More on Universal Health Care

Found this link thanks to Jane Galt – Asymmetrical Information. Premium Blend: Why is it so difficult to provide universal health care?

…the core economic issue: It’s the rising cost of health care that has left some 41 million Americans without health insurance today. For the last 30 years, health-care costs have been rising 6 percent to 8 percent a year—more than double the inflation rate in the rest of the economy—because demand keeps outstripping supply. Moreover, the forces behind this exploding demand cannot easily be changed or affected. As people’s real income rises, they expect more medical care; our society is aging, so people need more care; and with new technologies treating formerly intractable conditions, people want more care.

In practice, almost everyone, insured or not, has access to health care, especially in emergencies. Insurance affects how much people actually use health services: The access of the uninsured involves inconveniences and costs that encourage them to underconsume medical services, sometimes with grim results. By contrast, people with insurance often have such broad access that many overconsume those services. These consumption patterns drive the price increases that ultimately shrink insurance coverage. Still, it’s hard to blame Gephardt or Dean for skipping past the cost issues, since every effort in the last 30 years to stem those costs—creating Medicare and Medicaid, wage and price controls, government threats of strict cost containment regulation, and the rapid spread of managed care—has failed. Anyway, who gets elected president by telling people that their health-care costs will soar so long as everybody has access to the most expensive forms of care?

The problem lies not in people’s natural desire for the best (and most expensive) care, but in the way our health-care market operates—especially the weakness of the market forces that normally slow high inflation. That makes health care a prime example of what economists call “path dependency,” where pivotal events from long ago shape a sector’s development more than normal competitive forces. Health care’s path began when employers in World War II, desperate to attract workers without breaching wage controls, first offered health insurance as an untaxed fringe benefit. This approach took strong root, because tax law requires that firms providing any tax-free form of compensation have to offer it to all their employees.

Over time, these beginnings brought most people into an insurance system that insulated them from the full cost of each treatment; they also left government as the insurer for everyone outside the work force, notably retirees and the poor. All insurance markets are subject to “moral hazard,” where the small personal cost of using the insurance—a co-payment in this case—encourages people to overuse it for minor complaints. The hazard is intensified in the case of health care, because people don’t pay for the insurance directly. To be sure, working people ultimately pay for their coverage in lower and slower-rising wages, but the cost of premiums is still subsidized by its tax-free treatment; and since employers write the checks for us, we don’t even feel the pinch directly when premiums go up. (Imagine how much less coverage many would accept if we all had to write annual premium checks for $4,000 or $5,000.) These hazards are even greater in public-sector health care, where the retirees and poor people consuming most of the services don’t bear most of the taxes financing them.

Individual costs are rising, but other forces continue to undercut greater price discipline. In most markets, for example, this discipline also depends on people having the information required to judge the value of goods or services before they buy them. In health-care markets, how many people have the information to say no to a more expensive test for diabetes or a treatment for a heart murmur? The norms of the medical profession are supposed to reduce this “agency” problem by aligning a doctor’s incentives with a patient’s medical interests (especially when the prospect of a malpractice suit reinforces these incentives). But there’s no mechanism to align the financial interests of doctors and their patients. So doctors can deliver sound health services in ways that maximize their billings.

When prices rise unusually fast in other markets, people can usually find and substitute cheaper products: Beef prices rise and people eat more chicken, or a real-estate bubble drives up housing prices and people downsize their residential ambitions. That doesn’t work nearly as well in health care, when patients are told that the alternative to a costly test or procedure is poor health or even premature death.

Finally, health-care inflation suffers from a classic “free rider” problem. Everyone has a common interest in moderating demand if it will ensure continuing coverage. But no one has an incentive to take the step alone, so no one does.

I hope you read those paragraphs carefully. Shapiro has summarized the dilemma of health care costs beautifully!!

He offers a modest solution, but admits that it is unlikely to work. As long as we have no connection between health care costs and personal expenditures, we likely will have no major health care reform.

Economists cannot tell us how much health care we need . Rather, as a society we determine how much health care we want . Unfortunately, our desires have no relation to what we would spend. The current system has no balances. Universal health care would not improve that problem, it would only shift the locus of control. One need only look to Canada and Great Britain (amongst many) to understand the types of health care cost decisions made in a single payor system.

Our health care insurance system is broken. Perhaps we could look at ways to improve that system, and in some way link behaviors with costs (e.g., smokers and the obese would pay higher insurance) and expenditures with graduated co-pays. Only when each individual starts to understand costs will market forces apply. Without the power of market forces, I suspect that we will be continuing this debate for many years.