Seriously thoughtful US/Europe Cultural Divide -- Musings

[Ea]

This, quoted from the third paragraph here: Liberalism, says what I was trying to say:

... In Europe, the term "liberalism" is closer to the economic outlook of American economic conservatives. "According to Harry Girvetz and Minoque Kenneth "contemporary liberalism has come to represent different things to Americans and Europeans: In the United States it is associated with the welfare-state policies of the New Deal program of Democratic President Franklin D. Roosevelt, whereas in Europe liberals are more commonly conservative in their political and economic outlook".[8]"

[Greg Anos]

Originally Posted by Xenophon

So... Nate the great is voluntarily uninsured, and views this as choosing to bet that his medical expenses will be less than the insurance would have been.

Zerospinboson appears to be making the argument that insurance programs are untenable if the only people who enter the program are those who realistically expect to take more money out than they put in.

It seems to me that both of you are right! (more or less...) In the US insurance system, Nate's side of the bet leaves him open to the possibility of bankruptcy if he has bet wrong. In the mean time, he's paying out of pocket for any medical expenses he incurs. He is not "free-riding" in the sense that he's liable for any and all medical expenses that come his way.

But zsb's point is also correct. If you allow too much in the way of self-selection, you destroy the insurance program. It only works by spreading the risk over many people -- in the full knowledge that most of those people will pay a bit more than their actual expenses in any given year, and a few will pay less (sometimes far less).

In our admittedly partly broken US system there are several things that help encourage people not to make the bet that Nate is making. First, as people move into their prime earning years (middle-age, more or less), they begin to accumulate assets -- a house, retirement accounts, and the like. As these people have more to lose, they have more incentive to sign up with the insurance program. Second, a standard feature of all US health insurance programs (the private ones, not Medi*) is an exclusion for pre-existing conditions. Any problem that you develop while uninsured will not be covered for the first two years of insurance. Thus, if Nate is hit by a truck tomorrow (let's hope not!) and requires ongoing medical care as a result he would not be able to add health insurance so as to collect immediately. Instead, he'd pay into the plan for two years with full coverage for anything new, but not for the results of that hypothetical truck accident. Only after two years would his insurance pay out anything at all for a pre-existing condition. And that, too, is part of the bet that Nate is making. Finally, there's the convenience factor -- it's much easier to do sane budgeting when you can realistically predict your expenses. Medical insurance is one vehicle for making medical expenses predictable.

So my take is that Nate isn't a free-rider, but that he has self-selected out of the insurance pool. Zsb's point about the problems of self-selection is an important one! But from an my American (and admittedly fairly radical) point of view, Nate is free to make that decision. The question I would ask is this: "Is a two-year exclusion for pre-existing conditions enough to reduce self-selection bias sufficiently to keep the insurance pool viable?" I'm not an expert in this area, so I honestly don't know the answer to that question.

One other thing about Nate's choice. He may not be able to get an individual policy at all later. Private insurtance is not required to accept everybody. So they may evaluate Nate and decide not to insure him at all when he decides to get insurance. This is the gaping hole in US health care. Should statisically sicker peple pay more? Yes. But if no insurer will maintain a high-priced high risk pool, access becomes meaningless...

This bites particular hard on older people who have been laid off and have exhausted their COBRA benefits. They may have paid in for 20 or 30 years to a group policy tied to a job, but having lost the job, find themselves antiselected out of any health care policies at all...

[zerospinboson]

Originally Posted by Xenophon

So my take is that Nate isn't a free-rider, but that he has self-selected out of the insurance pool. Zsb's point about the problems of self-selection is an important one!

Paying as little as you can get away with in order to qualify for membership of some program (be that road tax or insurance) is also free-riding; it's just that there are a few more obstacles put in your path, or checks that exist to prevent free-riding that you have to take into account. Anyway, sure he runs a small risk by not being insured now, but that isn't really all that interesting. The point is that, with a system that exists for longer time periods, an amount of money has to come in every year both to cover the current pool of insured, and to save for some time down the road, to compensate for the increased costs that come with age-related diseases in an aging population.

