Center for Business and Public Policy
at the University of Illinois, Urbana-Champaign

Senator Evan Bayh (D, Indiana) wrote an interesting piece for the New York Times this week explaining why he is not going to run for reelection despite polls showing that he is well ahead in the race there.  Here’s what he had to say:

 There are many causes for the dysfunction: strident partisanship, unyielding ideology, a corrosive system of campaign financing, gerrymandering of House districts, endless filibusters, holds on executive appointees in the Senate, dwindling social interaction between senators of opposing parties and a caucus system that promotes party unity at the expense of bipartisan consensus.

 The one that catches my interest is filibustering, since it is the threat of a filibuster which has prevented progress on the 2009 health reform bills.  In short, without a 60 vote Democratic majority the Republicans can filibuster the health legislation, preventing the bill from being voted on by the entire Senate.  Hence, the Senate is dysfunctional.

 First, of course, whether you think this is dysfunctional or not depends on what you mean by dysfunctional.  Many people, often myself included, would argue that rules that prevent the Senate from passing legislation may actually do more good than harm.  Over time, both parties have made use of the filibuster.  The party in power usually argues that the abuse of Senate procedure is unprecedented, while the minority party usually argues that Senate procedures exist to prevent the tyranny of the majority.  George Will often argues that gridlocked Washington is Washington at its best.  The speeches remain the same, only who reads which lines changes depending on the prevailing political winds.  But, let’s, for the sake of argument, propose that (1) majority rule is a good thing, and (2) it is a good thing for the Senate to have up or down votes on legislation.

 Now, like many Americans my understanding for Senate procedures comes primarily from the film Mr. Smith Goes to Washington.  So, when I hear the word “filibuster” I expect that it means that some Senator or other has to stand up in front of the Senate and talk and talk and talk to prevent the majority from moving forward on a bill.  And, if that’s the case, then why don’t the Democrats just let the Republicans filibuster the health bill?  No doubt if forced to talk 24 hours a day, the Republicans will provide late-night comedians with some pretty good fodder.  Sooner or later the American public will get tired of watching the Senate literally do nothing, and public opinion will force the Republicans to relent and let the bill move forward for a vote.

 Now, while I’m ambivalent about the bill, this seems like a pretty good strategy to me, so I was surprised that nobody has even mentioned the “Jimmy Stewart Option” along with the so-called “nuclear option” for moving forward on health legislation.

 Senators are nothing if not skilled in Senate procedures, so there had to be a reason, and here it is.  Basically, if the Republicans want to filibuster, and the Democrats play the Jimmy Stewart card, the Republicans just need to have one person talking.  And, if at any time there are not 51 Senators present, the speaker can “suggest the absence of a quorum,” in which case the roll is called and if there are not 51 Senators present, the Senate must adjourn until a quorum is established.  So, while the filibustering Republicans would only need 1 Senator on the floor to keep speaking, the Democrats would actually need 51 Senators to be nearby in order to maintain a quorum.

 In other words, if I understand the rules correctly, and there’s no guarantee that I do although I read this fascinating document on “Filibusters and Cloture in the Senate,” the Jimmy Stewart option is much more costly for the majority than it is for the minority.   Here’s the relevant passage from page 9:

 Today, all-night sessions are very unusual. The Senate may not even convene earlier or remain in session later when a filibuster is in progress than it does on other days. One reason may be that filibusters are not the extraordinary and unusual occurrences that they once were. Another may be that Senators are less willing to endure the inconvenience and discomfort of prolonged sessions.

The latter point is important because late-night or all-night sessions put as much or more of a burden on the proponents of the question being debated than on its opponents. The Senators participating in the filibuster need only ensure that at least one of their number always is present on the floor to speak. The proponents of the question, however, need to ensure that a majority of the Senate is present or at least available to respond to a quorum call or roll call vote. If, late in the evening or in the middle of the night, a Senator suggests the absence of a quorum and a quorum does not appear, the Senate must adjourn or at least suspend its proceedings until a quorum is established. This works to the advantage of the filibustering Senators, so the burden rests on their opponents to ensure that the constitutional quorum requirement always can be met.

