Regulating the Poor

28 March 2012


Last January in Ica to Lima I quoted a famous line from Anatole France:

“The law, in its majestic equality, forbids the rich as well as the poor to sleep under bridges, to beg in the streets, and to steal bread.”

And last September on Twitter I wrote:

We shouldn’t say that anything is “banned,” only that it has been “denied to the poor.” The rich can always satisfy their wants and needs.

I don’t think that there has been a sufficient appreciation of the intimate relationship between law and poverty.

Our legislators like to pretend that they are making laws that are universally applicable to everyone within a given nation-state, and the mass media is complicit in this illusion by reporting on an egalitarian society that simply does not exist. Of course, our legislators have plenty of practice in this art, because every two or four years they must go out on the campaign stump and pretend as though they are “just plain folks” when they are not.

There is an old saying that, money can’t but you happiness, but it does allow you to choose your own kind of misery. So it is that the wealthy have choices denied to the rest of us, and among these choices are opportunities to avoid any law felt to be onerous or an inconvenience. The rich live in a libertarian anarchy in which all things are possible.

This I take to be F. Scott Fitzgerald’s point at the end of The Great Gatsby when the narrator says:

“Tom and Daisy — they smashed up things and creatures and then retreated back into their money or their vast carelessness, or whatever it was that kept them together, and let other people clean up the mess they had made…”

The same essential idea was expressed with less poetry and more viciousness when Leona Helmsley, the “Queen of Mean,” was quoted as saying, “We don’t pay taxes. Only the little people pay taxes.”

Despite the persistent idea of equality before the law in democratic societies, we all have known, even if we don’t much talk about, the fact that the rich are not subject to the same laws as everyone else. Back before abortion was legal in the US, if a girl from a privileged family got in “trouble,” she went to Sweden for a safe and legal abortion, or she was sent to have her child in Europe where such things carried less social stigma. Today, abortion is legal in the US, but the political climate in large swathes of the US means that an abortion is almost impossible to obtain in some states, but for those for whom travel out of state presents no difficulties it is not a problem, though it is a problem for the poor.

The middle classes don’t have the scope of free action that the wealthy possess, but they do posses some scope of action that the poor do not. For example, the middle classes have just enough money that, if they prioritize some particular interest or activity, they can choose one or two or maybe three areas where they will exercise their freedom — whether these areas might include private schools, exotic vacations, or boutique health care.

And to mention medical care brings us back to the topic of yesterday’s Three Alternatives to PPACA. It is important to understand that the debate over health care is really a debate over what health care the poor will have, and then this debate is really a debate over how the poor will be regulated (in ways that do not regulate other segments of society).

Regardless of what measures are imposed on the US population as a consequence of PPACA, the wealthy will continue to enjoy the best medical care that money can buy. They can afford to pay into whatever system they need to pay into, and then still buy themselves whatever they want outside the system (or above and beyond minimum requirements). It is those without options who will be stuck with the system and whose lives will be most profoundly affected by it. And, as I noted yesterday, most of those who have no health care or no health insurance at present do not have it because they cannot afford it. They will be the ones forced to face either unaffordable premiums or fines.

Neither the wealthy nor the middle class will have to make painful decisions about cutting back on food or cutting back on electricity or cutting back on heating in order to meet health insurance premiums (and thereby ensure that the insurance industry continues livin’ large), but these are issues as real to the poor as the monthly worry of making rent and having enough to eat.

Thus we can say in precise analogy with the earlier quote from Anatole France:

“The health care law, in its majestic equality, obligates the rich as well as the poor to purchase health insurance, to choose between paying bills and paying premiums, and to face fines if they cannot afford the premiums.”

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Grand Strategy Annex

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Voltaire famously said of the Holy Roman Empire that it was neither holy, nor Roman, nor an empire. In a similar spirit we might say of the “Patient Protection and Affordable Care Act” (apparently named by the shade of Kafka) that it will not protect patients, that it will not make health care more affordable, that it is not about care, and it is not even an act — rather, it is an excuse for legislative inaction. It is as though someone proposed “solving” the problem of homelessness by passing a law that every homeless person must either buy a house or rent an apartment or face a fine. Great. Problem solved.

With the US Supreme Court hearing arguments on the constitutionality of the provisions of PPACA, political rhetoric is heating up and the news stories are flying thick and fast. I don’t have much confidence that the Supreme Court will decide the case on the constitutional merits — this is, after all, a political process, so the judgment will be a political judgment. That is unavoidable. But apart from the legal constitutional issues posed by PPACA, there are the larger questions of whether or not it is any good as legislation. After all, a law can be lousy and still pass constitutional muster.

