Krugman’s Table D'Hote: Delusive Broccoli

“Why? When people choose not to buy broccoli, they don’t make broccoli unavailable to those who want it. But when people don’t buy health insurance until they get sick — which is what happens in the absence of a mandate — the resulting worsening of the risk pool makes insurance more expensive, and often unaffordable, for those who remain. As a result, unregulated health insurance basically doesn’t work, and never has.

There are at least two ways to address this reality — which is, by the way, very much an issue involving interstate commerce, and hence a valid federal concern. One is to tax everyone — healthy and sick alike — and use the money raised to provide health coverage. That’s what Medicare and Medicaid do. The other is to require that everyone buy insurance, while aiding those for whom this is a financial hardship.” - Broccoli and Bad Faith, Paul Krugman, 03/29/2012, New York Times


One might want to examine the following statement more closely:


“But when people don’t buy health insurance until they get sick — which is what happens in the absence of a mandate — the resulting worsening of the risk pool makes insurance more expensive, and often unaffordable, for those who remain. As a result, unregulated health insurance basically doesn’t work, and never has.”

Krugman’s statement is backwards. Krugman is substituting the concept of mandate for the concepts of the pre-existing condition clause and the risk selection process [underwriting the risk]. Stated alternatively, Krugman is stating that without a mandate the risk pool [collection of underlying risks] deteriorates when people don’t buy health insurance until they get sick when in fact the collection of underlying risks remains unchanged as anti-selection is avoided by a pre-existing condition clause and risk selection aka underwriting the risk. That is to say, in order for Krugman’s statement to be correct if would have to be written as: …..in the absence of a pre-existing condition clause and medical underwriting, anti-selection occurs hence driving up the price to insure the underlying collection of risks.

The next question is how in the world does private insurance work well without a mandate? According to Krugman  "in the absence of a mandate — the resulting worsening of the risk pool makes insurance more expensive" however no such mandate exists in life insurance and that particular private insurance program works well. What about private property that is insured without mandate? That insurance program works well. What about pet health insurance? No mandate and the plan works. Hence putting forth "mandates" and asserting "worsening of the risk pool" concluded by "makes insurance more expensive" is a sweeping fallacious statement.

Looking at Krugman’s statement from another angle, its actually the “mandate” in conjunction with the elimination of pre-existing condition clause and the elimination of underwriting that makes the underlying collection of risk characteristics deteriorate. How so? If all comers are insured, as Krugman suggests in the following statement “The other is to require that everyone buy insurance, while aiding those for whom this is a financial hardship“ then he is making the implicit assumption and explicit assumption based on his prior statement of “…..don’t buy health insurance until they get sick” as he assumes all comers are healthy and totally insurable as they are purchasing insurance before they are sick. Nay, nay! The collection of all comers would be made up of some healthy, some healthy but with penned up demand for health maintenance, some unhealthy with acute problems and some unhealthy with chronic problems. Hence the assumption Krugman makes is that the healthy comers somehow, someway outweigh the unhealthy comers in the area of cost and by some magical pixie dust phenomena known as “insurance” the risk characteristic and associated cost disappears.


Examining Krugman’s other statement:

　

“There are at least two ways to address this reality — which is, by the way, very much an issue involving interstate commerce, and hence a valid federal concern. One is to tax everyone — healthy and sick alike — and use the money raised to provide health coverage. That’s what Medicare and Medicaid do. The other is to require that everyone buy insurance, while aiding those for whom this is a financial hardship.”

Krugman yet again substitutes concepts. Krugman substitutes a social insurance [social welfare plan] concept/argument for a private welfare plan [private insurance] concept/argument. What Krugman is stating, in effect, is that the entire field of insurance, both private and public, is based upon social insurance concepts which is fallacious. Moreover, he fails to tell the reader that “tax” and more succinctly escalating tax over time, in social insurance [social welfare plans] is a substitute for “reserve” in private insurance [private welfare plans]. That is, in a private insurance plan adequate premium supports reserves that are in anticipation of future losses. In most social insurance schemes, no reserve exists for future losses [does the phrase “unfunded future liability” ring a bell?] hence the private insurance “reserve” for future losses becomes escalating tax over time in social insurance schemes as no reserve exists hence increasing taxes function to pay for unfunded future losses [fund future losses = increasing tax].

One can only surmise that there is economist Krugman, then there is Mr. Krugman, and finally there is columnist Krugman.