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Tuesday, October 01, 2013

Luck, Taxation, and the PPACA

I am not a health economist, nor a political scientist, so I’m not exactly the most qualified person to talk about today’s shutdown. But I am a law professor, and one of our birthrights is a sense of entitlement that allows us to write about anything at all, regardless of our level of expertise.

Moreover, unlike a lot of policy debates, I have a direct, personal stake in this one. My wife and I had twins on Christmas Eve, one of whom was born with major defects in his heart, aorta, esophagus, and lungs. While he is making amazing strides, he spent over three months in the NICU at Columbia and has been in and out of Columbia and Boston Children’s Hospital for months. Needless to say, I’ve been thinking a lot about medical costs lately.

Not surprisingly, my family is a direct beneficiary of the PPACA. My son has a laundry list of pre-existing conditions (nothing is more pre-existing than a congenital defect), and if his medical bills haven’t exceeded $2 million yet, they will by the time he turns one. And the PPACA has made it illegal for insurance companies to deny coverage based on pre-existing conditions, and prior to the PPACA insurance companies often imposed lifetime (!) benefits caps of $2 million, meaning that my son would be uninsurable before his first birthday. So I am admittedly not a neutral observer.

I don’t want to talk about the individual mandate issue, even though that is often at the heart of the debate. I think Uwe Reinholdt, in a single NY Times blog post, pretty much puts that whole topic to rest. In short, Americans want three things: universal access, affordable care, and no mandate. Unfortunately, only two of the three can exist at any one point in time. If someone promises you all three, that person is either lying or hasn’t thought things through. And at the end of the day, I think Americans want the first two more than the third, despite all the rhetoric to the contrary today.

Instead, I want to think a bit about the taxation/reduced-benefits-for-the-insured issue and how it relates to Obama’s controversial “You didn’t build that” statement. As Uwe Reinholdt points out in a different blog post, one cause of US exceptionalism in health care (and I don’t mean that as a compliment) is an attitudinal difference:

The vast majority of citizens in these countries view health care as a “social good” that is to be shared on the basis of need by all on roughly equal terms and is to be financed largely on the basis of ability to pay.

By contrast, Americans have never agreed on a shared social ethic that should govern their health system, as the current debate over health reform has made visibly and audibly clear.

Likely part of our opposition to viewing health care as a social good stems from the deep-seated libertarianism that runs through much of our political discourse. (It seems fair to say that even the American left is more libertarian than its European counterparts.) We view our money as our own (“I built it!”), and so if someone wants to take it—to, say, provide insurance for the less well-off—the justification burden is high. But there are two problems with that argument, one general and one perhaps more specific to health care issues.

More generally, our liberatarianism is likely tied to our perceptions that our economy is a meritocracy. Of course, we grossly overstate the degree of intergenerational mobility (the “American Dream” is more alive in Sweden than here), but there is an even deeper problem with the libertarian/meritocratic perspective: to a perhaps-disturbing degree, meritocracies reward generic lotteries.

In our economy, smart people rise to the top, but those smart people didn’t earn their intelligence, they were born with it. And to the extent that it was nurtured and cultured, that is due to their parents (since the returns on education are greatest when we are quite young, and thus before we are making many decisions on our own). And that work ethic? Again, significantly genetic and parental.

It’s true: you really didn’t build it, or at least not all of it. Which isn’t to argue for some sort of completely-leveling socialist state. Incentives are important, and those who take risks need rewards to compensate them. But once we realize that meritocracies are largely genetic and birth-parent lotteries, the moral claim on wealth becomes a bit weaker on the margin, and the moral argument for taking care of the less-lucky-in-birth becomes stronger.

More specifically to health care, many large health care shocks are purely random. It is perhaps easy to make “personal responsibility” arguments when debating how much help to give the smoker who gets lung cancer. But congenital heart defects? They afflict one in one hundred babies born every year—that’s about 42,000 of the 4.2 million annual births—and have no easily identifiable causes. Certainly the baby has done nothing wrong, and more often than not neither have the parents. It’s a just random. And this is true of plenty of cancers, heart attacks, strokes, and other high-cost medical problems.

And medical costs can be an expensive random shock. A single night in Columbia’s NICU costs $11,000, and that’s just for the nursing and general supervision (worth every cent). The neonatologist stopping by? That’s another $1,500. The x-rays, fluoroscopes, echocardiograms? More and more thousands. We received a single, 76-page bill for just part of our son’s NICU stay that totaled over $1.3 million.

Now, in our case, we were lucky. My wife’s company provides great insurance, and we will be able to weather the financial storm. (Our share of that $1.3M bill? $500.) But it is easy to see how even a short stay in the NICU can completely wipe out a family’s savings and drive them into bankruptcy.1

Now one way to approach the faultless un- or under-insured family whose finances are shattered by something like a sick baby is to view that family as simply unlucky. Awful, but what can you do? The other way to approach the situation is for those who have never experienced such financial hardship to appreciate just how lucky—truly lucky, as in you-did-nothing-to-deserve-this-luck-but-just-win-a-lottery lucky—they are. And when viewed that way, the moral claim the lucky have on their wealth becomes weaker. They may have earned some of their wealth, but some of it comes from not experiencing random shocks that others have. And when seen that way, taxing them or restricting some of their options seems much more morally justifiable, even given the general public’s relatively libertarian bent.