One thing for sure that PPACA isn’t going to save anyone any money. It is not about affordability. If you really believe that funneling vast new sources of money into insurance companies is going to make the health care industry more frugal and more efficient, then if we met we probably wouldn’t have anything to say to each other because our perspectives are essentially incommensurable. And please be clear about the fact that this legislation is not about providing health care, it is about purchasing insurance, and, as anyone who has purchased health insurance knows, having health insurance is not the same thing as receiving health care.

Health care premiums will continue to ratchet upward, steadily and relentlessly, and the new pool of forced contributors to the system will mean that even more money will be dumped into the ever-hungry maw of the medical-industrial complex, as more and more of US GDP disappears into a rat hole without a shred of accountability. Everyone knows the dismal statistics: the US spends a greater part of its GDP on health care than almost any other country (and since the US has the largest economy in the world, this means that not only are the rates the worst, but the absolute numbers are the highest also), and the US population is far from being the healthiest for all the money that is spent on health care. The US population has been very poorly served by the health care industry. What are we going to do about it? We are going to reward the industry by giving it even more money and forcing everyone to participate in a deeply troubled industry.

PPACA is not an act, because it takes no action — it does not confront the vested interests of the health care industry (whether hospitals or doctors or labs or the manufacturers or medical technology), it does not confront the vested interests of the insurance industry, it does not confront the vested interests of the pharmaceutical manufacturers, it does not confront the vested interests of the US government itself, and it does nothing to change the way health care is managed or delivered. Rather than taking on the powerful, the PPACA targets the most vulnerable and least powerful elements of our society — people who do not already have health insurance and probably cannot afford it.

It will be obvious from the above that I have nothing good to say about PPACA, but there are three simple things that could be done that would cause me to drop my objections:

1. a universal single-payer system

2. an “opt out” clause

3. bring all employees of the government, from the president on down to the lowest bureaucrat, into the PPACA as individuals forced to purchase insurance under the individual mandate

Unfortunately, all three of my alternatives are politically “radioactive” to the point that they are not even on the agenda. We do not talk about the ways in which real reform could be brought to health care in the US; instead we take action against those least able to resist the intervention of the government into their lives. This reveals the rapacity of the welfare state in its most ugly aspect.

I would have no objection whatsoever to a universal single-payer health care system in the US. In fact, I think it would be a good idea. When it is mentioned how every other industrialized nation-state has universal health care, so we therefore need to have government-mandated health care in the US also, it curiously goes unmentioned that the vast majority of these universal health plans are single payer systems that eliminate private insurance in favor of a truly universal system. In the US we don’t discuss this — not because the older universal single payer systems in Europe are running into chronic problems not unlike over-promised legacy pension systems (which is true) — but rather because the insurance industry in the US is very big, very profitable, and employs a lot of very wealthy and influential people. A tough-minded administration would be willing to take on vested interests like the insurance industry, but nothing whatsoever is being done by the PPACA to reign in insurance companies, who stand to be flooded with a tsunami of new money unless the individual mandate is struck down by the Supreme Court.

An “opt out” clause would be equally fine with me. Since PPACA incorporates an individual mandate, which particularly targets individuals, why not give the individual a chance to opt out of the system? And I do mean opt out entirely. I would be perfectly willing to carry a card in my wallet, like an organ donor card, or even to wear a tag around my neck, explicitly stating that I have opted out of PPACA and that I am not to be taken to a hospital or an emergency room unless I have the money available to pay cash on the barrel head for my treatment. I can imagine the people who thought this through would think I am crazy, and if my opinion mattered it would be denounced as barbaric and inhuman. So be it. I have no problem with it. If I die as a result of injuries sustained from a car crash because no ambulance was called, I accept that risk. (As I have attempted to explain in Risk Management: A Personal View, I believe the management of risk to be illusory, and in fact a moral hazard.) If I came down with a chronic problem requiring medical care, I would seek medical help in a country where the prices of the health care industry have not been so distorted by non-market incentives. So I am perfectly willing (if not enthusiastic) to do without the entire US health care system.

Similarly, I would have no objection to the PPACA if I knew that those making the law had to live according to its dictates (or alternatively, if they provided the benefits that they receive under their plan to the American people generally — but then that truly is politically unthinkable, is it not?). As with the unspeakable alternative of a universal single payer health care system, which would take on the vested interests of the health care industry, the insurance industry, and the pharmaceutical industry, government employee inclusion in PPACA provisions would not only take on the vested interests of the US government, but would also ensure that something actually gets done. As I wrote above, the legislation in its present form does nothing except to target the disadvantaged and the powerless — not something that you would call courageous legislation. If the people who wrote this law had to live according to its provisions, they might actually do something and make some changes. At present, they have no incentive whatsoever to do anything.

