Saturday, October 19, 2013

An Insurance Company with an Army?

Is personal insurance a public good?

For all the talk of what's right and what's wrong with, one thing that it is not is publicly provided health insurance. Instead, it offers subsidized (for those that qualify) state-based private insurance to individual residents of those states via a government-run exchange. Though a government-run marketplace is far from ideal and state-based insurance limits nationwide price competition, that's the whole of it.

A recent article in The Economist discussed how government entitlement programs get entrenched and institutionalized, offering, "People like to joke that America's government is basically an insurance company with an army." At first I merely wondered the genesis of the joke; New York Times columnist Paul Krugman credits former U.S. Treasury and Federal Reserve official Peter R. Fisher. But then, as my day progressed and I worked with my government client, I started to realize the depth of the issue.

Let's look at health insurance first. Medicare and all its parts are financed through FICA – the Federal Insurance Contribution Act – and the burden is shared equally by employees and employers on a portion of wage income. (BTW – it's not a "contribution"; it's a tax.) The current combined tax rate is 2.9%. Medicaid is healthcare insurance for low-income individuals that is funded jointly between the federal and state governments and is managed by the states. Tricare provides civilian health benefits for military personnel, military retirees, and their dependents.

(You could make the case that Federal employer contributions to Federal workers' health insurance fits into this category. But you could also make the case that it's part of workers' total compensation package that includes paid leave and holidays. For example, my company pays 100 percent of the employee's share.)

Then there's income maintenance insurance. Let's start with Social Security. "But wait", you say, "Social Security is a retirement system that I paid into and I expect my payout." Sorry, but your and your employer's FICA contributions – a combined 12.4 percent on the first $113,700 of gross wages – are "pass through" payments to current beneficiaries. If you thought that the Social Security Trust Fund was there to hold your "contributions" until your retirement, then you've been deceived: it's there only to buffer times (like now) when payouts exceed receipts.

There's also insurance for those out of work through the Federal Unemployment Tax Act (FUTA) and various state unemployment tax acts (SUTA) that taxes employers.

Economic activities are insured or subsidized by the government as well. The Federal Housing Administration (FHA) insures loans made by banks and other private lenders for home building and home buying; it's the main backstop for the 30-year mortgage. The Department of Agriculture (USDA) provides subsidized crop and livestock insurance and income insurance through the Supplemental Nutrition Assistance Program (SNAP). The Federal Emergency Management Agency (FEMA) provides subsidized flood insurance to homeowners.

Then there's the Department of Veterans Affairs which does a little bit of everything through Veterans Benefits Administration and Veterans Health Administration. With VA benefits you could point out that benefits accrue to those that proudly served their country, and you'd be right. In fact I continually argue that compensation to active military professionals is too low considering the service they provide. However nonwage benefits in the private sector end with the termination of employment; veteran benefits continue after separation and, in some cases, cover and transfer to family members.

This list is not meant to be exhaustive, just illustrative. Payments to individuals now comprise two-thirds of the federal budget. Public goods and services are meant to serve we the people, not me the person.

Look – I think the Affordable Care Act (ACA) needs an overhaul and I made some suggestions to do so during my 2012 Congressional run. But the bigger question goes beyond ACA and Is the federal government the insurer of last resort? Or have we made it our easy-out first stop because of political pandering and formidable institutional barriers to health insurance competition?

Whenever I see the GEICO gecko or Flo from Progressive, I wonder.