Monday, November 02, 2009

Why the government leads to dizziness and inefficiency

rather than transparency and effective help:

Health reformers start with the problem that some people are expensive to insure, because of pre-existing health conditions. Their solution is to require insurers to sell insurance to everyone (a policy called guaranteed issue) at the same price (called community rating).

This solution, however, causes another problem. For healthy people, insurance is now a bad bet. A person without significant medical needs has an incentive to wait — to buy insurance later if and when he gets sick, a decision that raises the cost of insurance for everyone else. This problem, according to the reformers, calls for another solution: a mandate requiring people to buy health insurance.

But this mandate leads to yet another problem. Requiring an expensive purchase like health insurance can be onerous for low-income families. So the health reformers offer subsidies.

Which brings us back to marginal tax rates. If large health insurance subsidies were offered to all Americans, regardless of income, the program’s cost would be exorbitant, requiring substantial increases in explicit taxes. So, instead, the subsidies are phased out as income rises. As a result, we get implicit marginal rates like those in the Senate Finance bill.

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