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Grand Strategy Annex

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alexis de toqueville

The rapacity of the ruling class

One of the most striking features of most pre-modern, pre-industrialized societies was the rapacity of the ruling class. Anyone with their hands upon the levers of power would manipulate whatever institutional apparatus was available in order to enrich themselves at the expense of those less fortunate — a practice that reached such obscene extremes that the vast mass of the populace was impoverished while a privileged few enjoyed unimaginable luxury. Since that time, modern industrialization has raised all boats, flooding many societies with unprecedented consumer goods and therefore giving the impression that there has been a leveling of the human condition. Unfortunately, it has been only a relative leveling, and the agents of rapacity have been exchanged. What has changed is that rapacity has been displaced from splendid individuals onto the nation-state.

The principle of redistribution

The basic principle at stake is that those with enough should be satisfied with enough, and therefore render to the government anything beyond what is enough in order that this should be re-distributed to those who are judged not to have enough. The rhetoric of “needs” is common in this context, and we often encounter formulations like, “needs being met,” though this ought to give pause to anyone who notices that one of the basic confusions of consumer societies is that between wants and needs. Whereas rights are counterbalanced by duties, there is no political concept to counterbalance that of needs, except perhaps superfluity. Needs become associated with a minimal condition of bare survival (i.e., subsistence) that no one has the moral right to question, whereas the countervailing conception of superfluity is associated with luxury and conspicuous consumption, which everyone has the moral duty to censure.

Again, in contradistinction to pre-modern, pre-industrialized society, we have it good. Sufficiency under the agricultural paradigm (that is to say, agrarian-ecclesiastical civilization) was subsistence farming, and this often meant the barest of bare survival. Given that rudimentary baseline, anything over and above bare subsistence can be seen as superfluous. But we all know that in a social climate of rising wealth, allowing too great a gap to open up between haves and have nots can be disastrous, possibly even leading to catastrophic state failure, also known as revolution. Thus the have nots must be raised above mere subsistence, but the level of increase in standards of living will always be relative to the socio-political context. Being poor in Sweden implies a different standard of living than being poor in Gabon.

Notwithstanding the fact that “sufficiency” in this context is a term of art, the welfare state will take anything that it judges to surpass mere sufficiency, will count itself righteous for doing so, and will judge as deviant anyone who resists the expropriation of their property. Expropriation, even for the highest and noblest of motives, is still expropriation. Moreover, it remains expropriation even when expropriated according to the most meticulous machinations of due process and procedural rationality. As noted above, anyone with their hands upon the levers of power will manipulate whatever institutional apparatus is available in order to enrich themselves at the expense of those less unfortunate — though now rather than anyone it is anything, and in particular it is the nation-state in the form of the welfare state.

Origins of the welfare state

The contemporary welfare state is the result of a pragmatic political compromise intended to forestall the spread of communism in Western Europe. In this it was successful. The German Historical School of economists, in other respects not particularly well respected, was instrumental in this compromise. From the perspective of later communists, this compromise constituted the capitalists “buying off” their workers (cf. the above referenced flood of consumer goods). From the perspective of the privileged, it was a remarkable act of enlightened self-interest scarcely equaled in history. Look to the reluctance of dictators today unwilling to relinquish power even as their fellows are being removed (and often killed) one after another, and it is easy to see the extent to which the privileged and powerful will go to retain their privilege and power.

The state knows best

The logic behind the rapacity of the welfare state, like the logic of the rapacity of the kings, emperors, popes, and cardinals that preceded the nation-state in privilege, and like the logic of dictators ruling today, reveals its relentless, implacable extension to other areas of life — ultimately, to all areas of life — in the current healthcare debate in the US. I have written several times about the individual mandate (i.e., the requirement that would force individuals to buy health insurance) and its presumption to know the best interests of consumers better than consumers themselves know it. This is but one facet of the rapacity of the welfare state, but it is both an important and a telling facet.

If individuals believed contemporary individual health insurance policies to be a good deal, these individuals would be clamoring to buy them. That is the way that capitalism works: you offer something for sale; if consumers want what you have for the price you offer it, you sell your product; if consumers do not want what you have for sale, or don’t want to pay your price, you will not sell your product. It is pretty obvious that individuals not covered by employer-sponsored health care coverage (which latter are therefore insulated from the true cost of health care) are not clamoring to buy individual health insurance policies. These policies are not a good deal, and they are becoming a worse deal with the passage of time. These policies cannot compete in the market. In fact, they choose not to compete. Rather than compete, they choose to legislate and litigate.

