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Paul Krugman on health care
Krugman produces this "add-on" to his recent Op-Ed, I think it is a very clear explanation of the issues...
...Basically, everyone agrees that health care is a messed-up sector. But there are two opposing doctrines about what the problem is.
I believe — and the evidence, I think, supports this belief — that the big problem is "adverse selection." An insurance plan offered to everyone at the same rate would be a great deal for relatively sick people, a poor deal for the healthy. So one of two things happens to private insurance. Either plans go into the "adverse selection death spiral," as sick people flock in, driving up rates, driving out more healthy people, and so on. Or insurance companies spend a lot of the money they receive in premiums screening out "high-risk" clients, so that the system has huge overhead and the neediest cases are excluded.
The clean solution to this problem is for the government to provide insurance to everyone. Other rich countries do that. So do we, for older Americans, veterans, and others. Actually, government health insurance is already bigger in America, in dollar terms, than private insurance — it covers fewer people, but that's because the elderly, who cost more, are handled by the government.
Employment-based insurance is a distant second-best, but better than nothing. Large employers, in particular, can spread risk widely, creating the kind of risk pool that dies from adverse selection in the individual market. And the tax preference for employer-based care, more or less by accident, has helped sustain this imperfect fix — which is why I'm highly skeptical of anything that might erode that preference.
What conservatives in the "consumer-directed" health movement believe, however, is that the big problem is "moral hazard" — people consume too much medical care, because someone else pays for it.
Now, this isn't entirely wrong. People probably do undergo expensive surgery with questionable effectiveness, and so on, because it's not out of pocket. Curbing that was supposed to be the point of managed care. But managed care didn't deliver, because people — rightly — don't trust private H.M.O.'s to make life and death decisions on their behalf. Successful managed care only takes place in institutions like the V.A. where there's more trust in the institution's motives.
The whole consumer-directed thing is, in my view, just at attempt to avoid facing up to that failure. Rather than admit that private-sector institutions aren't any good at rationing, conservatives now say that patients should be induced to ration their own care by being forced to pay more out of pocket. And that's where Bush's attack on gold-plating comes from: reduce the tax advantage of employer-based care, and deductibles and co-pays might go up.
The trouble is that the big money is in stuff like heart operations or other areas where (a) people can't pay out of pocket in any case — they must have insurance or go untreated — and (b) people really aren't sufficiently well informed to make the decisions. Yet the whole focus of consumer-directed doctrine is on things like routine visits to doctors' offices and annual dental checkups. It's going where the money isn't — because the advocates just can't believe that markets aren't always the answer.
Now here's the thing: in the name of consumer-directed health care theory, Bush is proposing changes that would essentially encourage people to move into the individual market — which wastes a lot of money, and doesn't and can't work for those most in need — while undermining the employer-based system, which isn't wonderful but is still essential. In particular, healthy high-income people would be encouraged to drop out of employment-based plans, leaving behind a sicker risk pool, driving up rates, and pushing employer-based care in the direction of an adverse selection death spiral. The plan we're supposed to learn about tomorrow doesn't sound big enough to have catastrophic effects, but it's a step in the wrong direction.
I might add I don't think adverse selection is the major problem, nor for that matter would I cite moral hazard. I would cite the (temporary?) difficulty in evaluating procedures and outcomes, plus consumer irrationality, noting those same consumers still could be rational in choosing insurance plans, even if they screw up their on-the-spot medical decisions. In my preferred but still imaginary model, consumers rationally choose insurance companies ex ante, those insurance companies make and fund key medical decisions ex post, and other third party intermediaries keep those insurance companies honest.
Posted by Tyler Cowen on January 23, 2007 at 04:49 PM in Medicine | Permalink
Comments
Adverse selection is a big problem in how the insurance industry works. There is substantial competition for the healthy and incentive to discourage enrollemnt or reenrollment of the sick, rather than assure their optimal care. Risk-related premiums would overcome this but make insuring the sick expensive and, in an employment-based insurance world, create incentives for employers to avoid employing those who are sick or whose families include the chronically ill.
I've written a long comment in response to the earlier post "The new Bush health care plan" expanding on this and its implications.
