• Is the Affordable Care Act an Excuse for Income Redistribution?

    This post has been cited in the 29 April 2010 edition of Health Wonk Review.

    Greg Mankiw wrote on Saturday, “[O]ne of the prime motives for healthcare reform had nothing to do with health per se but rather was a desire by those on the left for greater redistribution of income.” As rationale for this claim Mankiw cites his November 2007 post.

    To judge whether my conjecture is correct, ask your favorite pundit of the left the following: What health reform would you favor if the reform were required to be distribution-neutral? That is, you can change the rules of the health system but you cannot change the distribution of economic resources between rich and poor. My guess is that your favorite pundit would either object to the question or answer by retreating to more modest reforms. If so, this suggests that calls for sweeping reform are mainly motivated by the desire for increased redistribution.

    One thing I noticed in following health reform closely is that few pundits–on the left or right–understand health economics. However, the lefty pundits in Mankiw’s hypothetical would be correct that the provisions of the Affordable Care Act (ACA) could not be implemented without increased redistribution. A motivation for increased redistribution as an end in itself is not required to hold that point of view.

    There is a perfectly good reason why the ACA must be redistributive. By now we know how avoidance of adverse selection requires that a mandate accompany outlawing pre-existing condition exclusions. And low-income subsidies must accompany a mandate (if necessary, see Krugman for a review of the logic). If an individual can’t afford health insurance without a subsidy, it’s not helpful to provide one and to adjust the tax system to make the overall package distribution neutral. That’s like saying, “Can’t afford insurance? Let me help with the cost. Now pay me back.”

    If a distribution-neutral reform exists it doesn’t do much and/or isn’t politically viable. That may be what Mankiw prefers, but admitting as much isn’t evidence that increased redistribution is the motivation for reform. It’s just being honest.

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    • What is even MORE worrisome is how few health economists, let alone economists, really understand health economics….. ;-)

      The things that most people don’t understand in my view are the roles of risk aversion, time preferences, and the other unpacking of preferences, along with what goes under the overall umbrella of “behavioral economics” (including loss aversion, and various types of myopia).

      The very definition of income redistribution actually does not hold up to scrutiny here and the problem there is the lack of equality and tradability between income and utility. Do Mankiw and others mean total utility redistribution? Well, that’s silly, since realizations of health outcomes guarantee that utility is redistributed by health insurance.

      This all is quite complex and very few people (not to be arrogant, I’ll say not me either) really understand how all this is put together.

      Jim

    • I understand the argument concerning the necessity of the mandate, although I don’t believe that adverse selection is quite the death knell to private insurance based delivery that many say it is.

      The problem I see, however, is that the mandate itself isn’t truly a fix to adverse selection, it simply redistributes the costs of adverse selection by law caused by the guaranteed issue.

      Guaranteed issue was the driving force behind this reform. Because of the reasons that you have mentioned, guaranteed issue necessarily becomes redistributive because insurers are actually fairly accurate in their risk assessment and a mandate is necessary to allow insurers to pass the costs of the inflated risk in the pool to lower-risk customers.

      Basically, the ACA is redistributive in terms of wealth and health, and the impetus behind it was to shift costs away from the poor, elderly, and sick to the wealthy, young, and healthy.

      To repeat Mankiw’s question (and to ignore your valid point about the availability of such plans, this is a thought game here), if presented with a plan that reduced health care spending as a portion of GDP to European levels, but did not include guaranteed provision, would the drive for health reform been satisfied? I seriously doubt it.

      As for the political viability, there are multiple interest groups who can benefit at the expense of the other, so I don’t see why it would be necessary to confront all industry players at once. I also do not see price controls as necessary to combat health care costs. How about removing employer tax breaks and adding incentives to medical savings accounts and certain types of payment bundling plans?

      To Jim,

      “Do Mankiw and others mean total utility redistribution? Well, that’s silly, since realizations of health outcomes guarantee that utility is redistributed by health insurance.”

      I don’t really understand this.

      Costs for insurance pools are assessed by risk, if costs are intentionally shifted to the lower-risk by the mandate, how is this not redistributive in whatever terms you wish to use. And, if opportunity costs are incurred according to risk, how would the realizations of “health outcomes guarantee that utility is redistributed by health insurance”.

      Does this mean that hedge funds are also redistributive?

