Arnold Kling  

Health Care Madness

Comment of the Week, 2003-06-0... Oil Econ 101...

Why is health care regarded as something that the market cannot provide? In this essay, I argue that the problem is mental illness.

Anyone who believes that we can afford collectively what we cannot afford individually is delusional...

Suppose that a group of friends is getting ready to go out for dinner. At first, they consider a fancy restaurant, but then it is pointed out that the price of a meal there is higher than anyone in the group can afford. Somebody pipes up and says, "That's ok. We can just split the check." Does that make sense?

For Discussion. The essay argues that the American health care system is too collectivist. The conventional wisdom seems to be the opposite: compared with other industrial countries, the American system is not collectivist enough. Is there merit in the conventional wisdom?

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COMMENTS (12 to date)
dsquared writes:

Massive equivocation here between "health care" and "health care insurance". Pooling risks makes them more affordable and large pools are better than small ones, so your example doesn't work. If the principle that "we cannot afford collectively what we cannot afford individually" were generally applicable to cases when there is uncertainty, it is hard to see why the insurance industry would exist. A system of public health insurance and private health care is exactly what France has, and it apparently works very well.

I'd also argue that nationalisation is a good way of ensuring that we aren't held to ransom by the doctors' cartel.

Eric Krieg writes:

I agree with Arnold. A system of catastrophic health insurance obtained by individuals spending after tax income, with vouchers for the truly poor, is where we should be going. Routine care should be paid for by individuals out of their own pocket, not by insurers.

Of course, with Prozac costing $2.60 PER PILL, this isn't the system that many powerful interest groups, like the pharmaceutical companies, wants us to have.

Arnold Kling writes:

D-squared: 'Massive equivocation here between "health care" and "health care insurance".'

I pretty much agree with the way you've got it sorted out. Because of the risk pooling that you describe, the high cost of health *care* can be mitigated for an individual by purchasing catastrophic insurance. So the policy focus can be on health insurance, not on health care. Relative to what you say prevails in France, all I am suggesting is that we have a private insurance market rather than a government one.

In the U.S., we have managed to get the car insurance market to work without requiring employers to pay for it and without government having to subsidize more than a segment of the poor. I would be curious what factors make this model unworkable in health care.

You mentioned the "doctors' cartel." I don't think it's nearly as strong as the "teachers' cartel." In my view, the correct way to fill in the blank of the sentence "nationalization ___ cartels" is not with the word "resists" but with the word "fosters."

Mcwop writes:

Of course we can “afford” a collective health system, but at what cost? People often point to Europe and Canada. Many aspects of their systems work well compared to ours, but those systems appear to tax government budgets (similar in manner to Medicare), contribute to high unemployment by significantly increasing the cost of labor, forcing the actively employed and businesses to pay higher premiums to cover the unemployed (or people that choose to stay out of the job market).

In a collective system run by the government you have another significant cost issue. This happens when the system becomes a political checkbook. Politicians propose to add new things that must be covered in order to win elections. "If elected I will add massage coverage! (don't laugh that was in the Oregon proposal, but I don’t know many people that have been in poor health because of a lack of massages)"

A little story: I was driving with an acquaintance during Clinton’s first term, when universal healthcare was proposed. I was a waiter in DC, and paid for my own health insurance ($85/month GWU HMO – I was young so premiums were reasonable). This person went into a discussion on how it was not fair that he did not have health insurance. This person worked only during the winter season at a Colorado ski resort (Nov – April). The rest of the year he just traveled, spending the money he saved during the winter months. I started thinking about who would pick up the tab for this person. Would I subsidize this, or would he be forced to contribute a portion of his pay to such a system. Would he get a more favorable rate working in the resort industry? Would the ski resort’s share of premiums go up so much that they find ways to replace human labor? Lifts could be designed so people don’t have to load/operate them. Slopes don’t need to be groomed. Would I continue to find a higher paying job, when I would be guaranteed free/low cost health care in any old job (that ski resort thing begins to be very attractive)?

These are the types of questions that need to be addressed before I buy into any such proposal as a voter. The idea is a laudable one, but as with anything else the devil is in the details.

Patrick R. Sullivan writes:

It's hard to think of anything that could be said about Arnold's essay that could be less accurate than:

"Massive equivocation here between 'health care' and 'health care insurance'."

Pretty clearly the point was to illustrate the difference between the two. And, as to a system of public insurance and private provision, the U.S. has that too. It's called Medicare, and it is a looming financial disaster.

Jim Glass writes:

Mental illness, or irrefutable religious belief.

Medicare functionally is just politicians buying votes by promising voters that others will pay their expenses for them. It's simply not any kind of coherent medical coverage program.

