Obamacare: Why Better Isn’t Better

Obamacare supporters who are irritated by people complaining that their current insurance policies have been cancelled respond by pointing out that the people are getting “better” insurance. They’re wrong, because they don’t consider the issues of subjective value, risk tolerance, and opportunity costs.

The debate over the cost of individual health insurance policies on the state exchanges continues, with some states reporting lower policy rates than predicted by the Congressional Budget Office, while others are reporting higher rates. The overlooked problem even in those states with lower than expected costs is that the baseline for comparison is CBO estimates, not what people are currently paying. A Heritage Foundation study finds that in 45 states costs are expected to increase (the irony that Obamacare is modeled on a Heritage Foundation proposal should not escape us here). And the Manhattan Institute’s Avik Roy argues that a 49 state analysis shows premiums increasing by an average of 41%. Obamacare supporters prefer to focus on the CBO estimates, but as former CBO director Douglas Holtz-Eakin argued in September:

“There are literally no comparisons to current rates. That is, HHS has chosen to dodge the question of whose rates are going up, and how much. Instead they try to distract with a comparison to a hypothetical number that has nothing to do with the actual experience of real people.”

But that’s ok, supporters argue, because people will be getting better health care, so they’ll be better off. And there’s the fatal fallacy, because getting a better product does not always make a consumer better off.

Let’s start with a simple analogy, my car. I drive a 14 year old Subaru with 160,000 miles on it. I recently had to spend about $1800 replacing the transmission (with a used one that has “only” 90,000 miles on it, the mileage at which–according to my mechanic–Subaru transmissions begin to start failing), and I think I hear the rumbling noise that signals I’ll soon need to spend a few hundred dollars replacing a wheel bearing. There’s also a weird metallic rattling when I accelerate or make a turn, it needs new weatherstripping on the driver’s door, and one of the rear windows leaks and has caused pockets of rust to appear. And there were a couple other small repairs last year as well that added about another $400 to the total cost. And let’s say that my inconvenience and car-rental costs when my car is in the shop are about $500 year (that’s a high estimate–I didn’t rent during those auto repairs, and since our town is small and my wife and I work at the same college, the inconvenience costs are pretty minimal, not even high enough to persuade us to rent a small car for about $30/day). In other words, in the past year the repair-related costs on my car can be estimated at around $2700.

I honestly don’t know how much longer I can keep this car going, so I’d be better off buying a new car, right? As it turns out, not so.

To keep the comparison simple, let’s say I’m not even considering upgrading to a better car model; if I buy I’m just going to get another Subaru Forester. The list price for a basic level 2014 Forester is $22,000 (and considering that mine cost about $20,000 in 1999, that’s pretty good price control). According to Kelly Bluebook it’s trade-in value, were it in excellent condition (which it’s not) would be $816. Let’s say an anxious-to-sell dealer more than doubled that, to $2000, and I put $2,000 down (which is about all I could manage). I’m then looking at $18,000 remaining, and using Bankrate’s number of 2.98% over a 48 month loan I’m looking at a payment of just under $400/month. Add to that the increased cost of comprehensive insurance (I only carry liability now), and let’s be generous and say that would only be only $200 a year higher (even though I have a teenage driver), and I’m looking at an annual cost of $5,000 over the next 4 years, for a total of $22,000 (adding in my down payment, and generously excluding any interest I might have earned by sticking it in a CD). And although repairs to my current cost were unusually high this year, let’s assume they remain constant at $2700 per year over the next 4 years. That means over the next 4 years the new better car would cost me $22,000, while my current crappier car would cost me $10,800. And that’s with tilting the numbers in favor of buying new.

I’d be an idiot to buy a better car.

Of course an analogy is just an analogy, and although the example demonstrates that better isn’t always better, a car isn’t life insurance. Still, just as the person who looks at my crappy car being towed to the garage might mistakenly think I’d be better off with a new one, those who assume people with crappy health insurance will be better off under a new Obamacare policy are mistaken, too, because they are ignoring some basic economic principles that apply to both cases.