Sidenote: This is how "they" more or less made sure SocSec would fail. Because of changes made in the early '80s to the way socsec was being funded there now isn't enough money in the pot to pay for the retirement plans of the future. (that is, because a bunch of important people noticed that a lot of money was being put in there that wasn't really "doing" anything, who then took it "to invest in innovation" leaving an promissory note to "pay it back later" with interest. They never did, of course, because by the time they needed to start paying it back nobody wanted to decrease spending anymore)

By choosing to not pay now, and only start paying once you feel you'll need it, you're not just increasing the premiums that people have to pay now, you're also promising to take a disproportionate amount in the future; the only reason you can "get away with" that is because of the relative anonymity the system offers.
And because the insurance providers know that people do this, they are then justified to increase the premiums for those currently insured (in order to offset those future extra costs), and the late-insured will have more reason to say "it's too expensive now", thus closing the loop. (As well as excluding people who might be able to afford it in a mandatory system, but not when after the premiums are increased in order to correct for this type of free-riding.)

But from my American (and admittedly fairly radical) point of view, Nate is free to make that decision. The question I would ask is this: "Is a two-year exclusion for pre-existing conditions enough to reduce self-selection bias sufficiently to keep the insurance pool viable?"

At issue are not just preexisting conditions: the (i suspect more costly) problem is that normally you would've been (statistically) saving for your own later-in-life conditions. When you don't, you're forcing other (real) people to bear those costs for you.
The fact that you don't know the people whom you're forcing to pay for you doesn't detract from that at all. "Insurance" is not a game or control mechanism invented by the government, nor by evil corporations (although abuse may happen): insurance is a mutual agreement between those who choose to be insured to pay for each others possible costs.

[Sparrow]

Originally Posted by Ralph Sir Edward

Should statisically sicker peple pay more? Yes. But if no insurer will maintain a high-priced high risk pool, access becomes meaningless...

Should perfectly healthy people pay more if they're genetically at higher risk of developing certain conditions?
I think there is a lot of resistance in Europe to letting insurance companies have access to that type of information.
Cherry picking has too big a downside.

[pilotbob]

Originally Posted by Sparrow

Should perfectly healthy people pay more if they're genetically at higher risk of developing certain conditions?
I think there is a lot of resistance in Europe to letting insurance companies have access to that type of information.

It is strange though, because this is how most other insurance rates are calculated. Actuarials do all types of research and calculations on this. Think about car insurance. Your rate is based on your age, your driving record, your school record (good student discount) your marriage status, how many miles you drive a year, what you use the car for, where you park it, etc. Life insurance policies rates are based on your age, health, if you are a smoker, and many require a medical exam.

Also, most states in the US mandate a minimal amount of liability insurance if you own/register a car.

Once again not an easy issue.

@socialism - I think in the US when "know" what socialism is. Conservatives use it to label liberals to make them sound much worse than they are. However, I don't think anyone believes that the New Deal was actually socialism, since we know what that term really means. Very few if any people in the US, that I am aware of want the "state" to own and run things. Heck many people want alot of current things privatized like the Post Office and Air Traffic Control and Air Port Security.

BOb

[Xenophon]

@Zerospinboson: I now understand one more spot where differences of common usage obscure communication. Typical American discourse names the problem you are talking about as "self selection" and reserves the terms "free rider" or "free riding" for those who obtain a particular benefit without paying for it at all. Both are real issues, but we use different names for them because the typical American attitude is that self selection is unfortunate (in that it complicates the problem of maintaining a viable insurance pool) but is not immoral or wrong. Thus, we consider self selection something to be dealt with via careful design of policy terms.

By comparison, free riding is something that is viewed as being wrong and immoral. And sometimes illegal as well. So you and Nate the great have been failing to communicate because (from an American point of view) you are accusing him of "doing something wrong" by using the term "free riding." But common American attitudes say that what he is doing isn't wrong or immoral. Instead, we worry about fixing the insurance so that he has incentives to sign up and pay rather than self selecting out of the pool. (My favorite scheme for this is the Medical Savings Account approach, which has been hamstrung by rules and limits imposed by congress, but that's a topic for another message.)

I think that all of us, Nate the great included, are aware of the issues of self selection. I can't read Nate's mind, but I suspect that he'll likely be part of that insurance pool long before the age-related higher costs you mention really kick in. The self selection problem is real, but manageable -- or so I think.

