Making terrible policy to get Obama out of his “If you like it you can keep it” lie

by pdxblake

Without going into much detail, let’s look at why the “fix” to make Obama’s promise that “if you like your plan you can keep it” line true is a VERY BAD IDEA.  I am no health care economics expert, but it is pretty simple.  

Assume you have two types of consumers: young and health and old and sick.  

The cost of young and healthy is, say, $100 per year, and they have a 2% chance of having an accident or disease that costs $100,000 and bankrupts them unless they have insurance.   

The cost of the old and sick is, $1,000 per year and they have a 20% chance of having an accident or disease that costs $100,000 and bankrupts them unless they have insurance. 

And let’s use those made up numbers dividing the population between elderly and non-elderly for the two groups in the proportion of the population overall (13.7% over 65 according to the 2010 Census).  

Taking the ACA as the law of the land (which it is), you are grouping all these people into a pool and everyone pays regardless of their current health status (except for the different rates based on age alone, but we can ignore that for this exercise).  

If you use the numbers above, then everyone goes in the same pool and the average healthcare cost is $4,769 per person.  That is our abstract view of the existing law.  Under the previous system, there were two pools with average cost of $2,098 for the healthy and $21,600 for the sick. 

If you give people the option to “keep their old plan”, then each group will look at the cost to them and make up their mind accordingly. For the two groups the decision is: 

YOUNG: $4,769 vs. $2,098
OLD: $4,769 vs. $21,600

So if you give the choice, the young will switch back to the more limited cheaper plans that won’t actually cover much (just the 2% chance they get hit by a bus or something, not the “chance” that they one day become old).  The old will look at the choice differently and keep the status quo.  

But that choice affects the cost of the ACA because it will be more old than the population averages and the average cost will rise, driving out more young people and eventually ending up with the “bad” pre-ACA equilibrium.  That’s great if you are young, but what if you are young now and one day you wake up and you’re old.  Uh oh, you’re screwed.  

But there’s more.  There is also a concept of Pareto optimality in economics.  That is where you find some mix of economic variables where no change can be made that makes one person better off without making someone else worse off.  In our simple example, the ACA (current law) is Pareto optimal because while you make the young and healthy better off by “giving them choice”, you also are making other people worse off (not to mention ending up in a worse equilibrium). 

So, if you are a congressman or congresswoman considering whether to make Obama’s campaign line into a law, please step back and reconsider how absolutely terrible it would be as policy.  And then go read the Center on Budget and Policy Priorities analysis.