As the proof of both points look at what it covers:
[] It does *not* cover major dangers people actually do need protection from, but which voters consistently greatly underestimate their risk of ever incurring -- catastrophic long-term expenses such as nursing home care.
[] It *does* cover routine medical costs that people don't need protection from, but which voters know they would otherwise to have to pay out of pocket. (And of course it increases these costs too*)

And it covers the middle class and rich, no matter how rich, without covering the poor who wouldn't be able to pay medical costs out-of-pocket anyhow (they would have their costs covered in any event by Medicaid). I.e., it covers people by whether they can benefit by shifting costs through it, not by need.

As a medical care program this is completely incoherent.
As a vote buying program it is perfectly coherent.

* Some years ago the AMA said stress tests to detect heart problems were generally unreliable and shouldn't be given to people who had no medical history indicating them. Shortly afterward I took my healthy retired parents to have their annual medical examination.

When the doctor said, "Now let's do the stress tests", I asked about what the AMA had said. He said, "That's right, but they can't hurt, the government's paying for them, and it's better to be safe by taking everything the government pays for." And my parents agreed since the tests *might* detect something, you never know. So then I asked the doctor, "Should I have a stress test at my next examination?". He said, "No, if you are paying out of pocket you're right, it's probably not worth it."

So my parents got the extra safety of the two unreliable tests, the doctor got his fees for conducting the tests, and Medicare costs rose a tiny bit taking us a tiny step closer to our pending national insolvency...

Mcwop writes:

Jim G you are spot on. My in-laws had to declare bankruptcy. Medicare did not come close to covering prostate cancer treatment and removal (thousands of dollars). Medicaid and the needed layers of compliance is a bad joke. But hey soon my pop-in-law will only have to pay $5 for a prescrption.

In my eyes Medicare is proof that the gov cannot run a health program.

David Thomson writes:

“After over half a century of employer-provided health care coverage, the American people have developed a phobia of paying for health insurance themselves”

I would like to suggest that the above sentence should be rephrased to say “the American people have developed a phobia of directly paying for health insurance themselves.” There is, of course, no such thing as not paying for one’s own health insurance. Indirectly or directly, in the long run the bill is ultimately presented to us. The money spent by the employer is simply not added to one’s paycheck.

“A system of public health insurance and private health care is exactly what France has, and it apparently works very well.”

This is a most peculiar assertion considering that France’s welfare state is collapsing. It is very doubtful that this nation will be able to turn around its economy.

BfloGuy writes:

If Food Stamps had been implemented as Medicare and Medicaid were, we'd now be in the midst of a food crisis.

As it is, a Food Stamp recipient has his food allotment rationed. This is a dirty word in health care.

Second, when Food Stamps are redeemed at the grocery store, the store owner is compensated for his full price -- no government chart to decide that he's overcharging for milk. So he doesn't need to raise his prices for the rest of us to cover the gov't shortfall.

Were public health benefits set up along the lines of this model, we'd be in better shape.

And as for private insurance, imagine the chaos if our auto policies included unlimited oil changes, spring detailing, and routine maintenance. The repair shops would have lines down the road and I can only imagine what their prices would be.

David Thomson writes:

“And as for private insurance, imagine the chaos if our auto policies included unlimited oil changes, spring detailing, and routine maintenance. The repair shops would have lines down the road and I can only imagine what their prices would be.”

This analogy is right on target. There is no doubt that people are far more willing to see a doctor for the most trivial of reasons as long as the insurance company picks up the tab. Liberalism is premised upon the silly notion that people are innately good. The opposite, of course, is the actual reality.

I have recently purchased the highly recommended “Myths of Rich and Poor” by W. Michael Cox and Richard Alm. The authors say the following on page 65:

“Employees’ out of pocket payments accounted for 49 percent of healthcare costs in 1960, 34 percent in 1970, and just 18 percent in 1994.”

I strongly believe that this above sentence succinctly reveals a major reason why we are experiencing our current medical costs crisis.

Mcwop writes:

Dave T - good point on people visiting the doctor for trivial reasons. You may already know this, but in the insurance industry this is known as a moral hazard.

Further reading for all:

David Thomson writes:

Thank you very much for introducing me to the concept of moral hazard. I hate to admit my ignorance, but I was previously unfamiliar with this term. I also consider Robert Schenk’s example of suspected moral hazard (that he found in the WSJ) to be extremely funny:

Over 50 people in the town have suffered 'accidents' involving the loss of various organs and appendages, and claims of up to $300,000 have been paid out by insurers. Their investigators are positive the maimings are self-inflicted; many witnesses to the 'accidents' are prior claimants or relatives of the victims, and one investigator notes that 'somehow they always shoot off parts they seem to need least.'"

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