Pardon me, while I go off on a bit of a rant. There is a bit of
math content to this, but there’s more politics.
There’s a news story that’s been going around this week about a guy who’s bitterly angry. His name is Luis Lang. Mr. Lang is going blind because of complications of diabetes. The only way to save his eyesight is to get very expensive eye surgery, but Mr. Lang can’t afford it. He doesn’t have insurance, and now that he needs it, he can’t buy it. According to him, this is all the fault of President Obama and the unjust Obamacare insurance system which is denying him access to insurance when he really needs it.
In the US, we’re in the early days of some big changes to our health-care system. Up until a couple of years ago, most people got insurance via their employers. If they didn’t get it through work, then they needed to buy policies on their own. Privately purchased policies were typically extremely expensive, and they came with a “pre-existing condition” exclusion (PECE). The pre-existing exclusion meant that if you had a medical condition that required care before you purchased the policy, the policy wouldn’t pay for the care.
In the new system, most people still get insurance through work. But the people who don’t get to go to government-run insurance exchanges to buy policies. The policies in the exchanges are much cheaper than the old private coverage used to be, and rules like the pre-existing condition exclusion are prohibited in policies on the exchange. In addition, if you make less than a certain income, the government will subsidize your coverage to make it affordable. Under this system, you’re required to buy insurance if it’s possible for you to buy it with the government subsidies; if you choose to go without, you have to pay a penalty. If you’re too poor to buy even with the subsidies, then you’re supposed to be able to get medicare under an expanded medicare program. But the medicare expansions needed to be done by the states, and many states refused to do it, even though the federal government would cover nearly all of the costs (100% for the first few years; 95% indefinitely thereafter.)
I’m not a fan of the new system. Personally, I believe that for-profit insurance is fundamentally immoral. But that’s not the point of this post. We’ve got a system now that should make it possible for people to get coverage. So why is this poor guy going blind, and unable to get insurance?
The answer is simple: because he very deliberately put himself into a terrible situation, and now he’s paying the price for that. And there are very good reasons why people who put themselves into his situation can’t get covered when they really need it.
First, I’ll run through how he got into this mess. Then, I’ll explain why, as sad as it is for this dumbass, he’s stuck.
Our alleged victim of unjust government policies is around 50 years old. He owns a nice home, and runs his own business. He had the opportunity to buy insurance, but he chose not to, because he has a deeply held philosophical/political belief that he should pay his own bills, and so he always paid for his medical care out of his own pocket. When Obamacare came down the pike, he was strongly opposed to it because of that philosophy, and so he paid the penalty rather than buy insurance, and stayed uninsured. It’s important to note here that he made a deliberate choice to remain uninsured.
Mr Lang isn’t a paragon of good health. He’s a smoker, and he’s had diabetes for a couple of years. He admits that he hasn’t been very good about managing his diabetes. (I’m very sympathetic to his trouble managing diabetes: there’s a lot of diabetes in my family – my mother, her brother, my grandfather, and every one of his siblings, and his father all had diabetes. I’ve seen members of my family struggle with it. Diabetes is awful. It’s hard to manage. Most people struggle with it, and many don’t ultimately do it well enough before they wind up with complications. That’s what happened to Mr. Lang: he developed complications.
Specifically, he had a series of small strokes, ruptured blood vessels in his cornea, and a detached retina. Combined, these conditions will cause him to go blind without surgery. (This is exactly what happened to my uncle – he lost his vision due to diabetes.) Mr. Lang’s condition has gotten bad enough that he’s unable to work because of these problems, so he can’t afford to pay for the surgery. So now, he wants to buy insurance. And he can’t.
To really see why, we need to take a step back, and look at just what insurance really is.
Reduced to its basics, the idea of insurance is that there’s a chance of an unlikely event happening that you can’t afford to pay for. For example, say that there’s a 1 in 1000 chance of you needing major surgery that will cost $100,000. You can’t afford to pay $100,000 if it happens. So, you get together with 999 other people. Each of you put $100 into the pot. Then if you end up being unlucky, and you need the surgery, you can draw on the $100,000 in the pot to pay for your surgery.
The overwhelming majority of people who put money into the pot are getting nothing concrete for their money. But the people who needed medical care that they couldn’t afford on their own were able to get it. You and the other people who all bought in to the insurance pot were buying insurance against a risk, so that in case something happened, you’d be covered. You know that you’re probably going to lose money on the deal, but you do it to cover the unlikely case that you’ll need it. You’re sharing your risks with a pool of other people. In exchange for taking on a share of the risk (putting your money into the pool without knowing whether you’ll get it back), you take a share of the resource (the right to draw money out of the pool if you need it).
In the modern insurance system, it’s gotten a lot more complicated. But the basic idea is still the same. You’ve got a huge number of people all putting money into the pot, in the form of insurance premiums. When you go to the doctor, the insurance company pays for your care out of the money in that pot. The way that the insurance company sets premiums is complicated, but it comes down to collecting more from each buyer than it expects to need to pay for their medical care. It does that by mathematically analyzing risks.
