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John Edwards on health care, part II
Paul Krugman writes:
Mr. Edwards goes two steps further. People who don’t get insurance from their employers would... purchase insurance through “Health Markets”: government-run bodies negotiating with insurance companies on the public’s behalf. ...
Why is this such a good idea? ...[M]arketing and underwriting — ... screening out high-risk clients — are responsible for two-thirds of insurance companies’ overhead. With insurers selling to government-run Health Markets, not directly to individuals, most of these expenses should go away, making insurance considerably cheaper.
If I understand correctly, when it comes to the health markets, private companies would process the payments but government is the residual claimant, bears the financial burden of high-risk customers, and calls the final shots.
This passage by Krugman is an object lesson in why many economists disagree. I read this and think:
"My god, once government covers insurance company losses, incentives for cost control will vanish."
I'm willing to add: "Cost control doesn't work very well today, I admit," without changing my net assessment: "Yes, things can always get worse, furthermore implicit rationing might be the result. A reformed private option can work better than the American status quo. Let's not lock ourselves out of those potential gains."
Many economists to the left of me are more worried about saving on the overhead costs.
No one serious believes in central planning any more, but the intellectual roots of this disagreement are to be found in those debates.
Addendum, from the comments: "Huh? Wouldn't the screening expenses be replaced by the expense of insuring high-risk people who could no longer be excluded from the pool? And isn't it safe to assume that the latter expense exceeds the former, for otherwise insurers would keep the high-risk people in the pool rather than pay for the trouble of screening them out?"
Posted by Tyler Cowen on February 9, 2007 at 11:48 AM in Medicine | Permalink
Comments
"No one serious believes in central planning any more, but the intellectual roots of this disagreement are to be found in those debates."
Well said! This is why it is so important to study and learn from the debate about central planning. I would rephrase slightly though: "Few still believe in complete central planning..." is more accurate.
Posted by: liberty at Feb 9, 2007 12:03:16 PM
Your concerns/fears sound a bit knee-jerk to me -- is there any evidence private sector health insurance is automatically better than a gov't-run program. Other countries manage to pull it off.
I think Krugman is on more solid ground than you give him credit. If the feds run the program the way they run the VA medical system, I won't have any complaints.
Posted by: Auto at Feb 9, 2007 12:22:35 PM
I did not understand it in at al the way you did. In my reading, the government creates very large pools with which to negotiate health insurance.
The government run bodies wuold negotiate on price, leaving in all of the price incentives, and perhaps increasing them for reasons of specialty and market power, and eliminating all of the incentives to screen out potentially costly people (because of the large pool).
With that said, I think the amount of regulation required in any of these private health insurance markets makes most cost savings initiatives adventures in exploiting temporary or politically gamed loopholes, and that this is a fatal flaw that not even the God of deregulation could save.
Posted by: theCoach at Feb 9, 2007 12:33:11 PM
I just got back from visiting Australia. They've had universal government provided health insurance since the 70's. They spend about half of what we do per capita on health care and are no less healthy. So I don't understand why you think that government provided insurance would necessarily be more expensive.
Posted by: Jeffrey Miller at Feb 9, 2007 12:33:48 PM
Jeffrey Miller - Be careful comparing two countries who differ in so many areas, of which the health care system is only one, and assuming that the only thing driving health care costs is the health care system. Especially when one country absorbs millions upon millions of extremely poor (relative to the rest of the nation) immigrants.
To Auto - the only area where governments have EVER shown themselves to be more efficient than the market are areas where the markets completely break down (such as roads, police, etc.). I've not seen any evidence that this is the case for health care. And given that none of us has seen real free market health care, I'm not sure anyone else has either.
Posted by: Josh at Feb 9, 2007 12:49:13 PM
As Jeffrey Miller points out Australia and lots of other countries seem to deliver care at least as good as ours in most respects and better in some respects at much less cost. A system in which the federal government paid a risk adjusted flat amount somewhat similar to the system for federal employees would leave incentives for the insurer and the beneficiary to contain costs. Granted risk adjustment is not easy but it is doable. Income based subsidies to reduce cost sharing for cost effective preventive procedures would need to be part of the mix.