To me, the aversion to having to raise taxes to care for those who have not won the meritocratic race reflects a significant failure to appreciate the role luck—luck in birth, luck in parenting, luck in not experiencing a major medical shock—plays in our lives. If someone is in a position to see his taxes go up or his benefits somewhat restricted by the PPACA, then he is actually in a quite lucky place. And the moral claim to keep the benefits that luck has provided them completely untouched strikes me as quite weak.


1 Not surprisingly, despite all the “personal responsibility” and “profligacy” rhetoric surrounding our tough, new bankruptcy laws, medical expenses are responsible for 60% of American bankruptcies

Posted by John Pfaff on October 1, 2013 at 12:56 PM | Permalink


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I am happy to hear your child is doing better but this piece is so poorly reasoned it's hard to know where to start. Let's start at the end with your statement that "medical expenses are responsible for 60% of American bankruptcies". The article you linked to does not say that. There are medical expenses involved in 60% of bankruptcies but in most cases they are a minor part of the costs. The extensive misuse of this study in the run up to PPACA has been effectively dismantled elswhere.

I am very interested in reform of the health care system, which could not go on as it has, but wishing and hoping is not policy; unfortunately that's what the PPACA is based upon. We were told premiums would decline by $2500. Nope. We were told that if you like your policy you could keep it. Nope. We were told we could have more healthcare, more people covered and all at less cost. Yeah, right. PPACA is founded on incompatible goals and the hubris that perfect regulators can design the perfect system which is why it will fail. It is the rebirth of the insurer driven HMOs that were so hated by the consumers in the 1990s except now the government is in the driver's seat. PPACA assures that you will get healthcare of the type and amount that the government believes is cost-effective, like it or not. It's a bad policy solution to a real problem.

Posted by: Mark | Oct 2, 2013 9:57:08 AM

"I'm sure a lot of people that read it felt the same way I did, but didn't comment."

Sure. Let's just assume this each time. :)

Posted by: Joe | Oct 1, 2013 10:39:12 PM

Powerful post. Thanks.

Posted by: Joan Howarth | Oct 1, 2013 6:26:44 PM

I'm sure a lot of people that read it felt the same way I did, but didn't comment.

Posted by: Chris Lund | Oct 1, 2013 5:19:03 PM

Nice post, John. A very important and human story.

Posted by: Chris Lund | Oct 1, 2013 5:18:47 PM

We had twins a few years ago. Both were healthy, but because the mother was in her mid thirties, it was considered a high risk pregnancy and she had to go through a bunch of testing -- biweekly ultrasounds, various blood tests, etc. We had a high deductible policy, and the pregnancy was timed so it hit two separate deductible periods. I think we ended up spending about $12k (though that was effectively pretax dollars due to an HSA). It wiped out a good chunk of our savings, definitely more than half. (The other half was wiped out by the $3k/month childcare starting at six months, though with full-day preschool, it's now starting to drop finally. Not sure what we're going to do with all of the money when they're in public school.)

The twins are really cute though!

Posted by: Funny | Oct 1, 2013 3:55:12 PM


Just curious: What do you think should be the top income tax bracket? What do you think should be the tax rate for, and exclusions from, the estate tax?

Just curious.

Posted by: Sam Bagenstos | Oct 1, 2013 3:46:28 PM

With that kind of nihilism you can justify anything. There's always a worse spending option. I agree that subsidizing the upper-middle and lower-upper classes (largely via cross subsidies rather than progressive income taxes) isn't the absolute worst thing in the world to spend money on, but that doesn't make it a great social spending either.

Posted by: brad | Oct 1, 2013 2:40:20 PM

Oh yes, "brad," if we cut care for kids that money will immediately be transferred to America's poorest, and won't end up as tax cuts for the rich or war spending. Great reasoning.

Posted by: Wow | Oct 1, 2013 2:24:50 PM

It's an odd kind of socialism that takes from the poorer to give to the the richer. It's one thing to say that there should be programs that prevents people from dying in the street because they don't have health care, but quite another to say that someone should get millions of dollars of health care provided by others *without* being required to spend down their own more than amble assets first. That't not a safety net, it's a climbing harness. Shielding relatively rich people from the consequences of their bad luck means less money for the truly needy.

Posted by: brad | Oct 1, 2013 2:14:30 PM

The comment of "interesting" at 1:30 is really instructive regarding opposition to basic human rights like health care: condescending, meanspirited, utterly closed to considering the human reality of the situation. The second comment reflects utter confusion about Pfaff's argument and Murray's.

I guess moral blindness and stupidity go together--one more reason for "interesting" to hope for a social system that apportions benefits and burdens based on people's innate humanity, rather than their merits. The latter system would, in any just world, be rather unkind to "interesting."

Posted by: Wow | Oct 1, 2013 2:13:17 PM

"In our economy, smart people rise to the top, but those smart people didn’t earn their intelligence, they were born with it."

In other words, you subscribe to the Bell Curve book.

Posted by: interesting | Oct 1, 2013 1:32:06 PM

Interesting. So instead of being thankful for the massive transfer of wealth from others to support the health of your young children, you instead tell others how lucky they are to be able to subsidize you. No wonder Obamacare has gotten a bad rap in many quarters.

Posted by: interesting | Oct 1, 2013 1:30:12 PM

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