Xenophon

[Xenophon]

Originally Posted by zerospinboson

[GREAT BIG SNIP]
At issue are not just preexisting conditions: the (i suspect more costly) problem is that normally you would've been (statistically) saving for your own later-in-life conditions. When you don't, you're forcing other (real) people to bear those costs for you.
The fact that you don't know the people whom you're forcing to pay for you doesn't detract from that at all. "Insurance" is not a game or control mechanism invented by the government, nor by evil corporations (although abuse may happen): insurance is a mutual agreement between those who choose to be insured to pay for each others possible costs.

My favorite fix for the issue of self-selection is the Medical Savings Account (a.k.a MSA) plan that has been in very limited use here in the US in the past decade or so. It's been "very limited" because congress authorized an "experiment" of no more than (I think) 50,000 MSAs nationwide. And has never increased the number.

As usual, I'll probably blow it on the specific numbers I give in the description that follows! The general sense of the description is correct, but the exact numbers are probably off. If you want exact details, do your own research!

The idea is basically that instead of a traditional health-care plan or HMO or preferred provider plan or whatever, you and your employer fund a two things:

• A savings account whose contents may be used only for medical expenses.
• A high-deductible catastrophic care plan.

The high-deductible plan typically kicks in at $10,000 of medical expenses in any given year. Before that point it pays out nothing. Because of the very large deductible, it's quite inexpensive to purchase. Additionally, these plans typically have a very low copay when they finally kick in. I believe numbers in the 0%-1% range are typical, but I may be wrong.

The savings account is funded each year with a fixed contribution from employer and employee. That contribution is usually comparable to the delta between the cost of traditional health insurance and the cost of that high-deductible insurance plan. It is important to note that the delta fails to cover the full deductible on the catastrophic plan in any given year!

The key difference between an MSA and other plans in the US is that the individual -- the consumer of health-care services -- owns the cash balance in the MSA. It's their money! If they don't spend it this year, it builds up for future use. If there's any left when you die, it's part of your estate and can be left to your heirs.

The idea is that people are more careful with their own money than with other people's money (the infamous OPM).

In the case of someone like Nate the great, a plan like this would have him saving now to pay for his own expenses later. Part of that savings would be direct (via the balance in the MSA); the other part would be through the insurance pool for the high-deductible catastrophic coverage plan.

Various academics have studied the health outcomes and expenses of the (not very many) people covered by MSAs in the US. My recollection is that overall health outcomes are comparable to other forms of insurance (a good sign!). Further, MSA owners tend to be more engaged in asking questions of their medical providers (like "is this test really needed?" or "How likely is it that this procedure will fix my problem?"), and so wind up consuming moderately less medical services (also a good sign, given the comparable outcomes).

Sadly, expenses for MSA owners do not appear to be reduced. At least one study suggests that this is a result of a structural problem with pricing of health-care in the US -- insurance companies negotiate fixed prices, but individuals pay "list", which is always the highest price going. The largest provider of MSA plans in the country has been attempting to address this problem by giving MSA owners an "insurance card" that lets them use the insurance company as their payment agent (and price negotiator!) for their MSAs. When last I checked into things it was too soon to know whether or not this would work around the pricing problem.

There are some other unanswered questions that need more research. These include (but are not limited to):

• Did self-selection issues lead to a population of MSA-owners that is net healthier than the general population? (initial studies say no, but there's not enough data yet to give a definitive answer.)
• Is the MSA-owners' greater involvement in health-care decisions a result of the "it's my money" factor, or is it a result of better-educated and more sophisticated people self-selecting into the program? This one is wide open research-wise, as far as I am aware.
• What's the best choice for sizing the gap between the yearly contribution to the MSA and the point where the catastrophic insurance plan kicks in? There's been no opportunity to study this, because the design of these plans is congressionally mandated.

How 'bout it, Nate? Does that sound like a plan that would get your attention?

Xenophon

[zerospinboson]

Originally Posted by Xenophon

Typical American discourse names the problem you are talking about as "self selection" and reserves the terms "free rider" or "free riding" for those who obtain a particular benefit without paying for it at all. Both are real issues, but we use different names for them because the typical American attitude is that self selection is unfortunate (in that it complicates the problem of maintaining a viable insurance pool) but is not immoral or wrong. Thus, we consider self selection something to be dealt with via careful design of policy terms.

By comparison, free riding is something that is viewed as being wrong and immoral. And sometimes illegal as well.
Xenophon

I see. The distinction seems to be a specious one, though, sort of like one of those other recent inventions, "enhanced interrogation," so I don't really see how "unfortunate" applies in the situation. On the level of implementation, perhaps, but I do think it's harmful to invent lots of euphemisms, as they allow people to rationalize too many things away too easily.
Perhaps these word games are your alternative to British puns?

Anyway, those MSAs sound fun (and would be something I would be interested in if we had them here). Shame the implementation is so nerfed, though.

off-topic: this might be interesting/informative if you've got 60$ or so to spare, as a general introduction to lots of current policy (came out just before the money crisis, though). Pick it up when it's 70% off, though; sales happen at least once a year for every course. [it can probably also be found on various sites that shall not be mentioned here]

[pdurrant]

Only sort-of interest free. Interest is charged, but 'only' at the rate of inflation.

Repayment starts when earnings rise above £15,000 pa. But it's entirely possible that the repayments won't even cover the interest charged initially, so the debt will continue to grow until one earns considerably more than £15,000 pa.

Originally Posted by HarryT

English universities can currently charge students a maximum of £3000 per year in tuition fees, but there is a government-run "student loan" system which will lend students the money, interest-free, until they start work and have to repay it. ie in theory, at least, access to university education is not dependent upon one's ability to pay for it "up front".

[Xenophon]

Originally Posted by zerospinboson

[SNIP stuff on non-SocSec related issues]
Sidenote: This is how "they" more or less made sure SocSec would fail. Because of changes made in the early '80s to the way socsec was being funded there now isn't enough money in the pot to pay for the retirement plans of the future. (that is, because a bunch of important people noticed that a lot of money was being put in there that wasn't really "doing" anything, who then took it "to invest in innovation" leaving an promissory note to "pay it back later" with interest. They never did, of course, because by the time they needed to start paying it back nobody wanted to decrease spending anymore)

Actually, the issue with Social Security is both simpler and more complicated than what you describe! I see it as coming in several parts.

First, Social Security is not and never has been an insurance plan! Rather, it has always been a system whereby current tax revenues are spent on current benefits for retirees (and a few other groups like widows-and-orphans and the severely disabled). Political rhetoric notwithstanding, Social Security has been well-known to be a simple transfer payment system from day -1 -- that is, this was a deliberate design feature of the system even before it was first enacted.

Secondly, US government accounting is done purely on a cash basis. This form of accounting would get any corporation's executives thrown in jail if they tried to get away with using it! One consequence of cash accounting is that in reality there is no such thing as a "lock box" or "trust fund" for Social Security. Rather, any surpluses have made the official deficit numbers smaller in the year they were collected. Meanwhile the contents of the supposed trust fund are... Treasury Bills and Notes. And those, in turn, represent a call upon the future taxing ability of the US Government. Nothing more, and nothing less.

If an investment firm does this, and claims that they are investing the money we call it a Ponzi Scam and prosecute the principles of the firm for fraud. To simplify only a little with a non-investing example, the equivalent in my own finances would be to take some of my retirement savings, spend it on a fancy vacation (or a bad investment, or any non-productive asset) and replace the money in the retirement account with an IOU that says "I'll pay myself back. Really."

Aside: The original designers of SocSec had a good reason for designing the program as they did! In order to avoid the "phony IOU" problem, they would have had to invest any SocSec surpluses in non-government assets. If the program were actuarially sound, this would rapidly result in the government having a controlling interest in almost everything, which even the New Deal folks thought would be a bad idea. My readings in the congressional record of the day suggest that the designers of SocSec expected the program to be run without a surplus -- thus effectively (and publicly!) admitting that it was a transfer payment scheme rather than insurance. But that admission doesn't fly politically, so our politicians call it "insurance" even though the public has no legal right to or property interest in the "promised" SocSec benefits. Aside: I call that "a lie." Others may view it differently.