Subjective Value
First and most fundamental, value is subjective. Other people value the inconvenience of getting their car repaired at a higher rate than do I. Other people value the look and feel of a new car and suffer an embarrassment cost at driving a clunker. I don’t, but that doesn’t mean they don’t. They do, but that doesn’t mean I do. There is simply no way for any person to tell another what value they should set on anything. Any attempt to do so is both empirically wrong and condescending. It implies that you know what’s better for that person than they do themselves. This type of condescension is, of course, all too common.

Risk Tolerance
Closely related is risk tolerance. In fact risk tolerance is a form of subjective value. One of the critiques of crappy health insurance is that it’s too risky, that if anything does go wrong it won’t be sufficient. But individuals naturally and inevitably vary in their degrees of risk tolerance. I would never go free climbing at any height, but that doesn’t mean I would suggest that others should be forbidden to accept that risk. And I will do wilderness canoeing trips that others might see as too risky for themselves. Risk imposed on others, is of course a fit issue for regulation, but self-imposed risk is not.

Opportunity Costs
Opportunity costs also are subjective values. My second best use of money saved by buying lower quality is not your second best use of the money you save by buying lower quality. This is where it’s most clear that an actual cost is being imposed on the person who is forced to pay more for a better product. Not buying a new car will save me an estimated $2800 per year for the next 4 years. I have numerable better uses for that money–that is, other uses that will give me more return value than would a new car. And that is precisely equivalent to the person who doesn’t want to pay more for health insurance–they have other uses for that money they haven’t spent on insurance.

Yes, they’ll be getting a higher quality policy, and considered in isolation that policy may certainly be worth the cost. But to consider it in isolation is to ignore the individual’s opportunity costs. The individual will have to give something up in order to pay the higher cost, and nobody else can say that what they’re giving up is less valuable than what they’re getting except the individual herself. And if she actually thought that, she’d already have the better, more costly, insurance. It doesn’t matter what she’s giving up. It could mean downgrading her apartment, or buying cheaper food, or going to the movies less often, or giving up the trips home to see family…it doesn’t matter which of those it is because it is her valuation of those things that matter, not yours, mine, or anybody else’s. We simply cannot substitute our own values for those of another person’s in their own life.

But They’ll Be Subsidized If They Can’t Afford It
But it’s ok, we’re told, because if they really can’t afford it they’ll be subsidized. But that misses the point, because it’s still an external party telling them whether they can “afford” it or not, and that decision is not based on the individual’s values, but on the external party’s values. Particularly those who are above the subsidization level are being told they can “afford” it, when in fact they may be making a significant sacrifice. And those who are subsidized may not be subsidized enough to offset their opportunity costs.

On a different note, I don’t quite understand how this whole subsidization scheme is supposed to work. We’re told that we need the young (and healthy) in the exchanges to subsidize the elderly (and sick). But if the young–who tend not to be high wage earners, especially those who don’t have insurance through an employer–are in need of subsidies, who’s subsidizing their subsidization of the elderly? Maybe there’s enough young healthy people who can afford insurance but just have chosen not to get it to make this work, and I’m willing to be persuaded by evidence of that, but intuitively it sounds dubious to me.

In Conclusion
To summarize all this, those who smugly argue that individuals who are losing their current policies will be better off because their policies will be better are ignoring fundamental economic principles. Of course this argument doesn’t address the issue of the costs un/underinsured people may impose on others. I don’t know that it’s necessarily impossible that at the social level Obamacare will be a net gain; I just don’t know enough to make a case either way on that issue. But I’d be pleased if its supporters would stop trying to tell others what their values really are.

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About J@m3z Aitch

J@m3z Aitch is a two-bit college professor who'd rather be canoeing.
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18 Responses to Obamacare: Why Better Isn’t Better

  1. Murali says:

    Just a few nits to pick

    That value is subjective in the economic sense does not mean that it is subjective in the moral sense (of course doesn’t mean it isn’t either) The economic sense only talks about whether the consumer values (or more accurately prefers) a given marginal widget more than the asking price for that widget.

    The moral notion of value is not about what you actually prefer or value, but what you ought to prefer or value. It may still be condescending to talk that way, but only insofar as making any kind of objective value claim to others is condescending.

