Intellectual (Dis)Honesty, The Affordable Care Act (ACA), and the Redistribution of Wealth

A reasonable analysis of the ACA illustrates that one of the major issues is that it entails is a functional redistribution of wealth, except that in this case, it does not exclusively seek contributions from the wealthy. 

In order to best understand my point, I ask the reader to think in terms of homeowner’s or other property and casualty insurance.

One of the fundamental principles of insurance is that it redistributes risk, which from the point of view of the insurer, necessitates getting a large enough pool comprised primarily of low risk participants, so that the premiums it receives will be enough to pay for the risk it undertakes and its operational expenses, while allowing for a profit. 

From the insured’s point of view, they recognize that there is a certain level of risk — fire, storm, theft etc., for which they are not willing or able to undertake the risk of loss, and accordingly are willing to pay a certain amount of money (“wealth”) to buy peace of mind and security. What they are really doing though, is redistributing their wealth. If they ever have a large claim, they will receive money (“wealth”) that was contributed by other people, whereas, if they never have a claim they will contribute their wealth to other people who are victims of fire, theft etc. In the final analysis, they are either a net payer or a net receiver. 

Insurers are very careful to make sure that the pool of insureds, are not subject to “adverse selection,” which means that a disproportionate number of people who are especially risky, or know they will have claims, seek insurance. For example, if there is a forecast for a hurricane in a particular region, one typically cannot buy homeowner’s insurance. The insurance company does not want the responsibility of payment for those people who seek insurance when the risks are especially high.

For whatever reason, individuals are not troubled or not cognizant of the fact that when they purchase homeowner’s insurance, they are engaged in redistribution of wealth. In fact, the term “redistribution of wealth” is rarely used with respect to homeowner’s insurance. If you think about it I think you will agree that when insurers pool risk, they are to some extent, redistributing wealth.

Now let’s look at healthcare insurance. Essentially, it follows the same principles, and from the point of view of the insurer, one would want a large enough pool of healthy people so that the premiums would pay for the sick and infirm, operational expenses and yield a profit. The distribution of risk and receipt of premiums and payments to the insured is, functionally, redistribution of wealth.

As a general rule, albeit with some exceptions, those who receive a net benefit are most likely to favor the redistribution, and those who are net payers, are more likely to oppose it. 

Now let’s look at the ACA.

To the extent that some of the fundamental underpinnings of the ACA are to require coverage for pre-existing conditions, and take away caps on coverage (both of which increase the potential risk to the insurer), it is an absolute necessity to broaden the rolls of the insured to a pool of less risky participants, e.g. the young and healthy. Essentially, allowing for pre-existing conditions and taking away caps necessitates that the healthier segment of our society join the ranks of the insured. In fact, it necessitates a mandate for insurance either at the individual level or at the employer level. Without a mandate (obligation), an individual could wait until he/she were faced with a catastrophic illness and then sign up for insurance. It would be the absolute most extreme case of adverse selection – a situation insurers could not withstand. 

As such, the ACA mandated employer-sponsored insurance, individual insurance and/or fines for failure to obtain coverage. To the extent that we want to cover pre-existing conditions, raise caps on coverage, and broaden coverage, the mandate is necessary. Let’s not forget that insurance is all about redistribution of risk, and redistributing premiums (“wealth”). 

The problem is that the insurance mandate affects young and healthy people that do not recognize the need for insurance (especially at today’s premium prices) and bristle at the thought of paying premiums (that they often cannot afford) for the benefit of others. Clearly, they are not ready for a redistribution of wealth before they have achieved any level of wealth.

For better or worse, however, that is what the ACA mandates.

Of course, a significant portion of the ACA relates to expanding eligibility for Medicaid, which means that our government is now subject to (at least to some degree) the same issues set forth above. The difference, though, is that the government has tools that are not available to the private insurers – namely, taxation.

It is no surprise that the Supreme Court allowed our government to surcharge people/companies who did not buy insurance under its ability to tax. One could strongly argue that any tax that goes towards entitlements is a redistribution of wealth, or that it is self-evident that tax (at least in part) is a redistribution of wealth.

It is also not surprising that President Obama will seek to increase capital gains taxes with a carve out for couples earning less than $500,000 to pay for certain initiatives to boost the effective income of individuals in the lowest earning brackets, and to ensure that it is only the more affluent that participate in this new redistribution of wealth.

My point is that whether you are pro or con, let’s at least call it what it is. The ACA must incorporate a redistribution of wealth by obtaining net contributions from young, healthy and probably not wealthy people, as well as net contributions from more wealthy in the form of increased taxes.

What do you think?


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