Anyway, when you write that "a lot of money was being put in there that wasn't really "doing" anything" you have fallen prey to the rhetoric from the politicians. Quite a large surplus was indeed coming in... but due to the above effects it was just being spent immediately. None of the surplus was ever being invested to cover future SocSec expenses. Not once, since the very beginning of the program back in the 1930s.

If we wanted to treat Social Security as actual insurance, complete with individual property rights in the future payouts we would need a significant change in Federal law. An those future payouts would represent the single largest obligation of the US government, by far.

Xenophon

[zerospinboson]

Originally Posted by Xenophon

Rather, any surpluses have made the official deficit numbers smaller in the year they were collected. Meanwhile the contents of the supposed trust fund are... Treasury Bills and Notes. And those, in turn, represent a call upon the future taxing ability of the US Government. Nothing more, and nothing less.

If an investment firm does this, and claims that they are investing the money we call it a Ponzi Scam and prosecute the principles of the firm for fraud.

Indeed. Odd how some pigs are different.

Anyway, when you write that "a lot of money was being put in there that wasn't really "doing" anything" you have fallen prey to the rhetoric from the politicians. Quite a large surplus was indeed coming in... but due to the above effects it was just being spent immediately. None of the surplus was ever being invested to cover future SocSec expenses. Not once, since the very beginning of the program back in the 1930s.

As i understood it, that SSTF did exist, hence my use of the party line on the issue. That clarifies that, then.

[Nate the great]

Originally Posted by zerospinboson

I'm annoyed because I'm being forced to explain concepts here that should already have been covered in high school level economics classes, and because I get the feeling I'm talking to a wall, for one reason or the other.

Originally Posted by zerospinboson

this might be interesting/informative if you've got 60$ or so to spare, as a general introduction to lots of current policy (came out just before the money crisis, though). Pick it up when it's 70% off, though; sales happen at least once a year for every course. [it can probably also be found on various sites that shall not be mentioned here]

I'm going to ignore the insult you implied here, and respond to your point.

You seem to have forgotten the principle that everyone acts in their own best interest. I have identified what is in my own best interest, and act accordingly. Why is that so hard to understand?

[Xenophon]

Originally Posted by zerospinboson

As i understood it, that SSTF did exist, hence my use of the party line on the issue. That clarifies that, then.

Well, there's a thing in legal theory called the "Social Security Trust Fund." So in that sense, the SSTF "exists." But its only assets are T-bills and T-notes. And those, as I noted above, are purely calls on future taxing capability of the government, and nothing more. Just IOUs.

One side effect of this is that asking "will SocSec remain solvent" just isn't a relevant question at all. The right questions to ask are these:

1. When will the cash flow of the SocSec program switch from positive to negative?
2. When that change happens, how will we pay the bills?
3. Why have our congress-critters been extracting surplus "SocSec payments" all these years while effectively lieing about their purpose and disposition.
4. With respect to the previous question, why do this with the single most regressive tax imposed by the Federal Government? Note that even the "fair tax" crowd is against regressive taxes -- everyone says that taxing the poor more than the rich is just wrong. So why have we been doing so for at least the past 30+ years?

Xenophon

[wodin]

Originally Posted by zerospinboson

Indeed. Odd how some pigs are different.

Not different, just "more equal"

[Laz116]

Originally Posted by Nate the great

This I can respond to.

First of all, where are you located, ZSB? I want to understand your viewpoint.

You're upset becuase you think I'm gaming the system. You think I should pay at 30 becuase I will need it at 50. I disagree. In a given year, I pay for insurance based on the probability of needing it. I do not pay for it based on whether I will need it 10 years from now.

I do not pay to support a "system", I pay based on the probability of my own need.

Wow... that's just horrible imo. Over the matter of a life span you will be gaming the system with that attitude.

One thing is to reject insurance, government health care and so forth. An entirely different thing is to exploit a system which is build on the foundation that we all pay a median as insurance so that we don't have to sell our houses if we get a costly disease. What you do is maximising your advantage at the cost of everyone else. All the people out there paying insurance all their lives pay a higher median because you only insure yourself when the probability of having to use the insurance is high.

Correct me if I'm wrong, but that is just completely unacceptable in a democratic society. You are a consumer, not at citizen.