Thursday, February 27, 2003

Political Economy of the Drug-Induced Stupor

Mark Kleiman, provocative as usual, blogs about laws in 38 states that permit health insurance companies to deny claims for medical care necessitated by the abuse of drugs or alcohol. As a result of these laws, trauma center docs routinely avoid testing for alcohol or drugs for fear of not getting their insurance reimbursements. This is unfortunate because a very large volume of medical problems are drug- or alcohol-related, and just a little bit of medical attention to the matter could (supposedly) induce the abusers to alter their behavior and reduce their health costs.

I’m with Mark right up 'til the end, when he suddenly chucks the gauntlet at libertarians: “Go ahead. Tell me how the market is going to solve this one, in the face of the obvious adverse-selection problem: being the one insurance company that offers coverage for drinking-induced accidents is going to be a marketing advantage for drunks, who are lousy health care risks.”

Well, let’s see. First of all, we libertarians oppose laws that grant special interests the right to renege on their contracts – such as, for instance, the 38 state laws in question here. A non-libertarian might reply that these laws merely “permit” the health insurance companies to deny certain claims, so these are actually libertarian laws. I don’t have the text of the laws in front of me, but generally, special interests don’t have to lobby for new laws to permit them to do things they are already entitled to do by the basic principles of freedom of contract. If the insurance companies wanted to deny claims for alcohol-induced conditions, they could just write that into their contracts. But that is not what they want to do. They want to write contracts that *appear* to cover conditions they actually do not, and they want to assure that their competitors can’t undercut them by offering some customers a better deal. That is what I highly suspect these laws are intended to accomplish: regardless of what your health insurance policy *says* it will cover, *in fact* it does not cover alcohol-induced conditions. Repealing these laws would mark a (partial) return to the traditional law of contract, whereby parties are actually held to their promises.

Second, if these laws were repealed, there is every reason to think the market would be able to deal with the problem of drug- and alcohol-related health problems. Mark cites the adverse selection problem, but keep in mind that adverse selection is a problem of asymmetric information: if the insurance company cannot tell the difference between customers with different degrees of risk, it will have to charge them the same premium, and that premium will be most attractive to the higher-risk customers. But if the insurance company *can* tell the difference (say, through medical testing), or if it can identify factors correlated to the difference (such as medical background, previous conditions, etc.), then it can charge differential premiums that take into account the different degrees of risk. If "the one insurance company that offers coverage for drinking-induced accidents" attracts more drunks, then it will charge a higher premium than the other health insurance companies, just like auto insurance companies that specialize in insuring people with lousy driving records. Yes, that means alcohol and drug users will have to pay more for health insurance – and that’s exactly as it should be. The alternative approach, which contends that people should have to pay the same amount regardless of their health or behavior, leads to both adverse selection (as the low-risk customers opt out of the insurance pool) and moral hazard (as the abusers realize their bad behavior is being partially subsidized by the rest of us).

No comments: