John Cochrane on portable health insurance

This piece by Tyler Cowen on John Cochrane on portable health insurance is so good I'll just quote the whole thing:

The entire Op-Ed is interesting and noteworthy, but the part on health insurance is perhaps the cutting edge of the piece analytically:

Health insurance should be individual, portable across jobs, states and providers; lifelong and guaranteed-renewable, meaning you have the right to continue with no unexpected increase in premiums if you get sick. Insurance should protect wealth against large, unforeseen, necessary expenses, rather than be a wildly inefficient payment plan for routine expenses.People want to buy this insurance, and companies want to sell it. It would be far cheaper, and would solve the pre-existing conditions problem. We do not have such health insurance only because it was regulated out of existence. Businesses cannot establish or contribute to portable individual policies, or employees would have to pay taxes. So businesses only offer group plans. Knowing they will abandon individual insurance when they get a job, and without cross-state portability, there is little reason for young people to invest in lifelong, portable health insurance. Mandated coverage, pressure against full risk rating, and a dysfunctional cash market did the rest.Rather than a mandate for employer-based groups, we should transition to fully individual-based health insurance. Allow national individual insurance offered and sold to anyone, anywhere, without the tangled mess of state mandates and regulations. Allow employers to contribute to individual insurance at least on an even basis with group plans. Current group plans can convert to individual plans, at once or as people leave. Since all members in a group convert, there is no adverse selection of sicker people.

I suppose my worry is this. As individuals age, they will become greater health risks and that will hold even if Cochrane keeps Medicare going. That means a higher price for their individual portable insurance. It is not clear to me under what conditions premia can be raised legally (what does “unexpected increase” mean?), but it seems the result is much higher premia for sick people, or legally-mandated low premia, but then providers will restrict access and lower the quality of care, as another means of raising the price of course. Contractually speaking, price is verifiable but quality of care is not. The overall problem is not one of “adverse selection” but rather simply that the good information of the suppliers means that insurance is hard to sell at all for many conditions.

I do understand the option of letting the premia rise, and selling insurance against that event too, and maybe that could work. Still, it is surprising how many insurance markets don’t really blossom even if it seems they would make economic sense. Just ask Robert Shiller or look at the earlier history of failed CPI futures. I’d like to experiment with Cochrane’s idea, which I think has real promise, but on a trial basis first. The question is what such a trial might actually mean, and who would be willing to give up their current arrangements to make such an experiment possible. If the recent Obamacare reactions show anything, it is that status quo bias is getting stronger all the time in matters of health care.

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