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.
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.
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 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.
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.