Arnold Kling  

Starve-the-Beast Health Care Policy

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Jed Graham writes,


Much has been written about Ryan's plan to have the vouchers only keep pace with inflation, which is generally well below health care inflation.

But almost nothing has been said about how the Democrats' own health care law includes a provision that would hold the growth of subsidies below the rate of premium cost growth.

This may seem like an obscure point, but we are talking about a health care law crafted for obscurity, so I think we should give Jed credit for trying to figure it out, whether or not his analysis ultimately holds up. (My guess is that it will, but I have not independently verified it.)

I think that any health care policy going forward will do two things.

1. Create a two-tier health care system, where people who rely solely on payments from government get noticeably less in terms of medical procedures (not necessarily implying a difference in longevity or other tangible measures of outcomes).

2. Starve the beast. That is, take funds away from the health care system, and force some form of rationing. Under a Ryan-type proposal, individuals would self-ration, as their vouchers (or "premium support") would fail to keep pace with the growth of new and expensive procedures. In other countries, the beast is typically starved by a government budget constraint, which limits the resources available to doctors and forces them to ration care. Under Obamacare, the beast will be starved in various ways, including perhaps the mechanism that Graham highlights, in which those relying on government subsidies find that those subsidies will buy less and less in terms of health insurance coverage.


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COMMENTS (5 to date)
R Richard Schweitzer writes:

We continue to see, especially in the "ObamaCare" legislation, but to some degree in the mecahnics of the Ryan proposal, a mis-conception and mis-use of the function of insurance premiums.

While there is still some amount of "risk" cost in HealthCare coverage "premiums," the premium charges no longer represent "risk" in the same sense (let alone degree) as they do in Home Owners coverage, or Automobile coverages. Further, because of this mis-use, the added factors of "administrative" requirements in funding care costs (rather than covering risks)are exacerbated, adding to "premium" charges.

In fact, "premium" is not the correct term in this context. In its origins for cargo insurance in Venice, the consignee merchant would "sell" the cargo to a banker for the period in transit (usually by sea) and then would have the right to repurchase it by paying a premium over what the banker paid upon safe arrival. That process was refined.

Nothing comparable can be found in the "premiums" for funding HeathCare costs.

Until we get away from this basic misconception, and separate HealthCare cost-funding from Health Insurance concepts and categories, we will NOT find a definitive mechanism to deal with cost funding.

Shangwen writes:

Arnold, I work in Canada where we have limited two-tier (in a skewed way) and beast-starving. What happens there? There are indeed those who consume less even in the public system, and they appear less healthy. But often those are income and education effects.

You can call top-down rationing starving the beast, but in some areas it's more like rush seating. Those with higher income and education will work the system more, so they get better seats. They aren't necessarily being made healthier, but they are confirming their pre-existing superior fitness.

topcat writes:

Dr. Kling:
I cannot find the item, but I recall you recently wrote that there are three options for a government to handle the health care system. Paraphrasing roughly, they are:
1. Top-down management, in which the government pays for medical services but rations care in order to control costs.
2. "Bottom-up" control, in which the government allocates funds(or vouchers)to the public within a given budget and then people shop for insurance to cover their own needs.
3. Pretending that the system is OK and things will work out with minor tinkering.

It seems to me that the Democrats' current position is the third option and that Obamacare will lead us to the first (e.g. the IPAB).

Paul Ryan's position is essentially the second option. This option, I would argue, will hold down costs not only by "self rationing" as you say, but also by introducing competition among insurance companies.

Examples of how the second option works:
1. Medicare Part D. Reportedly, costs for this program are much less (40%)than initially projected.
2. The health care program for Congress.
3. The health expenditures of the Amish, often cited by Senator Tom Coburn (OK).(Apparently he has delivered many Amish babies.) They have no insurance, but their health care costs are less than half those of the general publc. Why? They use their own money.

The basic idea in each case is to have people spend their own money (or "allowance").

Of course, there are also many examples of top-down rationing by governments, none of which are encouraging


steve writes:

"In other countries, the beast is typically starved by a government budget constraint, which limits the resources available to doctors and forces them to ration care."

Not really. Mostly they just pay less for the same care, often in the form of salaries. In the two true socialist systems systems they do ration somewhat, though much of that consists of not paying for stuff that does not work, unlike the US. OTOH, everyone gets care. In the US, since we ration by price, millions do not.

"Examples of how the second option works"

Let me offer examples where it does not.

Medicare Advantage.

The entire private insurance sector.

Why would the private insurance sector, which cannot hold down costs now, suddenly do so when selling to seniors? Make an argument that assumes the private sector wants to make money.

Steve

R. O. Huertas writes:

Why western europeans countries can have health care systems that cover everyone and the U.S, the richest and most powerful country in the world still a have very deficient and unequal health care system?

I have known several people that while vacationing in France, Spain, Italy have suffered accidents and sudden illness. They have told me that there were given an excellent medical service, in some cases they were hospitalized for days or weeks and they were not charged a penny.

Recently a friend told me the case of an appeals judge in the U.S. who is a friend of him, who was hospitalized in Great Britain for six months when he has vacationing there. According to my friend the judge told him that if this situation would have happened in the U.S. probably he would be financially broke by the hospital bills. In Great Britain they provided him with an excellent care and they did not charge a penny for his treatment according to what the judge told my friend.

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