California’s Universal Health Care

Gov. Schwarzenegger has unveiled his new plan for universal health care for all people in California. This is a big topic and as such it is a difficult one to discuss in a single blog post, so I’m not going to do it. There is one thing that caught my attention, the idea of community rating in terms of health insurance premiums.

Why is this important? Well, the idea of community rating is that everybody is charged the same insurance rate in a defined community irrespective of age, gender, health history, etc. All that matters is are you in the community and what are the costs for that community as a whole. In insurance lingo this is called a pooling equilibrium. That is, everybody is put into the same pool when it comes to figuring out insurance premiums. Why is this interesting? Well, without regulations enforcing the pooling equilibrium such an equilibrium is “broken” by a seperating equilibrium. A seperating equilibrium is where insurance companies would offer more than one insurance policy with different premiums/deductibles to induce people to self-select. If you are generally healthy and lead a fairly non-risky lifestyle having a low monthly premium, but a high deductible might appeal to you. Thus, healthy people end up leaving the pooling equilibrium and since only the unhealthy are left in the pool, it is no longer viable.

Is this forced pooling equilibrium a good thing? Well that is hard to say. There could be some equity concerns here, and when the economy is not perfectly competitive seperating efficiency and equity is not possible. That is, equity concerns could have implications for efficiency. Or to put it in simpler terms, if the economic pie becomes to unequal it could be that it has an adverse impact on the size of the pie. My initial feeling though is that not a great deal of thought has gone into Schwarzenegger’s plan and that doesn’t bode well for either equity or efficiency.

FILED UNDER: Economics and Business, Health, US Politics,
Steve Verdon
About Steve Verdon
Steve has a B.A. in Economics from the University of California, Los Angeles and attended graduate school at The George Washington University, leaving school shortly before staring work on his dissertation when his first child was born. He works in the energy industry and prior to that worked at the Bureau of Labor Statistics in the Division of Price Index and Number Research. He joined the staff at OTB in November 2004.

Comments

  1. Anderson says:

    Well, without regulations enforcing the pooling equilibrium such an equilibrium is “broken” by a seperating equilibrium.

    I don’t pretend to understand the plan, but I’ve seen where buying health insurance will now be mandatory, like car insurance. Does that correct the opt-out problem, if no one’s allowed to opt out?

  2. Steve Verdon says:

    No, the breaking of a pooling equilibrium isn’t opting out of insurance, but out of the pool. The new proposal will prevent people from leaving the pool.

  3. dutchmarbel says:

    In the Netherlands we have a mandatory basic health insurance (same amount for everybody, insurers have to accept everybody). In addition you can have “supplementary health insurance”, where the insurance companies can compete – and can refuse candidates.

  4. Steven Plunk says:

    Government makes it all about insurance rather than look at costs. No solution will be had until we look at runaway costs.

  5. anjin-san says:

    At least we are moving in the right direction. If we wish to think of ourselves a a civilized nation, it is not unreasonable that the richest country in the history of the world should be able to provide minimal health care to everyone.

    I am waiting for another chorus of “French, British and Canadian health care systems are on the verge of collapse” stories and posts. (You know, the ones we have been hearing for about 25 years now) Funny, my friends in those countries are telling me that their health care systems are doing just fine, thanks so much…

  6. Bret says:

    If we wish to think of ourselves a a civilized nation, it is not unreasonable that the richest country in the history of the world should be able to provide minimal health care to everyone shouldn’t have to steal from it’s own citizens.

    Fixed it for you.

  7. Steve Verdon says:

    I am waiting for another chorus of “French, British and Canadian health care systems are on the verge of collapse” stories and posts.

    Well, not the French, but the Canadian system is in bad financial straights and so is the English. I know empirical evidence probably doesn’t mean much to you anjin-san, but it doesn’t look good.

    The measures also seem certain to add to the anger that erupted last week after Ipswich Hospital in Suffolk admitted it had forfeited £2.4 million because it treated patients too quickly, having already agreed a 122-day minimum waiting time with East Suffolk Primary Care Trust (PCT), its funding body. The hospital finished the last financial year £16.7 million in the red.

    I’m sure you’ll tell us that all that red ink and minimum wait times is actually a good thing.

