Loopholes in reform bill will mean fewer people covered, higher premiums

A key feature of the House and Senate health bills would prevent insurance companies from denying coverage to anyone with preexisting conditions. The new coverage would start immediately, and the premium could not reflect the individual's health condition.

This well-intentioned feature would provide a strong incentive for someone who is healthy to drop his or her health insurance, saving the substantial premium costs. After all, if serious illness hit this person or a family member, he could immediately obtain coverage. As healthy individuals decline coverage in this way, insurance companies would come to have a sicker population. The higher cost of insuring that group would force insurers to raise their premiums.

The higher premium level would cause others who are currently insured to drop coverage, pushing premiums even higher. The result would be a spiral of rising premiums and shrinking numbers of insured.

Feldstein notes that fines would be imposed for this sort of rational behavior, but that they are far too low to alter the practice. The type of gaming the system comes naturally to people when it comes to spending their money versus the "government's" money. Feldstein does the math for individuals and for the economy as a whole.

Worth a read and a pass along to friends, family, and Congressmen.

Incidentally, the University Chicago economist (and close personal friend of Barack Obama's) Cass Sunstein was appointed by the president to be his "regulatory czar." Sunstein has been known for carving out a reputation in the field of behavior economics - how people respond to incentives and penalties. He co-wrote a superb book on this very topic last year, "Nudge: Improving Decisions about Health, Wealth, and Happiness. " Did he just take a pass on reviewing how people would rationally respond to both the House and Senate bills, all in the pell-mell rush to takeover one-sixth of the economy while Democrats control Congress.