Arnold Kling  

Samwick, Thoma, and Pearlstein on Health Care Policy

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Here are a couple of new pieces on health care policy, with my comments.

First, a new Wall Street Journal Celebrity Death Match between Andrew Samwick and Mark Thoma. It gets off to a slow start, but then Samwick writes,

We should make health insurance mandatory, but we should do so by putting the mandate on the individual, not the employer. Those who cannot provide proof of insurance on their tax returns should be charged an amount that corresponds to an insurance policy in their area. Implementing this on the tax form allows for family resources to be taken into consideration.

The second mistake is to allow the tax code to distort the type of insurance offered. Premiums are fully excludable from taxation, but out-of-pocket expenses are only imperfectly tax deductible. This generates extremely generous, first-dollar coverage and little incentive for individuals to economize on the care they receive. Rather than the Bush administration's proposal to make out-of-pocket expenses deductible via expanded medical savings accounts, I favor removing the excludability of health-insurance premiums from taxable income.

The third mistake is to force young workers to subsidize older workers in group health-insurance markets. Insurance is supposed to transfer resources from those who have unpredictably low expenses to those who have unpredictably high expenses. But the differences in average expenses by age are predictable. Under the current system, young workers with lower average incomes subsidize older workers with higher average incomes -- the opposite of what we would expect. Lowering premiums for younger workers would draw them into the insured sector and hopefully keep them there.

On Medicare, Mark Thoma writes,

Cost containment will need to be part of the strategy, and I believe a single-payer system offers the most advantages in this regard, more so than plans for the private sector to regulate costs through competitive pressures.

...The benefits of a comprehensive single-payer system covering both non-retirees and retirees begin with preventative care. Under the current system, there is little incentive for insurance companies to pay for preventative care...

A second advantage is a reduction in the high overhead and administrative costs incurred by private insurance companies. Much of this cost is to avoid taking on high cost patients or to pass the costs along elsewhere...

A third advantage is the substantial saving that a single-payer system can realize through its bargaining power with drug and medical device suppliers. A comparison to health-care systems such as Canada's shows such savings can be large.

Finally, single-payer systems offer a solution to conflict of interest problems among doctors, drug companies, and medical equipment makers that lead to an overinvestment in high cost treatments and higher medical costs.

Samwick replies,

I offer no argument on lower administrative costs and greater bargaining power. Both are a function of size, and a single system is necessarily the largest one possible.

But Medicare already offers us a glimpse of whether a single-payer system generates enough preventive care and superior opportunities to resolve conflicts of interest. I am less persuaded here. I do not see Medicare as it is currently implemented as a model of preventive care. Practitioners get paid for providing inputs to health, not necessarily for achieving a healthy outcome.

I would be even less charitable than Samwick. The canard that administrative costs in private health insurance are due to attempts to exclude costly patients is false. Administrative cost consists mostly of claims processing. If health insurance were truly catastrophic insurance, then claims would be relatively rare. Instead, we have "health plans" which generate administative expense every time you obtain medical services. In any event, administrative cost is less than 10 percent of health care costs.

Also, it is a stretch to say that single-payer systems reduce health care costs because of "bargaining power." When governments reduce the incomes of providers, this lowers supply. The result is back-door health care rationing through queues and shortages, as Canada demonstrates.

In my opinion, preventive care is an individual responsibility. If people do not have the self-discipline to obtain preventive care under our private health insurance system, then the question is whether things would be different under a government system. Thoma writes as if it is obvious that we would have more preventive care under a government system. I see it as far from obvious.

I would not use the term "conflict of interest" to describe the incentives under which health care providers operate. They have the interests of patients in mind. What they do not take into account is cost. That is, any treatment that has benefits is recommended, regardless of cost, as long as third parties are paying the bill.

Making government the third-party payer does not change the incentives for providers to ignore cost. In fact, I believe that it would require a large cultural change in America to get us to the point where we are willing to forego treatment based on cost-benefit

The Washington Post's Steven Pearlstein writes,

Will there be some people who choose not to get care under a "catastrophic" insurance plan because they don't want to pay a share of the cost? Sure. But that "bad" can't be considered in a vacuum. It has to be weighed against the "good" that would come from being able to offer more affordable policies to 45 million uninsured Americans and their employers, at prices 25 percent below today's standard policies. And those harmful effects would also have to be weighed against the good that would come from eliminating tens of billions of dollars each year in unnecessary health care expenditures -- money that could be used to extend care to the uninsured or simply be returned to workers in the form of higher wages.

