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A Real CLASS Act

The administration declared a piece of the healthcare bill “unworkable”  on friday, ending the Community Living Assistance Services (CLASS) Act.  Long-time readers of this blog will not be surprised by this as it is a clear result of the adverse selection inherent in these markets.  As administration officials put it:

If they designed a benefits package generous enough to meet the law’s requirements, they would have had to set premiums so high that few healthy people would enroll. And without a large share of healthy people in the pool, the CLASS plan would have become even more expensive, forcing the government to raise premiums even higher to the point of the program’s collapse.

Sound familiar?  So the Obama administration finally figured out what I was explaining a year and a half ago.  If only they had read my blog….. Of course, it’s not as though the people who designed this stuff had never heard of adverse selection, this was in there because in theory it reduced the deficit by $86 billion.  This accounted for over 40% of the imagined savings in the bill.  So this is playing out exactly as I and many others predicted.  The promised savings are not materializing for reasons which were entirely predictable (notice the quote at the end of this post).  Of course at the time everything was far too complicated for most people to understand so it just came down to our word against theirs and you took the side of whichever party you were predisposed to agree with.  But I digress.

The important thing here is that this presents the perfect opportunity to notice how government robs us of our liberty by promising the impossible.  They told us that they were going to have a voluntary insurance program that would generate $86* billion in profits.  It should be obvious from the start that this is a complete lie.  If it were possible to offer a voluntary insurance program that paid for itself (and actually generated a profit) someone would be doing it already.  And of course they are doing it, there are all kinds of long-term care insurance products available in the market.  We don’t need government to have insurance, we just need to pay for it.

The government doesn’t have special powers to eliminate asymmetric information.  They don’t have special powers to produce goods cheaper than the private sector.  There is only one special power the government has which the private sector doesn’t have: the power to force you to do things.  The failure of this plan is the result of three particular causes:

1.  Information is asymmetric and this causes adverse selection

2.  The plan is required to be self-sufficient

3.  The plan is voluntary

The first one is a law of nature.  Notice, the first step in the theft of your liberty is always a claim that the government can overcome some natural yet inconvenient consequence of individual liberty.  But the way they overcome it is never by somehow changing the laws of nature, it is always by taking away some element of individual liberty.  This, after all, is the only power government has.  The reason they failed to eliminate the effects of adverse selection in this case is that they prevented themselves from using this power from the outset by including numbers 2 and 3 in the bill.  Notice that if the plan didn’t have to be self sufficient, they could just keep it going by subsidizing it with money they took involuntarily from someone else.  If the program didn’t have to be voluntary they could force people to be in it and, again, keep it going with money they took involuntarily from someone else.

But have no fear, the rest of the healthcare law won’t have this problem….

Sherry Glied, assistant secretary for planning and evaluation at HHS, countered that the CLASS program was an isolated case whose practicality was questionable from the beginning.

“There is a very clear difference between that kind of uncertainty and the rest of the law,” she said.


*I’ve been hearing 79 billion lately  so the exact number seems a little uncertain but the principle is the same

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  1. October 19, 2011 at 6:16 am

    Yes. I was amused by the Administration dropping part of their own plan as well. Obama doesn’t even believe in himself anymore. I suppose it becomes ever more difficult to believe you are right when everything is telling you that you are wrong. So, is the health care package going to kill the economy in 2014? I think so. 18% of the U.S. economy is health insurance. How much higher will this go?

  2. Free Radical
    October 24, 2011 at 4:49 am

    First of all, sorry it took me so long to reply. Second, this health insurance thing is one of the many diseases that have been growin in and on the patient for decades. When it dies it will be very hard to say which one killed it. Of course this is the way they like it because it allows them to blame it on that insidious free market.

    I’m watching Stossel right now and they were talking about the “Soviet style” bureaucracy that “manages” our education system and it occurs to me that the Soviets had a populist revolution to instate collectivism which then required an endless framework of oppressive bureaucracy. We are doing it in reverse. We have been constructing an endless framework of oppressive bureaucracy which is gradually destroying the forces that regulate a society which is based on individual liberty until we have no choice but to turn to collectivism.

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