“Forcing the Poor to Buy Volvos?”

When, if Ever, Is It Permissible for a Government to Require People to Buy More Comprehensive Health Insurance than

They Want?

Alex VoorhoevePrinceton & LSE

papers on: http://personal.lse.ac.uk/voorhoev

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Structure

1. Core case2. Sunstein’s argument3. Counterargument

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1. Core caseSingle plan, provided by government, either mandatory or the only reasonable option for insurance. Financed by (i) donors; or (ii) individuals through tax or an insurance premium.

Decision-maker who must decide what to include in the plan.

Under certainty, this decision-maker rightly gives some priority to improving the well-being of those who are worse off than others (is NOT utilitarian).

Simplified example: 1,000 young adults. A disease will affect one person in this population. Each person’s chance of developing it is 1/1,000.

If untreated, the affected person will die young. If treated, he/she will be cured.

The cost of universal coverage for this treatment is $10 to each person. If there is no UC, no treatment will be available.

As far as each person’s self-interest is concerned, everyone in this population is willing to pay up to $9 for this treatment to be included.

Given their information, this is a rational preference.

INCLUDE: Expected utility: 50 for each. Final utility: 1,000 have a life-time utility of 50.

EXCLUDE: Expected utility: 50.06 for each. Final utility: 999 have a life-time utility of 50.08; 1 person has a life-time utility of 30.

Assume: In a case of certainty, the distribution of final utilities under INCLUDE would be superior.

But we are dealing with a risky case. From the perspective of each person’s expected utility, EXCLUDE is superior. This is just to say that each person’s current Willingness to Pay for INCLUDE ($9) is less than its cost ($10).Should the decision-maker nonetheless choose INCLUDE?

2. Sunstein’s argument for “no”.(“Valuing Life”, Duke Law Journal, 2004.)

The case for respecting WTP is based on considerations of welfare and autonomy.

Welfare: “If people are willing to pay [$9] but no more to eliminate a [mortality] risk of [1/1,000], their welfare is decreased by asking them to pay more.” (p. 400).

“If poor people are required to pay an amount for risk reduction that exceeds their WTP, desirable redistribution will hardly result” (p. 394).

Autonomy: “People should be sovereign over their own lives and government should respect individual choices about how to use limited resources (so long as these choices are informed). If regulators do not use people’s actual [WTP] judgments, then they are insulting their dignity” (pp. 400-1).

Conclusion:“Requiring poor people to buy Volvos is not the best way of assisting them” (p. 395).

3. Counterargument -- WelfareIt is not true that every individual’s final utility is lowered if we include treatment. One individual’s final utility will be greatly improved.

This also means that there is redistribution in favor of the worst off individual through INCLUDE.

Unanimity in favor of EXCLUDE is due to individuals’ lack of information of what is truly in their interest.

If they all knew what was truly in their interest, 999 would favor EXCLUDE for themselves, but 1 would favor INCLUDE.

Insofar as final welfare is of concern:If the decision-maker knew what was truly in the well-being interests of each, she would be aware of this conflict of interest. And she would also (by hypothesis) know how to resolve it: in favor of the worst off.

So the decision-maker knows that there is an alternative she would, rightly, invariably regard as best if she had full information: INCLUDE.

A decision rightly reached with full information is at least as good as a decision reached with partial information.

So, whenever possible, a decision-maker should decide as she would with full information. She should choose INCLUDE.

Autonomy Scenario 1: Donor pays and decides.Suppose INCLUDE would use funds that would otherwise redound to the population on a $10 per person basis (e.g. lower taxes because of direct budget support).

It is not a violation of a person’s autonomy to give her health insurance that she/he values at $9 rather than give her $10.

Autonomy Scenario 2. Individual versus social preferencesNow suppose the government decides and citizens pay.The preferences that underlie the WTP are typically based on what an individual values for himself.

“How much would you be willing to pay for you to be covered against this illness, which affects 1 in 1,000?”

Similarly, standard practice for eliciting health utilities is to use this person’s preferences concerning what happens to him only.

But individuals also have social preferences. And the decision to include or exclude treatment affects the distribution of well-being in society.

Some who prefer EXCLUDE for themselves may prefer INCLUDE, considering the impact on themselves and the distribution of final well-being.

If a majority favors INCLUDE on grounds of solidarity, then this majority’s autonomy is not violated by INCLUDE.

The minority is forced to buy a more comprehensive package of coverage against their will, but this does not seem a problematic limitation of their autonomy.

Autonomy Scenario 3. Creating goods versus banning transactions.Suppose the government decides, citizens pay, and all citizens favor EXCLUDE in spite of its distributional effects. Compare:

(I) The government creates beneficial health insurance, which did not exist. It decides for INCLUDE.

(II) Health insurance contracts INCLUDE and EXCLUDE are offered in a private market. Everyone chooses EXCLUDE. The government bars EXCLUDE.

(III) There is no interference with free choice, just a failure to give individuals what they want most (because of lack of info).

(IV) A violation of autonomy, though perhaps justifiable.

Summary: May the decision-maker choose INCLUDE?Donor pays & decides

Government decides; citizens pay

Social preferences

favor INCLUDE

Government creates

insurance

Insurance exists; ban on

EXCLUDE

ConsideringWelfare Yes Yes Yes Yes

ConsideringAutonomy Yes Yes Yes No

Considering both Yes Yes Yes ?

The most common cases in very poor countries.

ConclusionEx ante Individual Willingness to Pay > Individual Cost for a service is not a necessary condition for inclusion in a health care package.The decision which health services to include is not merely answered by asking what each individual wants coverage for (given the cost to them). It must also take into account the distribution of final well-being.