Post-Keynesian Observations

Understanding the Macroeconomy

Health-Care Economics: Part Three

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Health Care Issues
The last post argued that while health care/health insurance is currently primarily a product of the private sector, evidence suggests strongly that it is not competitive. Hence, the idea that we, the consumers, are in control because health insurance is in the free market does not follow. Part two ended with a couple of questions: “What does this mean for policy? A couple of regulations here and there, a breakup of the big firms, or government run health care?” I want to say first that our answer must be pragmatic, not driven by ideology. We have to decide on the basis of what makes sense. If our conclusion is “use the free market,” so be it. If it’s, “let the government take over the whole damn thing,” then that’s what we should do. Recall something I said in the first post of the series on health care:

The market as a tool. It is a means of addressing particular social problems in the same way that a hammer is a means of addressing certain carpentry problems. If what you need to do is to drive nails into a piece of wood, then a hammer is ideal. But if your job is to cut a large plank into smaller pieces, you’re better off with a saw. You can use the hammer, but it will do a very poor job of it. Carpenters don’t view the choice of whether or not to use the saw or the hammer as one fraught with philosophical, moral, and religious implications. They decide pragmatically which one accomplishes their goal with the least effort and I suspect that they lose very little sleep over it. They are also willing to experiment to determine which one works best.

That emphasized sentence is really important. I hope this spirit dominates our debate today (though I’m not sure it does): “American citizens don’t view the choice of whether or not to use the market or non-market solutions as one fraught with philosophical, moral, and religious implications.” And this one would be nice, too: “American citizens don’t view the choice of whether or not to use the Democratic or Republican solutions as one fraught with philosophical, moral, and religious implications.” If it makes sense, it makes sense. To hell with who said it or whether it uses markets or governments.

Is Health Care a Right?
To devise a pragmatic solution, you must have a clear goal in mind. What do we want health care to be? Is it a right that should be extended to all Americans, or only those who earn sufficient income to pay for it? I can’t give you an objective answer to this because I can’t look in the Big Book of American Rights like I can check 4-firm concentration ratios. Maybe to you it’s already in the preamble of the Constitution: “We the People of the United States, in Order to form a more perfect Union, establish Justice, insure domestic Tranquility, provide for the common defence, promote the general Welfare , and secure the Blessings of Liberty to ourselves and our Posterity, do ordain and establish this Constitution for the United States of America.” Perhaps “general Welfare,” in a country as wealthy as ours, includes health care. And maybe it doesn’t–hell, we can change the Constitution, anyway (the Bill of Rights is just a list of amendments), so that’s no real help. There simply is no definitive answer to that question. We make up “rights,” they aren’t handed down to us by God, aliens, or L. Ron Hubbard. We have to decide for ourselves. But, we need to decide, because which way we lean makes a big difference to the goal I mentioned in the first sentence of this paragraph.

Since I can’t get any further with a pragmatic analysis without specifying a goal, I’ll insert my opinion here: yes, it should be a right. Maybe it’s a function of the morality shaped by my 12-years of Catholic school, maybe it’s because half of my family and many of my friends are English and their experiences with universal health care have been strongly positive, or maybe it’s because I think that the most advanced industrial nation in the world can afford to make sure everyone can have an operation when they need it–and not by begging, borrowing, or showing up at the emergency room, but with dignity. We spend the highest percent of GDP on health care in the world, yet we rank below every other developed nation (and some developing ones) in life expectancy and infant mortality. A conservative estimate of uninsured Americans is 16%–that number is 0% in the overwhelming majority of the nations we’d consider to be in our peer group. If they can afford to do it, why can’t we?

You might argue that being able to afford to do it does not imply that we should do so. We can afford to buy everyone a XBox 360, but we don’t. Quite right. I’m drawing a line at things that a) are associated with life, liberty, and the pursuit of happiness (wait, does that include the XBox?) or b) have positive externalties. In this context, the latter means that even those who did not consume product in question nevertheless gained from the fact that someone else did. For example, if you get inoculated against H1N1, it makes it less likely that I’ll get it, too, since it eliminates a carrier from the pool. I think health care clearly falls into both categories: life, liberty, and the pursuit of happiness and positive externalities. Sick and unhealthy people make others sick and they lower GDP. Bastards!