Posted by: Jack Needleman at Jan 23, 2007 5:34:10 PM
Isn't Singapore a clear rebuttal to Krugman's assertion that private individuals can't manage their own healthcare?
http://www.watsonwyatt.com/europe/pubs/healthcare/render2.asp?ID=13850
Posted by: Chris at Jan 23, 2007 5:38:30 PM
"In particular, healthy high-income people would be encouraged to drop out of employment-based plans..."
But then they take private insurance. And if the adverse selection problem is worse in private insurance markets, then that's where we want healthy people going, yes?
It looks like the employer-based system worsens your adverse selection problems, because less healthy people are less likely to be able to work, so incentivizing people towards employer-based health-case would make your problem worse. So, conversely, Bush's undoing of that bias should alleviate the problem.
Posted by: Keith at Jan 23, 2007 5:52:57 PM
Krugman's description of the debate is not bad. (Although, to nit-pick, I think his use of the term "moral hazard" is a bit off. Moral hazard would be if people did more extreme sports because they are insured.) What he unfortunately muddles is the distinction between "the problem" and "the mechanism".
What he is really describing here are different ideas about the mechanisms at work in the market for mediacal care. It is possible to have objective discussions about how much which mechanisms influence various measurable characteristics of the market.
But "the problem" is entirely subjective. One person may believe that the problem is that too many poor people don't get good medical care, and cost-be-damned. Another person may believe that the problem is that his gold-plated CEO-medical-insurance costs too much, and damn-the-poor. There are no objective criteria to decide which person is "right" about "the problem".
Posted by: David Wright at Jan 23, 2007 6:07:16 PM
From the linked-to post on adverse selection:
"Everyone talks about adverse selection in the market for health insurance but in fact non-group policies in these markets are not relatively expensive and not hard to get. The national average annual premium for reasonably generous coverage for a single person is just $2,268."
Either I'm a liar, or you're misinformed. Since I had to change my entreprenurial plans in order to get health insurance (the spouse went to work for a "big enough" company), I think you're misinformed. If a healthy person with about as mild a history of cancer as it's possible to have can't get insurance for *any* price, it doesn't matter at all what the average price is.
This is all very disappointing. Extremely poor information dissemination among people who should know better bodes poorly for sanity improvements in the future. Have any of you policy wonks ever worked for a company with 10 employees or fewer? Ever talked to a lawyer who just made partner?
Posted by: Russell L. Carter at Jan 23, 2007 6:35:15 PM
Am I a liar? Hmm, maybe we should consult the oracle.
Here is your search string: "health insurance individual policy reject applicants"
What if you're nuts?
"In the 34 states where individual market carriers are not required to guarantee access to coverage, carriers may deny coverage to any high-risk applicant, but may be more likely to deny coverage to those with mental disorders than other chronic health problems."
That's from
http://www.gao.gov/new.items/d02339.pdf
Interestingly, the date is from 2002.
There's lots more to be read from that search, tho I do note that some links are somewhat hopeful, in that some rejectees do find insurance.
There's always a but:
"If this is the first time you've gotten an individual (non-group) policy, be careful not to be rejected. Applications for individual policies aren't approved automatically, as group-policy applications often are. If your application has details that scare the insurance underwriters enough, they may reject you. And one of the questions on every insurance form I've seen is whether you've ever had an application rejected. It's a red flag; you don't want to have to explain rejections to other insurance companies!"
That's from
http://www.jpeek.com/msa.html
It's all hearsay, I know, this is the best of all possible worlds.
Ezra Klein ought to have a go at this, it's his job after all.
Posted by: Russell L. Carter at Jan 23, 2007 7:20:25 PM
Jack Needham and Russel L Carter:
You don't know what adverse selection is. Read Alex's post on adverse selection again, particularly what he says in the comment section.
If Krugman is right that insurance companies spend a lot of money screening applicants, that would be adverse selection. As far as I can tell, they don't spend a lot of money, they just reject a lot of people. That's not adverse selection.
If they're overzealous in screening people out, maybe that's adverse selection, but it's not an "adverse selection death spiral." It is mysterious to me why they don't offer a plan to Carter that simply excludes cancer treatment.
Posted by: Douglas Knight at Jan 23, 2007 7:27:11 PM
One problem that Keith misses and Russell L Carter hits on, is that adding healthy individausl to the private market does not cure the adverse selection. Insurance companies don't receive any more beneift from insuring sicker people because their risk is not spread out under a group-umbrella with the healthy people. All driving healthy people to the private market does is increase the profit margins of teh insurance companies.