    • Jeez conservatives are sure hung up on redistribution. It’s their Cardinal sin. The point they miss is that most liberals aren’t looking to redistribution as a means to, well, the mean. Rather, policies with a redistributive component are meant to ensure a basic standard of living for all and a level playing field so merit can trump circumstances.

      The old adage of being born on third base and thinking you hit a triple is really true with many conservatives.

      • If you care about those who lack then you share with your own money and time. Obama used deceit to mandate (steal, extort) money to subsidize (bribe) others. Charity is a choice it doesn’t require trickery and forcing others into pain. Obama is a rich hypocrite who doesn’t play by any rules, that he didn’t learn in rules for radicals. Obama isva shake down artist. Obama’s way causes pain and the government to grow as it oppresses all equally who don’t conform to his lawless tyranny.

    • To Bob: The fascinating and misunderstood part of health care is that if two people are born on third base, both thinking they hit that triple, thinking they’re going to score today….. one tries to steal home and makes it, the other tries to score on that easy lazy fly to right field, trips and breaks his ankle on the way home and is tagged out easily.

      To Brad: that’s exactly right, and all people in insurance pools benefit to some degree when more people have insurance. So the truly non-redistributive goal should be to outlaw insurance.

      Jim

    • Bob,

      While I agree that the “being born on third base and thinking you hit a triple” is actually true to a lot of conservatives personally, in that they don’t recognize how little of their success is based upon the system in which they reside, I also think that liberals tend to vastly underestimate how much the system is responsible for the things they desire as well.

      Liberals tend to think that the economy is a zero-sum game and that redistribution simply corrects the inequities the market system inputs.

      And a conservative would scoff at the idea that redistribution allows for merit to trump circumstances. The conservative accepts the opposite side where redistribution is specifically designed to make sure merit is undermined by circumstances.

      Both sides are correct: In terms of health care reform, this reform will make it so that people who have had difficult financial circumstances will not incur the private and public negative medical outcomes they would have experienced before, but more often it will simply subsidize the poor financial and medical decisions that Americans are notorious for.

      Jim,

      I think that the existence of the mandate demonstrates that the addition of more people to insurance pools is not always beneficial to those involved.

    • Hi Brad, sorry, I didn’t mean to suggest it would (always be beneficial) if you thought I was saying that (which is why I said “to some degree”).

      In simple terms what I was really trying to say is that preferences vary tremendously, risk varies tremendously, uncertainty varies tremendously (different from risk), and patient perceptions of all of the above varies even more tremendously. Result: really hard problem that few people understand very well. And I do believe that mandates are the only way to move to the next step in that complex discussion (that eventually may or may not reign in US health care spending and medical choices). It actually doesn’t really matter that much whether the mandate is to outlaw health insurance or require everyone to have it, outlawing it would get more attention faster — under health reform we won’t deal with it for at least a decade. And “my break the ankle” example is intended to show that eventually EVERYONE will have to come to terms with the unchecked uncertainty issues in the health care system, but under that scenario, some people will be able to steal home and get off more or less scot free (though everyone dies in the end).

      Jim

    • I wonder what a “non-redistributive” defense policy would be?

      For instance, when Japan attacked Pearl Harbor and caused the entire country to respond, weren’t we redistributing resources from the part of the country that could take care of itself to an isolated little island that couldn’t support itself? Why should the east coast or middle of America have cared what was happening thousands of miles away?

      Of course, the obvious answer is that an attack on one part of our nation is an attack on our entire nation. And if we allow this in one place, then any place is vulnerable. I’ve never met a conservative who didn’t understand this.

      So why is it so hard to understand that disease is the same way? A crippling, expensive-to-treat disease can strike anybody. Even if you’ve got good insurance, if you can’t work and keep paying the premiums, they’ll drop you in a heartbeat. No matter how much you work and save, there are terrible diseases that strike people for no reason other than bad luck that will wipe out the life savings of all but the wealthiest .0001%.

      The free market has nothing to offer these people (and don’t get me wrong, I love free markets in general and believe they’re an excellent solution to *most* economic problems). There is simply no way to have a health care system that works for people who actually need it that is not redistributive. It’s as absurd as having a defense policy that doesn’t redistribute resources to areas where they’re needed.

    • Gregory Mankiw argues from a purely ideological position, and that is his right.