Posted by: Sonia at Feb 9, 2007 12:57:09 PM
Mr. Cowen,
There is solid evidence showing that
in insurance markets government monopolies can be more
efficient than competition due to such screening efforts
that produce costs but no benefits. Your unawareness fits the long tradition to ignore European research
which does not support American free market dogmas (such results are hard to publish in AER, it is of course easier to publish evidence that Indians of the Amazon respond to market incentives).
Posted by: Montez at Feb 9, 2007 1:25:12 PM
Krugman wrote: "With insurers selling to government-run Health Markets, not directly to individuals, most of these expenses should go away, making insurance considerably cheaper."
Huh? Wouldn't the screening expenses be replaced by the expense of insuring high-risk people who could no longer be excluded from the pool? And isn't it safe to assume that the latter expense exceeds the former, for otherwise insurers would keep the high-risk people in the pool rather than pay for the trouble of screening them out?
Posted by: jp at Feb 9, 2007 1:32:51 PM
I think there is already rationing. The best health care is given to the rich, who can pay for it without a health care company. The second best is given to those with health care. The worst is given to those who cannot afford it.
Simply stated, rationing is an inevitable part of a market based system. For example, there are only so many $1,000,000 homes and they are rationed to those who could afford them.
There seems to be a bias for providing the best healthcare to those who can afford it themselves (those who society puts most value in). I am not expressing an opinion for or against this. I am merely observing that the capitalist system, just as much as the Communist or socialist system, rations goods. The systems simply assign different values to the goods.
Posted by: Allan at Feb 9, 2007 1:38:35 PM
Josh,
Austalia, as Sonia points out, is not an outlier. It's the US which is an outlier in health care costs. Austalia and Canada both have a higher % of foreign born residents than does the US, so I'm skeptical that immigration is the cause for our absurdly costly, unfair, and inefficient health care system.
I had a long talk with the former treasurer of New South Wales about this and he said that when their system was being debated in the 70's all the usual suspects - insurance companies, hospitals, doctors, were opposed. Fortunately for them, they got it through despite the opposition.
Posted by: Jeffrey Miller at Feb 9, 2007 1:42:39 PM
The commentary from the libertarian economist blogosphere about universal health care sounds a lot like physicists and engineers standing around the wright brothers plane discussing all the various reasons as to why it can't possibly fly. There are dozens of concrete examples from every other industrialized country in the world that a government sponsored universal health care provides comparable health results at lower cost and with much greater access to care. That is a fact. If our theories say that it can't work, and reality says that it does indeed work, THEN OUR THEORIES ARE WRONG! We should expend our energies trying to figure out why it does work and adjust our theories accordingly, rather than pointlessly grinding our ideological axes.
Posted by: nelziq at Feb 9, 2007 2:05:22 PM
What may be overlooked in discussing foreign healthcare systems is their dependence on the US for innovation and for medical goods, such as drugs, effectively supplied at only marginal production costs. Everyone benefits from price discrimination, but most of the beneficiaries have incomplete economies, unable to stand on their own and produce comparable results.
A welfare mother benefits from the low priced food that a somewhat free market economy produces, but an economy made up entirely of welfare mothers will produce nothing.
Regards, Don
Posted by: Don Lloyd at Feb 9, 2007 2:09:43 PM
Dr. Cowen, why did you pull out and thereby highlight JP's post? He and
Krugman clearly have a different conception of the word "cost". For Krugman
they are a waste. For JP they seem to be payment for a sevice provided.
They are not comparable so that dispute is really just semantics. Surely
you know this. Not to say that Krugman is right and you are wrong, but JP
does not support your case much.
Posted by: Gerard MacDonell at Feb 9, 2007 2:11:57 PM
--There are dozens of concrete examples from every other industrialized country in the world that a government sponsored universal health care provides comparable health results at lower cost and with much greater access to care. --
Not from what I've read in their papers. I used to have a lot of articles from their papers saved on my old computer. Geez, Canadians dogs and cats were getting MRIs sooner than humans!
