The ObamaCare Prisoner’s Dilemma

Why it’s foolish to buy overpriced insurance.




With Barack Obama safely re-elected and ObamaCare’s main provisions coming into effect, some supporters are striking a triumphal note. Former Enron adviser Paul Krugman, for instance, is assuring his readers that Americans will greet ObamaCare with flowers:

Moreover, all the early indications are that the law will, in fact, give millions of Americans who currently lack access to health insurance the coverage they need, while giving millions more a big break in their health care costs. And because so many people will see clear benefits, health reform will prove irreversible.

This achievement will represent a huge defeat for the conservative agenda of weakening the safety net.

But Ezra Klein isn’t so sure. He understands that ObamaCare poses a problem of adverse selection. In order to make health insurance “affordable” for people who are at higher risk of becoming sick, it jacks up the premiums for those at lower risk–that is, young adults–and thereby gives them an incentive to pay (or avoid) the tax penalty rather than buy an expensive policy.

That is foolish and shortsighted, Klein attempts to argue in a Bloomberg column. He gets off on a bad foot by making the following claim:

Health insurance isn’t like other forms of insurance. It’s not protection against the unlikely; it’s insulation against the inevitable. Most people never use their fire insurance. Almost everyone uses their health insurance. Eventually.

That’s like saying, “He’s unique. There’s hardly anyone else like him.” The qualifier “almost” renders the claim that the need for health insurance is “inevitable” false.

Presumably what Klein means is that death is inevitable, which implies that every human being will at some point experience disease or injury. Some, however, die suddenly or neglect to seek care–hence the “almost.”

What’s odd about Klein’s claim is that there’s another form of insurance that does provide indemnification against the inevitable: life insurance. Yet nobody suggests that life insurance should be mandatory or “universal” or that it is unjust for insurance companies to vary premiums according to actuarial estimates of the policyholder’s short-term risk of death.

What really sets medical insurance apart from other forms of insurance is that it covers routine expenses as well as catastrophic ones. Imagine if homeowner’s insurance covered not just major damage but every minor repair or upgrade, every visit from a plumber or electrician, every paint job (including the cost of paint). Medical insurance works like that, which is why even people who’ve never had a life-threatening or otherwise catastrophic illness or injury have typically filed many claims. By mandating coverage for even more routine expenses–contraceptives being the highest-profile example–ObamaCare makes health insurance even less like “insulation against the inevitable,” in Klein’s description.

Klein concludes with an appeal to the young and healthy to buy insurance even though it is not a good value:

Young people grow old. Healthy people get sick. Rich people become poor. The people overpaying to keep costs low today are the people underpaying 10 or 20 years from now. It’s a terrible mistake to believe your health-care needs won’t change over time.

Those young, healthy rich people will need a functional system in the future when they become older, sicker or poorer. So even for those least in need, health-insurance premiums are an investment–not in someone else’s future, but in their own. Only a cramped and narrow view of self-interest assumes that the status quo lasts forever.

Klein presents ObamaCare as akin to the classic prisoner’s dilemma, described here in an article for the Stanford Encyclopedia of Philosophy:

Tanya and Cinque have been arrested for robbing the Hibernia Savings Bank and placed in separate isolation cells. Both care much more about their personal freedom than about the welfare of their accomplice. A clever prosecutor makes the following offer to each. “You may choose to confess or remain silent. If you confess and your accomplice remains silent I will drop all charges against you and use your testimony to ensure that your accomplice does serious time. Likewise, if your accomplice confesses while you remain silent, they will go free while you do the time. If you both confess I get two convictions, but I’ll see to it that you both get early parole. If you both remain silent, I’ll have to settle for token sentences on firearms possession charges. If you wish to confess, you must leave a note with the jailer before my return tomorrow morning.”

The “dilemma” faced by the prisoners here is that, whatever the other does, each is better off confessing than remaining silent. But the outcome obtained when both confess is worse for each than the outcome they would have obtained had both remained silent. A common view is that the puzzle illustrates a conflict between individual and group rationality. A group whose members pursue rational self-interest may all end up worse off than a group whose members act contrary to rational self-interest.

But self-interest can converge with aggregate group interest if the game is played repeatedly, so that the players establish the ability to trust each other to cooperate (remain silent) rather than defect (confess), thereby overcoming their “cramped and narrow view of self-interest.” Similarly, Klein argues, if young and healthy people pony up for overpriced insurance now, they will benefit later when they’re able to buy an “affordable” policy when they need it, courtesy of the next generation’s inflated premiums.

There are several problems with this argument. For one, although it seems indisputable that a high degree of cooperation is a necessary condition for making ObamaCare sustainable, it is far from clear that it is a sufficient one. ObamaCare could collapse under the weight of other political, economic or demographic pressures. (Medicare in its current form is unsustainable over the long term, at least without massive tax increases–notwithstanding near-universal “cooperation” in the form of payroll withholdings.)

Even if we assume that widespread cooperation by young adults would be sufficient to sustain ObamaCare until they’re well into middle age, any individual’s cooperation would have too negligible an effect to be either sufficient or necessary. Klein’s argument is analogous to pious exhortations that “your vote makes a difference.” For the most part that is true only cumulatively: When hundreds or thousands or millions of citizens believe their votes count, they do. But even in Florida in 2000, any individual voter could have stayed home and it would only have made the difference between a 537-vote margin and a 536- or 538-vote one.

Many people take satisfaction in voting even though it is not, in this sense, entirely “rational.” But a lot fewer people would vote if they had to pay for the privilege, especially if the price tag were as a high as that of an ObamaCare policy. Even a minimal charge for voting–a “poll tax,” in American parlance–is constitutionally forbidden, and people of Klein’s ideological orientation are hypersensitive about any procedure that reduces the convenience of voting. It’s odd to expect young people to absorb huge costs to make ObamaCare work–especially when some of them will see the decision not to buy insurance as a “vote” against the law.


Getty ImagesOrange is the new pre-existing condition.



Further, a central feature of ObamaCare ensures that the individual cost of defection will be minimal. Let’s say you’re 28 and you decline to buy unaffordable insurance. A quarter-century goes by, and you’re a 53-year-old with a heart condition. If ObamaCare is still in place and working according to plan, you’ll be able to buy an “affordable” policy despite your “pre-existing condition.” If ObamaCare has collapsed because too many in your generation defected, you’ll be out of luck. In neither case will you be better off by virtue of having bought unaffordable insurance now.

If you’re young and healthy and farsighted enough to be thinking about middle and old age, your most prudent course of action would be to pass up ObamaCare insurance and save or invest your money instead. That way you will have a cushion against the personal or political vicissitudes of the next few decades.

Of course a lot of young adults do not have such long time horizons and will spend the money instead. On the bright side, at least that’ll stimulate demand.

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I am a retired Roman Catholic Bishop, Bishop Emeritus of Corpus Christi, Texas