Harvard economist explains why Obamacare will raise premiums

The people in Congress seem to know nothing about how insurance actually works. Martin Feldstein, who is a professor of economics at Harvard University and the president emeritus of the nonprofit National Bureau of Economic Research, explains what should be obvious about the insurance market. In the Washington Post, he writes:

A key feature of the House and Senate health bills would prevent insurance companies from denying coverage to anyone with preexisting conditions. The new coverage would start immediately, and the premium could not reflect the individual's health condition.

This well-intentioned feature would provide a strong incentive for someone who is healthy to drop his or her health insurance, saving the substantial premium costs. After all, if serious illness hit this person or a family member, he could immediately obtain coverage. As healthy individuals decline coverage in this way, insurance companies would come to have a sicker population. The higher cost of insuring that group would force insurers to raise their premiums. (Separate accident policies might develop to deal with the risk of high-cost care after accidents when there is insufficient time to buy insurance.)

The higher premium level would cause others who are currently insured to drop coverage, pushing premiums even higher. The result would be a spiral of rising premiums and shrinking numbers of insured.

In an attempt to prevent this, the draft legislation provides penalties for individuals who choose not to buy insurance and for employers that do not offer health insurance. But the levels of these fines are generally too low to cause a rational individual to insure.

Consider: 27 million people are covered by health insurance purchased directly, i.e. outside employer-based plans. The average cost of an insurance policy with family coverage in 2009 is $13,375. A married couple with a median family income of $75,000 who choose not to insure would be subject to a fine of 2.5 percent of that $75,000, or $1,875. So the family would save a net $11,500 by not insuring. If a serious illness occurs -- a chronic condition or a condition that requires surgery -- they could then buy insurance. Since fewer than one family in four has annual health-care costs that exceed $10,000, the decision to drop coverage looks like a good bet. For a lower-income family, the fine is smaller, and the incentive to be uninsured is even greater.

At the San Francisco Obamacare tea party last October 15, I listened to many liberals explain that insurance companies' treatment of pre-existing conditions was evil. Yet, when asked, none appeared to have thought about (a) how consumers would behave if insurance had to be granted regardless of pre-existing conditions, and (b) how that would require insurance rates to change. Pelosi and the House's other 219 supporters of Obamacare seem just as clueless.