Editor’s note: This commentary is by Michael Gardner, who is a lifelong Vermonter, graduate of UVM, maple sugarmaker and financial advisor in southern Vermont. He was a regular contributor to Vermont Tiger, and his pieces have been featured in Stratton Magazine, as well as many daily publications.
If there is one reason that health care reform in Vermont will fail it is the very simple concept of adverse selection, a proven economic principle that the majority of our politicians seem to be willing to ignore. Adverse selection in the insurance industry is a situation where the willingness to “buy” insurance is positively correlated with an individual’s perception of their health care need. Or, put in another way, sick people are more likely to seek insurance than healthy people. This creates an immediate problem, as insurance only works if you can spread the risk/cost out over sick and healthy people alike.
When dental insurance first gained popularity it was common practice for individuals to only sign up for the insurance when they knew in advance that they needed an expensive procedure such as braces, root canals and crowns, or if they had a family history of expensive dental problems. Insurance companies and employers quickly learned that individuals with healthy teeth rarely signed up for dental insurance, they were experiencing adverse selection. This process forced dental insurance rates to rise and coverage for expensive procedures to be dropped, or weakened considerably. The end result was less coverage, higher premiums and fewer participants. Notably, very few dental insurance policies cover high cost procedures as they once did, preferring to offer coverage for only preventative measures such as cleanings. By reducing coverage the insurance companies reduced their adverse selection, if they had not done so claims would have quickly outstripped premiums.
Vermont remains largely ignorant of this lesson. We are a small state, and if we choose to finance our single payer health care program with payroll taxes, as Sen. Galbraith suggested, we will become a magnet for adverse selection. Repeated studies have shown that lower income families are more likely to engage in higher risk activities that increase health care costs. These activities include things like smoking, alcohol abuse, and overeating, resulting in high costs associated with heart disease, COPD, diabetes, and cirrhosis of the liver to name a few. On top of these conditions we should also consider people with pre-existing/high cost conditions of geographically close families and individuals.
A payroll tax financing structure would provide an immense incentive for low-income, middle-income, and older individuals with high known health care costs, to move to Vermont for high-benefit/low-cost care.
A payroll tax financing structure would provide an immense incentive for low-income, middle-income, and older individuals with high known health care costs, to move to Vermont for high-benefit/low-cost care.
The current health care cliffs built into the Affordable Care Act only exacerbate this problem. In the ACA, earning one extra dollar of marginal income can cause your family to lose all, or a substantial amount, of your federal subsidy. If Vermont had a single payer, payroll tax-funded program we would attract the lowest income group of people affected by that marginal dollar of income versus benefit.
A single payer health care system can only work if the risk pool is large enough for premiums to offset claims; even in a non-profit model there has to be enough premium payments to cover costs. Vermont’s small geographic size, and proximity to other states, especially in southern Vermont, would make it easy for adverse selection to quickly overwhelm any payroll financing scheme. Healthy people would be inclined to leave Vermont because they are not realizing any perceived benefit from their insurance, and unhealthy people would flock to our state because their benefits would far outweigh their costs. This further exacerbates the youth flight out of Vermont, leaving our state with a disproportionate amount of “sick” people versus healthy people and an unsustainable cost structure.
The impact of a payroll-financed single payer health care system in Vermont would be devastating. Even if we ignore that individuals that work for self-insured companies like IBM, General Electric, Energizer, and many others, would be paying twice for their insurance, even if we ignore that Medicare eligible, but still working, Vermonters would also be paying twice for their insurance, a payroll financed single payer health care plan in Vermont is not viable. Vermont’s risk pool is not large enough to spread the costs without simultaneously driving out high income/healthy families and attracting lower income/unhealthy families. This creates a vicious cycle, driving costs higher with fewer and fewer people capable of absorbing the costs. This is a fool’s errand.
In order for a single payer health care plan to be effective it would need to be done on a national level, similar to veterans’ benefits, or Medicare. It would need to consider the implications of self-insured employees that are happy with their current coverage, as well as current enrollees in Medicare, VA, and public sector retiree plans. While wishful thinking can often make us smile, the reality of life is that there is no such thing as a free lunch. Vermont cannot ignore economic realities, and to continue down this road is wasted days and wasted nights.
