Friday, November 02, 2012
The Unappreciated Link between Health Insurance and Job Creation
Thanks to Prawfs for having me back. I hope to blog about a variety of things this time around, mostly in my primary areas of interest. But first, I've got a post that I've been thinking about for a while, and while I've got the bully pulpit, I'll try it out.
After two presidential debates (three if you count the “foreign policy” debate), a vice-presidential debate, and eighteen months of campaigning, the candidates seem to be missing a critical link between health care reform and job creation. This link undermines Governor Romney’s plan to create jobs through tax cuts as much as it represents a missed opportunity by President Obama to defend his signature legislation. I have views about the best way to bring affordable health insurance to everyone, but I won’t express those here. I don't want my main point to get bogged down in the details of how you get there. Instead, I’ll only point out the importance of widespread availability of such insurance.
More than tax cuts, and more than abandoned regulation, small businesses need customers. Health insurance is a critical but unappreciated link to provide these customers. I’ll give a personal example. In May of this year, my wife and I committed to a modest renovation of a part of our home. A couple months later, just before work was to start, I was diagnosed with an extremely rare condition that took two surgeons about six hours to repair . The bill for my five day stay at the hospital was about $133,000, and the doctor’s bills, CAT scans, and MRIs will easily put the total over $150,000. But I was insured. We had to pay for a chunk of the operation – about $2000 after all copays.
Coincidentally, work started on the house the day I came home from the hospital. We could continue with the plan, and our contractor and his employees, subcontractors, and supply houses will all see business. Our contractor may make over $250,000 per year, but I doubt it based on what we are paying for this work and what we are getting in return. He’s just a decent guy doing good work, but he needs customers – especially in a tough economy – and we would have been one less job. Our project isn’t the biggest one in the world; indeed, it’s a fraction of what I would have owed the hospital if I were uninsured. My insurance created jobs, and I am sure my insurance is not alone in that respect.
Insurance not only creates customers, it can help directly create jobs. Just last month, my sister—a podiatrist—seriously considered selling her practice for almost zero equity to become an employee at a large practice. This would have likely cut her lifetime earnings in half and forced her to lay off her three staff, one of whom is our mother! Why would she do such a thing? To get health insurance, of course. She has been denied several times due to a “preexisting condition” that is related to her sex, essentially healed, and never life threatening. In other words, she cannot get insurance at any price. Her staff is all insured by other means, so she can’t form a group, and even if she did her coverage would likely be limited by preexisting conditions. She is holding on for the ability to buy insurance under the new law, and we are all hoping it will come soon. She is surely not alone.
My sister’s story ties to a bigger job creation issue. Without the ability to obtain affordable healthcare, people will simply not form businesses and hire other people. They will remain employees. This is a much bigger implication of insurance cost reduction. I know how much small group insurance plans can cost; I used to negotiate them for my law firm. We wound up having to purchase major medical insurance while self-insuring the first $5,000 of medical expenses because our premiums rose at astronomical rates. My partners and our employees were not happy with the bureaucracy this created, but the alternatives were daunting. This is not an incentive to form a business, and shaving some percentage points of my top tax rate won't get me to create a business if I think I can't get insurance at any price. That's me, by the way. Not that I would ever quit being a professor (the greatest job in the world), but because of my condition I won't be able to get insurance without. I would be an employee for the rest of my life, without even the ability to take a year off that isn't a sabbatical that includes coverage. So much for harnessing bright ideas to hire others.Maybe it would be better to have more expensive insurance available to fewer people like we do now, but justifying the status quo should take into account all the effects of insurance. Accessible, affordable health insurance creates jobs in ways no one is talking about, but they should be.
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Insurance is a religion. As such, it is based on ignorance of the economic facts of life. Any scientific analysis will show that:
1. It is a bad investment, since it returns less than 80% on the premium dollar, and often much less (65% in the case of NFIP and 2% in the case of title insurance). Folks will respond that, in spite of the obvious loss, it is justified by the fact that it moderates risk. That attitude is even held by the brain-dead who play Roulette, Slots, Bingo and the Lottery (and who get married)! Actually, the return on a Roulette spin is around 95%, far better than the return on insurance, and paying an insurance premium is no fun whatsoever.
2. Of two persons, one who spends his life insured and another who doesn't, the uninsured who covers his own medical expenses will die tens of thousands of dollars richer, not only because of the lousy return on the insurance premium mentioned above, but also because he can seek better and cheaper treatment in places like Mexico, Thailand and the Czech Republic, where his insurance would be worthless. The uninsured is free to change jobs, take high-pay contracts or do independent work, take years off work to travel, study or build a house, even take a job in Buenos Aires, as I have done, at no disadvantage. The insured does not have that liberty-- he has made himself a prisoner to superstition.
3. The stats on insurance suffer from an evidence bias: every time someone suffers a loss in a disaster like Sandy, the first question posed by folks (especially on National Proletarian Radio) is "Did they have insurance"? NPR never asks folks in Peoria, where nothing ever happens, how much they've wasted in insurance premiums over the years. Of course, they won't have a clue anyway, especially if they've been covered by an employer's group theft insurance. The "accessible, affordable health insurance" you speak of destroys jobs on net everywhere, especially in Peoria, "in ways no one is talking about, but they should be."