Health insurance providers have the heavy hand of the welfare state to intervene on their behalf and to force consumers to buy products that consumers will not and would not buy on the open market when free of compulsion. Instead, these policies will be sold upon threat of legal prosecution.

Promote the general welfare

The welfare state intends to provide welfare for all. This is a noble aspiration. No one can rationally argue with the desire to improve the lives of all and to reduce the glaring inequities of our society. (Some on the contemporary left like to say, “When everyone does better, everyone does better” — and this tautology certainly is true.) One can, however, rationally argue with the means intended to accomplish this end. For we all know, in the overwhelming complexity of the world, that unintended consequences often swamp intended consequences, so that means are uncertain in the extreme: particular means may contribute more to the defeat of the intended aim than to eventually securing the intended aim. How, then, should we go about supporting the general welfare in a manner consistent with democracy and liberty?

And there is a tension between democracy and liberty, as embodied in a now well-known quote frequently mis-attributed to Benjamin Franklin: “Democracy is two wolves and a lamb voting on what to have for lunch. Liberty is a well-armed lamb contesting the vote.” (I have also seen versions of this substituting “rabbit” for “lamb.”) The simplest form of democracy — majoritarianism — is especially vulnerable to this tension. More sophisticated incarnations of democratic ideals have made provisions for individual rights that are not to be infringed even if social consensus supports infringement. This is the enlightened tradition that the Founders extended to the US Constitution, and it is the model that we should continue to follow: the democratic ideal pursued in so far as it is possible, and in such a way that its infringements upon individual liberty are minimized. It is in this spirit that I return to the health care debate.

Living “off the grid”

There is a solution to government coercion in purchasing health care services, but this solution, while simple, is radical in its simplicity and would call into question some of the deepest presuppositions of the welfare state. That makes this alternative politically impossible, no matter how much sense it makes. What is this solution? Simply this: offer the option to “opt out” of health care, i.e., to voluntarily live without health insurance, and to accept the consequences of living without health insurance, essentially opting out and living off the health care grid.

I would opt out, and I would do so with my eyes wide open, and with the knowledge that I would be subject to different protocols in the eventually of illness of injury. And I would be willing to make this official, and to certify my decision to the satisfaction of legal standards of evidence, whatever they might be in the this case. For example, I would be willing to carry a card in my wallet, next to my driver’s license, that in the eventuality of my injury, that I am not to be treated, or taken to a hospital or emergency room, or that only a certain specified amount of money should be spent on my treatment, with this amount of money supported by some oath or affirmation that I possess the amount in question in cash.

Prior to writing this, I have not suggested this to anyone, so I don’t know how others would react. However, it is easy to guess the outrage that would greet my proposal in some quarters. For instance, I can imagine it being said that, while a person feels healthy and fully able, they would say that they would like to opt out, but when it came time to pay the piper, no one would be left who would really and truly accept the consequences of their decision, especially if it meant death or living with disfigurement.

Heath care in extremis

This objection is the same as the old canard that there are no atheists in foxholes: the presumption that, in our hour of need, everyone will fold, without exception, and want the aid and comfort to which scientific medicine entitles us. We know this to be false, because we know principled individuals who accept the consequences of their actions without any attempt to save themselves. Interestingly, however, this argument shows how far we have come in real terms — in terms of the actual ideology by which we live, rather than the ideology that is honored more the breach than in the observance — because the “heath care in extremis” objection is the perfect mirror image of the no-atheists-in-foxholes objection. The no-atheists-in-foxholes claim assumes that in our hour of greatest need that we will all, despite any previous profession made under circumstances of security, seek supernatural aid and comfort. The “heath care in extremis” assumes that we will all, despite any profession made under circumstances of security, seek material aid and comfort. So which is it going to be? Supernatural aid and comfort, or materialistic aid and comfort?

What is it in the welfare state’s conception of human nature that it must embrace the totality of our being, and extract from us our forced consent for our total expropriation by the state, body and soul, such that no exceptions are to be allowed? It is simply this: for the welfare state, man is simply homo economicus. The welfare state is an economic institution; each individual instance of homo economicus is a functioning part of our economic institution; therefore, homo economicus is a functioning part of the welfare state. It is an elegant syllogism that reduces the individual to his role within the state as part to whole.

