For Obamacare to work, we must ignore what insurance is

Obamacare protest U.S. CapitolLiberals are just now grasping the economic case against Obamacare that Tea Party protestors and town hall attendees have made for four years—and they’re still getting it wrong.

Witness Cornell University economics professor Robert H. Frank’s Sunday column in The New York Times called ‘For Obamacare to Work, Everyone Must Be In.’  In it Frank notes that there are two incompatible propositions framing the Obamacare debate: that people should not be denied coverage based on preexisting medical conditions, and that government should not force individuals to buy health insurance.  Both conditions, Frank writes, cannot be adhered to simultaneously.

He describes how banning the denial of healthcare coverage due to preexisting conditions without having an individual mandate leads to an “adverse-selection problem,” whereby people with expensive illnesses are willing to pay the universally priced premiums but healthy people are not. As a result, healthy people tend to drop out of the market, thus driving the price of insurance up. This never-ending process continues until insurance becomes exorbitantly expensive, as demonstrated through case studies from California, Washington, New York and New Jersey.

Frank further argues that the only way around the “adverse-selection problem” is to force everyone to buy health insurance. Labeling the problem “a profound source of market failure” and challenges, he writes: “We must ask those who would repeal Obamacare how they propose to solve the adverse-selection problem.”

There is in fact a way around this dilemma, however, and it doesn’t involve forcing anyone to do anything. It also demonstrates the genius of the free market and not its failures.

That solution: To treat health insurance as – surprise – insurance; that is, to treat it as a voluntary plan that you can invest in if you want or take your chances and decline to purchase if you’re young and healthy. If you decline and get sick, then it’s up to you to pay for your expenses, including potentially relying on savings, family, loans or charity to pay for your healthcare.

Sure, in this system, there are lots of people forking over thousands of dollars a year to insurance companies and getting nothing in return because they are “unlucky” enough to remain healthy. But this is how the insurance companies stay in business – in order to be able to pay a “jackpot” to the few people who develop expensive illnesses their reserves need to be funded by the thousands of other people who don’t get sick.

Insurance with high deductibles is still generally available for people with preexisting conditions for some serious illnesses, and those who have trouble finding insurance can join high-risk pools set up in their states.  But sick people can’t pretend that getting their treatment paid for when they already know they’re going to get sick is insurance.

Frank’s argument is barely more sophisticated than Ezekiel Emanuel’s embarrassing plea to young people several months ago to buy health insurance to show their support for Obama.  But neither Frank nor any other economist is ever going to come to a satisfactory resolution to the adverse-selection problem if they refuse to grasp the fundamental concept of insurance.