Bill of Health

This article appeared in the Wall Street Journal, April 7, 2006.
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The elected leaders of Massachusetts have come up with a novel solution for the vexing problem of having to pay for health care: abolish the laws of arithmetic. Their new plan is a perfect illustration of what happens when politicians approach a problem unconstrained by reality.

The plan includes tax incentives and penalties for employers and individuals to get everyone covered by a health-care policy. It also promises affordable health insurance for people with modest incomes, under a program yet to be negotiated between the state and private insurance companies. Nevertheless, three numbers stand out: $295, the annual penalty per worker a company must pay to the state if it does not provide health insurance; $0, the deductible on the typical state-subsidized health-insurance policy under the plan; and $6,000, the average annual expenditure on health care for a Massachusetts resident. Each of these numbers represents one of the irreconcilable goals of health-care policy:

  • $295 represents the goal of affordability. We would like to be able to purchase health-care coverage for $295 a year. If that's what it actually cost, my guess is that the problem of the uninsured would pretty much disappear.
  • $0 represents the goal of insulation. As individuals, we would like to be insulated from health-care costs. That is why, instead of real insurance -- which would have us pay for at least the first $10,000 of health care out of pocket -- most of us have health-care policies with much lower deductibles.
  • $6,000 represents the goal of accessibility. We want access to the best care that modern medicine can provide, whatever the expense.

The question is this: What insurance company will provide coverage with $0 deductible, at an annual premium of $295, for someone whose health care costs on average $6,000 a year? The numbers imply losses of over $5,700, not counting administrative costs. To subsidize zero-deductible health insurance, state taxpayers might have to pay out about $6,000 per recipient.

There is no reason to expect firms to rush to offer a policy to uninsured employees. It makes more sense for them to pay their $295 penalty and hand the health-insurance problem back to the individual -- and ultimately to the taxpayers of Massachusetts. Economically, consumers who face deductibles of $0 have no incentive to restrain health-care spending. They are only constrained by the time and discomfort involved in obtaining medical care.

If more Massachusetts consumers enjoy coverage without any deductible, then the average per-person expenditure on health care of $6,000 seems likely to go up. Health insurance companies will not write policies that lose them money. Policies with deductibles of $0 in a state where spending per person on health care is on average $6,000 a year will have very high annual premiums -- presumably over $6,000 a year.

The Massachusetts health plan promises to provide health-insurance companies with subsidies in order to induce them to offer these low-deductible insurance plans. The arithmetic suggests that these subsidies will have to be large -- thousands of dollars larger than the $295 per worker that the state plans to collect from employers that do not provide health insurance.

The problem of paying for health-care coverage, which politicians are declaring they have "solved," is really just beginning. The only way to make zero-deductible health insurance available at low cost is with a large subsidy; how much will depend on negotiations with insurance companies. Only when the size of the necessary tax increase becomes clear will Massachusetts's leaders learn the laws of arithmetic.