We must see this development in the context of the evolution and maturation of the institutions of advanced industrialized society. That is to say, we would be misunderstanding the situation if we attributed all of this development to wild-eyed ideologically motivated radicals who have an agenda for a utopian society which would be a dystopia for the rest of us. This is not how most social change comes about. Most social change comes about from incremental changes in attitude and incremental changes in material circumstances, which between the two of them create a coevolutionary spiral that issues in unintended consequences that were no part of anyone’s design. Homo economicus and his role within the economy of the welfare state has not been imposed from above; all of this has emerged organically from historically continuous circumstances.

Implicit consent to welfare state rapacity

As always, the wealthy will be left untouched by the law. They will have health care regardless. The individual mandate will fall most heavily on those who have a limited quantity of disposable income and have made a conscious decision to spend that income in a certain way. As the tentacles of the welfare state find their way into the regulation of every aspect of life, like some kind of secular Hadith, every penny of an individual’s income is more and more spoken for by the state before it is earned and spent. One has the “choice” from what company one will purchase health insurance, just as one has a “choice” between buying Crest or Ultrabright toothpaste (the kind of choices that result from a flood of consumer goods), but the supposed greater number of choices made available to the individual in modern society are choices not worthy of the name. The real choice has already been made, and it has been made by the welfare state before the individual is even born.

We find here a particularly radical embodiment of the doctrine of implicit consent to a social contract: if you are born into a society, and if you choose to stay, you choose to accept the social contract of that society. In other words, you relinquish all of your rights, in a Hobbesian moment of absolute submission to the Leviathan, in order to receive a few compensatory rights later, as the Leviathan chooses to grant at its discretion. Thus the welfare state arrogates to itself the right to organize your life before you are even born, and once you emerge as an individual within society you are obligated to arrange your affairs, down to the budgeting of your income, according to the dictates of the state. And if your income is limited, and that limited income has already been spoken for by the state and its epigones? That is your tough luck. Next time, come back rich. For this life, cough up your money. All of it, if need be.

Acceptable and unacceptable choices

Are we going to tell people that it is not a legitimate choice to live fast, die young, and make a beautiful corpse, because this is socially unacceptable? Is it beyond the pale that, if an individual prefers danger to safety, that they should willingly place themselves in danger? And is it unacceptable that an individual should allow himself to take risks? Are we going to tell people that it is unacceptable that they buy a sports car because they need to spend this money instead on health insurance? The welfare state bureaucrat has no problem telling individuals that their choices are not allowed because they do not conform to the economic planning of the welfare state, of which the individual is a part, and the state is the whole.

Thus the welfare state sets itself up like Periander, the despot of Corinth, who, not being satisfied by the example of his father, the despot Kypselos, sent to the famous (or notorious) Thrasybulos of Miletus to learn more effective means of depredations upon his people:

“Now Periander at first was milder than his father; but after he had had dealings through messengers with Thrasybulos the despot of Miletos, he became far more murderous even than Kypselos. For he sent a messenger to Thrasybulos and asked what settlement of affairs was the safest for him to make, in order that he might best govern his State: and Thrasybulos led forth the messenger who had come from Periander out of the city, and entered into a field of growing corn; and as he passed through the crop of corn, while inquiring and asking questions repeatedly of the messenger about the occasion of his coming from Corinth, he kept cutting off the heads of those ears of corn which he saw higher than the rest; and as he cut off their heads he cast them away, until he had destroyed in this manner the finest and richest part of the crop. So having passed through the place and having suggested no word of counsel, he dismissed the messenger. When the messenger returned to Corinth, Periander was anxious to hear the counsel which had been given; but he said that Thrasybulos had given him no counsel, and added that he wondered at the deed of Periander in sending him to such a man, for the man was out of his senses and a waster of his own goods,–relating at the same time that which he had seen Thrasybulos do. So Periander, understanding that which had been done and perceiving that Thrasybulos counselled him to put to death those who were eminent among his subjects, began then to display all manner of evil treatment to the citizens of the State; for whatsoever Kypselos had left undone in killing and driving into exile, this Periander completed.”

Herodotus, Histories, Book V, section 92

It remains to give the theoretical justification of opting out of compulsory spending mandated by the welfare state. It will be objected that, in something so fundamental as health care, opting out would create a two tier system, and ultimately a two tier society, and that this is invidious to democracy. I will, for the moment, leave aside the fact that we already have a stratified society in which many individuals receive preferment and privileges because of their income, social status, or family background. It is fundamentally a question of one’s conception of the law. I have many times remarked that the nation-state system is predicated upon a radical and uncompromising application of the territorial principle in law — that is to say, the principle that one law holds for all individuals within a given geographical region. The historical alternative to the territorial principle of law is the personal principle in law, which is the principle that an individual will be subject to the law of their community, regardless of their geographical location.