One major point to consider in this discussion is the 90-10 rule. In health care, 10% of the people take up 90% of the money. People who get REALLY sick are rare but cost vast sums while milder sicknesses, like the flu, broken bones, or even hypertension, cost next to nothing in comparison.
Posted by: William Smith at Jan 23, 2007 7:32:48 PM
"As far as I can tell, they don't spend a lot of money, they just reject a lot of people."
"It is mysterious to me why they don't offer a plan to Carter that simply excludes cancer treatment."
Doug, it is essentially free for a computer to scan for a fixed set of rejectable premises on the very detailed individual health insurance applications. Have you ever filled one out? This is done with all small companies by the way, not just individual applications. I was the vice president of a 10 person company that was rejected by several insurers because *as a group, including children and spouses* our collective pool was too risky[1].
Why don't all you smart people know this? I find this very mysterious.
Now where is all this going? I don't think any of you that don't think adverse selection, or whatever it is, that keeps people who are willing to pay even exorbitant costs in order to obtain at least catastrophic insurance off the insured rolls have made your case. I can appreciate your position if you've always had a large company or university health plan; I had the best in the world when my doctor in Healthnet was a tremendously cool professor in Stanford medical school. But there's a whole nother world out there of small business and garage entreprenuers, and we see a vastly different world than you do.
[1] At the time, I didn't think much of it, you know, we'll just find somebody else to insure us. It didn't get rammed home until I went out on my own, and couldn't get insurance for *me, and my family*.
Posted by: Russell L. Carter at Jan 23, 2007 8:25:43 PM
Besides "adverse selection" and "moral hazard", there is a diferent type of market failure ( at least where I live (Brazil)):
The same treatment, from the same hospital, has diferent prices, depending on who pays.
If I pay out of my pocket, price is higher than if the treatment is paid by my health care plan.
I dont understand why a hospital charges me more than it would receive form the insurance company. As far as I know, the insurance company does not have a take-or-pay agreement with the hospital, they simply have a diferent price table.
Posted by: Mauro Kochen at Jan 23, 2007 8:41:18 PM
Doug:
Adverse selection means that individuals who are more likely to use insurance seek it. If premiums are based on the average risk in the population, the premiums will not cover the costs of the insured group. If an insurer prices the policy higher to reflect the actual risk profile of the insured group, healthier individuals are more likely to drop the coverage, since the value of the insurance relative to expected risk is lower. As they drop out, the premium to cover the less healthy risk pool needs to keep going up, further encouraging dropping of coverage by the lower risk. That's the adverse selection death spiral.
Health insurance companies would prefer to insure the healthy, and the process for estimating the risk of individuals via underwriting is imperfect at best. They respond by using very aggressive underwriting where they can, and may also respond by making the coverage they provide less attractive to the sick (more restricted lists of specialists, more hoops to jump through to have care approved, etc.). Perhaps not adverse selection per se, but a response to it, and one that contributes to health insurance serving the needs of the sick poorly.
Posted by: Jack Needleman at Jan 23, 2007 9:06:25 PM
I think that Krugman overstates that people are wary of the motives of HMOs, but not of the VA. Socialized medicine run by bureacrats who have a limited budget could be just as ruthless as HMO administrators in denying care. After all, what's the most an HMO is going to make in profits? 4% of revenue? 5%? Is that small sliver of profit really going to make a big difference when costs are going through the roof?
I don't care if it is the VA denying care, or a greedy HMO. ANYBODY who tells ANY American that they can't have ANY medical procedure is going to have a lawsuit on their hands. If we get socialized medicine that implements rationing, there will be a second American Revolution.
Posted by: Buzzcut at Jan 23, 2007 9:23:09 PM
Seconding buzzcut, I would have to suggest that Paul Krugman doesn't know many veterans (not too surprising, perhaps). In my experience, veterans complain about the VA at least as much as the average American complains about his or her HMO. Alternatively, maybe Krugman walks by faith, not by sight, and has the will to believe that patients like the VA, so he simply can't hear the veterans he knows.