On February 18, the President Obama signed an Executive Order establishing the “National Commission on Fiscal Responsibility and Reform.”  The Commission will consist of 18 members.  Of these, 6 will be appointed by President Obama (with no more than 4 of the 6 being Democrats).  The remaining 18 will be divided up “3 each” among Democratic and Republican House members and Democratic and Republican Senators. 

The stated mission of this Commission is to identify “policies to improve the fiscal situation in the medium term and to achieve fiscal sustainability over the long run.”

The mission is a critical one.  As I have noted in other posts (see, for example, my post from 2/2/10 on the 2011 budget or my post on 1/14/10 about why deficits matter), the long-term fiscal outlook is dire.   While the short-term deficits are being driven by a combination of recession-induced revenue declines, aggressive spending policies targeted at averting an even worse credit crunch and/or recession (e.g., TARP, stimulus, etc), as well as high levels of spending on Iraq and Afghanistan, the most serious long-term fiscal problems arise as a result of the runaway growth of entitlement programs.  Social Security, Medicare, and Medicaid are growing faster than the economy as a result of an aging population, rising health care costs, and the important interaction of these two factors. 

Commissions have a long history in the U.S., some of them successful in terms of leading to real changes (e.g., the Greenspan Commission in 1983) and some of them not (e.g., the President’s Commission to Strengthen Social Security in 2001 on whose staff I served.)  One of the features of this new commission is that it will be dominated by sitting members of Congress.  IF (1) these members are ones with real power (e.g., chairs and ranking minority members of the key committees like Senate Finance and House Ways and Means) and IF (2) these members can somehow move beyond ideological bickering and election-year politics and come to some meaningful compromises, THEN such a Commission could have an extraordinarily meaningful and positive impact on our fiscal future.  If, however, they simply resort to their political safe zones - with Republicans calling for balancing budgets solely through spending cuts and Democrats calling for balancing budgets solely through tax increases - then I would not expect much to come out of it.   

The political outlook is not promising, however.  Recall that only a month or so ago - in January 2010 - the Senate failed to garner the 60 votes needed to pass the “Bipartisan Task Force for Responsible Fiscal Action Act of 2010.”  In a blog on this same subject (click here to see it), Stephen Huth notes that “even before members have been appointed, both liberals and conservatives are dooming the work …”

The economic consequences are real.  As the Financial Times reported in January, the credit rating agency Moody’s announced that the U.S. could be at risk of losing its tripple A credit rating in the future unless it took steps to reduce its long-term deficits.  While Treasury Secretary Geithner says the U.S. will “never lose” its top rating, the very fact that the Treasury Secretary has to engage in such a conversation is an indication of just how serious are the risks posed by long-term deficits.  As noted by CNBC, “even if a downgrade in US credit is not imminent, the underlying conditions that raised such fears are worrying investors about what the future holds.” And even if our credit rating is not at risk, the long-run tax burden required to finance projected levels of spending are so enormous that I am afraid we will risk something far more important - our potential for sustained economic growth.

In short, I am in the “glass half empty” camp when it comes to my political assessment of the Commission’s likely impact.  I hope they prove me wrong …

This week, I’ve been travelling in Paris, to make a presentation at an OECD meeting on “encouraging low-carbon vehicle technologies”.  Now I’ve moved on to Barcelona, and in a few days fly to Istanbul.  I’ve been sightseeing “old Europe”, with very narrow city streets that are really just alleys at best, where walkers share the space with intermittent bicycles and mopeds.  The occasional delivery van is the only four wheeled vehicle that must venture down some of these alleys, just to reach the shops where they have to deliver their goods.

It is all very quaint, and picturesque.  Anybody who really needs to get somewhere just rides the metro.  Perhaps the dense grid of subway stops is not surprising in a city the size of Paris, but Barcelona has a similar number of stops on many routes, all around the city.  The population is about 3 million.  I don’t think that any city of 3 million in the United States has dug so many subway lines for convenient public transportation.

The narrow streets and convenient subways reflect the culture and history of the place.  Given the topic of my presentation, however, I have to wonder if it reflects the current policies in place.   Has the high tax on gasoline (“petrol”) encouraged these citizens to buy mopeds instead of cars, and to vote more funding for public transportation?  Or has the number of mopeds and subways induced the people to vote for high taxes on petrol?