The possibility of opting out of government programs appeals to the personal principle in law, and we can see on this basis why representatives of the nation-state — and all of the advanced industrialized nation-states are welfare states — would be opposed in principle to anyone opting out of a territorial principle. The advocate of the exclusive legitimacy of the territorial principle in law must hold that the personal principle in law is illegitimate everywhere and always, and that no legitimate political entity can be erected upon the personal principle in law. If any exceptions are allowed, we would be forced to recognize that our society is shot through with instances in which individuals are held to the standards of their community rather than to universal standards enforced throughout a geographical territory.

As I pointed out above, we do in fact have a stratified society, and whether or not we formally recognize it in our legal codes, we have de facto instances of the personal principle in law that hold throughout our supposedly universal territorial law. To point this out, however, would be to contradict the powers that be. And to allow a separate community that has opted out of the health care mandate, and indeed out of the health care system altogether, would be too glaring an exception to the territorial principle in law to be tolerated.

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Grand Strategy Annex

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Cash Flow is King

17 January 2011


How to Make a Killing

in the Insurance Industry

Insurance company fat cats can expect to grow fatter.

Without Really Trying

Suppose you ran a business and you could get the government to force people to buy your product or service under threat of penalty. That would be really sweet, wouldn’t it? Well, health insurance companies in the US are now in this enviable position. One could say that anyone who doesn’t go right out and set up shop in the insurance industry is a fool, except that there are significant barriers to entry to the industry. It takes a lot of money to be in the insurance industry. You have to sit on a mountain of cash, and you have to have a lot of cash flow to make it work.

Sometimes people in the business world say, “cash flow is king.” Even a business that isn’t doing so well can leverage its cash flow for its benefit, if it has a cash flow to leverage. Small businesses routinely do this in minor ways by, for example, charging their business purchases on credit cards that give them benefits. So if you have a lot of cash flow but not much profit, you can still get something out of the cash flow. It’s sort of like juggling money.

Big businesses leverage their cash flow in big ways. Indeed, some industries make their money not from sales of goods and services, but from the management of their cash flow. The insurance industry is one of these industries. It is not usual for an insurance company to pay out $1.06 in claims for every dollar it takes in from premiums. How do they stay in business? They sit on so much cash, that they invest the cash they sit on and they make some money from capital gains. An ADP representative once told me that this is how they make their money too.

The pending individual mandate to force the uninsured to purchase health insurance is a promise of even greater cash flow to the insurance industry. During the run up to the passage of health care legislation in the US, the insurance industry lobbied hard for the mandate and for penalties that would really bite: “AHIP objected to the version of the penalties in the original Senate leadership proposal as insufficiently strict to induce many people to become insured.” The insurance industry was never fooled about this, though the popular press persisted and still persists in characterizing this legislation as “reigning in” the healthcare insurance industry and calling them to account. This behavior has been encouraged by the Kafkaesque title of the legislation: Patient Protection and Affordable Care Act (ACA).

I encourage the reader to look over a document from the Urban Institute titled Why the Individual Mandate Matters dated December 2010. Here’s a quote from the Urban Institute‘s report:

“Three important goals of reform are to increase health insurance coverage, to eliminate discrimination by health status in the sale and maintenance of health insurance, and to increase the affordability of coverage. Without an individual mandate, these would all be affected by the natural tendency for people to want to pay for health insurance only when they believe they will need health care services. Since those currently without insurance have significantly lower costs on average than those paying for insurance, the mandate will bring lower-cost people into the insurance risk pools. This would lower the average cost per person covered and thus lower premiums.”

When you read the insurance industry treatments of the problem you find formulations like “a diverse risk pool of enrollees.” This sounds very nice, but what does it mean? In the context of health insurance, it means health diversity. In other words, some people are weak and sickly, and some people are strong and healthy, and the insurance industry, as well as a lot of politicians, want the strong and the healthy to subsidize the weak and the sick. Failure to do so they call “adverse selection.” You know what adverse selection is in evolutionary theory? It is extinction. This is a debate about extinction. Go figure. I can say things like this bluntly and honestly because I don’t have to care what other people think of me, but politicians and politically visible persons (like CEOs of major companies) can’t be honest. They cannot afford to be honest.

