Fresh Air for Health Care (Third in a Series)

At the risk of wildly oversimplifying, my last two posts have argued that private health insurance stinks but it’s mostly the government’s fault. Because I hold these two opinions together, I am at odds both with those who favor a strong government intervention (including both “single payer” models and other highly prescriptive approaches to insurance regulation like “pay or play”) and with those who oppose government intervention on the dubious ground that our current health care system represents some sort of triumph of free enterprise. The truth is that our current health care system is dumb, but government can almost certainly make it dumber.

But what if Congress and the President cared more about promoting a sustainable long-term approach to health care expenditures than they care about the next election? If they really wanted to do something to help, could they? Maybe.

First, Do No Harm

Fundamentally, this is a problem of resource distribution. We have plenty of health care resources, but some people overuse them and some people can’t get to them at all. So what we really need is a system, capable of working on a nationwide scale, that efficiently directs resources to the points at which the need for them is the greatest. I think I read about a system like that somewhere . . . yes, I think it was in one of my economics classes. I think it was called the free market.

I’m brainstorming here, and this may sound crazy, but . . . What if patients hired doctors and paid them directly? Some people might pay for checkups and treatments a la carte, while others might want to obtain services on a prepaid basis. There might even be privately managed membership organizations dedicated to improving their members’ health — like HMOs, only they would actually need to keep their members happy and their costs as low as possible. Can anyone honestly doubt that this sort of system would spawn innovations that no one reading this blog has thought of?

Could people pay for such expensive treatments directly? Well, for the most part, yes. The expenses are large, but almost never larger than the price of a new television, let alone a new or even a used car. Somehow, virtually every household in the United States manages to finance these things without “insurance.” And the price system somehow manages to put televisions into many households that are well below the poverty level. Of course, no one would want to be ruined by catastrophic or chronic illness, so people of all walks of life would want to purchase insurance against the risks they truly could not bear.

The real question is not whether people could pay directly for health care, but whether they would. And the obvious answer is, sometimes yes, sometimes no, depending on whether the price of any given treatment is less than or greater than its value. That’s the secret ingredient that makes it all work, and that’s the very thing our current system of faux insurance eliminates almost completely.

How can Congress bring this about? Mostly, by repealing misguided policies that prevent it from happening. First, tax employer-sponsored health benefits as income to the covered employees. Until that happens, the private employers who currently provide coverage for the majority of us will have no incentive to demand real insurance rather than pre-paid medical services contracts that essentially buy us all kinds of stuff we don’t need or want.

Second, end unfunded coverage mandates. I don’t pretend to know how often women should have mammograms or when prostate screening should start, but the odds are overwhelmingly against anyone in my federal or state legislature having a better-informed opinion on those questions than a doctor and patient will arrive at together. If the quality of care is legitimately in issue, the state’s control over licensing of doctors and facilities is a much more effective tool with which to address treatment decisions that are not medically appropriate.

And in the highly unlikely event that a coverage mandate is actually a good idea, fund it so taxpayers know what they are buying. If a law is really necessary, for example, to ensure that people are not turned away from emergency rooms based on a lack of insurance, then legislators who pass the care mandate should have the integrity to appropriate funds to pay the emergency rooms for their services. It may be, of course, that public support for public funding will decline as the costs become transparent to the taxpaying public, a phenomenon that Stanford’s David Brady discussed recently in an illuminating EconTalk podcast. So be it; the moral argument must eventually win the consent of the governed, or else this is just stealing.

Third, help the indigent directly. One of the few genuinely moral considerations in this whole debate (as opposed to purely pragmatic considerations) is that we should help the indigent obtain health care, for the same reasons and in the same way that we help the indigent obtain food and shelter. We must bracket here a large number of interesting disagreements about the best way to do this, and say merely that it will almost certainly be a combination of private charity and explicit government support.

David Goldhill has an interesting proposal for providing basic health care to the indigent by consolidating existing government programs and refocusing them on the poor in a way that supports the transmission of price signals rather than undermining it. Goldhill generally wants to move everyone toward a new-and-improved version of today’s individual Health Spending Accounts. Then,

For lower-income Americans who can’t fund all of their catastrophic premiums or minimum HSA contributions, the government should fill the gap—in some cases, providing all the funding. You don’t think we spend an absurd amount of money on health care? If we abolished Medicaid, we could spend the same money to make a roughly $3,000 HSA contribution and a $2,000 catastrophic-premium payment for 60 million Americans every year. That’s a $12,000 annual HSA plus catastrophic coverage for a low-income family of four. Do we really believe most of them wouldn’t be better off?

We could also have government clinics for the needy (as we have for veterans), with the understanding that these would provide only the most basic services. (This is what I take Fitz’s experience in the UK to have been.) We might also imagine government programs that focus specifically on children, such as expanded clinics in the larger public school systems. But voluntary transactions between willing buyers and willing sellers should form the core of the system, displacing the presumably well-intentioned dictates of that vast multitude of people who currently buy other people’s health care with other other people’s money.