Posted by: y81 at Jan 23, 2007 9:47:47 PM
Tyler Cowen has no plan: "Frankly I have no idea how to do that...." Frankly- while I greatly respect his opinions- I think he is working through a great deal of cognitive dissonance on this issue.
Douglas Knight, whether you call it adverse selection or not, that an individual with any medical problem cannot purchase health insurance is a serious problem with the current system. It is also a problem for any system that seeks to make individuals purchase their own insurance while still giving insurance companies the ability to reject applicants.
I would argue that insurance companies rejecting applicants is closely related to adverse selection: in effect, the insurance companies are anticipating the adverse selection problem and trying to avoid it by rejecting many applicants. Here, the "death spiral" is not the growing percentage of sick in an insurance pool, but the growing number of sick who cannot purchase any insurance.
Chris suggests the Singapore system is a "clear rebuttal to Krugman's assertion that private individuals can't manage their own healthcare." First, Krugman does not write such a statement in either of the items linked to recently in this blog. Second, Krugman's main concern is not an individuals inability to "manage" their healthcare, but a system that does not allow people a large number of people to afford health insurance.
Furthermore, the article Chris links to states,
Medisave is a subset of the mandatory Government pension scheme . . . to which a total of 33 per cent of wages is contributed . . . to individual accounts to fund retirement and health related expenditure. . . . [P] Medishield is effectively a national insurance scheme for catastrophic illness that is intended to cover a significant component of medical expenses from major or prolonged illnesses that are not covered by Medisave.It appears Singapore has a mandated payments for health care (i.e., taxes) and created a universal benefit for catastrophic care (which is similar to John Kerry's health care proposal during the last Presidential campaign). Hardly a repudiation of Krugman's policy recommendations (He supported Kerry's catastrophic coverage plan as a way to reduce insurance companies incentives to spend money in an effort to avoid insuring high-risk patents).
Douglas Knight, also comments "It is mysterious to me why they don't offer a plan to Carter that simply excludes cancer treatment." States often mandate a coverage of many illnesses. Therefore, a insurance company is not able to make such an offer. You may find this inefficient, but it reduces transaction costs when employers or individuals purchase insurance and when individuals evaluate employment compensation offers (as it is, many people are surprised to find their insurance does not cover many procedures). In addition, even if insurance was available without cancer treatment, we still have a serious problem: Carter is not fully insured! It is not very useful to have insurance for only those illnesses we are unlikely to suffer from.
Mauro Kochen, there could be a number of reasons for for differences in prices for insured vs. uninsured. One might be insurance companies have more market power to lower prices and negotiate with hospitals. A second might be that hospitals can count on insured patients actually paying their bill, while many uninsured will not; therefore, they must charge more to make up for those who do not pay (essentially charged for collection costs up front).
Posted by: c&d at Jan 23, 2007 10:08:51 PM
Russel Carter and Jack Needleman:
I'm sorry for my tone. Adverse selection is a problem, but I agree with Tyler that it's not the problem. I object to Krugman's claim that private insurance is in a death-spiral, and everything he says follows from that; everything you say seems compatible with my belief. I think a more central problem is that everything is absurdly expensive. If the actual cost of insurance for RC did not look "exorbitant," perhaps a company would have made him an offer.
Mainly I object to Krugman's claim that private insurance is in a death-spiral. JN: your description of a death-spiral is correct, but I don't see it occurring in private insurance. Krugman claims that these companies dissipate money trying to find the healthy, while I claim it's cheap. RC seems to agree with me, but seems to claim he doesn't.
Since I don't believe Krugman's claims about how much worse private insurance is, I don't see moving in that direction as a bad thing. It's not obviously a good thing, either, but it is plausible that if the private insurance industry grew, it might become more flexible, and be willing to insure RC. Of course, if it doesn't, and the employer-sponsored system is destroyed, then he's worse off.
Anything that gets us closer to Singapore, like moving to catastrophic insurance, seems like a pretty good thing to me. The complaint about risk pools is absurd. If you want the healthy to subsidize the sick, do it through taxes.
I said I think the problem is that everything is expensive. Perhaps it's worth the cost, but we can't decide without knowing what the costs really are, and we don't know that because all the prices are fake numbers produced by hospitals and insurance companies trying to trick each other. Paying for medicaid, medicare, and charity cases are other sources of deception, but probably not as bad.