And most of them do not spend as much on their military, would there systems be *as good* if they did?
They freeride on our military and our prescription drugs.
How much does Michigan make from all the Canucks coming across the border for treatment?
You think Americans are going to wait 2 years for a knee replacement?
Posted by: Sandy P at Feb 9, 2007 2:12:26 PM
I am naive on this matter, but could'nt a counter argument regarding cost controls be that government rarely wishes to pay more for services. i.e would not govt pressure insurers to write off some of the costs of high risk people? I agree that govts can be inefficient, but they are equally inefficient at paying out sums of money. Of course, this also depends on the extent insurers can lobby for lack of government "oversight" on cost controls.
Posted by: vkri at Feb 9, 2007 2:13:10 PM
"Austalia and Canada both have a higher % of foreign born residents than does the US, so I'm skeptical that immigration is the cause for our absurdly costly, unfair, and inefficient health care system."
Can Australian, Canadian, and US immigrants all be really equated to each other? Each of the three does not take in immigrants from the same countries in the same proportions.
Posted by: pjgoober at Feb 9, 2007 2:17:07 PM
So far, the discussion has left me relatively enamored of Edwards' plan, and not so much enamored of total single payer.
If you have mandatory insurance coverage and mandatory insurance purchase, it looks like you solve some of the major problems in health care. First, screening may be profitable for insurers, but they are a deadweight cost.
In addition, I believe that if healthy people could sign a contract saying they'd pay more for health insurance in exchange for the guarantee that they'd still be able to get health insurance if they were sick, they'd take that deal.
So it looks like you get quite a few of the benefits of single payer, without the one major negative of harming Research and Development through price controls on pharmaceuticals and other such nonsense. Don is right that the rest of the world, especially the rest of the world's national health care systems, benefits from the American market's shouldering of the R&D burden through enticing (and socially beneficial) patent-generated profits.
In addition, if people have to get insurance and have to start shopping, there'll be some good deals with insurance companies who offer lower premiums in exchange for the insured's willingness to go overseas for care. I fear that Edwards, with his Neanderthal attitudes towards trade, would then want to discourage this beneficial innovation.
Posted by: Keith at Feb 9, 2007 2:23:10 PM
Many of you are reacting emotionally rather than analytically. You might favor various foreign systems, and think they are cheaper and better than America, but that does not necessarily constitute a defense of the Edwards plan.
Posted by: Tyler Cowen at Feb 9, 2007 2:39:21 PM
1. Allen: If it goes through the price mechanism with demand equalling supply than it is not rationing, in the common use of the word. What it the criteria is that if you have the money you can buy a million dollar house with no waiting.
2. The defining characteristics of the American health care system is not that is it more expensive per unit of health, but that Americans (about 50% richer than Europeans) consume much more health care, compared to other countries and compared to the past.
This includes more comfort, more state of the art technology, more specialist doctors, more marginal care, and most importantly no rationing. Another part of the European system that you cannot replicate in the US by going socialist is low pay for doctors and nurses, and free-riding on American spending on drugs.
3. There is simply not that strong of a link between health and health-care, above a certain point. This should really be obvious, life style, genes, substance abuse, body weight, crime, accidents, eating habits are much more important than which hospital you go to. But people do not only buy health care to get a few more months of life expectancy.
Japanese Americans have the longest measured life expectancy on this planet. Mormons live 10 years longer on average than Europeans. Black men in the US live 8 less on average than Hispanic men (I am sure it is the racist health care system).
4. What idiot Krugman will not tell his readers that they can get “cheap” European care if they like, just create extremely bad American HMO insurance, or don’t buy health care at all and go to Public hospitals. The reason the Euopean systems are cheaper is not that they magically have less costs, it is that they give the consumer much less health care. Of course the people in the US that go to Public hospitals in the US are not the same kind of people that consume government health care in Europe. This makes the health outcome different, even if the quality of the health care is not.
