Arnold Kling  

The Crux of Health Care Reform

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Economics of College and Sport... Ignoring Cost-Benefit Analysis...

Clive Crook writes,


Much more needs to be done to push employers out of the health insurance market. Most of the reforms now being touted, by Democrats and Republicans alike, aim to do the opposite.

...You could give everybody a voucher (which could be used as partial payment for a more expensive policy) and recover the cost from general taxation. Or you could give full vouchers only to people on low incomes, tapering the value to zero as incomes rose, again asking taxpayers to pick up the check -- and in this case also mandating that everybody buy at least the basic plan. You could satisfy the "ignore pre-existing conditions" criterion either through regulation or by adjusting the value of vouchers according to health risk. The cost would depend on such details, and many more besides -- but you can be sure it would not be small.

I can understand why no Republican contender for the presidency is proposing this. Only a very unusual Republican would suggest a significant rise in taxes to mainly benefit the least-well-off. But why is no Democrat proposing such a scheme? Because it is politically more appealing to pretend that this great and long-overdue social advance can be achieved mainly at the expense of greedy employers (and grasping insurance and pharmaceutical companies).


The original sin of America's health care system is employer-provided health insurance. But:

--the workers who have it are generally happy
--labor unions don't want to lose it as something they can bargain for on behalf of their members
--many, many people are under the illusion that the cost is borne by employers, not by workers

So from a political perspective, no one wants to take it on. Instead, they try to graft health care reform onto the employer-based system. Which is like trying dance therapy on someone suffering from congestive heart failure.


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COMMENTS (13 to date)
SheetWise writes:

...they try to graft health care reform onto the employer-based system. Which is like trying dance therapy on someone suffering from congestive heart failure.

Now that's funny. Sad. True. But still funny.

Gary Rogers writes:

It is interesting what can be hidden in something as complex as health care. One of the interesting things here is the segmented market. We have Medicare, employer health care and uninsured care all serviced by the same health care providers but without free choice for the consumers to move from one segment to the other.

Look at the situation from the standpoint of a healthcare provider. The government comes in and legislates how much they will pay for Medicare coverage and you have no choice but to accept it. So, what do you do? First, you raise other rates so you can continue to make money. Next, you might make sure your services are weighted in favor of those procedures where you can make the highest margin. If you are unscrupulous, you might also start making up charges to pad the bill. After all, you have to make a living.

Remember the part about raising other rates? Now assume that you are the insurance company and the providers just raised rates. What might you do? You go back to the providers and let them know how much business you can send their way if they join your PPO and agree to a set of discounted rates. This is attractive to the provider and leads to another set of decisions which might include raising rates on the remainder of the customers, making sure that services to PPO customers favor the procedures that provide the most opportunity for making money and maybe you make a few errors that throw a few extra charges on some of the bills.

In the mean time, both the government and the insurance companies recognize the potential for padding the bills and throw on another layer of administration to catch cheaters and charge this back to the tax payers and employers. The group that gets hurt the worst, interestingly enough, is the group that should be paying the least and that is the uninsured customers that pay cash.

Medicare recipients are happy because they get their health care. Employees are happy because they never see the money they could be getting if it were not going into health care. But, people who are not insured are not happy, nor are employers nor are tax payers.

As an interesting note, another segmented market is the prescription drug market in the US and Canada. The same pharmaseutical companies sell to both markets. Wwhen the Canadian government mandates price controls, the companies are forced to make their money in the rest of their markets and the US consumers end up subsidizing the Canadians.

Add this to the points made in the original post and I think there is a definite case for changing the system.

Mr. Econotarian writes:

You'd think Republicans might say "hey, let's DE-REGULATE medicine".

I'm a realist, and I realize that some people would prefer to have Cuban-style medical care (we all have different desires for risk). Let's de-regulate medicine, then allow those who want Cuban-style medical care to pay for it with their tax dollars. Or heck, drop the embargo and just send the patients to Cuba for treatment!

dWj writes:

Labor unions don't want to lose something that impedes worker mobility. The more competitive the labor market is, the harder it is for the labor unions to justify their existence, to workers or to anyone else.

spencer writes:

the standard economic assumption is that if something of this nature was done that the employer would shift what they now pay for insurance to the employees take home pay and this would largely offset the cost the consumer would experience.

But I suspect the political system would need a little more persuasion that this would actually happen and that corporation would not use the shift to increase profits.

spencer writes:

Note: i am not saying the standard economic assumption is wrong. I'm just saying that politicians would not believe it without much more evidence.

Mitch Oliver writes:
The original sin of America's health care system is employer-provided health insurance.