This system is very easy to game if you can buy insurance whenever you want. You simply don’t buy insurance until something happens, and you need insurance to pay for it. Then you buy coverage. So you weren’t part of the shared risk pool until you knew that you needed more than you were going to pay in to the pool. You’re basically taking a share of the community resources in the insurance pool, without taking a share of the community risk. In philosophical circles, that’s called the free-rider problem.
Insurance can’t work without doing something to prevent free-riders from exploiting the system.
Before Obamacare, the way that the US private insurance system worked was that you could buy insurance any time you want, but when you did, you were only covered for things that developed after you bought it. Any medical condition that required care that developed before you bought insurance wasn’t covered. PECEs prevented the free-rider problem by blocking people from joining the benefits pool without also joining the risk pool: any conditions that developed while you were outside the risk pool weren’t covered. So before Obamacare, Mr. Lang could have gone out and bought insurance when he discovered his medical problems – but that insurance wouldn’t cover the surgery that he needs, because it developed while he was uninsured.
Without PECEs, it’s very easy to exploit the insurance system by free-riding. If you allowed some people to stay out of the insurance system until they needed the coverage, then you’d need to get more money from everyone else who bought insurance. Each year, you’d still need to have a pool of money big enough to cover all of the expected medical care costs for that year. But that pool wouldn’t just need to be big enough to cover the people who bought in at the beginning of the year – it would need to be large enough to cover everyone who bought insurance at the beginning of the year, and everyone who jumped in only when they needed it.
Let’s go back to our example. There’s only one problem that can happen, and it happens to 1 person in 1000 per year, and it costs $100,000 to treat. We’ve got a population of 2000 people. 1000 of them bought into the insurance system.
In an average year, 2 people will become ill: one with insurance, and one without. The one with insurance coverage becomes ill, and they get to take the $100,000 they need to cover their care. The person without insurance is stuck, and they need to pay $100,000 for their own care, or go without. In order to cover the expenses, each of the insured people would need to have paid $100.
If people can buy in to the insurance system at any time, without PECEs, then the un-insured person can wait until he gets sick, and buy insurance then. Now the insurance pool needs to cover $200,000 worth of expenses; but they’ve only got one additional member. In order to cover, they need to double the cost per insured person per year to $200. Everyone in the pool needs to pay double premiums in order to accomodate the free-riders!
This leads to a situation that some economists call a death spiral: You need to raise insurance premiums on healthy people in order to have enough money to cover the people who only sign up when they’re unhealthy. But raising your premiums mean that more people can’t afford to buy coverage, and so you have more people not buying insurance until they need it. And that causes you to need to raise your premiums even more, and so it goes, circling around and around.
The only alternative to PECEs that really works to prevent free-riders is to, essentially, forbid people from being free-riders. You can do that by requiring everyone to be covered, or by limiting when they can join the pool.
In the age of PECEs, there was one way of getting insurance without a PECE, and it’s exactly what I suggested in the previous paragraph. Large companies provided their employees with insurance coverage without PECEs. The reason that they could do it was because they were coming to an insurance company once a year with a large pool of people. The costs of the employer-provided insurance were determined by the average expected cost of coverage for that pool of people, divided by the size of the pool. But in the employer-based non-PECE coverage, you still couldn’t wait to get coverage until you needed it: each year, at the beginning of the year, you needed to either opt in or out of coverage; if, in January, you decided to decline coverage, and then in July, you discovered that you needed surgery, you couldn’t change your mind and opt in to insurance in order to get that covered. You had to wait until the following year. So again, you were avoiding free-riders by a combination of two mechanisms. First, you made it so that you had to go out of your way to refuse coverage – so nearly everyone was part of the company’s insurance plan. And second, you prevent free-riding by making it much harder to delay getting insurance until you needed it.
The Obamacare system bans PECEs. In order to avoid the free-rider problem, it does two things. It requires everyone to either buy insurance, or pay a fine; and it requires that you buy insurance for the whole year starting at the beginning of the year. You might think that’s great, or you might think it’s terrible, but either way, it’s one way of making insurance affordable without PECEs.
Mr. Lang wants to be a free-rider. He’s refused to be part of the insurance system, even though he knew that he had a serious medical condition that was likely to require care. Even though he was a regular smoker, and knew of the likelihood of developing serious medical problems as a result. He didn’t want to join the risk pool, and he deliberately opted out, refusing to get coverage when he had the chance.
That was his choice, and under US law, he had every right to make it for himself.
What Mr. Lang does not have the right to do is to be a free-rider.
He made a choice. Now he’s stuck with the results of that choice. As people like Mr. Lang like to say when they’re talking about other people, it’s a matter of personal responsibility. You can’t wait until you need coverage to join the insurance system.
Mr. Lang can buy insurance next year. And he’ll be able to get an affordable policy with government subsidies. And when he gets it, it will cover all of his medical problems. Before the Obamacare system that he loathes and blames, that wouldn’t have been true.
It’s not the fault of President Obama that he can’t buy insurance now. It’s not the fault of congress, or the democratic party, or the republican party. There’s only one person who’s responsible for the fact that he can’t get the coverage that he needs in order to get the surgery that would save his eyesight. And that’s the same person who he can’t see in the mirror anymore.