Written by Stephen Hyde
What The Senate And House Bills Miss
People will game any economic system for their own benefit-whether medical care or anything else. It is this characteristic human behavior that makes markets thrive while assuring that no alternative, centrally-controlled mechanism will ever match markets' ability to optimize the creation and distribution of economic goods.
The necessary rules and top-down decisions that govern centralized systems can never be sufficiently detailed or flexible to match markets' indescribably complex and dynamic interactions among millions of consumers, producers, and intermediaries-each gaming the system for his own advantage. No one really understands why this emergent property of human behavior works, but it does.
Thus, we should always seek minimally regulated market solutions for creating and distributing economic goods, even-or especially-in the presence of market failure. Accordingly, enacting health reform to correct the health insurance market failure requires setting up a new regulatory and safety-net framework that reforms the system to allow everyone to purchase (or not) affordable individual insurance while preventing people from killing the market with free-riding adverse selection.
I wrote in Part 1 that there are many reasons why some people may rationally wish to abstain from purchasing health insurance. But in the new market framework I propose, it is essential to presume that all abstainers do so to save money by waiting until they get sick to buy bargain insurance-the equivalent of purchasing home insurance after the fire has started. These people must be firmly disabused of any notion of a bargain. The cold reality must be that all costs of gaming the system are to be paid by the gamers-not by those who participate appropriately. Anything less will allow free-riders to drive up medical costs, push up premiums, force healthy people to drop insurance, and necessitate further premium increases in a continuing death spiral that, unchecked, will thoroughly cook the market's golden goose. Here's how to prevent that:
Some may view these rules as harsh, but I argue they are inherently fair, because mentally competent adults may reasonably be held responsible for the consequences of their actions-or inactions. And please remember, such sanctions will exist only within the context of universally available health insurance made increasingly affordable by enlightened minimum-benefit and premium-rate-setting requirements, increasingly competitive insurance and medical markets, continued availability of financial contributory mechanisms (e.g., employers, Medicaid, Medicare), and the extension of additional financial safety nets to anyone otherwise unable to participate.
It won't be perfect. There will always be people who fail to listen or to respond rationally to the new environment, but even those few are unlikely to be any worse off than they are now. And there will be a lot fewer of them. But no one living in the land of the free will be forced to buy something she doesn't want.
STEPHEN HYDE is the author of "Cured! The Insider's Handbook for Health Care Reform" (HobNob, 2009) and "Prescription Drugs for Half Price or Less" (Bantam-Dell, 2006).
The former federal chief HMO financial regulator and a certified actuary, Hyde started and grew Peak Health Care, Inc., into a highly successful public managed-care company, recognized by Business Week as one of "America's Best Small Companies." He has extensive experience in managed-care operations and strategy, health insurance, managed-care regulation, consumer-driven health care, pharmacy benefits, disease management, medical information technology, medical group management, medical network and PPO operations, health benefit design and pricing, health insurance underwriting, community rating, and health service product development and marketing.