I don’t know, and it would be very difficult to sort out the direction of causation.  But I do know that “old” Europe is a long way ahead of the U.S. in terms of low carbon footprint.  We in the U.S. see congested highways as an indication that we need to spend more money on highways!  That kind of reaction will never get any of us out of our cars and into public transportation.  For that we need infrastructure, which requires exactly the wording I used above: “culture and history”.  It cannot be built overnight.  The existing trajectory for building of highway infrastructure will put us on the path to future emissions, which sow the seeds of future global warming.

I’m easily as patriotic as the next American.  Last night I cheered when Bode Miller won the gold metal in the men’s “super combined event” at the Vancouver Olympics.  But I really have to wonder if the rest of the world is right that the United States has already caused more than its share of what will be a huge global warming problem, and we’re just not doing enough about it.  It’s not much warmer yet, but CO2 concentrations have already increased enough to guarantee another 5 degrees warmer climate.  If we don’t change our culture of driving, our way of life could be history.

 “It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, …”   Charles Dickens, A Tale of Two Cities

 Almost 30 years ago, the then young David Stockman was about give up his U. S. House seat in Michigan to become the budget director for the incoming Reagan Administration, leading the conservative charge for lower taxes and the futile fight for restrained federal spending.  Before he assumed his new position, he accompanied an interviewer from the Atlantic back to his rural home in Michigan.  When he and the interviewer approached his family’s farm, they passed a new tennis complex that seemed strangely out of place in this setting. 

The interviewer asked Stockman if tennis was a major sport in this area. Stockman responded that it wasn’t and explained that the local township decided to build the courts because the jurisdiction had received federal revenue sharing funds for recreation projects.  Stockman explained: “It’s all right, I suppose, but these people would never have taxed themselves to build that. Not these tight-fisted taxpayers! As long as someone is giving them the money, sure, they are willing to spend it. But they would never have used their own money.” 

This is instructive in the current environment one year after the approval of the nearly $800 billion federal stimulus package.  Because of the effects of the recession, state and local government in Illinois and around the nation are experiencing the worst fiscal crisis in memory.  The state of Illinois is facing a shortfall in the neighborhood of $13 billion for the next fiscal year and is delinquent in billions of dollars of promised payments to universities, health care providers and state vendors.  Local governments including schools are planning for major cutbacks.  In Chicago, the Chicago Transit Authority which provides vital transportation services for the city is on the verge of financial collapse. 

The anomaly is that in this environment of austerity and retrenchment, governments are considering hugely expensive, wildly ambitious projects.  For example, the Champaign-Urbana area is considering a $30-35 million broad band infrastructure program to bring high speed Internet service to poor, “underserved” neighborhoods.  A collateral benefit would be access to better Internet service for some businesses, schools, and government organizations.  Even the huge price tag would not guarantee the ongoing operation of the network since annual fees would be needed for this—fees that are likely not to be paid. 

Residents of Champaign County were surprised to learn recently that the Illinois Department of Transportation was considering widening I-74 to six lanes from the western edge of Champaign to Mahomet at a potential cost of $71 million.  No local public official could recall any request of this nature and many people expressed concern about the need for such a project.  Note that I-74 is only four lanes through the more congested Champaign-Urban area.  Even I-57 south of I-80 in southern Cook County is also four lanes. 

In January, Gov. Pat Quinn and Sen. Dick Durbin announced an ambitious $1.1 billion “high speed” rail program to connect Chicago and St. Louis.  Illinois’ high speed rail plan should not be confused with true high-speed rail similar to Japan or Europe.  A recent Commerce Connection article referred to 45 minute, 17 trips-a-day service from Champaign to Chicago.  This is not the high speed rail proposed by Quinn and Durbin.  Instead, the $1.1 billion would increase speeds slightly to shorten the trip from Chicago to St. Louis from five to four hours.  The problem with high speed rail in a low-density environment is that it simply doesn’t work.  How many people travel from downtown Chicago to downtown St. Louis?  Would the promise of a four-hour trip get people out of their cars or away from airlines?  At the same time that high speed passenger rail is being considered, freight transportation improvements are sorely needed in the Chicago area to maintain the region’s economic competitiveness. 

What is the connection between the Champaign-Urbana broad band proposal, the I-74 expansion, and the high speed rail initiative?  Like the tennis courts in David Stockman’s rural Michigan, they are all to be paid for largely with federal money.  These are projects that state and local taxpayers would never pay for themselves and they would never use federal money for these purposes if the funds were fungible. 