For those who argue that we shouldn’t provide it as a right, are you also against national defense? Police protection? Fire protection? Public libraries? Public parks? Public education? Public roads? Just about every single one of those could be provided by the market instead, the last six quite easily. What would happen, of course, is that the rich would continue to enjoy all these services while the poor and some of the middle class would not. But, then, the rich enjoy Jaguars and Hummers while others don’t, so is that a problem? I don’t have a definitive answer for you because there simply isn’t one. However, I would say this: if you are in favor of all or most of those other services but are against universal health care, then I believe you need to ask yourself why. If you are a rational, thinking person, then there had better be something unique about health care that makes it unacceptable while the others are acceptable, or you’re being inconsistent. You’re allowed be inconsistent if you want to, of course, but most people find that it makes them uncomfortable. That’s good, because pragmatism and inconsistency don’t go together!

Can You Rely on the Market to Provide a Right?
If you are with me that it should be a right, then consider the problem of providing health care via private health insurance. Remember, our goal is provide some specified level of health care to all citizens. Can the private sector do this? Here’s the problem: they have to earn a profit. Hence, they have no incentive to insure anyone but the most healthy and no incentive to make claiming on your insurance an easy process. You can’t blame them. As I mentioned in the last post, they have families to feed and this is now they make their living. But can such a system, with such built-in incentives to avoid insuring anyone who might actually need insurance, provide universal health care? I think that answers itself.

To put this in another context, imagine if the US Army were actually the US Army, Incorporated. You hear a knock at the door and answer it to see two young, fresh-faced officers with big smiles and an armload of pamphlets:

US Army: “Hi, sir, I’m Captain J.T. Johnson of the United States Army, Incorporated, and I’d like to talk to you about the very real threat of foreigners. Are you currently insured against organized martial incursions originating from any of America’s border nations? If not, I think you might be interested in some of our plans.”

The Army would then collect fees from subscribers and use these to buy equipment, train, and go into combat when necessary. But, think seriously for a moment about what you would do as Five-Star General and CEO of the Army. You are under no obligation to sell policies to everyone–on which states do you focus your sales efforts? States on the outer rim: Texas, Montana, and Alaska? Or those in the middle: Colorado (wait, Red Dawn!), Missouri, and Tennessee. I may sell some plans to the states on our borders, but I’ll really focus on getting volume in those where I’m unlikely to have to pay claims in the first place. I won’t be able to charge as much, but it’ll be damn near pure profit. No claims and a lot less paperwork. And, if Texas does get invaded, at least the organized martial incursion may have petered out by the time it hits the Mississippi River and I’ll have a less-costly problem on my hands.

Not only do I have an incentive not to insure the states most likely to be invaded, but I’m also going to want to dispute claims whenever I can:

“Sorry ma’am, that appears not to have been an organized martial incursion, but just some Canadians who’d had a few too many Molson’s. No, it’s not common to see them driving tanks with air support, but it has happened. Look, if you are still alive in a few days, give us another call and we’ll send a representative out to evaluate your claim. Hello? Ma’am? Hello?”

You could imagine the same sort of scenarios with police or fire protection.

What this suggests is that a private-market only solution to health care not only leaves us with little competition (as shown in the previous post), but also with a system biased against achieving the goal of universal health care.

How to Provide Health Care as a Right
There are several things we could do. But first, let me address a common complaint: if we get the government involved with health care, we’ll have to ration it. That statement implies that we do not already ration health care, but of course we do. That’s what the market system does, it decides who gets what. The particular rationing mechanism is income. Those with more income get more goods and services. The fact that everyone who wants an XBox 360 doesn’t get one means that they are rationed. What we are talking about is using a different rationing mechanism, which we already do that with all those government services I mentioned above. So a move away from the market does not introduce rationing, it simply changes the mechanism.