It's not clear that moving to catastrophic insurance would actually solve this problem, but it's hard to see how it would hurt. It's not clear that solving this problem would solve the adverse selection, but it's hard to see how it would hurt. Singapore shows that these problems are solvable, though I admit that doesn't mean it can be replicated.
Moving to some kind of socialized system would solve the adverse selection problem. It might even make price information better by getting rid of the insurance companies, but I suspect it would get worse in the long run. I suspect that European systems, which are all rising exponentially and faster than GDP, get some price information from the US. I must admit that Singapore's health care is also rising faster than GDP, but I think slower than elsewhere.
Mauro Kochen: Maybe this what you're saying is not true, but I'd guess they have some kind of agreement. My last insurance plan involved 20% being taken off the list price immediately. This is the kind of distortion I was talking about above. The other thing that springs to mind is that maybe the rich don't have insurance.
Posted by: Douglas Knight at Jan 23, 2007 10:09:48 PM
other third party intermediaries keep those insurance companies honest
Is this like the "then a miracle occurs" part of the blackboard in the famous cartoon?
I wish TC would explain these excellent intermediaries.
y81, PK praises the VA because recent studies suggest its care is quite good, no matter what the vets gripe about.
Mauro: You will also find that Wal-Mart is charged less by its suppliers than they would charge others who buy less from them. No economist I, but I would guess there's an analogy there. My insurance co. can promise to send lots of business to the hospital, & negotiate rates accordingly.
Posted by: Anderson at Jan 23, 2007 10:11:28 PM
I think Krugman is largely convincing, but why not a combination of government-supplied insurance *and* 'consumer directed' policies?
That is, the government policy would not cover 100% from dollar one but would require significant deductibles and co-pays (the amount could vary as a function of income). This would make government-provided insurance substantially less costly and create incentives for individuals not to over-consume routine care. HSAs could even be included to help with the deductibles and co-pays. Patients no longer run into the doctor's office to demand a useless antibiotic for every sniffle (or if they continue to do it, they pay themselves), but everybody's covered if they need a heart bypass operation or cancer treatment.
Posted by: Slocum at Jan 23, 2007 10:20:12 PM
PK praises the VA because recent studies suggest its care is quite good, no matter what the vets gripe about.
After some recent cost cutting and improvements (previously it was fairly poor), but yes.
The problem with Krugman's point, OTOH, is Medicare and Medicaid. Both spend proportionately more on the poor and elderly than similar government programs in other countries as well. (And this despite Medicare and Medicaid negotiated discounts that cause some doctors to want to refuse the patients.) Both also spend money on unneeded proceedures. I think Medicare and Medicaid dispute his point that adverse selection and insurance company overhead are the problem. Other factors (including a desire to use lots of latest and greatest drugs and tests) have a lot to do with the cost of health care.
Would national health care look more like the VA, with a much more restricted formulary of drugs, restrictions (sensible and cost-effective ones, mind you) on treatment, or more like Medicare and Medicaid? I fear the latter. I fear in particular that people are promising Medicare treatment at VA prices.
Posted by: John Thacker at Jan 23, 2007 10:42:46 PM
Also, anyone discussing individual health insurance should mention which state of the Union that they live in. There's a law banning buying health insurance coverage from another state, and state regulations about health insurance vary considerably. Not just in states mandating that plans cover certain items, but also New York and New Jersey attempting to ban insurance companies from taking prior conditions into account. The latter results in a real problem of adverse selection, since the insurance companies are not allowed to price the customers differently, and hence it doesn't make sense for the healthy to get health insurance. This does result in a death spiral. NY and NJ individual health insurance rates are MUCH, MUCH higher than the rest of the USA.
Since Professor Krugman is at Princeton, his perspective about the adverse selection death spiral might well be skewed.
Posted by: John Thacker at Jan 23, 2007 10:49:01 PM
I think that the VA vs. HMO debate involves lots of point-missing by most people involved in it. The VA and HMOs do more or less the same thing - they don't pay for treatments that don't have a high enough cost-benefit ratio. And like the VA, HMOs don't produce worse health outcomes - they produce worse patient satisfaction, because people get told they can't have something that they think they need. Your typical veteran is getting care for free and has some familiarity with being told "this is how it is. deal." A typical HMO customer is going to have a different attitude.
