Most people believe that government should subsidize health insurance. Liberals endorse this view with gusto, arguing for universal provision as in Canada or Western Europe. Conservatives endorse less government subsidy, but they routinely defend Medicare and the tax preference for employer-provided health insurance, the two largest subsidies in the United States.
Given this “bi-partisan” support for subsidizing health insurance, one might assume the arguments for such provision are compelling. Actually, no good case exists for universal provision, or for Medicare, Obamacare, and the tax subsidy. Reasonable people can defend some government role in health insurance, but one far smaller than current policy.
The standard justification for subsidizing health insurance holds that private markets will not supply “fair” insurance due to a phenomenon known as adverse selection. This perspective assumes that insurers cannot tell which applicants are healthy, so they must charge the same premium to everyone. Then, however, only the unhealthy apply, and insurers go broke.
Government can in principle fix this problem by mandating that everyone buy insurance, preventing any “adverse selection” of applicants. But this mandate must include subsidies for low-income households, who otherwise cannot afford insurance.
This argument for government insurance is standard, but it suffers a key flaw: insurers can readily determine applicant health via physical exams and medical histories. So, private insurers will offer health insurance to all applicants, with one key caveat: they will charge higher premiums to those in poor health. This is precisely what most people fear about a free market for insurance.
The real issue for health insurance, therefore, is whether policy should protect people against the differences in economic circumstance implied by their differences in health.
This kind of redistribution strikes many people as compassionate. And, behind a veil-of-ignorance — before knowing one’s future health — most people would trade some consumption for protection against the possibility of a bad health outcome. Since markets do not seem to offer such insurance, government provision can make everyone better off.
Yet this view does not justify government health insurance for all. Any attempt in this direction would be costly, since everyone would demand unlimited health care. Full or substantial government insurance trades one problem — the high cost of private insurance for some people — for a different problem: an inefficient and expensive health care system.
The natural way to balance these concerns is to subsidize health insurance for the poor, but for no one else. Roughly, this mean eliminating Medicare, Obamacare, and the tax-subsidy for employer-provided insurance, but retaining a (scaled down) version of Medicaid.
This approach insures everyone against the worst case scenario in which poor health makes it impossible to earn income. This approach also means that even among the non-poor, some people will pay higher health insurance premiums than others.
This focus on helping the least fortunate is exactly what we do currently about the fact that some people cannot earn a reasonable income. Policies like welfare or a negative income tax protect everyone against extreme poverty, but they do not equalize all differences in income. Doing so would destroy the incentive to work and save, just as broad subsidies for health insurance would guarantee runaway expenditure and a distorted health care system.
So is it heartless and cruel to force people to become poor before they can qualify for subsidized health insurance?
Yes, but it is necessary. If policy tries to do more, whether by subsidizing health insurance broadly or by redistributing income beyond the truly poor, it insures that everyone has an equal share of a tiny pie. That is not the right balance.