Health Care End Game Predictable

Ever notice how quickly the health care debate turns to insurance? It has long seemed to me that this is just a trick to advance redistribution under a different mechanism, because first you conflate insurance with health care, then start regulating in such a way that everyone is treated the same by the insurer regardless of the riskiness of the insured. In such a system, low risk people will try to opt out entirely or form groups that exclude high risk people (say, by having a company of young healthy people form a self-insurance plan).

Brad DeLong notes a professor who sees the end game and then concludes:

Maintaining the pooling equilibrium as health care costs increase is going to be really hard. If it turns out to be impossible–well, then, the ACA system will lurch toward pay-or-play and then single-payer.

Markets break down if low cost people are grouped with high cost people; someone with diabetes will cost more than a healthy person actuarily, and healthy people understand that and try to avoid being in their group. The only way to avoid this is to use force, and so like public schools or postage, have everyone charged the same, and queue the same.

Aristotle had this all explained in his Politics (book 3), where he notes all justice is equality, but the question is really equality of what? Egalitarians want more redistributive equality that generates equal positive rights to goods and services, whereas libertarians want more equality of negative rights, such as our equal right not to be assaulted. I can empathize with the egalitarians, as envy is a fundamental instinct. Yet I think this is not a good objective because it neglects the facts that if you make positive rights equal, then everyone has an incentive to free ride, and this encourages the worst in people. Further, in egalitarian societies like the old Soviet Union or China, it was not as if there was ever euality of positive rights. As H.L.Mencken noted:

The chief difference between free capitalism and State socialism seems to be this: that under the former a man pursues his own advantage openly, frankly and honestly, whereas under the latter he does so hypocritically and under false pretenses.

I’m not optimistic this preference will prevail in a direct democracy as opposed to a democratic republic, as more and more republican guards against mob rule are dismantled every generation.

About Eric Falkenstein 136 Articles

Eric Falkenstein is an economist who specializes in quantitative issues in finance: risk management, long/short equity investing, default modeling, etc.

Eric received his Ph.D. in Economics from Northwestern University , 1994 and his B.A. in Economics from Washington University in St. Louis, 1987

He is the author of the 2009 book Finding Alpha.

Visit: Eric Falkenstein's Website

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