April 22, 2012

Will Obama's medical plan cost us all?

Colin Read: Everybody's Business

---- — The Supreme Court has again been thrust into the divisive politics of our nation.

Depending on your viewpoint, its intervention may be either welcome or detested, just as in the Bush v. Gore Florida ballot challenge.

The current controversy has two dimensions. One is a concern about the expansion of health-care costs. I will address that next week.

The other point has to do with the perception of government control in our lives. As a friend reminds me, people don't like being told what to do, almost regardless of whether or not it is good for us, as individuals or a nation.

Like it or not, the federal government makes many economic decisions on our behalf. We must all pay toward Social Security, which, interestingly, is called social insurance in Canada. We pay this even when we are young and far from retirement.

Mandates for our own prudence are not unusual. Our founding fathers passed a law in 1790 that required all shipowners to purchase hospital insurance for their crews. Two years later, a Congress that still contained many constitutional framers required all able-bodied citizens to purchase a gun, and, six years after, all seamen were required to purchase their own hospital insurance.

It is a stretch to argue that the constitution framers banned the federal government from delving into our individual economic affairs. It happens often.

We may argue that government should not be able to mandate that we buy insurance if we want the rather essential privilege of driving a car or that all past, present and future parents — and even those who will never become parents — pay for education costs. However, that is a political argument, not a constitutional one. In this sense, the Supreme Court is prevailing on a debate we must have amongst ourselves.

I view this not as politics or law but as economics. The primary economic goal is to ensure we strike the right balance of healthfulness and cost. We can have the most expensive medical system in the world (wait, I think we do) and yet not have the world's best outcomes.

Instead, we should strive for a balance in which our children are healthy, our workers are productive and our seniors can retire in comfort and dignity. Once we figure out how to create and deliver such a system, we must decide who pays for it.

All of us have a stake in a healthful society. In this nation, unlike most others, our grand compromise in the 1940s placed this responsibility on a combination of employers and employees. They are required to hire private insurance companies to pool the premiums and administer the plans.

It appears, though, that we have hit the proverbial brick wall. Private insurance companies would rather withdraw from a market than be required to carry high-risk individuals with pre-existing conditions unless they can pool these liabilities across the larger population.

If an insurance company is required to cover those with pre-existing conditions, we have the classic insurance problem of adverse selection. All healthy people will exit an insurance pool until the moment they get sick. Then, the only people who would voluntarily subscribe to health insurance are the sick. Premiums would go up dramatically, and coverage would go down.

That's what happened when Washington State put together a plan that forbid barring coverage for those with pre-existing conditions, combined with a mandate for all to subscribe. The mandate was removed by the courts, and the system disintegrated.

The Supreme Court has placed itself squarely in the design of an optimal economic system. The system passed by Congress may be a politically imperfect solution to a looming problem. It can be likened to a human body. The justices are now going to remove a heart, a lung or a liver. They are beginning to see that to tamper with the mandate is to effectively kill the entire bill.

That is appropriate, if the bill is indeed unconstitutional. It is dangerous if the Supreme Court is dabbling once again in politics. Depending on which direction five judges go, one side or the other will take solace.

However, our entire nation is weakened. First, we will remain unable to fix an ailing system, even if imperfectly. Second, we will become as skeptical of a politicized Supreme Court as we have with a politically dysfunctional Congress.

Our country can ill afford either outcome.

Colin Read is the chair of the Department of Economics and Finance at SUNY Plattsburgh. His tenth book, Great Minds in Finance — the Efficient Market Hypothesists, is coming out this fall. Continue the discussion at