    Oh, and why don’t you tell me how many MRI machine’s Canada has on a per-capita basis. Did you know the U.S. is first when it comes to MRIs on a per-capita basis? Funny how the nitwits who bemoan the massive spending in the U.S. don’t take things like this into consideration.

    Funny, my friends in those countries are telling me that their health care systems are doing just fine, thanks so much…

    They are probably healthy. Minimum wait times cost them nothing is they aren’t sick and they don’t affect them. Funny that. Your friends aren’t lying you just aren’t getting a complete picture…that is the problem when relying solely on anecdotal evidence.

  8. anjin-san says:

    Bret,

    A fine example of what Bob Dylan calls “A passion for dumbness”.

  9. anjin-san says:

    Steve,

    Are the assumptions you make about my friends supposed to be some sort of display of your superior analytical powers?

    Actually several of the folks I mentioned have had serious medical problems in the last few years, one of which required multiple microsurgeries to repair.

    And is the tale of one hospital suffering financial woes your idea of conclusive empirical data? Apparently it is you that the concept means little to. You have concluded that the Canadian system is in trouble on the basis of one sample?

    The for profit hospital that serves my community just got done telling us it might have to stop serving about 4,000 local folks because of its fiscal issues. I guess hospitals with financial problems are not limited to our friends north of the border.

    As for “Funny how the nitwits who bemoan the massive spending in the U.S. don’t take things like this into consideration.”

    Well I did not mention massive spending, so I am not sure what you are referring to.

    As for the MRI machines, wow, you know how to use Google? Maybe I should just concede the argument right now! Lets see, heres a fun factoid that comes to use via Google:

    The 1990s witnessed the closure of roughly 500 community hospitals across the US. In 2000, Tampa, FL officials authorized $3.5 million from local tax revenues to bailout Tampa General Hospital. Gosh, can a hospital go broke under our free-booting capitalist system? Is Florida a hotbed of red socialism? Is Steve talking thru his hat??? Stay tuned to this channel…

  10. Steve Verdon says:

    And is the tale of one hospital suffering financial woes your idea of conclusive empirical data? Apparently it is you that the concept means little to. You have concluded that the Canadian system is in trouble on the basis of one sample?

    You really should follow the links. That way you wont look like an ignorant fool. It isn’t just one hospital, but quite a few.

    The for profit hospital that serves my community just got done telling us it might have to stop serving about 4,000 local folks because of its fiscal issues. I guess hospitals with financial problems are not limited to our friends north of the border.

    The problems with health care aren’t going to be solved by simply making hospitals for-profit. The problems are laws, regulations and insurance that has created perverse incentives.

    As for the MRI machines, wow, you know how to use Google?

    I already knew the answer, I was checking to see if you did, and apparently the answer is, “No.” Canada is 13th (with between 4 and 5 machines per million people). Funny how that civilized society can’t seem to buy enough of the machines to better serve its population.

    Gosh, can a hospital go broke under our free-booting capitalist system?

    With comments like this you just demonstrate what a complete nitwit you are on this topic. The U.S. system isn’t “free-booting capitalism” but is instead a bizzare and confusing patch-work system of markets, governments, and distortionary laws. For example, the tax exempt status of health insurance benefits is a distortion. The laws requiring hospitals to treat people irrespective of ability to pay creates perverse incentives. Then add on the massive subsidies for one of the largest demographics that also happen to be extremely intensive users of health care resources. Describing our system in anyway as being “capitalistic” simply highlights, in very bright colors, how extremely ignorant you are.

  11. anjin-san says:

    Steve,

    Apparently you are unable to distinguish between a sarcastic post made in the wee hours of the morning and serious debate.

    At any rate, for an allegedly grown man to indulge in an amount of name calling that would embarrass a 16 year old that had even a bit of class tells me that you are one angry dude. Whats your problem bud? Perhaps you are just one of those guys who has to take himself very seriously because no one else does.

  12. Steve Verdon says:

    Oh…so that’s it…the ol’ lame, “I was only joking.” Okay then. You simply aren’t serious about this discussion, fine.

    And the amatuer psych evaluation is also very lame. And I seem to recall some of your more angry comments as well….