Insurance or Health Savings Accounts? Pensions or 401(k)s? Social Security and Medicare or Buy Your Own? The two parties are not the same. (More)

Not the Same, Part I: Health, Retirement, and Risk

This week Morning Feature examines the differences between the Democratic and Republican parties. Today we consider their views on who should bear the risk in health and retirement. Tomorrow we’ll look at their views on risk in business and banking. Saturday we’ll conclude with their views on who “We the People” are.

An insurance company with an army?

Nobel Laureate Paul Krugman often describes the federal government as “an insurance company with an army,” explaining:

The vast bulk of its spending goes to the big five: Social Security, Medicare, Medicaid, defense, and interest on the debt.
[…]
And if you want smaller government, either you’re talking about cuts in the big five, or you have no idea what you’re talking about.

That’s an accurate description of the federal budget. At a deeper level, it’s also a good shorthand description of what progressives see as the essence of civil society. At the federal, state, and local levels, progressives envision government as “an insurance company with legal authority.” Aside from maintaining public safety and resolving disputes through law, we see government (often working through private actors) enabling us to pool assets and pool risks so that together we can do what few if any of us could afford to do on our own. We pay ‘premiums’ in taxes or fees, and expect to receive commonly-defined ‘benefits’ in infrastructure, education, health care, and retirement. If your ‘premiums’ don’t cover the ‘benefits’ you need, the loss is made up by those whose ‘premiums’ exceeded the costs of their ‘benefits.’

But there is another perspective on government. Call it “a bank with an army” at the federal level or, more broadly, “a bank with legal authority.” In this view, again aside from public safety and dispute resolution, government (or the private actors it supports) should enable us to hold assets and save for expected and unexpected risks. But this is ‘banking,’ not ‘insurance.’ The risks remain individual, and no one should expect to ‘withdraw’ more from government (or private actors supported by government) than he or she has individually ‘deposited.’ If you didn’t ‘deposit’ enough for pay for a risk, the loss is on you.

Insurance vs. banking in health care

That distinction between insurance and banking – pooled assets and pool risks vs. held assets and individualized risks – is the key difference between the Democratic and Republican views on health care.

While Democrats debated whether health care reform should mean government providing insurance directly (single-payer or public option) or through private actors (premium support for and better regulation of private insurance), we agreed that health care should be a pooled risk. A major illness or injury costs more than most of us can afford on our own, as proved in the American Journal of Medicine study finding that health care costs were the leading cause of bankruptcy in 2007. And while many Democrats were disappointed that the Affordable Care Act works mostly through private actors, most of us were (or should have been) pleased that the ACA treats health care as a pooled risk … as insurance rather than banking.

To call the ACA a “Republican bill” because it mirrors ideas proposed by Republicans in the 1990s is to miss how much the Republican Party has changed since then. By 2009, Republicans were advocating health savings accounts as the primary way to pay for health care:

Money kept in HSAs can be used for health care in later years, or for anything in retirement. So patients are effectively using their own money for non-catastrophic care. That provides powerful incentives to avoid overly costly or unnecessary care and to look for doctors and hospitals that can provide quality care at lower cost, creating real market competition to reduce costs.

The Republican House alternative would allow consumers to use funds saved in HSAs to pay for the catastrophic insurance covering costs above the deductible. Broadly expanding HSAs across the entire health system, including Medicare and Medicaid, would essentially solve the health cost problem.

This is the ‘banking’ model of health care, based on the Randian premise that health care is not a right. In this view, health care is a commodity or service just like food or haircuts. If you need it, you should save for it, or borrow for it. If you need it and can’t save or borrow enough, the loss is on you.

Whatever Republicans may have proposed in the 1990s, by 2009 the Affordable Care Act was not a “Republican plan.” It was a Democratic plan that pooled rather than individualized risk.

Similarly, Rep. Paul Ryan’s plan to ‘reform’ Medicare would change it from a defined-benefit plan to a defined-contribution plan. Again, this individualizes risks. If the government’s defined contributions are not enough to cover the cost of seniors’ insurance or care, the loss would be on them.

Insurance vs. banking in retirement

Republicans also advocated policies that encouraged businesses to switch from defined-benefit pension plans to defined-contribution 401(k)s, and long for a similar ‘reform’ for Social Security. The difference is, again, between insurance and banking.

In a defined-benefit plan – the insurance model – the government or employers pool assets and pool risks. When the economy is strong, workers’ contributions and pooled interest accrue faster than retirees’ benefits and the pension fund balance grows. When the economy is weak, the pension fund balance shrinks. Regardless, retirees get their defined benefits.

In a defined-contribution plan – the banking model – the government or employers hold assets and individualize risks. Workers ‘deposit’ their individual contributions and accrue individual returns. If the investment market is strong, if the portfolio is well-managed, and if a worker can afford to contribute enough during his/her working years, he/she will ‘withdraw’ a good retirement check. But as millions learned during the 2008 market collapse, the market is not always strong. And if the market is weak, if a portfolio is poorly-managed, or workers can’t afford to contribute enough during their working years … again, the loss is on them.

Those who say “both parties are the same” because President Obama and Democrats in Congress propose changes to health and retirement premiums or benefits are missing the forest for the trees. Democrats remain committed to health care and Social Security as insurance programs, with pooled assets and pooled risks.

Republicans want health care and Social Security to operate as banking programs, with held assets and individualized risks. That’s an entirely different, far more perilous forest.

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Happy Thursday!