How much cash flow are we talking about as a result of the individual mandate? I did some very rough calculations — literally on the back of an old envelope — and if we take the frequently cited figure of 47 million Americans without health insurance, and divide this by average household size of 2.59, we get more than 18 million uninsured households. I found figures cited between $46,000 and $50,000 as the median US household income in 2010. I took the lower number of $46,000, and found estimates between 7.5 and 12.8 percent of household income to be spent on healthcare (the Urban Institute’s report cited above gives a rate of 2.5 percent, but this is not to be taken seriously). If we pick a number between the two percentages cited, between the high and the low figure, we get about $4,650.00 annually for health insurance per household. This is an unrealistically low number, but I’m doing a conservative calculation. With these conservative numbers, we find that the individual mandate would funnel another 83.7 billion dollars into the coffers of the insurance industry annually. This is cash flow that they can leverage even if they have to pay out a little more than 83 billion in claims.

Now, if I were an insurance executive, even if I had to operate under government regulations (what industry does not have to deal with regulators?), I would be very pleased indeed to hear that the government was going to force people to spend another 83 billion dollars in my industry. Even if I didn’t get all of it, I could count on getting a portion of it. And we all know that an expanding industry is an industry in which the established players don’t have to fight over scraps. A bigger pie means a bigger slice for everyone invited to the table.

But the business model of profiting off investments has weaknesses. Sometimes no profits are to be had from investments. Sometimes investments lose value. This can create a crisis. During the last stock market plunge prior to the 2008-2009 debacle, insurance companies were hit quite hard. Policy prices spiked as the industry sought to make up their losses. My business policy increased significantly. Nothing could be done about it. You pay the bill, you accept the fact that you may have lost your profit for the year, and you hope that next year will be better. C’est la vie.

What happens when everyone is forced to buy insurance, the insurance companies have their money invested, and the stock market tanks, threatening the industry as a whole? After all, we do live in a capitalist economy (more or less, granting exceptions like the nationalization of the airport security industry following 11 September 2001), and no one has figured out how to have a free market without a business cycle. The business cycle is a fact of life in a market economy. It will happen again, like it or not. We can do our best to smooth out the business cycle, but we won’t eliminate it.

When this eventuality comes to pass, and premiums must spike sharply across the board, for everyone, the politicians and the insurance company executives will say that there is nothing they can do about it. And they will be right. Honestly, under these circumstances, there is nothing that can be done except to raise everyone’s premiums, or to let a few companies go bankrupt, or a combination of the two. But it is one thing to understand this, and another thing entirely to explain it to more than 300 million people with an attention span shortened by the cleverest spin doctors in the business. Maybe there will be congressional hearings. Maybe heads will roll. But the one thing that is sure is that the money has to come from somewhere. The politicians could turn to the expedient of printing money, thus creating inflation, but that has been made more difficult by the same measures that have been introduced in the attempt to minimize the business cycle.

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Grand Strategy Annex

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The front page of the Financial Times featured the health care vote.

The Insurance Industry Attains to a State of Grace

If grace is an unmerited gift, then certainly today the insurance industry must have attained to a state of grace, for it has received an unmerited gift of truly stupendous proportions. Health care legislation has been passed that will require individuals to purchase health insurance and will require businesses to offer health insurance to employees. In other words, an enormous amount of money is about to flood into the medical-industrial complex, to which the insurance industry is central, and which will be the primary recipient of this government-mandated largess.

What must the insurance industry do in order to earn this gift? Nothing. Nothing whatsoever. That is what makes this government directive the purest form of grace. An industry that has been profiteering off the misery of mass man is now, by legislative fiat, to be enriched beyond anything that the market free of coercion would provide.

The Loyalties of the Democrats

Shrill and unthoughtful commentators sometimes say that Democrats tend to side against the business community in their political dealings, but more thoughtful commentators have observed that the Democrats’ primarily loyalty is to big business while Republican loyalties tend to go with small business and entrepreneurs. Thus in the past Democratic policies have favored enormous big businesses of the sort that appear in the Dow Jones index, companies like 3M and GM. The UAW has always been a stalwart supporter of Democratic candidates. But the big businesses of the past are no longer the big businesses of the present. GM, once a force to reckon with in the economy, is bankrupt.

Not only has industry changed, but workers have changed too. The constituency of the Democratic party tends to be better educated and better paid, and that means that they tend to have pencil-pushing desk jobs, the sort of jobs one might find, for example, in the insurance industry. Thus a gift of magnanimous proportions to the insurance industry from a Democratically controlled federal government ought not to be a surprise.