    I would like to make the caveat that I don’t think that any objective value claims are epistemically justified. How the hell does anyone know whether anything is objectively valuable? But consequentialists and Aristotelians make such judgments all the time: This and this are objectively good outcomes and thus things we must promote etc etc.

    (That doesn’t mean that you couldn’t get a moral theory off the ground using subjective value, but other than deontological theories which deliberately bypass the issue, you are going to get fairly weird moral theories.)

  2. J@m3z Aitch says:

    As far as I can tell, the only way anyone’s ever been able to get moral theory off the ground is with a set of skyhooks.

  3. Murali says:

    The best way to go about doing moral theory right without the skyhooks is to start with a sociological account of what role moral rules play in society. e.g. coordinate human action. The idea is that when people invoke morality they are trying to make other people’s actions their business. reciprocally this requires the one making the demands on others to provide reasons that would justify the prospective coercion. Once we’ve got a good psychological and sociological story going on about our moral practices in general, I think it would be possible to extract certain basic premises that we can use to build a moral theory. For example, one principle that could be extracted is that coercion requires a comprehensible and acceptable justification or something like that.

  4. Michael Drew says:

    I can’t argue a single point – you’re 100% right (well, maybe I’ll be smarter than Obama and reserve my right to be wrong by saying 99% right, and I’m not sure what the 1% consists of yet).

    The reason this argument fails so badly is because all this argument about the value of the “better” plans to those being forced to buy them is really just a smokescreen for the redistributive intent of the law. Likewise the subsidies subsidizing the subsidization of high-cost health insurance buyers (formerly frustrated seekers). Means tested subsidies given to people forced to buy insurance they wouldn’t otherwise want are just stealth subsidization of the purchases of health insurance that sick people have always wanted to be able to make but weren’t entertained in doing so by insurers before. This was done to limit the governmental pass-through numbers of much of the law, in order to control the estimates of its spending, taxing, and effect on the deficit.

    I’d have been fine with all of that if it could have worked. And maybe it can, though it’s not looking good right now. The ironclad ‘you can keep it’ guarantee in that context was mind-crushingly stupid given how easy it would have been to hedge the promise. I honestly don;t think that passage of the law hinged on him being that irresponsible with the promise. And that promise is why this is all SUCH a huge problem now (though it still wouldn’t have been any too popular when people actually started experiencing the law in action).

    I guess the question I would have for you is whether you’re open about the implication of your subjectivity argument that being uninsured is a value calculation that outsiders shouldn’t question. Politically, I don’t think the “problem of the uninsured” was ever going to be defined away, and in fact I do think it was a policy problem – it limited preventive care and caused too much financial ruin. And the argument about “junk insurance” was that that did the same thing. I tend to think there is a lower level of basic insurance that it can be argued is in the public interest for people to be nudged to buy – they just set that way too high. I also think that the issue of junk insurance could have been addressed by some sort of consumer protection/education initiative rather than a mandate to purchase such a high level of insurance. (Murali made this point to me some months ago, and he was quite right.) I’m sure you disagree, but I think it’s a reasonable disagreement on both sides. I think there are situations where being fully hands off in treating people’s consumer preferences as sacrosanct because of subjective value can produce adverse social and economic outcomes; I expect you disagree, but I’d hope you’d consider the possibility that thinking that doesn’t always constitute condescension, in particular when the argument isn;t “We’re making you do this simply because it;s better for you,” but, “While we suspect you may find value in the path we’re prodding you onto, in reality we’re doing that because it works out better for everyone on the whole.”

  5. pierrecorneille says:

    I really can’t argue much with anything James says here, and as someone who supports Obamacare, it’s a concern I need to take seriously.

    I will say that I see the function of Obamacare less as a “way to subsidize the elderly” and primarily as a way to subsidize the poor(er) and to provide more predictability that people won’t have to fear pre-existing condition and lifetime cap exclusions. If Obamacare meets those goals, even if it does so clumsily and at slightly higher premiums for those who can afford to pay them, then I’ll say it’s a success. If premiums increase “a lot,” the policy will have been a failure, if they increase only “a little,” then it’ll meet my standards.