Regarding how to provide health care as a right, I picked out four possible solutions. In no particular order:

1. Government As Major Provider: You get health insurance because you are a (legal) citizen of the United States of America. We still have private plans available (but the private insurance industry is much smaller) for those who want and can afford them, but the government provides the overwhelming majority. We pay for this through taxation, and, like Social Security, it’s probably a bad deal for you in your younger years. But as you age and more problems creep up, you don’t have to worry (incidentally, the idea that Social Security could go bankrupt is based on a misconception of how it works–but I’ll leave that for another time). Also, this would hopefully break the link between employment and insurance. Employers shouldn’t have to worry about this, and it creates an incentive for them to hire people only part time. Note that since the government doesn’t need to hire lots of folks to make decisions on who they should insure and how to avoid claims, we don’t need the overhead of those analysts and lawyers. As James Galbraith wrote in The Predator State (thanks to Marshall Auerback and Randy Wray for noting this passage):

Public health insurance entities such as Medicare do not evaluate risk because they are universal. Therefore, they save the major cost associated with private health insurance. They pay their personnel at civil servant salary scales and are under no obligation to provide a return to shareholders via dividends or meet a target rate of return. Insurance in general is therefore intrinsically a service that the public sector can competently provide at lower cost than the private sector, and from the standpoint of the entire population, selective provision of private health insurance is invariably inferior to universal public provision.

The drawback, of course, is making sure that the government providers remain accountable. Remember that that’s the problem with the current set up in the private market: the industry is too concentrated. Hence, there is little competition and thus little accountability to the customer. And that the government system could have the problem would have to be addressed. However, there is a big difference because we have completely eliminated the incentive to withhold insurance from those who will most need it and to obstruct claims. And that by itself is huge. In addition, who says something run by the government has to be populated by lazy, inefficient workers? Tell that to the next policeman you see, or fireman, or solider, or airman, or sailor, or marine. Or teacher (not me, of course, I’m in the private sector!).

2. Government As One of Many Providers: Leave the industry as is, and just add a new company run by the government. If you want to use them, you can, and they enter the marketplace with everyone else. Their costs are subsidized and they have no incentive to refuse to give a policy to anyone or to fail to pay claims. Depending on where they set their rates, the government insurance company might either wipe out the private sector companies, in which case we are left with #1, or the government will accumulate all those customers that the private companies didn’t want–sick folk. The perverse incentives are thus still alive and well.

3. Government Subsidization of Private Insurance Fees: If you can’t afford insurance, we’ll help you out by tossing a few dollars your way. Exact same problem as in #2–same perverse (perverse given the goal of universal coverage) incentives but we are also now essentially subsidizing the private insurance industry.

4. Anti-trust Action Against the Insurance Companies: This could be combined with any of the above and it’s similar to what the AMA has been arguing. It’s a very good idea to break them up as it would make them more responsive to consumers. I don’t know if there are economies of scale involved (i.e., if breaking them up would raise costs significantly), but there will still be the perverse incentives. Furthermore, if the insurance company you run decides to compete by only hiring the healthy, then you’ll have lower costs and out compete the others–back to concentration again.

As I see it, 2 and 3 help some, but 1 is the only real solution. However, politically and given the massive power of the oligopolistic insurance agency, I don’t see a chance in hell for #1. Maybe we can hope for #2. What we got last Sunday is a lot closer to #3, but more on that some time this weekend. I should really type more (and maybe do a couple more proof readings), but it’s past midnight so this is it until maybe Sunday or Monday. Thanks for reading!


Written by rommeldak

March 25, 2010 at 11:34 pm

Posted in Uncategorized

Tagged with , ,

2 Responses

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  1. I think the 1st option would create the type of dual system, as in the banking system when the SBUS existed. The SBUS showed to provide accountability to the free banks. After it was shut down things went crazy and there was a panic. This is a bit different, but I think the idea of a mix between a private and public market balances the motivations (profit driven versus providing a public good and promoting “general welfare”). as you mentioned.. accountability is the key.. as of now there is none, leading to exploitative behaviour.

    Just a thought from one of your students…

    Joe Brownback

    July 16, 2010 at 10:49 am

  2. Howdy, Joe! Yeah, that’s kind of what I was thinking, as with private and public schools. They can be a check on each other and force (or at least encourage) certain standards to be maintained. At the same time, however, we provide a good in a quantity that the market would not otherwise supply.


    July 22, 2010 at 7:35 pm

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