      The problem is this: According the Milliman Medical Index, health care for an average American family with employer-based coverage of the sort Gregory Mankiw undoubtedly enjoys now amounts to about $18,000, averaged over a huge data base of some 10 million families. This includes out of pocket spending and ther family’s as well es employers contribution to the insrance premium.

      There are many people earning $20,000 or so a year. Take a two-earner household earning $40,000 a year. If that family were to pay for its own health care, close to half of its income would go for health care. They’ll probably go without needed care.

      I take it that this would be fine with Mankiw, and he is free to espouse that ethic.

      It is not fine with many other Americans, professional economists among them. They do not want income distribution per se, but they do want this family to have a health insurance policy that is as close as possible to Mankiw’s. That, too, is of course an ideolical stance.

      Mankiw probably also thinks that if you have to stop bullets with human bodies, it is better to use for that puspose bodies that would otherwise not have produced much GDP. I don’t know if that’s his position, but, juding by this comment on health reform, I shouldn’t wonder if it were. After all, economists would call that “efficient.” It is the foundation of our profession’s case for the all-volunteer army.

      Occasionally economists still function as social scientist, but ever more rarely.

    • Thank you Mr. Reinhardt. Perhaps the real problem is that those on 3rd base have no idea about the real costs of obtaining health insurance in the individual and small group markets.

      The new reform measures are nothing more than corporate welfare to an already powerful industry with a few consumer protections thrown in for good measure. Those considering themselves economic conservatives should be alarmed. For profit health insurance will not work much longer without serious consideration of excessive profiteering in the health insurance industry. They make the rules they break the rules.

    • Professor Reinhart,

      That post was extremely unfair.

      First off, to say that he is arguing from a purely ideological position doesn’t seem to reflect what he actually said. In fact, he stated that health care reform was largely and mostly about redistribution to its supporters, a point which you seem to confirm.

      It seems that he was making a statement of what appears to have a good degree of truth to it, and it is you who is basically making the ideological argument.

      To go a bit further, let me quote from a Times piece he authored:

      “Of course, millions of Americans have trouble getting health insurance. But they number far less than 47 million, and they make up only a few percent of the population of 300 million.

      Any reform should carefully focus on this group to avoid disrupting the vast majority for whom the system is working. We do not nationalize an industry simply because a small percentage of the work force is unemployed. Similarly, we should be wary of sweeping reforms of our health system if they are motivated by the fact that a small percentage of the population is uninsured.”

      I disagree quite a bit with Mankiw in that particular piece but he makes it quite plain that we should engage in reforms that make access easier to come by for those who have financial difficulty in obtaining it.

      And your analogy to military service is absurd.

    • I’m coming late to this discussion, but I’ll extend this conversation into the realm of reality and away from the baseball vernacular. I will tell you this…based on this health care reform act I will be taxed based on the level of employee sponsored health care benefits that I receive. For me, it’ll mean $15K – $20K in additional reportable income on my W2 starting in 2011. I resent the hell out of this. I’ve worked hard over many years to earn a position where that is possible. I resent to my core the fact that I’m now responsible for all of those screw-offs and n’er do wells that pissed away their future. Oh, by the way, I’m a Major in the US Army so now not only am I dedicating time away from family to defend the Constitution but I’m also being attacked financially by those that I have sworn to defend. Ironic isn’t it? I’ll tell you that I plan to exit the service as quickly as I can as a result of this legislation. I plan to advocate to many of my peers to look at their own situation and do the same. In the end, it’s not worth it to serve and then be attacked from within by our own leadership. Keep it up and those of you in the ivory towers will enjoy meeting Al Qaeda face to face on their terms.

      So, while it’s cute to see academics like Mr. Reinhardt pontificating from a position of liberal superiority there are those that really have to pay for this massive expansion in health care coverage. – a large portion of which is going to be extended to those that are undeserving of my support (e.g., illegal immigrants – see the Pew Study, drug addicts, alcoholics, the morbidly obese, etc). Moreover, this legislation places a monstrous liability on state taxpayers to fund the increase in Medicaid coverage. What will suffer as a result? Education? Transportation? Economic Development? At what price full coverage? How long before we have bankrupted our government and we are looking like Greece or Spain?

      • @Brad – Please explain how it is you will be taxed on an additional $15k – $20k of income as of next year? Clearly there is a tax change I’m not aware of. Can you refer me to a section of the law or a news report or website that explains it? Thanks.