This week’s Chronicle editorial “Profit over principle…” sets a new low for competence and common sense. The general thrust of the editorial is that health insurers are “bad” because they are not allowing new child-only insurance policies because of the new requirements that children with pre-existing conditions cannot be turned down. Two quick points are important: (1) While many insurers are not writing new child-only policies, they are honoring existing policies; and (2) children with pre-existing conditions can get coverage through new policies as long as a parent is also on the policy.
Unfortunately, the Chronicle’s editorial fails to include an iota of common sense in discussing this issue. The problem with the new regulation is that it would increase the cost of child-only insurance, and thus increase premiums for this type of coverage. This would be bad for current policy holders of child-only policies. Otherwise, if profits were reduced by the costs related to these new regulations, then insurers would have to find others ways to cut costs (e.g., scaling back employment, wages and, yes, health care benefits to their employees). Since when is it principled to risk failure so that a poorly conceived policy can accomplish a goal (even a laudable goal)? Political incompetence should not rule over common sense (however, in defense of most reasonable politicians, even they see the problems with the new regulations as written).
From an economic point of view, the problem with the new regulations on child-only policies can be summed up in two words — adverse selection. Adverse selection — when demand for insurance is positively related to the risk of loss — is a real problem that requires carefully crafted regulations and competent underwriting standards to avoid. Unfortunately, the regulation would cause major problems for insurers because of adverse selection. For example, the provision would (1) attract a very high cost risk pool and (2) almost certainly lead some families to postpone buying insurance for children until care is needed (and then potentially canceling it afterwards). Arguing that insurers should be principled and take losses (i.e., putting principles before profits) is foolishness at best.
Instead of cheering the passage of the recently passed health care reform and taking insurers to task for logical decisions, we should begin to think very hard about all the problems which will be created by the poorly crafted nature of the reform, such as the incentive for companies (e.g., McDonald’s) to drop “mini-med” plans to low wage workers, corporate writedowns due to the expected increase in employee health care costs, increases in individual insurance premiums, and reducing the link between the consumption of scarce resources and the market pricing mechanism to mention a few. We are sure to see many more problems as the reform is phased in over the next few years.
John W. Diamond is the Edward A. and Hermena Hancock Kelly Fellow in Public Finance at the Baker Institute and an adjunct professor of economics at Rice University.