The Incidental Economist

“That’s how insurance works”

You’d be on much stronger ground simply arguing that the redistribution from the young to the old mediated by the ACA is consistent with a particular vision of fairness that you endorse, rather than claiming that redistribution between groups of individuals that represent vastly different risks is a normative feature of insurance markets.

“Insurance” in which the premiums paid by a cohort of people are insufficient to cover the financial costs associated with the specific risks that they are underwriting against does not actually “work” in that eventually the aggregate value of the claims will eventually exceed the value of the assets that the insurer has accumulated to pay them.

Any attempt to use transfers from a low-risk cohort to subsidize the premiums of high risk cohort would quickly end for two reasons. Low risk clients would quickly flee to insurers offering better rates, and any insurer subsidizing high-risk clients would rapidly attract more high-risk clients, the excess claims from which would accelerate the insolvency brought about by the gap between the said claims and the funds that the insurance company had available to pay them.

This is why systematic transfers from low-risk cohorts to high risk cohorts aren’t evident in actual insurance markets that are allowed to operate in an actuarially sound manner – e.g. life, driver’s, liability, shipping, etc, etc, etc.

It’s redistribution from the young to the old, pure and simple. If you think that’s fair and ethical (and that’s a perfectly defensible stance), why not just come out and defend the said redistribution on ethical grounds instead of falsely claiming that “that’s how insurance works?”

Both the original article and Mr Carroll’s comments are slightly off point, in this respect.

The fairest allocation of health costs is by income, not age.

A senior who is wealthy and a young person who is wealthy should pay more for health insurance.

A senior who is poor and a young person who is poor should pay less.

A tax-funded system like Canada accomplishes this with no fuss or debate.

The drafters of the ACA knew this, but they had to try and accomplish fairness in a very indirect left-handed way — through subsidies.

First they had to correct the insurance market itself by age ratios and banning underwriting.

That would lead to higher charges on young people, but that would be corrected by subsidies to young people with low incomes.

This whole arrangement is not precise and open to much gaming and requires constant enforcement.

Making insurance part of taxes is much simpler.

Bob Hertz, The Health Care Crusade