POLICY: Last shot of the Cannon?

Michael Cannon has written a response to my response to him. Even ignoring the issue about my personal HSA, we’re really talking past each other. Cannon doesn’t think our discussion is fruitful, and in truth it’s not. He wants to discuss the vast majority of his paper which looks at the role of HSAs within our current system. To me our current system is so broken, the introduction of HSAs (at least in the limited form they now exist which is all we’re likely to get for now) is pretty irrelevant, and a minor incremental change—albeit one away from the compulsory social insurance that, he correctly states, I advocate. Frankly in the next five years neither of us is going to get our way…so this argument is about what comes next.

The argument I want to have is a theoretical one about what would happen if we had essentially a completely personalized account-based system, as he advocates in his Large HSA proposal. As I explained at length before, I think that a significant number of people would take the money and by no or minimal insurance coverage. So apparently does he.

Large HSAs would give workers far greater freedom of choice. Workers could use their HSA funds (and non-HSA funds) to purchase insurance from their employer or any other source. Alternatively, they could forgo insurance to build larger HSA balances.

Now lets just assume that over say 20 years people really do build up huge HSA balances, and so when they need the money for their individual health crisis in year 20, they can pay for it all themselves. Even accepting that this would happen and that young healthies (His “students”) could buy a cheap heavily underwritten very high deductible policy for the early years, my question is what would happen in Year One? The money that would cover the sick in a compulsory social insurance pool, would have been extracted and instead be sitting in the personal accounts of the “students”. So when the sick start incurring huge health care costs, the money to pay them must come from somewhere. Unless the people who get sick had already saved up the huge amount they need or were allowed to buy into the cheap underwritten catastrophic plans, (both of which are totally unrealistic and the latter of which would destroy those plans as a profitable business), then that money must come from the taxpayer, or the providers (in the form of non-payment for services rendered).

This is the problem that I just don’t understand about the individual account theory. This is after all about the crux of insurance, which Cannon believes can work in a voluntary, HSA-based system. I just wish someone promoting those accounts would explain why I don’t understand how they overcome that issue rather than continually ignoring it.


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  1. I think you are talking past each other because for Cannon “insurance” is about a fair exchange of value among members of a mutual risk pool. He distinguishes this contractual mutuality-by-consent from the implied mutuality-by-geography-coupled-with-coersion presumed in the notion of social insurance.
    If we leave Medicare out of the equation, I think the actuaries can come up with a premium structure that covers both the “students” and the “professors” with whatever insurance contract they want. The premiums will change for the “professors” because the theoretically-bad admixture of distinct risk profiles will be seperated by letting the “students” opt into their own pool. This is true. In his age-based example, 50 year-olds will mutually-insure each other against (essentially) every expenditure, and 20 year-olds will mutually insure each other against “catastrophic” expenditures. If people’s private information about health status and prognosis is good enough that this turns into a genuine risk-based example, you could well put the comprehensive policy into a death spiral by adverse selection — but! The HDHP option is available to the “professors”, and if it is not agressively underwritten (i.e. it isn’t an approximately ideal mutual risk pool, and retains some characteristics of social insurance) maybe the “professors” all end-up in it so their catastrophic risks are shared with the “students”. I am not sure that total utility changes very much. I shall have to think about this, and see whether a real economist has studied the question.

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