Posted by: Jimbino | Nov 2, 2012 11:02:57 AM
Good points, Jimbino - I started writing a comment, but it got so long, I'm going to do a followup post tomorrow discussing your comment.
Posted by: Michael Risch | Nov 2, 2012 11:49:39 AM
Insurance is not a religion as that term is often defined.
1. The soundness of the investment has to take into consideration various criteria. Insuring a cheap car for theft is silly but mandatory liability insurance in an urban area, less so. Health insurance provides important resources, especially to certain people (e.g., those with children) and who pays when the "bet" is lost in the remainder? Here the insurance is for the society as a whole. We can just deny the 'general welfare' and not spread the risk, I guess. See, e.g., denying coverage for pre-existing conditions.
2. The "superstition" here is unclear since the insured when hit by a car will have the means to pay w/o declaring bankruptcy or something. If the uninsured has a medical condition, the lack of a system that spreads the risk also can reduce his/her liberty. The same applies to social insurance like police or fire coverage which back in the day was often only private in character. If we simply didn't have to pay for such public services, some might have more money. Is this ideal?
3. The label for NPR makes it hard to take this seriously but moving along ... "nothing" usually happens in NYC of this caliber. Thus, some might not buy home owner insurance for their 200K home. Ten years down the road, no more home. The money they saved might have led them to take another vacation or two, but still ...
Insurance is a key aspect of modern industry. The faith based sentiment here seems to go the other way. Have faith nothing will happen etc.
Posted by: Joe | Nov 2, 2012 4:31:50 PM
"Jimbino" may just be a troll, and so likely I shouldn't bother responding to him, but he seems to misunderstand the basic economic rationale for insurance. It's the diminishing marginal utility of wealth.
Assuming insurance companies will make a profit, buying insurance of course is never "profitable" for the insured in the sense a good investment would be -- that is, in expected-value nominal-dollar terms. But the whole point is that it is net *utility* increasing, not net dollar-increasing. It's unlikely I'll get my insurance payout, but when I do, I really need the money. Whereas the per-dollar utility loss of the premium payments is comparatively small.
If you don't understand that point, nothing you say about insurance will be sensible.
Posted by: BDG | Nov 2, 2012 4:50:08 PM
Insurance is not a religion as that term is often defined.
Jimbino gladly responds:
1. "mandatory liability insurance" is NOT mandatory--not in CA and not in TX. "Proof of financial responsibility" is, but insurance is one of many options. The folks of NH live happily without any compulsion, as in "Live Free or Die."
2. "The 'superstition' here is unclear since the insured when hit by a car will have the means to pay w/o declaring bankruptcy or something."
Insurance encourages careless driving and careless living. I'd prefer to live in a country (like most all of those in world history) that did not require insurance of the non-superstitious.
3. "some might not buy home owner insurance for their 200K home. Ten years down the road, no more home. The money they saved might have led them to take another vacation or two, but still ..." is a trenchant comment.
You buy health insurance or death insurance and, lo and behold, ten years down the road, you are dead. Just as you don't wish, on your deathbed, that you'd worked a lot more overtime, you won't wish that you had sacrificed food, fun, education and opportunity lifelong in order to have more death insurance.
"Jimbino ... seems to misunderstand the basic economic rationale for insurance. It's the diminishing marginal utility of wealth."
A person who employs ad hominem in place of argument will, of course, not be expected to explain how it is that the Black Amerikan Male gains from the "diminishing marginal utility of wealth" in the course of his lifelong (till death at 71) sacrifice to pay for the Social Security and Medicare insurance of the indigent widows of Wealthy White Guys (till death at 81).
Posted by: Jimbino | Nov 2, 2012 6:25:20 PM
I'll let the reply speak for itself.
Posted by: Joe | Nov 2, 2012 11:41:58 PM
I think President Obama should fire Clinton and hire you as his new Secretary of Explaining Stuff! Good breakdown. While some people who are simply dead set against the concept will never appreciate or even try to comprehend your rationale, I believe you give a sound analysis and explanation of the benefits of Obamacare as it relates to potential job creation. I too support it, but perhaps it is because I too see things differently because it hits closer to home (with an entrepreneurial wife who cannot get affordable healthcare due to preexisting conditions). It's easy to oppose something and scrutinize its impractical aspects from the comforts provided by an ivory tower. And it is easy to see insurance as a bad investment until you experience $150,000 in medical care debt in the blink of an eye. What is difficult is trying to walk an inch, let alone a mile, in someone else's shoes.
Posted by: Kendall Isaac | Nov 3, 2012 10:57:02 PM
No, what's difficult, Kendall Isaac, is to put aside your superstition and use the brain that Darwin gave you to think rationally.
Thinking rationally, you will conclude that participating in insurance of any kind is either foolish, fraudulent or feeding on the greater ignorance of others.
Yes, a person who has pre-existing conditions, is hypochondriac, a breeding female or an old White indolent widow will gain from insurance, but at the expense of the young, hard-working, single, child-free, Black male, whom, of course, we can't bear to free or educate, lest he learn to abstain from our sick married White breeding health-insurance game.
Posted by: Jimbino | Nov 4, 2012 12:53:25 AM
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