Both the Senate and House versions of health care legislation include provisions that would prohibit insurers from declining to underwrite people with preexisting conditions and prevent them from imposing annual or lifetime caps on coverage.
Today’s Shoe illustrates one of the problems with these proposed restrictions.
The comic strip Shoe was created by Jeff MacNelly in 1977 as an avian parody of life among a newspaper’s employees, their families and friends. (For those under the age of 30, “newspapers” are antiquated social media involving the transmission of ink-based words and images onto thinly sliced dead trees. Several can be found on display at the Smithsonian.)
Treetops Tattler reporter Perfessor Cosmo Fishhawk owns a pink 1959 DeSoto, which frequently is under the care of Irv the repairman. In today’s strip, Irv offers Cosmo helpful advice about how to avoid being stranded by his broken down car. Cosmo explains why Irv’s suggestion won’t work.
Insurance policies providing towing service in the case of breakdown are offered by numerous parties, most notably as a membership benefit by the American Automobile Association (AAA). Service quality and quantity vary depending on the customer’s choice of membership level (i.e., the insurance premium).
Insurers contract with local garages to provide towing service at fixed prices paid by the insurer. Thus, drivers with roadside assistance coverage do not need to fear facing perceived or real extortionate demands from tow truck drivers. However, these prices are below the market equilibrium price, so stranded drivers willing to pay cash can expect to go to the front of the queue and get better service.
Like all forms of insurance, roadside assistance entails both moral hazard and adverse selection. Moral hazard arises because having roadside assistance insurance weakens drivers’ incentive to ensure their vehicles are in proper working order. Adverse selection arises because the product appeals most to motorists like Cosmo Fishhawk, whose cars break down a lot.
AAA does not decline to cover drivers like Cosmo Fishhawk, whose vehicles present a high risk of needing roadside service. However, it limits free service to four calls per year. This is analogous to health insurers’ annual caps, which pending legislation would prohibit. If AAA were required by law to provide unlimited roadside service calls, it would face much more serious moral hazard and adverse selection problems. Some would rely on roadside service to start their cars every morning rather than replace a dead battery.
If in addition roadside assistance services were provided by a subsidized public option, as pending health care legislation proposes to do, moral hazard and adverse selection would increase disproportionately among those who receive government subsidized roadside assistance. Drivers who need roadside assistance rarely, whether because they maintain their vehicles in better shape or drive fewer miles, would pay disproportionately more to cover these subsidies.
As the proportion of drivers with roadside assistance coverage grows, the proportion of services provided under prevailing market conditions declines. Services must be allocated, and allocation by price would be replaced by rationing by waiting time (if all service requests are handled in order) or by political considerations (if some drivers or vehicles are treated more favorably than others).