This is the tragedy of the federal stimulus program.  If the economy needed a stimulus, why not spend the funds for high priority, high potential projects?  There is no requirement that funds be spent frivolously to promote employment.  However, it proved impossible to establish rational priorities as part of the hastily-constructed program. 

Another failure of the stimulus program is also illustrated in these three examples.  The stimulus bill was approved in February 2009.  Over one year later, the three programs discussed here are only in the planning stage.  They are still months away from funding if they are finally approved and years away from actually being implemented. By that time, with any luck, the stimulus will not be needed.  Unfortunately, good intentions do not guarantee good results.

Here’s a link to a really fascinating interview that Fortune Magazine did with Dr. Delos Cosgrove, CEO of Cleveland Clinic, one of the best and most efficient health operations in the country.  Many people have argued that if we want to really improve the U.S. system, we need to move to a Cleveland-like system, with salaried doctors in a non-profit, integrated care environment.   In a time of so much gloom and doom about the future of health care, Cosgrove’s sensible approach to success is a real sign of hope.  Of course, the real open question is whether Cleveland can be imitated and whether the model can be spread across the country.  After all, it is one thing to say that I would be a better basketball player if I were more like Michael Jordan, and it is quite another to make me more like Michael Jordan.  (Others have argued that the success might not even be real.  For example, they argue that places like Cleveland and the Mayo Clinic can be traced to the fact that their patients are relatively wealthy and highly educated, rather than the superiority of their business model.  Personally, I’m convinced that the business model seems to work well enough that we should at least be looking into whether it can be expanded to other places.)

Energy is an integral input to nearly all aspects of our economy.  Energy policies, especially policies aimed at curbing greenhouse gas emissions associated with energy consumption, thus have sizable effects on nearly all participants in our economy.  The distribution of these effects across participants is an important consideration of policy design.

The incidence of the costs of energy or climate policy manifests itself in at least two major ways.  First, policy affects the “uses side” of income, through product prices.  A carbon tax may disproportionately increase the price of gasoline and electricity, two goods that represent a higher share of expenditure for poorer households.  The uses side incidence is then regressive.  Second, policy affects the “sources side” of income, through factor prices.  A carbon tax may be more burdensome to capital-intensive industries and disproportionately reduce the return to capital.  If so, and if capital provides a higher share of income for richer households, then the sources side incidence may be progressive.

In a new working paper, however, Garth Heutel and I find that the sources side burden is regressive – just like the uses side.  The reason is that high income households do not get more of their income from capital than from labor.  The holding of wealth is not the same as the flow of income. 

The data for capital income indicate one major problem with using annual income to categorize families from rich to poor: the group with the lowest annual income has the highest fraction of income from capital.  This group includes a lot of retired individuals who have no labor income and are living off their retirement savings.  These individuals may not really be “poor” on a lifetime basis.  In other words, we would like to classify households by the stock of lifetime wealth, but instead we are classifying them by a flow of annual income.  If individuals smooth consumption over their lifetime, then total annual consumption might be a good proxy for lifetime income (or at least, a better proxy than annual income). 

So we also categorized all households in the Consumer Expenditure Survey by total annual expenditures (as a proxy for permanent income).  Still, however, the group with the highest annual expenditure has a higher ratio of labor income to capital income than does the group with the lowest annual expenditure.

Thus, the sources-side burden is also regressive.  The carbon tax applies to the energy-intensive sector, which uses relatively more capital than labor in production.  Thus it reduces the demand for capital, and it reduces the return to capital relative to the wage rate.  This places less burden on those with more labor income – the high income group.

The same occurs for annual consumption deciles instead of annual income deciles.  Both the uses-side and sources-side incidences are regressive.  When defined by annual consumption groups, however, the uses-side incidence is more regressive than when defined by annual income, and the sources-side incidence is less regressive than when defined by annual income.

This topic could use more research.  But this research so far is one indication that a cap-and-trade system or carbon tax might hurt low-income groups in two ways, instead of just one!

