President Obama, is a 'substandard' health plan really substandard?

U.S. President Barack Obama delivers remarks on the Affordable Care Act, commonly known as Obamacare, at an Organizing for in Washington, November 4, 2013. (REUTERS)

When I worked in the government, I lived only two miles from the White House. As a result, I decided that my transportation needs were minimal so I bought a no-frills Ford Focus.

The car had a standard, stick shift transmission, roll-down windows and manual locks. My car was “substandard” compared to the almost all other autos in the White House lot, but it was a fine car that served me well.

Last week in Boston, President Obama attempted to explain how losing health coverage because a plan was downgraded to be “substandard” was consistent with his earlier promises.

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The president told us that substandard plans that no longer meet the criteria of the Affordable Care Act (ACA) must be replaced “with quality, comprehensive coverage  -- because that, too, was a central premise of the Affordable Care Act from the very beginning....”

He continued, stating that the ACA ensures that “every plan in the marketplace covers a core set of minimum benefits, like maternity care, and preventive care, and mental health care, and prescription drug benefits, and hospitalization.”

Unfortunately, the president’s definition of “substandard” is likely to work in the wrong direction by disqualifying plans that induce health consumers to behave more efficiently.

The state does have a legitimate certification role when there are significant adverse spillovers to the others in society.

Economists call these spillovers “externalities,” and they provide a rationale for government regulation, certification, and action.

For example, a driver’s license is required to operate a vehicle because an unskilled driver can cause significant harm to others. The state wants to prevent “substandard” drivers from getting behind the wheel.

But even here, there is ambiguity because defining a substandard driver involves tradeoffs. Some drivers are safer than others.

A state could keep all drivers who get a traffic ticket off the road permanently, but no state adopts this rule.

By permitting those with tickets to drive, the state is implicitly stating that it views the value of allowing a larger fraction of the population to drive to be greater than the value of lives saved.

The president’s argument for mandating that particular provisions, like maternity and preventive care, are included in legitimate plans is that they are “core.” The logical requirement, though, is that absent this coverage there would be adverse spillovers to the other Americans.

That’s not what the president has done. 

First, the president’s rejection of “substandard” plans may result in eliminating the plans that are most efficient.

The problem of rising health care costs in large part results from the usual problem that arises when there is cost sharing, in this case between consumer and insurance company.

Because patients bear a small fraction of the cost of treatment, they do not make efficient decisions on health care.

Health economists, notably Daniel Kessler at Stanford, have demonstrated that the failure by the consumer to pay for health care on the margin induces high and in many cases over usage.

Plans that have low co-pays, first-dollar coverage, and insure routine predictable health care events are induce high and excessive use of care.

By contrast, those like catastrophic care plans that do not insure the routine and cover only unpredictable high cost events, induce consumers to behave more efficiently.

Indeed, plans that exclude the president’s “core” benefits may be exactly what is desired for those in good health with the means to cover their limited every-day and predictable medical expenses.

In these cases, the spillovers to others in society are minimal.

The greater problem is that incentives to use care only when appropriate are missing from most plans, especially the ones that meet the “standard” to which the president implicitly refers.

As a consequence, the cost of health care is too high and those who are forced into plans that cover those costs are harmed.

Second, the president’s view of “substandard” inappropriately substitutes government judgment for individual judgment.

Just as it would be a bad idea to require that all cars come with power windows, power locks, and automatic transmissions, it is also unwise to order citizens to buy health care that includes maternity benefits or other care.

Some may have no intention of having children.

Others may not want to devote the time required to take advantage of the preventive care that is covered.

Still others may be skeptical of the effectiveness of mental health care.

In a free society, we generally leave purchase decisions to the individual, whether their justifications for those purchases are prudent or not.

The fact that a health care plan does not include all the benefits of other plans does not imply that it is “substandard.” Instead, the ACA replaces plans that cater to needs of a particular consumer with those cluttered with bells and whistles that may be of little value.

Proponents of ObamaCare point to externalities created by those who do not have proper health care. Among the more legitimate arguments is that maternity benefits are necessary to protect the unborn children of the poor.

Even these arguments are suspect.

There are already programs (like Medicaid and Children’s Health Insurance Program) that assist those unable to afford the care and no need to distort the entire health insurance system to address this legitimate concern.

Moreover, there are almost always externalities to which one can point, but restricting consumer choice is not likely to be the best solution.

Even my roll-down windows created negative spillovers. Should I have been required to buy a car with power windows because reaching over to roll down the passenger window might slow down the White House security clearance process? Probably not.

Similarly, eliminating “substandard” health care plans replaces consumer sovereignty with a government dictate without justifying the superiority of the government choice.

When the president tells us that he is preventing consumers from buying what would be “substandard” plans, he implies that consumers would make the wrong decision absent government guidance.

Given the administration’s recent record of judgment and competence, we might prefer to trust the consumers.