At EconLog, Dave Henderson notes that today marks the effective date of some provisions of ObamaCare, including the one that makes it difficult to offer insurance with low lifetime limits. So-called mini-med insurance plans are beginning to be phased out. Henderson writes,
The mini-meds cannot promise absolute coverage in the case of catastrophic health problems, and they were never intended to. That’s one problem with such plans. But which is worse: having insurance that doesn’t cover all catastrophic expenses or having no insurance at all?
I’ve been pondering that question, and the truth is, I’m not sure of the answer. I’m no fan of ObamaCare, and as Walter Williams drilled into me, low quality goods are part of the optimal stock of goods. On the other hand, I think a case can be made that banning mini-meds is good policy.
Think about the health coverage we buy as being a bundle of two components. The first component is insulation. At a time of illness, we need not worry about weighing the costs and benefits of medical procedures. We can just focus on the benefits. If a procedure has an expected marginal benefit above zero, we go for it. Someone else picks up the tab.
The second component is pure insurance. This means that we transfer wealth from the states of the world in which we are relatively healthy to the states of the world in which we are relatively sick and need the money more desperately.
Pure insurance is socially valuable, but it always comes packaged with a bit of insulation, which is socially detrimental. Insulation leads to price insensitivity, which, when combined with entry restrictions, leads to overpriced healthcare. It also leads to overconsumption of healthcare. Robin Hanson argues that “we could cut U.S. medical spending in half without substantial net health costs.“
Different types of health coverage have different mixes of insulation and pure insurance. Relative to a typical plan, high-deductible policies offer more pure insurance and less insulation. Mini-meds, however, offer more insulation and less pure insurance.
People disagree about how much of a problem health cost insulation is, but it seems to me that it must be a substantial one. Think about a world in which health insurance is banned: what is the price of an MRI in this world? What is the price in our world?
So is it better for people to have mini-med plans or no health coverage at all? The answer might be no coverage at all. If we can’t have laissez-faire, probably the best government-directed healthcare system would be a lot like Singapore’s, in which everyone has a high-deductible plan (high insurance, low insulation). Banning mini-meds brings us closer to Singapore’s system by eliminating coverage that does the opposite (low insurance, high insulation).