News from the West Coast today that Anthem Blue Cross, one of the largest private insurers in California, is raising the prices for the 800,000 or so people it sells individual health insurance policies by up to 39%.  The Obama administration is not happy, to say the least.  HHS Secretary Kathleen Sebelius fired off an angry letter to Anthem and its parent company, WellPoint, demanding an explanation.  Of course, this also comes at a time when the Obama administration is struggling to make the case that health insurance reform is urgently needed, so this also provides a perfect example for them.  The letter is kind of cool, since I have never seen an angry letter from a Cabinet Secretary before.  The text is here.

What I find more interesting as an economist, however, is WellPoint’s response.  They haven’t replied formally to the letter yet, but in a statement WellPoint’s spokesman said the following:

“As medical costs increase across our member population, premium increases to the entire membership pool result. Unfortunately, in the weak economy many people who do not have health conditions are foregoing buying insurance. This leaves fewer people, often with significantly greater medical needs, in the insured pool. We regret the impact this has on our members.”

So, where’s the economics lesson here?  In a competitive market, health insurance prices are driven by the cost of caring for the average person in the insurance pool.  That means that healthy people usually pay more than their actual cost of care and sick people pay less.  Although healthy people pay more than their average health expenditures in any year, they’re still willing to buy insurance because it provides them with, well, insurance.  In the event that they have a car accident or other unexpected, large expenditure on health care, they’re protected against the financial consequences.  This works fine as long as the premium (driven by the average cost of care) doesn’t get too high above what the healthy people are willing to pay for insurance against relatively rare events.

Now, enter the recession.  People are losing their jobs, wages for the employed are stagnating, and people are losing money on housing and financial investments.  In light of these challenges, some healthy people are looking at their health insurance premiums, their income, and the likely cost of going without insurance, and deciding not to buy health insurance.

This is a perfectly rational response to increasing premiums and decreasing incomes.  However, it results in the remaining people in the insurance people being, on average, sicker.  This means that the average cost of caring for the insurance pool will be higher, which will necessitate higher premiums.

Unfortunately (and interestingly if you study this stuff), this leads to the potential for what is known as an “adverse selection death spiral.”  The idea is that once premiums rise, the healthiest people who are still buying insurance may decide to drop out of the pool.  Since the remaining pool is even less healthy on average, premiums will once again need to rise to cover their higher medical needs.  And then the cycle starts over again.  In extreme cases, the premium just keeps going up until nobody is willing to buy insurance.

So, what next?  Well, the adverse selection story holds in competitive markets.  But, you can already see Secretary Sebelius telegraphing the administration’s punches.  They will argue that the price increases are not due to competitive pressure and an increasingly unhealthy insurance pool but rather a greedy, for-profit insurer trying to take advantage of people when they’re down.  For their part, WellPoint/Anthem will argue that this just shows why health reform is needed, but health reform of a fundamentally different sort than Obama has proposed.

My prediction is that we’re headed for a highly charged series of Congressional hearings that boil down to an attempt to drive home to voters that something needs to be done.  Really went out on a limb, there, didn’t I?

Yes, I know that credit cards have gotten a bad name given the fact that so many families have gotten themselves deep into personal debt by not managing them effectively.  But a couple of interesting ideas have come across my desk recently that have me thinking that a “health care credit card” is an idea worth considering as part of an intelligent health care reform.

As background, my colleague Nolan Miller made a post last week about “The Health Reform House of Cards” in which he highlighted the difficulties in tackling reform.  He walks through the steps that one could take in order to put together a reform that actually works, highlighting how one reform element must be accompanied by other reform elements if it is all going to work.

As luck would have it, I recently received a proposal from a good friend of the College of Business, Jerry Carson.  In his proposal, which is much more detailed than what I will provide here, he outlines a system that appears to have many of the elements that Nolan calls for - and his approach has a role for health care credit cards.  I probably will not do Jerry’s proposal justice, but here are a few of the highlights …

First, require that everyone purchase a catastrophic loss health insurance policy.  In Jerry’s proposal, anyone could sell this insurance, including private insurers or the government.  Premiums would be based on the risk pool of the entire nation, which, in Jerry’s words is “the only true economical form of insurance - the broadest possible base with high deductibles.”  Policy terms would be the same without consideration of pre-existing conditions, and premiums would be tax deductible.  if insurers want to provide policies that wrap-around this catastrophic coverage by providing benefits that are more generous, they may do so, but such policies would not be tax deductible.  This would help limit the “Cadillac plan” problem that leads to inefficient over-utilization of health care services.  It also limits the tax burden arising from the “tax subsidy” of these plans.

Second, Jerry suggests allowing individuals to use a “health care credit card” that can be used at point-of-service.  These cards are with full recourse to the individual.  Private lenders can issue the cards, and again, if someone cannot get one then the government can issue one.  In the case that the government issues one, all services would be reviewed by a federal agency, and unpaid costs would be deducted from federal/state benefits.  As Jerry puts it, it would be “socialized health care without the free lunch.”  

Jerry is certainly not alone in trying to come up with creative ways to solve our health care dilemma by providing incentives for individuals to care about the cost of care (a focus on incentives and individual responsibility) while still protecting them from catastrophic losses (a focus on social insurance).  A few months ago, the esteemed economist Martin Feldstein (former President of the NBER and former CEA Chair for President Reagan) wrote an op-ed in the Washington Post that called for us to replace the current tax subsidy approach with a health care voucher system.  Interestingly, he also calls for “the government to issue a health-care credit card to every family along with the insurance voucher.”  

Health care reform is an enormously complex topic, and as Nolan’s blog and Feldstein’s op-ed both suggest, the solution requires a number of inter-locking pieces to work.  Both Jerry Carson’s and Marty Feldstein’s creative ideas may be the kind of innovation we need to get out of the current health care reform quagmire.

(written with Eeshani Kandpal)

Background: Eeshani Kandpal just returned a couple weeks ago from initial field work in the small, rural state of Uttarakhand, which is nestled in the Indian Himalayas.  She’s studying the effect of a program geared at improving women’s empowerment in this traditionally conservative area.  It seems as if the program is having a remarkably positive effect on these women’s lives, which got us thinking about why and how it seems to be working.

[Note:  I originally wrote this last week and scheduled it to post today.  Yesterday I read Uwe Reinhardt's post on the NYTimes Economix blog that expresses much the same sentiment with more real-world input and fewer of the blow-by-blow details.  If I hadn't written my post already, I might have just linked to his.  But, since the work is already done, I'll leave mine here.  If you are at all interested in health, I highly recommend reading everything Uwe writes at Economix.  Even when you don't agree on the conclusions, he's right on the facts and identifying the key issues.]

In the wake of President Obama’s falling approval ratings and last month’s stunning upset in the Massachusetts Senate race, I hear a lot of people saying that this is the inevitable result of Democratic hubris, and in particular of Obama and the Democrats trying to do too much on health care too quickly, especially when the country has not yet bounced back from the current, severe recession, is (still) fighting wars in Iraq and Afghanistan, and faces an ongoing a real terrorist threat.

I’m willing to concede the points in the last paragraph.  Maybe this wasn’t the time to try health care.  Arguably, though, given the Senate’s anti-filibuster rules, the chance may not come again for a long time.  I’m also not a huge fan of the bill because I don’t think it went far enough to contain cost growth, which I (and others) have said is the real threat to the system in the long run.  But, I think that those who argue that Obama and the Dems should have taken a more incremental approach to expanding access to health insurance also miss the mark.  Here’s why.

Suppose that you want to extend access to the health care system to the roughly 46 million uninsured people in the U.S. (or just the 80 percent of them who are U.S. citizens).  The least obtrusive way to do this in the context of the existing U.S. health care system would be to either expand Medicaid to cover wealthier people or to bolster the dysfunctional individual (non-employment-based) insurance market.  Now, Medicaid does a good job of providing basic care to poor people, especially children and their families, but because of its low reimbursement rates is probably not a great way to extend care more broadly.  And, any broad expansion of this government-run program would surely meet with strong opposition.  So, this leaves us with bolstering the individual market.

The individual market is the insurance market for people who don’t get insurance through their employers.  To put it bluntly, this market doesn’t work very well.  Only about 5% of the U.S. non-elderly population gets its health insurance through this market.  There are several reasons for this.  First, coverage is expensive because those buying insurance through the individual market do not have access to the economies of scale and bargaining power of employment-based coverage.  Second, those who seek to buy insurance on this market tend to be sicker than the population as a whole.  Insurers respond to this by charging higher prices based on medical history (“risk rating”), excluding pre-existing conditions, charging higher rates for coverage, putting annual or lifetime limits on benefits, or simply refusing to cover the sick.  And, in many states they can cancel an existing policy with little or no justification.