The only way to truly provide improved health care in the US at a lower cost would be to create a universal single payer system that would put the health insurance companies out of business. I would have no problem with this, but the Democrats are not going to take on the insurance industry because that is their constituency.

A single payer system could be made to work. But the American people, like peoples in democratic societies, are about to get exactly what they deserve. As they say, be careful what you wish for because you just might get it. And one ought also to be careful what one wishes not to have, because one may well not get it. Because of the hysterical antipathy to a universal single payer health care system that would be relatively simple and straight-forward, we will instead get a Rube Goldberg health care system that will cost a lot of money and not make people any healthier than they are now.

The Moral Hazards of Health Care Legislation

When an economic policy encourages irresponsible behavior, such as insulating people from the consequences of risk-taking, economists call this moral hazard, and we find that there is substantial moral hazard in the newly passed health care legislation. The provisions of the legislation, while well-intended, like all good intentions will have unintended consequences.

Individuals will be forced, under penalty of law, to purchase health insurance, and businesses will be forced, under penalty of law, to offer health insurance to their employees. What this means in actual fact is that young people and healthy people who have, to date, opted out of the medical-industrial complex, will be forced to put themselves at the mercy of that system. And what this means is that they will have to pay for a service that they neither want nor need.

A Tax upon the Healthy

Everything that your mother told you is true: you should eat well, exercise, and get plenty of rest. Simple as it sounds, that is the foundation of a healthy life. Forcing individuals to buy health care, however, will mean that the healthy will subsidize the unhealthy. Those who eat small portions of healthy food, exercise regularly, and get enough sleep will subsidize those who eat large portions of unhealthy food, live sedentary lives, and fail to get the rest that they need.

In other economic calculations we could say that this creates an incentive to eat unhealthy foods, to overeat, to become a couch potato, and to deprive oneself of sleep. However, when it comes to how individuals live their lives, this calculation no longer applies. People who live active and healthy lives enjoy the intrinsic benefits of their health and are not likely to begin neglecting themselves and their health because they have an economic incentive to do so. So the healthy will continue to live healthy lives, the unhealthy will continue to live unhealthy lives, and the the former will be forced, under penalty of law, to subsidize the unhealthy lives of the latter.

Since the healthy will not be able to opt out, and since they won’t take advantage of the medical-industrial complex in order to enjoy the dubious benefits of an unhealthy life, the new health care legislation constitutes a de facto tax upon the healthy. In other words, the incomes of the healthy will be redistributed to the unhealthy. It is difficult to imagine a worse social policy than this.

The Apotheosis of the Medical-Industrial Complex

The medical-industrial complex in the United States, which to date had been something that a law-abiding citizen could avoid, is now set to become an-embracing, all-pervasive reality in the lives of all US citizens. If you fail to make your contribution to the enrichment of the insurance industry, you will be fined according to the level of your income. Such a penalty will require an enforcement regime that has access to both the medical records and the financial records of every US citizen. Perhaps one will have to present one’s papers to the authorities to prove that one has paid one’s premiums. A whole new class of insurance industry commissars, apparatchiks, and nomenklatura will be created.

In his classic Principles of Political Economy (Volume 2, Book V, Chapter II, section 5), John Stuart Mill wrote these words in criticism of landlords:

The ordinary progress of a society which increases in wealth is at all times tending to augment the incomes of landlords; to give them both a greater amount and a greater proportion of the wealth of the community, independently of any trouble or outlay incurred by themselves. They grow richer, as it were, in their sleep, without working, risking, or economizing. What claim have they, on the general principle of social justice, to this accession of riches?

Landlords, while still powerful, are no longer the bête noire of the economy, but I would suggest that the insurance industry neatly fills their ample shoes. What Mill wrote of landlords can now be reformulated, mutatis mutandis, for the insurance industry:

The ordinary progress of a society which increases in wealth is at all times tending to augment the incomes of insurance companies; to give them both a greater amount and a greater proportion of the wealth of the community, independently of any trouble or outlay incurred by themselves. They grow richer, as it were, in their sleep, without working, risking, or economizing. What claim have they, on the general principle of social justice, to this accession of riches?

John Stuart Mill could not have imagined, in the very different climate of nineteenth century England, how timely his appeal to “social justice” would sound today, but I find that the advocates to today’s conception of social justice seem to have little say in the matter of enriching the insurance industry. It seems now that the insurance executives, aided and abetted by professed supporters of social justice, can now gently recline for a nap and can expect to grow fat while they sleep.

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Insurance company fat cats can expect to grow fatter.

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Grand Strategy Annex

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