While employer-provided "health insurance" is certainly a cause of our current health care woes, I think the original sin is the perverse incentive structure that encouraged employers to provide health care insulation in the first place.
Please correct me if my facts or timeline are incorrect. Prior to World War II there was a wage freeze. One way employers could get around this was to provide non-monetary compensation. A favorite alternative compensation was "health insurance," modeled after Medicare. I don't remember when, but at some point tax incentives were introduced to encourage employers to provide "health insurance" to their employees.

So we have employers responding to a foolish government policy with an idea that seemed good at the time, but did not consider the potential consequences (but really, who in the first half of the 20th century could have foreseen the medical advances available today?). Then the government steps in (again) to encourage this ill-considered "solution."

It would seem to me that the designation of original sin (in this matter) belongs to government wage controls.

Ravenor writes:

I would disagree with the assessment that employees are generally happy with the current system. Some employers certainly provide generous health care, but many employers have responded to increased costs by doing things such as switching to plans which offer few choices of physicians and facilities to the employee. Also, employers have increased deductibles.

I agree 100% with the idea that employers should be removed from the health care payment equation.

Matt writes:

Just make employer healthcare spending taxable at the individual income tax rate, and force employers to pay employees that sum as cash wages if they choose. The wealth gap that Democrats whine about will evaporate overnight. Once people have the cash, they'll still need insurance, and the market can provide it. Government can fill in the gaps. A more market friendly Massachusetts approach, which forces people to buy insurance, could protect hospitals and doctors against deadbeats.

Boonton writes:
While employer-provided "health insurance" is certainly a cause of our current health care woes, I think the original sin is the perverse incentive structure that encouraged employers to provide health care insulation in the first place. Please correct me if my facts or timeline are incorrect. Prior to World War II there was a wage freeze. One way employers could get around this was to provide non-monetary compensation. A favorite alternative compensation was "health insurance," modeled after Medicare. I don't remember when, but at some point tax incentives were introduced to encourage employers to provide "health insurance" to their employees.

The wage freeze was abolished many, many eons ago. True health insurance is not counted as wages so $100 spent on a premium is not taxed for the employee and the employer gets to deduct it as an expense but also pays no payroll taxes on it. I don't think that's the whole story, though.

The fact is most people like the idea of someone else doing this work for them. They're willing to do some of the work themselves, say choose between 5 different plans but they want someone else to narrow the field, negotiate with all the different players and give them a scaled down list of choices...hopefully with an easy to read chart comparing the main points of the different plans and maybe an 800 number to call with questions.

Most developed, democratic nations have taken this one step beyond and instituted some t ype of single payer system where basically you don't even have to choose between a few plans.

Abolishing employer based health insurance and not replacing it with gov't provided health insurance goes against what seems to be what people want. I suspect they are worried about two things:

1. Information overload: They don't want to second guess their doctors by managing their own health savings accounts. They have neither the time or the information necessary to evaluate and price shop medical recommendations and they especially don't want to do this if they are really sick. In other words, what's great for health care wonks and geeks isn't necessarily what's best for the rest of us.

2. Getting shafted by insurance companies: In a world where everyone buys insurance on their own insurance companies would profit by selling to the healthy with low premiums and deterring the sick (or likely to be sick) with high premiums. While most working people are generally healthy they suspect insurance companies may eventually be able to tell when they will get sick by data mining their medical records, genetic testing etc. and then yank away the 'safety blanket' of insurance just when they need it most.

Health insurance addresses problem #1. The insurance company has an incentive to data mine and study in order to figure out what doctors and procedures work and which ones are overpriced. While they sometimes take this too far (insert your HMO horror story here), it pays to have someone else do this for a host of reasons.

Buying insurance in large groups addresses problem #2. Single-payer is just taking the idea to the extreme...if everyone is in the group then everyone can have the same premium and no one will get priced out. Why shouldn't medium and large corporations utilize their purchasing power likewise?

kingstu writes:

Getting shafted by insurance companies>Getting shafted by the government

Boonton writes:

Shafted by the gov't how?

Ajay writes:

I actually have no problem with idiots who want somebody else to restrict choice for them, as Boonton describes. The problem is that their advocates want to force limited choice on everyone because they believe that's what everyone wants. If we go to a free market system where anybody can choose whatever insurance they want, the morons you describe can always have one company handle everything for them, they won't have to think at all. I, on the other hand, can shop around and figure out what works best. It would be similar to how some people just stick their savings in index or mutual funds and others are comfortable making their own investing decisions. By going single payer, you force everyone to use your horribly crappy system which has already led to the current disaster that is the medical market, since government already currently pays for 50% of the medical market. This leads to perverse incentives like the government basing their prices on what private insurers pay, therefore medical providers jack up their prices to private entities in order to get paid more from their biggest customer, the government. I will be the first to admit that the private insurers haven't done a good job in the medical market. But between some of the insane regulations they're forced to abide by and the abysmal job done by the government, I favor trying to fix the private market rather than the manifestly stupid idea of trying to squeeze administrative costs by going single payer.

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