negative value and almost no positive value, but it is "impossible" to stop them from taking the big chunk thay keep of our $2+ trillion healthcare bill.

All because politicians are beholden to them for campaign contributions. That is, the healthcos BUY their license to steal---with a small portion of the loot they collect from health insurance policy payers. We are financing our own robbery.

But there is one thing politicians need even more than campaign funds: votes. Let your Representative in Congress know you will oppose them actively unless they support HR 676, single-payer 'Medicare for All'.

For more, google HR 676.

[NABNYC]

What Hillary Clinton claims is health care "reform" is actually just a boondoggle for the insurance companies. Hillary will "solve" the problem of healthcare by ordering Americans to buy health insurance. The problem is, people can't afford it. That's the part she glosses over.

Hillary also says she will order the insurance companies to keep covering us even if we're sick. I have a friend who had a heart problem and surgery. The insurance company did not dump him, but they did raise him premiums to $1500/month, which meant he could no longer afford it.

The Democrats are taking money from the insurance industry in exchange for refusing to reform healthcare. That's the truth.

The government should provide healthcare for all citizens who want it. We can all be charged a little bit to pay for our share, just like with Medicare. The government can eliminate the insurance industry, which is essentially nothing more than a very expensive protection racket, and set fees to be paid to doctors, hospitals, and drug companies.

We also need free dental. 1/3 of Americans over the age of 65 do not have any of their own teeth. If they had dental, they could save their teeth as they go through life.

We need to start demanding that the government use our tax money to help us. Screw everyone else. I'm always hearing about how the U.S. is going to "help" foreign countries, which seems to always consist of selling them weapons and getting involved in more wars.

Let's use our taxes to take care of our own citizens. Let the warmongers have bake sales if they need money to pay for wars. We'll spend our tax money here at home on our schools, police, roads, housing, medical, the things we need.

[NoGoodNamesLeft]

The "people can't afford it" meme about Hillary's plan completely disregards the portions of her plan that address the cost issues. Her plan has tax credits to assist in affordbility, her plan has a premium cost cap at a percentage of your income. Based on te premiujm cap, your friend's premium could NOT HAVE been raised to $1500 per month.

Both Hillary and Obama have plans that work to LOWER the costs of insurance and healthcare in general.

How can you keep claimimg people can't afford insurance that you don't know the cost of?

[altohone]

The simple reality is that as a nation, we can't afford to give everybody the health care that Dick Cheney and Arnold Schwarzenegger have gotten.

Both have had millions of dollars in medical care. All of the healthy people paying into their insurance pools have subsidized Dick and Arnold... and since they work for us that means taxpayer dollars.

Medically, we can do more than we should, and the whole fight is over who gets more care than they deserve and who gets less care than they deserve.

Right now, the wealthy get all the care they want.
Add up all the premiums and taxes they pay, and it's clear they are paying their share.
However, it's not clear there's enough left over from their share to help out those less fortunate as they should feel obligated to do since they always quote "with great wealth comes great responsibility".

So, do we ask Cheney to forgo his 6th open heart surgey so we can vacinate poor kids and give them annual check-ups? When his battery runs out, does he deserve to get the newest most expensive platinum coated pacemaker to replace the old one, or should it be stainless steel so that poor kids can see a dentist?

Should Arnold have paid the full cost of his medical care when he crashed his side car while driving without a motorcycle license or when he broke his leg skiing in Aspen?

These are the questions at the heart of the issue.

[ceu]

"... could buy coverage for less than 10% of their income. This 10% threshold may exceed what government is likely to enforce within a mandate system."

I'm one of the 47 million people in this country without health insurance. I work 2 part-time jobs totalling about 45 hours per week and I have 2 kids in college with a 3rd entering in the fall. Where am I supposed to get the additional money to pay for coverage?? Take a 3rd job? 10%? Hell, I need that money to pay for home heating oil!
Yet, I need something. If I break an ankle, I'm totally screwed, what with the cost of x-rays, emergency room, orthopedist, 6 weeks of lost pay... God forbid my appendix becomes inflamed or I discover a lump in a breast.

[RickO]

You hit the nail on the head. If you are not sick or, god forbid, chronically ill, paying a few percent more in taxes seems unfair. But if you were diagnosed with cancer or diabetes, and you have no insurance, what the hell do you do? You can't just go out and get insurance, and even if you do survive, you may never be able to buy insurance at all becasue of a prior illness.

About a year ago, a friend of mine, who was uninsured, learned he needed a liver transplant. He tried a few things but in the end, he told everyone he loved them and died. That was his one and only option. Ask him if he'd have paid 10% of his mechanic salary if it meant seeing his kids grow up.

[HAP]

Very best to you and your family. I hope our next president will enact reform that will help you. Independent of the politics here, I suggest that you contact your local health department to explore your options to receive needed care. Depending on where you live, they may be of assistance.

take care,
HAP

[alyceclover]

"Welfare Queens in Cadillacs"? Try outsourced, downsized older citizens who work via a temp agency after not finding jobs; competing with high school graduates for the honor of flipping burgers at McDonalds for minimum wage. Unless you live in my town where speaking Spanish is a job pre-requisite even in a predominately English speaking neighborhood. College students who can not yet afford health insurance because of the high cost of attending? Discrimination, too, against those who prefer alternative forms of health care. Some religious groups; people who fought for approval to see a Chiropractor versus a surgeon. Even our veterans of war are having trouble collecting their earned benefits. I do not take Obama's word for that; I speak to the homeless ones living in my city about their problems with the VA. It seems you, like the Clintons, are out of touch with the realities of USA today.