Hear, hear.

As Massachusetts Institute of Technology economist Jonathan Gruber argues, the best way to structure a health care policy with a lot of patient cost-sharing is not through high deductibles (having insurance kick in only after the person has spent $2,000 or $5,000 out of his own pocket) but through co-payments (requiring the patient to pay 20 to 30 percent of every medical bill until an annual cap is reached).

But the annual cap is the same as a high deductible, which means that what you are doing is using co-payments in addition to a high deductible, which means that premiums are higher, administrative costs are higher, and so on. The case for co-payments rests on the theory that if you make consumers pay one hundred percent up to the deductible, then they will be deterred from obtaining preventive care. However, if the preventive care is cost-effective, then they should not be deterred. This gets back to the issue of self-discipline.

Pearlstein continues,

And to prevent the health insurance market from dividing in two -- a catastrophic insurance market for healthy people offering low premiums, and a full-coverage market for relatively unhealthy people with skyrocketing premiums -- the government would have to step in and manage it.

I do not know why we have to presume that the market will divide in this way. I would agree that if the health insurance market disappears for people who develop chronic illnesses, then government may have to help. But there are plenty of ways for markets to evolve, including a market that provides payouts if someone develops a chronic illness.

As Pearlstein, Samwick, and Thoma would agree, we have a distorted market, in which the tax system encourages comprehensive "health plans," not catastrophic insurance. However, I suspect that our public policies reflect the preferences of much of the population. As individuals, we want to be insulated from health care costs, even if it means that we become part of an expensive health care system that has large numbers of uninsured.

Comments and Sharing

COMMENTS (6 to date)
Robert writes:

When talking about cost-benefit analysis of preventive care, you have to specify to whom the benefits accrue.

Let's consider a disease that, if caught in its early stages, can usually be treated successfully, but if allowed to progress to its later stages, will usually resist treatment. Yet in either case, the cost of treatment is about the same.

Now, a third-party payer gets little benefit from early detection: they pay for treatment regardless of whether the treatment is successful. But the patient gets great interest in early detection: whether they recover or perish from the disease.

No cost-controlling third-party payer, even a single payer, can be motivated to promote the early detection of this disease. All the benefits of early detection accrue to the patient, so any cost-controlling payer will try to shift all the cost to the patient as well.

Chris writes:

In my opinion, preventive care is an individual responsibility. If people do not have the self-discipline to obtain preventive care under our private health insurance system, then the question is whether things would be different under a government system. Thoma writes as if it is obvious that we would have more preventive care under a government system. I see it as far from obvious.

I think its clear that in a government provided system preventative care would decline. People get pre-care now to avoid costly procedures down the road - if they don't have to pay for those costly procedures why would they attempt to avoid them?

This becomes especially true if you assume that GP supplies will decrease and demand increase which makes going to a doctor even more unpleasant than it is now.

aaron writes:

The problem is the current system and proposed "fixes" all focus on expanding demand in an industry that is notoriously incapable of chasing demand. To actually make healthcare more available, we must increase the supply. We need to set up incentives for good doctors to teach and train more new doctor. We need to set up incentives for students to enter into the healthcare industry. And, we need to streamline the education of key areas and have more narrowly focused programs. We should stop wasting resources on education and training that many doctors will never use.

Even Bush's HSA will drive up costs because it will slightly increase the number of people able to get health insurance and people able to pay for preventative care. HSA have the slight benefit that they may encourage people be more consious of their healthcare, but this is unlikely because the current system encourages employers to provide health care even to those who don't use it (increasing the supply of money for healthcare and driving up prices). I doubt employers will begin to offer an equivalant cash amount for people to opt out of healthcare programs, so people will stay in these programs because would feel like they are throwing away the money if the don't.

Dewey Munson writes:

Healthcare concerns death and longevity - the ultimate infinite demand.

How can a market provide an infinite supply?

aaron writes:

Excellent point Dewey.

aaron writes:

We also should lift regulation on all but the most dangerous medication and treatments. People should have the option of treating themselves and not have to rely on doctors for simple things.

FDA approval should be a certification, a reason to trust a product. It shouldn't determine whether a med/treatent is legal or not. FDA can also be responsible for issueing warnings for dangerous products. We should be able to go directly to a pharmasist for most things.

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