    The very real and valid constitutional questions aside, the arrogance of stating what others can afford–and how much is “slightly higher,” “a lot,” or “a little” for someone else to pay–is not lost on me. And an argument is to be made that the redistributive effect of Obamacare is actually regressive (I’m not sure how the numbers add up–or down–but such a result wouldn’t surprise me). And as James points out, my policy preference here imposes a “choice” where others adopt a subjective value, and these same preferences also limit the degree to which one can live by one’s own subjective risk tolerance.*

    I really do hope I’m not sounding dismissive of the argument here. I might even support a plan that I’ve heard you (I believe) endorse: a much freer market for regular health coverage with some sort of state provided insurance for serious illnesses that are otherwise uninsurable. If I’m putting words into your mouth, I do apologize….but I thought I’ve seen you argue that somewhere before. My main concerns are how someone qualifies for state-provided insurance in catastrophic cases,** how much freedom private insurance providers would have to boot people off their plans, and how such a scheme would be funded.

    *Some liberals like to point out that one person’s risk tolerance can impose costs on others (the free climber might injure himself and require emergency rescue services paid for by Jane Q. Taxpayer). I dislike that argument, because it’s not my true rejection (I don’t spend my entire April 15 seething at those “fishing free riders” who are increasing the amount of emergency care taxes I pay).

    **I realize “catastrophic” is probably a term of art whose meaning, as it applies to insurance, I’m generally ignorant of.

  6. J@m3z Aitch says:

    Michael,

    I don’t pretend to know health care policy well enough to know the best solution. I just want people to recognize this particular argument for the bullshit as it is. At least maybe then they’ll grasp why people are pissed off and why repeating this argument is likely to be unpersuasive to those people.

  7. J@m3z Aitch says:

    I should add that I’m not comfortable arguing against ensuring health care access for all, for two reasons.

    First, I’m fortunate to have excellent health insurance, and this past week I’ve been reminded of how valuable that is. I was in very bad shape, and a trip to the emergency room and to a specialist were not things I had to think twice about, so it would be a bit rich of me to be dismissive about the situation of folks who do have to hesitate about that. (I’m not telling others where to stand on that though–Lance, for example, argues against Obamacare, and I have no problems with that because he’s not a guy with a gold-plated health insurance plan who’s oblivious to the difficulties of being uninsured.)

    Second, as far as my personal prioritization of the critical issues libertarians should be addressing goes, making sure that the folks who are the least well off buck up and take responsibility for themselves doesn’t even make my top 10 concerns (don’t ask for a specific list, or you risk becoming one of my top 10 concerns). I don’t really support a fully nationalized health care plan, but it wouldn’t disturb my sleep if the U.S. adopted one. No matter how loudly someone screams “socialism,” that kind of thing is an infinitely smaller threat to individual liberty than the expansion of executive power, the war on drugs and the increasing militarization of American police forces, the war on terror, lousy K-12 education, corporate economic privilege, and so on.

    And to the extent health care presents specific attributes that make it less amenable to good competitive markets (particularly adverse selection and the negative externalities associated with untreated communicable diseases), then something beyond pure market solutions are justifiable. And it’s not as though our status quo ante was actually anything like a pure market solution anyway (as much as anything else, for folks like me in corporate plans the user is not the purchaser, nor is the purchaser even a true agent for the user, so we already have some basic market imperfections there), so I’ve never found myself able to work up a really strong defense of it.

    I’d just like that particularly smug set of liberals who think they know what’s best for Lance and others in his position to pull their heads out of their asses and realize that he and others are competent to make their own choices. So if the big concern is that they really want him to be covered for some reason, then just fucking cover him already. but don’t treat him like a child.

  8. Troublesome Frog says:

    So if the big concern is that they really want him to be covered for some reason, then just fucking cover him already. but don’t treat him like a child.

    What would that look like, and would it be possible to pass that legislation?

    Also, I don’t think that having Lance covered is really the purpose of the mandate. The big thing everybody always complained about was the pre-existing condition issue with insurance. If you want to do away with that, you pretty much need a mandate to prevent free riding. If you have a mandate, you pretty much need subsidies. We could go back to the world of pre-existing conditions again, but that’s not something that would be especially popular either.

