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October 14, 2005

Choice & Security

This deals with Health Care more that Retirement issues, but the fundamental principles still apply.

Choice & Security
What conservatives know about economic freedom.

By Michael F. Cannon

Which would you rather have, freedom or security?

The Left has argued that since September 11, 2001, President Bush has curtailed civil liberties in an attempt to keep America safe from terrorism. Few people on the Left believe this bargain will pay off, and the skepticism runs deeper the farther left one moves across the political spectrum. The same cannot be said when it comes to the economic freedom. Here, acceptance of a tradeoff between freedom and security increases as we look leftward. In The New Republic, Jonathan Cohn recently asserted the existence of that tradeoff — and argued for making the trade — on issues from Social Security to education to healthcare.

Cohn criticizes conservatives for selling greater choice in these areas without acknowledging that it would result in less economic security. His argument goes like this: The limits on choice that conservatives would sweep away also make people more secure. Social Security provides Americans a guaranteed pension; having the choice of putting one's Social Security taxes in a personal account would weaken that guarantee. Public schools are devoted to educating all comers; vouchers take money away from those schools and that mission. Each state has its own set of health-insurance regulations, many of which attempt to make coverage more affordable; allowing consumers to choose what slate of regulations they want would make those well-intentioned rules less effective.

Though not a conservative, I will break bread with conservatives when their aim is to tear down barriers to choice. Social Security privatization, school vouchers, and deregulating healthcare would expand the menu of choices available to ordinary people. There is an alternative explanation of the relationship between choice and security: Rather than crowd out economic security, choice actually increases it, whether it's saving for retirement, educating one's children, or protecting one's health

Who Wants to Buy from a Government Monopoly?
My argument goes like this. From whom would you rather buy bread: a government monopoly, a private monopoly, or one of a number of competing grocery stores? It's really not much of a contest. The government and private monopolies would have consumers right where they want them. They don't have to take much care to meet specific needs, and they are likely to overcharge, which leaves consumers with less money (i.e., they are less economically secure). Competing grocery stores, on the other hand, will fall over themselves to provide fresh whole grains at a price that most increases a consumer's economic security.

Adam Smith said it well: "It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest." But once consumers are dispossessed of their freedom to choose, businesses worry far less about consumers' economic security.

That is the basic argument. But it is over time that choice really begins to look good. In the process of falling over themselves, those producers strike upon tiny improvements in quality, delivery, etc., all of which translates into even greater security. Such innovations have caused prices to fall for everything from food to computers to telecommunications. Over time, choice makes products of ever-increasing quality available to an ever-increasing number of people at an ever-decreasing cost.

Applied to some areas of the economy — retirement savings, education, healthcare — the details become more complicated but the theory holds. In fact, the areas where people feel least secure — e.g., health care, education — are those where choice is most constrained.

Cohn reserves most of his caveats for healthcare, where he takes aim at one of the most innovative health-policy proposals in recent memory. Each state requires health insurers to obtain a license before they can do business in the state. The most basic licensing requirements include such things as solvency standards. But each state also requires health insurers to provide certain types of coverage, to cover certain categories of people, and/or to price coverage however the state thinks is best. Idaho has passed the fewest such laws (13) and Minnesota the most (60).

Cohn concedes that "some state rules . . . really do seem dubious — or, at least, suspiciously likely to benefit certain well-connected groups of health care providers." Those would include requirements that insurers provide — and that consumers purchase — coverage for hair pieces (seven states), dieticians (four states), marriage therapists (eleven states), massage therapists (four states) . . . you get the picture. At a time when the biggest health-policy concern is the number of Americans without coverage, these laws make coverage more expensive by requiring people to purchase coverage they do not want (or need).

Rep. John Shadegg (R., Ariz.) and Sen. Jim DeMint (R., S.C.) have introduced legislation that would allow individuals to avoid the cost of unwanted regulations by allowing them to purchase insurance from any carrier in the country, with the coverage subject to the rules of the licensing state. Cohn objects because some regulations are intended to expand coverage, such as laws that increase the cost of coverage for healthy people in order to reduce premiums for less healthy people. If healthy people can choose insurance from a state that doesn't charge that mark-up, he argues, those laws won't work. That's also the accepted wisdom among health-policy analysts.

The problem is that the data don't seem to bear out the accepted wisdom. Over the past decade, Mark Pauly of the University of Pennsylvania has made some fairly surprising discoveries about individual and employment-based health insurance. For example, the data show that insurers don't adjust health-insurance premiums for risk very much in either market. Moreover, that the type of laws that Cohn defends don't do much to expand coverage for high-risk people, and "the increase in overall premiums from [these laws] slightly reduces the total number of people buying insurance." In other words, healthy people know that they're being charged more than they cost to insure, so they stop buying. That increases the ranks of the uninsured and leaves insurance pools older and sicker, which puts further upward pressure on premiums. Talk about a "race to the bottom."

Having the choice of evading such regulations should make healthy people more secure. But the Shadegg-DeMint bill could even make less healthy individuals more secure. Many high-risk consumers certainly would benefit from having the option of lowering their premiums by declining coverage they don't need. Should teetotalers really be required to purchase coverage for alcoholism treatment (44 states)? Moreover, Pauly and colleagues find that administrative costs account for most of the price difference between the individual and employer markets. Those costs run 30 to 40 percent of premiums in the individual market, but only 5 to 25 percent in the employer market. Giving people the choice of purchasing coverage from anywhere in the country would allow even the not-so-healthy to seek out carriers who hold down that administrative mark-up, perhaps through higher volume individual sales or sales to large groups (churches, etc.). The point is that it is entirely possible that expanding choice could provide more security than laws limiting choice, even for the intended beneficiaries of those laws.

In essence, health-insurance regulation is a product. We pay government to ensure, among other things, that carriers actually pay our hospital bills. When we see regulation this way, it should come as no surprise that we are likely to see quality improvements and cost savings once its producers (the states) are forced to be competitors, rather than indulged as monopolists. Not only that, but the quality and price of related products (the coverage itself) would improve in an environment that is more competitive and more open to innovation.

Just as a pluralistic society that respects civil liberties ultimately makes for a stronger nation with fewer enemies, an open economy with few barriers to choice could ultimately provide ordinary people with the economic security we typically pursue — but fail to obtain — by limiting choice. My aim is not to establish that choice increases economic security always and everywhere. It is more to ask whether the presumed tradeoff really exists, or whether we can use choice to promote economic security in areas where we traditionally have not — particularly for those at the margins, and particularly in healthcare.

— Michael F. Cannon is director of health-policy studies at the Cato Institute, and co-author of Healthy Competition: What's Holding Back Health Care and How to Free It, which will be released by Cato this month. Portions of this article originally appeared in The New Republic Online.

Posted by Adam Cahn at October 14, 2005 05:41 PM

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