Hustlers, Handicaps and Health Insurance

I’ve been calling my idea for a better public health insurance system Medicare Prime. However, I should have Googled it first, since there is a company that has already trademarked that name. So, I’ll use Optimal Medicare Expansion (OME) from now on.

Part of the fun of being a masked vigilante is that I can insult self-important groups with reckless abandon. So, it’s high time the Lone Economist skewered that most solipsistic of associations, golfers. They’re crazy. I know this because I used to be the president of a local Rotary Club full of them. My job was to start every meeting with a few announcements and friendly banter. One of our members — I’ll call him “Steve” — had graduated from the cross-state rival of the university I graduated from. We often teased each other about the other’s alma mater.

On one occasion before I called the meeting to order, Steve let it drop that he had just returned from a pilgrimage/junket to the golfers’ holy land, Scotland. The other members were abuzz with admiration. So, I commenced the meeting with “I hear Steve is quite the golfer. Hey, Steve. What’s your handicap? I mean besides graduating from the University of __________”.

A sudden hush seized the congregation. This was what standup comedians call “misreading the room”. Joking about colleges was fine, but golf was sacrosanct!

What does golf have to do with health insurance? Here is a parable that tees up the relevant issues.

You wake up one morning with a fever and sore throat. Your mother, a registered nurse who knows that aspirin and rest is a cheap yet effective treatment, gives you an aspirin and orders you to bed. But the pain persists, and you don’t want to spend the day in bed. So, you appeal to your grandfather for help. He’s an irascible curmudgeon not afraid to opine on things about which he knows nothing. The old man hands you a bottle of Oxycodone, an opioid pain-killer, with a wink. He has an unlimited supply that he can pass along to you any time you need it.

Your grandfather’s remedy seems easy and costless, but you have this nagging feeling that something is not right. Aren’t opioids addictive? Could this be an example of a cure worse than the disease? Wouldn’t it be better to treat the cause of your problem (i.e. infection) rather than just the symptom (i.e. pain)?

This parable encapsulates many of the issues that fuel our health insurance policy debates. Private insurance markets suffer from adverse selection, the coverage gap that results from an information asymmetry between the insured and the insurer. Potential customers know more about their future healthcare needs than insurers. High-cost customers will pay relatively small premiums while low-cost customers will forego insurance. Insurers struggle to avoid bankruptcy while a lot of people are uninsured.

All the proposed remedies to adverse selection treat the symptom (i.e. coverage gap), but not the cause (i.e. information asymmetry). They concentrate on the weaknesses of our current public insurance system and ignore its strengths. Therefore, they decrease one problem while increasing another.

For example, Obamacare attempts to eliminate the coverage gap by subsidizing premiums for individual health insurance and mandating the purchase of insurance. But subsidies increase another problem caused by health insurance, moral hazard. They shift costs onto taxpayers and create an unstable insurance market. And the mandate (like your mother’s order to stay in bed) isn’t enforceable.

Proponents of Medicare-For-All and the Public Option demonstrate a surprising lack of knowledge about the U.S. healthcare system. (Guess who the irascible curmudgeon represents.) Medicare compensates healthcare providers for only part of the costs they incur caring for beneficiaries.  Private insurers make up the difference by paying providers more than the costs they incur treating the privately insured. Consequently, replacing private insurers with expanded Medicare coverage while paying providers Medicare rates, would amount to a large pay cut for providers. Many doctors would cease practicing medicine. Many hospitals would close their doors. And paying providers what they receive now from all payers would cost taxpayers much more than $32 trillion over ten years.

What we really need to do is adopt a policy that attacks the root cause of adverse selection, information asymmetry. We need an antibiotic, not a pain-killer. This is where golf hustlers and handicaps come into play.

A golf hustler is someone who pretends to be a much worse golfer than he really is. By doing this, he can lure the unsuspecting average golfer into making an unfavorable bet. Once the average golfer loses to enough hustlers, he might refuse to play people he doesn’t already know from fear of being hustled. This is golf’s version of adverse selection caused by information asymmetry.

Golfers discovered long ago that simply prohibiting hustling doesn’t work well.  The financial incentives are too great. Instead, golfers solved their hustler problem by creating a handicap registry. A handicap is basically a golfer’s average score above par with some adjustments. By making every golfer’s handicap public information, registries discourage hustling.

Like golf, health insurance is another forum for gambling. When a company sells you insurance, it is gambling that the premiums you pay are greater than the healthcare costs it will incur on your behalf. Like the average golfer, it is afraid of being hustled by potential customers who hide their pre-existing health conditions.

OME would solve this problem by providing people with an incentive to share their information while compensating them for their pre-existing conditions. The lower a household’s OME deductible, the more insurance coverage they have access to. Even for households with non-zero deductibles, the cost of private insurance and the cost of being treated by out-of-network providers will be lower if their OME deductible is lower.

If the size of the deductible is dependent on pre-existing conditions, then the household has an incentive to reveal information about its conditions. They want a lower deductible. This would be a signal to the private insurer that would guarantee that there is no information asymmetry and that their liability is limited. In effect, the OME deductible acts like a golf handicap.

Medicare already uses handicapping to some extent. For example, Medicare Part C, aka Medicare Advantage, purchases health insurance from HMO’s for Medicare beneficiaries. The premiums paid by Medicare to HMOs are risk-adjusted, meaning that a higher premium is paid for beneficiaries with pre-existing conditions.

Health insurance should be a guard against uncertainty, not compensation for chronic sickness or poverty.  The former is a service best produced by a private market, while the latter is wealth redistribution, a service reserved for governments.

Relying on private organizations to serve both purposes does not work well. OME would fulfill the government’s role of wealth redistribution while facilitating private industry’s role of providing health insurance.

Published by TheLoneEconomist

I am a PhD economist who studies just about anything and proudly specializes in nothing.

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