    Now, the minimum coverage level that they specified for the mandate seems obviously stupid to me. The correct minimum coverage seems like it should be some sort of catastrophic plan with a very high deductable. You know–insurance. I don’t see any problem with forcing people to make some sort of guarantee that they’re not going to dump a financial bomb on the rest of us if they can afford not to. But forcing people to buy a pre-paid medical consumption plan is not great policy.

    Of course, none of this matters because the web site is bad. THE WEBSITE IS BAD! THE GREATEST FAILURE OF LEADERSHIP IN HUMAN HISTORY! SOMEONE MUST PAY! BUST A DEAL, FACE THE WHEEL!

  9. J@m3z Aitch says:

    What would that look like, and would it be possible to pass that legislation?

    Setting aside all technical questions about what actual structure would work best, if it’s straightforward nationalized single-payer healthcare, that would do it, and I’d go along because it’d be hardly any skin off my nose. (Hey, my doctor’s office didn’t call me back when I was having a severe asthma attack, so I ended up in the emergency room; how much more neglectful could a gubmint bureaucrat doctor be?)

    It might not be possible to pass, but that’s not really my point here. My point is that people who keep telling complainers that they’ll be better off have their heads deep up their asses they probably couldn’t be pulled out with a tractor.

    Ah, the website. There are good technical reasons why developing a functional one is very very hard. And of course they’ll eventually be solved. But there’s no doubt there’s a certain colossal stupidity in having rolled it out before it was well-tested. It means absolutely nothing about the overall quality of the Obamacare policy, but it does say something about the political intelligence of the administration in its second term.

  10. Troublesome Frog says:

    I think you’re generally right about telling people that they’re better off. With the vast majority of products, I’d say you’re 100% right–subjective value is a real thing. *The* real thing, really. The only reason health insurance may differ a little bit is that most of us don’t even fully understand the edge cases of the plans we have and most us aren’t especially good at estimating risk. In a case like that, there’s probably some divergence between what we think we’re buying and what we’re actually buying. Is the government closer to the truth? In the majority of cases, probably not. Is it totally wrong? Also, probably not.

    I’ve seen a lot of surveys that say that the majority of people are “happy” with their current plan. But I’m forced to wonder, how many of those people have had to use their plan for anything other than cheap office visits? Everybody loves getting day-to-day stuff for free. In fact, that’s probably one reason why insurance pays for so much trivial crap. It has nothing to do with “payback on preventative care” nonsense and everything to do with the fact that the trivial crap is all most people see most of the time. If you can keep most people happy most of the time, you can have a less-than-stellar relationship with the minority of customers who need you for something real. They all pay the same premiums at the end of the day, right?

    For me, the biggest political stupidity by far was, “If you like your plan, you can keep it.” At the time it was said, it was a transparently foolish thing to say. Plans change constantly and very rarely do they change for the better, even in the absence of regulatory changes. You just promised something you can’t deliver *and* managed to make sure that everybody who sees a plan change for any reason has a good reason to blame you for it.

    I’m just getting a kick out of the fact that the media seems to think that the failure of a large software project (which probably happens more often than not) is finally the scandal that will bring down a presidential administration. Like none of the stuff that presidents have weathered over the past few decades comes close. History’s greatest monster!

  11. pierrecorneille says:

    I’d just like that particularly smug set of liberals who think they know what’s best for Lance and others in his position to pull their heads out of their asses and realize that he and others are competent to make their own choices.

    Yes, a lot of people on my side of the fence are unbearably condescending. One of my favorite examples is when they use the free rider problem in moralistic terms. The uninsured, in their view, are accursed “FREE RIDERS!” instead of people just making what they see as rational choices. (For some reason, they remind me of Ford’s “Whip Inflation Now!” buttons.)

    Concerning the website, what bothers me isn’t so much the reported glitches (I haven’t visited the website). Rather, it’s what even a non-bug-ridden system of sites requires. Less affluent people are less likely (I imagine, I don’t really know) to have reliable internet access. From what I heard, there are options to sign up over phone or by mail, but the latter seems underdeveloped, and the former is problematic in another way. (E.g., I hate talking on the phone. I get nervous and jittery…..and I used to be a telephone customer service rep.)

