Fast Track To The Single Payer

October 18, 2009

by Mario Rizzo  

For some time I have been interested in the dynamics of public policy – specifically, how particular policies make further policies more likely. Glen Whitman and I explored this in general terms in our paper, “The Camel’s Nose is in the Tent”  and our own Sandy Ikeda’s book, The Dynamics of Interventionism offers a different, but largely compatible, general dynamic framework  

I believe that dynamic-tendency (or slippery-slope) analysis — if carried on in a coherent theoretical framework with plausible empirical assumptions — can be a powerful supplementary critique of public policy.

The healthcare area seems especially prone to the dynamics of the slippery slope. In this post I wish to point to several factors that will ensure that the current proposals, if adopted, will not constitute a policy-equilibrium. Thus, they will likely lead to more and worse intervention by the state.  

The “moderate” Democratic proposals, in general, push us toward increasing politicization of healthcare as their logic and the logic of years of piecemeal intervention play themselves out.  

The New York Times reports that the lobbying efforts to reduce the cost control features in the now-current Senate (Baucus) bill are picking up steam. So let us, for the moment, put cost-cutting off the table as we consider the policy dynamics.  

There are many aspects of the current proposals that hide costs to taxpayers and therefore must be considered simply dishonest. But that is not all. These are some of the very features of the Senate Finance Committee (Baucus bill)  and related proposals that will set in motion political momentum toward expansion of government involvement. To see this, we must dig beneath the surface fantasies. 

Dynamic Tendency 1. One important factor that is just now becoming evident is that there is a high implicit marginal tax  (also here) in the current Senate Finance Committee proposal.  This amounts to as much as 70% for lower income groups, not including food stamps and other benefits to those of lower income.

The higher additional marginal tax rate (additional to the existing marginal tax rates) also applies to middle-class workers buying on the insurance exchanges. For them it is around 20%. Add that to the existing taxes and you get a marginal tax rate of more than 50%.  

This not a policy-equilibrium. It will produce a legislative incentive to reduce that marginal tax rate by continuing all or part of the subsidy to still higher income groups.  

Dynamic Tendency 2. People in the same income bracket will receive a much greater subsidy of their insurance premiums if they purchase from health insurance exchanges (set up by the government) than if they receive coverage from their employer. The latter are ineligible to purchase on the exchanges. From a family of four at twice the poverty line the shortfall amounts to about $5,000. Will the latter be satisfied with the lesser subsidy? There will be legislative pressure to raise the subsidy to those receiving employer-coverage.  

Dynamic Tendency 3. At the same time, for many middle-class wage earners there will be a rise in their insurance rates as government mandates take hold. For example, it would no longer be possible for insurance companies to deny coverage to people with pre-existing conditions. (This problem mainly affects people who do not have access to employer-provided health insurance.) They would have to community-rate these people which would drive up rates for younger, healthier people. These in turn would be forced to buy insurance to avoid the adverse selection problem.  

The younger, poorer, healthier would subsidize the older richer sicker. With the impending bankruptcy of Medicare and Social Security the burden on the younger was already scheduled to increase; this increases the burden still further. However, the new burden will not appear as taxes but simply as higher insurance premiums.  

It will be said that the young who are trying to start families and save for their retirement, etc. should not be so unfairly burdened. A higher subsidy might seem reasonable. 

Dynamic Tendency 4. However, we are now seeing another approach — a watering down of the fines and subsidies levied on those (presumably younger low-risk) people who might not want to buy insurance. 

If this tack is taken then many of the health-insurance exchange policies may go broke because the mandated new benefits will be hard to provide at affordable prices. (The young and healthy provide premiums but without incurring high medical expenses.) 

And then we would get a strengthening of demand for the “public option” which will further the exiting of the remaining private options as the latter fail to compete.  The major House proposal currently has the public option but the Baucus bill does not, as of the moment.

Overall, it seems pretty clear that the proposals we are now seeing are not political equilibria. Already, as noted above, we can see the unraveling not only of cost-control, but also of the political support to place higher burdens on taxpayers or younger people through higher insurance premiums.  

The political dynamic is becoming clear. Increase the cost of private insurance through mandates. Subsidize the private plans, but not by enough to keep them alive. Provide a public option or trigger for one. See the public option gain market share as more and more private plans become unaffordable or simply go broke.  

Those not eligible to buy insurance on these health-insurance exchanges will look on with understandable envy. Why do these people get a better deal?  

At that point myopic politicians will probably see no alternative to the public option for all.  A subsidy-heavy public option for all will crush all in its way. 

And there you have it:  fast track to the single payer.

I hope the proverbial wrench will be thrown into this process.

