Medical Reform Deal Breaker: Enforcement, Transaction Costs

528 words

(This article was published in the Corvallis, Oregon Gazette-Times on July16, 2009)

Congress seems to be moving towards a Massachusetts-style insurance system. Individuals will be required to purchase insurance and those who don’t will be fined. Insurers will be required to sell to all comers and cannot discriminate against pre-existing conditions.

A recent Wall Street Journal column noted that people in Massachusetts have been gaming the system. They pay for insurance just long enough to get thousands of dollars of medical care, then discontinue it and pay the nominal fine instead to save money. If they get sick again, they can once again sign up for insurance. This is like letting people carry no insurance on their houses, and then sign up for insurance after the house has burned down.

It might be possible to tweak the Massachusetts system to prevent such gaming, but this would not fix the more fundamental problems that any compulsion to buy insurance would have: enforcement costs and transaction costs.

To make purchase of insurance truly compulsory the fine for not being insured would have to be comparable to the costs of insurance----in other words, very high. A large, intrusive, and expensive governmental bureaucracy would be needed to administer such compulsion.

Transaction costs would fall directly on Americans as individuals. We would all have to choose between a large number of complex insurance policies with no way to make systematic comparisons of costs and benefits between them. It would be impossible for most of us to be sure exactly what coverage we were buying. We might benefit from expert advice, but advice would cost something, and there would still be the problem of deciding which expert to consult.

Insurance purchased household-by-household would inevitably cost more than insurance purchased on behalf of employees by businesses---retail costs are always higher than wholesale, and group bargaining is more efficient than individual bargaining.

Complexity and those transaction costs due to complexity might be reduced if insurance companies were restricted to offering only a few government-designed standard contracts, as is now the case for medigap policies purchased by many Medicare members, policy A, policy B, etc. This would help people understand what they are buying and shop for the best price.

But if we are going to require that everybody be insured, why not just go for a taxpayer financed single-payer system and be done with it? This would simplify life, minimize complexity, and eliminate all of the transaction costs involved in privately purchased insurance.

True, a single payer system would require a tax increase. But requiring people to buy insurance is also a tax increase, even though it doesn’t show up on our tax forms or in government budgets. And increased taxes would be offset by eliminating the premiums that we now pay directly, or indirectly when our employers write the insurance check.

The fact that a single-payer system would put the private insurance companies out of business (they could still sell other kinds of insurance) should not be a deal-breaker. Life is tough. A country which has survived the bankruptcy of airlines, auto companies, and banks should not hesitate to put the insurance companies out of their misery if it is what the public welfare requires.