    @Troublesome Frog:

    For me, the biggest political stupidity by far was, “If you like your plan, you can keep it.” At the time it was said, it was a transparently foolish thing to say.

    First, I agree. It was foolish.

    Second, I go back and forth about how shame-inducing that statement ought to be. On the one hand, politicians shouldn’t lie. On the other hand, nobody in this day and age should be surprised when a politician promises half a loaf knowing full well he can deliver only a quarter loaf.

  12. pierrecorneille says:

    I’m also coming to the conclusion that the mandate is a bad idea. I’ve always (since 2010 when I started learning about such things) been uncomfortable and ambivalent about it. I hadn’t realized, until very recently, that there was already an open-enrollment period. Why not have open-enrollment periods, maybe with a penalty for the months spent uninsured, payable upon enrollment during that period? It seems fairer to all (or most) involved.

  13. lancifer666 says:

    Interesting mini-economics overview of Obama-care.

    I am not very risk averse and I have equity in my home so my total lack of health insurance is (mostly) a gamble I am taking with my own assets. It would be total horseshit to claim that I am a “free-rider” since I have always paid all of my health care costs and it would take a major medical catastrophe to absorb more that my home’s equity.

    And if my expenses exceeded that amount I would hardly feel guilty about the hospital writing off my medical expenses having exhausted my life’s savings and all I had to pay them.

    When my wife and I become more financially able we plan on buying a catastrophic health insurance plan. But that should be our decision.

  14. lancifer666 says:

    James,

    Too bad you don’t live closer because we could have gone to a local bone-yard and scored a transmission for about 500 bucks and installed it in a weekend. I would have had you pay me back in a future labor swap and you would have learned a valuable skill.

    I am about to buy a manual transmission rebuild kit for my F150 for about $250. I haven’t bought a new car in over twenty years. I am fiercely self-reliant and the economics, as you outlined above, of keeping an old car running are undeniable.

    The downside is that I never have an excuse to buy a new car and I end up driving cars that are mechanically sound but are inferior in most subjective ways.

    I only recently sold my 40 year old F100 and bought the ten year old F150. It was shocking to me how much nicer a 2002 truck was compared to a 1973 model. Even though the old truck was still doing the job, the newer truck is a much more comfortable and pleasant vehicle to drive.

  15. J@m3z Aitch says:

    @T-Frog,
    I’m just getting a kick out of the fact that the media seems to think that the failure of a large software project (which probably happens more often than not) is finally the scandal that will bring down a presidential administration.

    I’m attributing that to how little other interesting news there is right now. It’s a handy story in a time of headline need.

    @Lance,
    Next time. I still may not want to get rid of the car whenever this replacement transmission wears out. And although it’s now been gone longer than I owned it, I still miss my ’73 GMC crew cab that was so minimal it didn’t even have a radio. Not nice, not as pleasant to drive, but an awesome workhorse that I could dent without getting stressed about it.

  16. lancifer666 says:

    TF,

    I’m just getting a kick out of the fact that the media seems to think that the failure of a large software project (which probably happens more often than not) is finally the scandal that will bring down a presidential administration.

    That’s the nature of our news media. It is a story…they don’t really have another one at the moment…thus it must be trumpeted as though it were the fall of the Roman Empire.

    Here in central Indiana there is a rather average mid November storm coming, but the local media is hyping it like it’s the Storm of the Century.

  17. Matty says:

    I know you said local but did they really not notice the strongest typhoon on record?

    There is a story, which I have never checked out, that in the early days of radio announcers would sometimes read out “There is no news today” before going on to the next programme, I sometimes wonder if this practice should be bought back.

  18. lancifer666 says:

    Matty,

    The Typhoon is old news and on the other side of the globe to the local news teams.

    Now the storm that they trumpeted is gone having knocked down some trees, power lines etc. There were a few tornadoes but no one in Indiana was killed of seriously injured.
    The local TV news is buzzing with stories and video footage of people thanking God with a tree down in their backyards.

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