12 Responses to “Fast Track To The Single Payer”

  1. George Says:

    “The Dynamics of Interventionism offers a different, but largely compatible, general dynamic framework.”

    Is this book available anywhere to purchase at a reasonable price? $125-$160 seems a bit high.

  2. Mario Rizzo Says:

    Other than the Kindle edition, I don’t know. Search Bookfinder.com and AbeBooks.com


  3. Nicely argued. The refrain “you can keep your current insurance if you are happy with it” is where everyone ought to shout “You lie!”

    All private insurance plans would become substantially more expensive under reform. Between an end to differential rates for pre-existing conditions, and elimination of any sort of limits on total spending caps on payouts, it’s inevitable that insurance prices would increase — worsening the plight of those who are at or below the margin, and “proving” that “the market doesn’t work.”


  4. The Road to Health-Care Serfdom.


  5. All of this assumes that the pressures for more state control, an ideological pressure, are stronger than those for handing millions of new customers to the handful of major-player insurance companies, an economic pressure.

    Money usually beats out ideas, and insurance companies will be getting a lot richer over this. Congressmen will make out well monetarily and politically. It’s a win-win for the oligarchy in a way a public option could never be. That’s why I believe the public option was a ruse to get the left to support making everyone a customer of insurance by force. It was never meant to be a serious possibility.

    However, it’s possible as well that this could be a transition period when insurance companies can become more like the “private” providers in socialized-medicine countries, a time during which they can position themselves to make out better as contractors in a single-payer system. Look for ins companies buying hospitals and other medical companies. By the time the calls come for a public option in the next round of elections, they can throw their weight behind it and finish the healthcare coup.


  6. The argument made by Jeremy Sapienza (I believe Ron Paul has made a similar argument) would seem to hold only if insurers are able to use the larger pool to hold down costs. I suspect they cannot, for the reasons Rizzo (and I) suggested; also, the increased use of insurance is likely to increase demand for medical services, pushing prices higher.

    If insurance becomes increasingly expensive, as I think it will, the “crisis” will worsen, and the longer term policy reaction will be to replace this “market failure” with state-run insurance, which common myth holds to be cheaper because of (i) no need to pay profits, and (ii) lower administrative costs.


  7. “also, the increased use of insurance is likely to increase demand for medical services, pushing prices higher.”

    Almost by definition the people who are currently uninsured are those who are least likely to need it and so don’t think it’s important to budget for. They are usually young and healthy and so are likely to be net contributors, as a group. This means profit for the companies.

  8. Mario Rizzo Says:

    It is true that the insurance companies would benefit with more business. Now this could occur if government requires more of the healthy to sign up and/or subsidizes the purchase of insurance. Stick or carrot, essentially. But if this gets very expensive — either the costs imposed on those required to buy insurance or the subsidies given by the taxpayers, then something will have to give. This is where there is room for different predictions. It is possible that the insurance companies would work out some partnership with the government. For example, in New York State, Empire Blue Cross-Blue Shield administers the Medicare program. It probably would be wrong to count out the insurance companies completely because they are a powerful interest group. Nevertheless, I think that the upshot will be that we get closer to a government managed system whether or not the insurance companies have a role. So we are all right!

  9. Sandy Ikeda Says:

    FYI, my book is actually entitled _Dynamics of the Mixed Economy_.

  10. Mario Rizzo Says:

    Actually, the book is entitled ” Dynamics of the Mixed Economy: Toward a Theory of Interventionism”. Apologies.


  11. Jeremy — my understanding is that most people who don’t have insurance are unemployed or low income, rather than by virtue of deciding they are so healthy it’s not a good buy. If so, forcing these people into the insurance pool is not adding the young & healthy.

    Which of us has this right is an empirical question, and if anyone has the evidence, I’d be interested.

    But regardless, there’s a second factor. Health insurance is supposed to be particularly subject to ex post moral hazard; i.e. once you have it, you’re likely to greatly increase your use of health care services since the MC of doing so suddenly becomes quite low. (I have a paper by David Cutler on this point if anyone wants a cite.)


  12. Answering my own question… from the Kaiser Family Foundation’s “The Uninsured: A Primer”

    “About two-thirds of the uninsured are poor or near poor” (p. 4)

    “More than half (62%) of nonelderly uninsured adults have no education beyond high school…” (p. 5)

    “The uninsured tend to be in worse health than the privately insured. About 11% of the uninsured are in fair or poor health, compared to 5% of those with private coverage.” (p. 6)

    So the uninsured tend to be poorer, less educated, and sicker than those currently in the insurance pool. Forcibly adding them to the insurance pool will raise the price of insurance, rather than be a great source of windfall profit for insurers.


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