Public-private is not the key here. If you go down to the health provision that you have in Europe whiting your private insurance the price will be equally low. But American consumers would never accept that. So if you want to combine an American system (lots of expensive care) with a European model (inefficient centrally planned provision) you get the worst of both worlds.
But hey, here we have a populist leftwing politician who tells us corporations are bad, and that we can have something for nothing. Hurray! Onward proud liberaltarians.
Posted by: Tino at Feb 9, 2007 2:49:57 PM
I'm in favor of mandatory health insurance. But, I could never support a plan that calls a government cooperative a "Health Market".
Posted by: DK at Feb 9, 2007 3:14:08 PM
People that continue to draw comparisons to other countries, such as australia, are victims of the vagaries of partial equilibrium analysis. Much of health care is a global market, typified by large fixed costs and low marginal costs. Not unlike movie theaters. Imagine what would happen to theaters if everyone tried to get the same deal senior citizens get. Improving health care is not and will not be as simple as adopting the european model.
Posted by: Taggert J. Brooks at Feb 9, 2007 3:22:16 PM
70% of the uninsured earn more than 25.000$ per year, and almost 40% earn more than 50.000$ per year.
The single largest group (30% of all the insured) are Hispanics. Hispanics have the same (actually slightly higher) life expectancy as the average American.
What is this liberal obsession with insurance? Clearly Americans get health care regardless of insurance status, which is why so many choice not to not get it. Symbolism aside, what do you think you will accomplish with all these socialist plans?
Taggert: what you say is true about drugs (12% of health spending) and about technological advances (machines etc). Europeans free-ride on the fact that Americans are paying for the research. Most of the costs of health care are however not in this categoy.
Still this accounts for more than the other hysterical obsession of the idiot left, "overhead". If Marx would come down from heaven tomorrow and elimitate all American administrative costs (as we all know Europe/Canada do not have administrative costs...) it would go very little to bridge the 2800$ per capita - 6100$ per capita health spending gap.
Posted by: Tino at Feb 9, 2007 3:41:26 PM
... There are dozens of concrete examples from every other industrialized country in the world that a government sponsored universal health care provides comparable health results at lower cost and with much greater access to care.
The argument isn't about whether it can be done or not. And, in fact, you're right about more access to care than the current US system, with the important asterisk of MA, which has the potential to get both capitalistic and access advantages. I don't expect MA to work out too well - it tends to take 3 or so experiments to get this kind of thing right, but I see it as the right direction.
Nor is the argument about govt, per se. Let's face it, BCBS is only slightly better. No, it's more about bad results of lack of competition. In fact, I'd like to see a law passed giving any private insurance plan the same safe harbors as employer-provided insurance.
The concerns are that single-payer would raise service times, decrease service quality, and reduce health-care innovation from our current system. High costs are partially a result of provision of better treatments and higher service levels not previously available. E.g., we pay more for more and better drugs.
Posted by: jon at Feb 9, 2007 3:43:13 PM
"Many of you are reacting emotionally rather than analytically."
I'm not sure. When I read this:
"My god, once government covers insurance company losses, incentives for cost control will vanish."
I think you're implying that the government will have no incentive for controlling costs. But the existance of relatively cheap, high quality government run health care in other countries seems to suggest that governments can find ways to control costs.
Maybe you're just objecting to the specifics of Edward's plan, and not to the idea of universal government sponsored health insurance.
Some people are suggesting that the quality of health care in other countries like Australia
is lower than here. I haven't seen any evidence for that.
Others are suggesting that the US is subsidizing the rest of the world. If that's true, it's all the more reason to move toward universal health coverage.
Posted by: Jeffrey Miller at Feb 9, 2007 3:43:21 PM
"we pay more for more and better drugs."
Lucky you, apparently you never had to worry about drug costs.
If you check any number of Canadian and Euro online pharmacies, you will
find that by and large they have the same drugs for sale.
A few drugs available here are no available in some other countries, there are also
a few drugs available abroad but not here.
So, better statement is: We pay more for the same drugs.
Posted by: mik at Feb 9, 2007 4:17:28 PM