All this translates into private, individual coverage being very expensive at the same time those who might buy such policies are relatively poor.  This leaves us in a situation where the sick can’t get insurance and the well do not want insurance because it is too expensive.  As a result, there are few people for whom buying insurance on the individual market is an attractive option.

So, how do you fix it?  The first step would be to prevent insurers from engaging in the types of practices mentioned in the previous paragraph.  So, let’s require that insurers charge everyone the same price for insurance and must enroll anyone who is willing to buy insurance.  Let’s also prevent excluding pre-existing conditions and lifetime limits on benefits.  In other words, we outlaw “abusive insurance practices.”

Fine.  Now anyone who wants to buy insurance can buy it at any time.  How does a reasonable person react to this?  Well, if you are currently sick, you buy insurance.  But, suppose you aren’t sick.  A reasonable calculation would be to not buy insurance while you are well and take advantage of the prohibition on denying coverage in order to buy insurance only if you become sick.  The result of this will be that only sick people will have insurance and that, without healthy people in the risk pool to balance them out, premiums will have to be high.  So, even though everyone will be able to buy insurance, it will still be expensive to buy, and many insurers will find that it is simply not worth the trouble of insuring an exclusively sick population.

So, how do you bring down the cost of insurance?  The way to do this is to bring the healthy people into the risk pool.  After all, even though they don’t buy insurance while well, they are already benefiting from the system which guarantees them access to health care if they get sick.  In exchange for this guarantee, let’s force them to buy insurance early.  So, we mandate that individuals buy insurance.

The mandate puts healthy people into the risk pool, so now we have a mix of sick and healthy buying insurance from the individual market.  This should bring average prices down.  How might insurers react?  Well, all else equal, the insurer does better if it attracts a relatively healthy pool to its policies.  While the regulations above prevent insurers from explicitly excluding sick people, they can try to design policies that are implicitly more attractive to the healthy than the sick.  For example, they may exclude mental health benefits, refuse to cover weight-loss surgery, put their offices on the third floor of no-elevator buildings, etc.  But, these “dumping” practices are wasteful.  So, let’s prevent insurance companies from engaging in these practices by standardizing benefits.  This will have the additional benefit of making it easier for consumers to shop for plans since it will be easier to compare apples to apples.  And, if consumers become more sensitive to quality and price differences between plans, this will encourage plans to improve quality and lower price, which is an added bonus.

In fact, let’s push that idea further.  In order to encourage insurers to compete more vigorously, let’s set up insurance markets, or “exchanges,” where people can easily shop for plans.  This will also help people choose a health plan, an extremely complicated decision.

Finally, we need to face up to the fact that the uninsured are primarily poor.  This means that many of them will not be able to afford coverage no matter how well the individual insurance market works.  If we want to them to have access to private insurance, we’re going to have to help them pay for it.  So, let’s subsidize poor people to buy insurance through the private market.  We can do this in two ways.  We can either directly subsidize purchases of individual insurance policies or force employers to expand their insurance offerings by requiring employers to offer insurance or pay a penalty if they don’t.  But, if we’re going to subsidize individual insurance purchases, the money is going to have to come from somewhere.  So, we’ll have to increase taxes in one way or another.  (Aside: Clearly, the best way to do this is through a tax on tanning salons, as proposed in the Senate Bill.  The only question I have is why we didn’t come up with such a brilliant idea sooner.)

And there you have it.  If you want to expand coverage and you want to use the private market to do it, you quickly find yourself with a very big piece of legislation.  It’s a house of cards, and without any of the pieces it will quickly fall apart.  (Another aside: many people feel the penalties paid by individuals and employers who choose not to buy/offer insurance are insufficient in the current legislation, so the house of cards may be destined to tumble, anyway.  See this op-ed by Martin Feldstein.)

While going all the way may be too far, it is unclear whether there would have been a way to ease into reform.  Unfortunately, the one part of the bill that can be chopped out without jeopardizing the short-run goal of covering more people is the one that we really need to address to ensure the long-run viability of the system — the cost reduction part.  Even if we expand coverage in the short run, without addressing cost and especially the rate of cost growth, we’ll be right back in the position of insurance coverage being unaffordable for an ever-increasing segment of the population in a matter of years.