Posted by: Jake at Jan 23, 2007 10:57:36 PM
The debate here sounds so *normative* with almost complete absense of counterfactual examples or cohorts (read: every other industrialized nation with the exception of a city state). You are well trained.
I'm surprised nobody mentioned the reinsurance option. Mr Krugman, shame on you.
Posted by: bronxite at Jan 23, 2007 11:07:57 PM
Bronxite:
I am well aware that every other industrialized nation does have a form of national health care. Some allow private alternatives, some do not. Some present little to no out of pocket costs for direct care and rely on rationing and waiting lists; others, like France, pass on some out of pocket costs to consumers to discourage overuse.
However, I still think that it is instructive to look at the actual national health care plans that we have in this country, Medicare, Medicaid, and also the VA. While there are many forms that a national health care plan may take, I think it is reasonable to assume that it will most likely take a form similar to Medicare and Medicaid, though supporters often argue that it will cost more like the VA. (While promising treatment like Medicare, I note.) However, patient satisfaction is higher with Medicare than the VA. Do we really believe that the political process and the voters will produce a health care plan similar to that of other countries and quite different from Medicare or Medicaid (though more similar to the VA)? Or do we think that the end result will be something like extending Medicare to all and still much greater expense on health care than other countries?
Posted by: John Thacker at Jan 23, 2007 11:22:16 PM
I think people are completely missing the point by focusing on the now and not the soon. More precisely you need to think about the future of dna profiling relative to adverse selection. It is relatively easy to scan ones DNA for markers even now and the number of known markers that change the probability of a given disease is increasing rapidly. (For example I am homozygous for a mild genetic disease called Hemochromotosis that increases the probability I will develop the disease 9X). It is clear that, within a few years an insurance company will be able to very accurately calculate "the actuarial value of a persons genes", and at this point health insurance that is based on individual coverage must end.
Posted by: A Biologist at Jan 24, 2007 7:18:33 AM
Every other nation also has a parliamentary system of government. Should we abandon our republican form of government at the same time that we move to socialized medicine?
Maybe socialized medicine and parliaments go togehter? Parliamentary governments tend to steamroll minority opinion.
Posted by: Buzzcut at Jan 24, 2007 9:21:03 AM
More precisely you need to think about the future of dna profiling relative to adverse selection.
You don't mean adverse selection, you mean something else. Adverse selection is when there is an asymmetry of information-- when certain customers know that they are a worse risk but insurance companies don't. In that situation, the customers who are a worse risk buy lots of extra insurance, so the companies pay out more to those people and have to raise premiums. This causes premiums to increase past the level where the people who know that they are a better risk feel that it's worth it, so they drop out. This causes the insurance companies to have to raise premiums again, since the risk pool just got worse. That is the death spiral of adverse selection that Professor Krugman and others warn about.
The problem you point to is not the economic problem of adverse selection, since both individuals and insurance companies would have access to the information. It is more of a social justice problem, where someone has drawn a bad result in the genetic lottery of life. The more certain the knowledge of congenital diseases become, the more it's about redressing the bad genetic hand someone drew rather than guarding them against an unlikely occurance that could happen to anyone. There are, of course, some genetic outcomes that we don't compensate for; we don't pay men who were born short or women genetically predisposed to be fat for the loss of income and mating possibilities. However, diseases are generally a bit more serious, and I certainly am not arguing that mandatory redress for rare genetic illnesses will lead to Harrison Bergeron. Certainly states have considered and in some cases implemented funds for children born with cerebal palsy, paying them and their parents for their poor luck. (Not in NC, of course, where John Edwards successfully led the opposition, since it would keep him from being able to sue on their behalf.)
Of course, one can hope that earlier screening and better knowledge will also come with better abilities to treat and mitigate congenital diseases. There's also the possibility that nearly everyone will have some congenital disease, it will just differ what from person to person and risk pools will still be possible. Also, if the chance of getting a disease is rare and it happens late in life, then it may have no more effect than finding out what is most likely to be a problem, but not necessarily raise costs.
(It's also possible that companies will offer insurance that will pay for anything other than the disease one is likely to get, or pay a reduced amount for that, depending on the propensity to get it.)
Posted by: John Thacker at Jan 24, 2007 10:56:06 AM
