economics politics

Freddie and Fannie healthcare and moral hazard

Obama had some proposals for improving the healthcare situation. Some of them sounded pretty good, like trying to get rid of “anti-competitive activity” in the insurance arena. The way it has been worded, it sounded like they wanted to target anti-competitive practices by the companies, that’ll help but they need to take on the big anti-competitive problems that are imposed by governments. Here’s a radical idea, allow companies to compete across state lines. Wild, I know. To me, this would be a good use of the commerce clause in the constitution. Right now, every state has it’s own insurance board and it’s own insurance laws. Get rid of that with a single, nation-wide set of rules and we should see much greater competition. In addition, with all of those people being able to be pooled, the risk sharing arrangements should also help to lower premiums.

So I like that bit of potential reform. What I worry about is the vague exhortations to “protect” businesses from catastrophic health care costs and the push to require the business to offer insurance. He has also talked about a public health care insurance plan that is similar to what the congress has access to. Making businesses take on additional costs is not going to be good for their bottom line. Ultimately, that will make them less able to hire people. SImple enough…

The other two things worry me quite a bit. I have zero confidence in the government’s ability to manage an insurance system that works. I also have a feeling I know how he intends to “protect” businesses from high medical costs. There is going to be some sort of government guarantee that will pick up the tab over x amount of dollars. That sound suspiciously like how Fannie May and Freddie Mac were set up. Lenders were encouraged to lend to people with less than stellar credit by telling them that Fannie and Freddie would take care of any mortgages that go into default. We have all seen the results of that policy. Economists have a two word phrase to describe the problem with insurance like that. It’s moral hazard. If lenders aren’t worried about the loan going into default, they will lend to many more people. The same thing is possible with any sort of government backing of medical costs. If insurers are backed by the government, they will indeed take on anyone and the costs will get out of control quickly. If the government backs businesses to “protect” them, costs will again go through the roof. Clearly, someone has to be the no man, it will either be an insurance company or a government bureaucrat.

My main point is that we should learn out lessons with Fannie May and Freddie Mac. It’s a lovely idea that everyone should own their own home, but we can’t have a total meltdown in order to insure that. In the same way, it is nice to think that everyone should have access to any medical procedure, but we can’t get into the same situation we did with housing. Whatever is proposed for healthcare reform, be on the lookout for moral hazard problems.

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