Fourth, mandate portability. It’s not necessary to prohibit employer sponsorship of health plans, but it is necessary to end employer un-sponsorship. If a worker wants to keep his health insurance while moving on to a new job, and he’s willing to pick up the premium, it’s hard to see how anyone is made worse off by such a mandate. And it is perhaps the simplest way of solving (or going a long way toward solving) the pre-existing condition problem. To be really effective, this would have to presuppose the ability to take coverage across state lines.

Fifth, leave it alone. The truth is that some federal programs already on the books, such as Health Savings Accounts and Health Reimbursement Accounts, might cure the disease if we gave them enough time. But when it was time to review our company’s health plan this year, we ruled those options out completely because there was no way to be confident that they will still be in effect in January 2010. Citizens simply cannot make rational decisions about things that are treated as perennial political footballs. In other words, Congress: It may itch while it heals, but don’t scratch it.

Is any of this likely? My powers of political prognostication are no better than the average bear’s, but my guess is that my first suggestion has a decent chance of happening this year, thanks to Congress’s insatiable appetite for more money to slosh around in. The bad news is that the prospects for the rest of the suggestions are poor. I see no chance whatsoever that Congress or the states will end unfunded mandates. Our misguided notion of what “health care” means — a notion begotten by decades of pre-paid nonsense — makes the price tag for my third suggestion much too high. And my fourth suggestion, portability, will be a pointless gesture unless the other suggestions are implemented, because most plans will be too bloated for a departing employee to want to port it and pay the premiums.

Tonight, perhaps the President will tell us what he has in mind. I’m sorry to say I don’t expect to like it, but we’ll see.


2 Responses to “Fresh Air for Health Care (Third in a Series)”

  1. David Fitzgerald Says:

    Mark, I’ve read the Goldhill article and now I’ve read your posts and I think I understand 85% of the economics. Perhaps I’m not the best judge because I have one son who has a life-threatening, but, thank-God, manageable chronic condition and another son that has a devilishly difficult to diagnosis and treat sensory processing disorder, but I can’t help thinking that we simply do not “consume” healthcare in the way we do automobiles and flat panel TVs.

    Perhaps that’s the problem and perhaps its unsustainable but, on the day Brendan was diagnosed with diabetes the last thing I had the head for or, frankly, the time for, was a discussion of various cost options surrounding his treatment. Perhaps thats the kind of day which would be covered by a catastrophic policy?

    What about uncertain disagnosis, like the devastating, “we can’t be sure but your kid may have autism, may have aspbergers or may be just a late blooming toodler?” Do parents on that day really need to determine whether there HSA’s are sufficently funded to cover the battery of tests that will be needed to even get to a diagnosis? A diagnosis, btw, which may take years to pin down. Further, the system Goldhill proposes seems to result in the following perversity, if it turns out that your kid is just a late bloomer (Hallelujah!) you are on the hook for a couple of grand but if it turns out to be autism, well your catastrophic insurance will kick in.

    Perhaps there are no satisfactory answers to these questions. But, those are the types of questions that need answering if the American people are going to get behind any reform at all. Unfortunately, neither Goldhill, the President, nor anyone else has done a good job in that regard. That is what I will be listening for tonight.

  2. Mark Esswein Says:

    I read the Goldhill article today on the Metro. Although I’m a longtime subscriber to The Atlantic, I had to print the online article because that issue was spirited away without my seeing it.

    I agree with Goldhill (and Grannis) that the cost situation in which we currently find ourselves, is the result of a skewed incentive system.

    In an earlier life I worked in the medical software business and the one thing I always had trouble getting my head around was highly inflated line item costs coupled with uniform markdowns of the total. “What’s up with that?” was my gut reaction. Of course, a little thought revealed the underlying shell game as Goldhill discusses in his article. It’s the same shell game that appears anytime an outside-market force imposes a middleman.

    In a rational system (a universe that seems farther away with each minute) Goldhill’s solution sounds great – mostly. The problem is transporting everyone back to the rational universe.

    In a nutshell, the insured population (whether through their employers or the current public systems) is conditioned to see the status quo as an entitlement. Once an entitlement is perceived, by both the haves and have-nots, only a revolution will overturn that perception and revolutions are ugly.

    Re-instituting a market that has been absent for the last 70 years will make undoing the recent interventions in the financial markets seem like child’s play. In fact, now that I think about it, look at the former Soviet Union and the ongoing process there. That is what it’s going to take to bring health car in the U.S. back to rationality – complete chaos – maybe. Maybe we’re smarter than than that and can bring it around in a more civilized manner. Maybe not.

    I watched the President’s speech. His call for structural status quo was disappointing, but not unexpected. I was, however, appalled by some of the Republican reactions. Boos? John Boehner rolling his eyes and at one point stopping his applause when he was caught on camera? Eric Cantor diddling his Blackberry? Where is the ex officio respect for The President they demanded not so long ago? What is this? Parliament on Question day?

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