Health Care and Functional Markets

Health care seems to be perennially in the news as of late…the supposed health care “reform” bill that holds a lot of political weight for Presdient Obama has a relatively uncertain future, but I place the probability of something resembling the current bill being passed at some point this year, whether through compromise or reconciliation. Leftist-liberals proclaim that this is a great step in the right direction. I disagree. If your definition of the bills “success” is that insurance will cover more people, then you will probably find some success (although I would bet money it will be much less than is claimed by, say Yglesias and Klein). As for it’s budget neutrality — even the most “enlightened” of folks have to lie to themselves to make the claim. The bottom line is the health care reform bill further cements the status quo, which to me is unacceptable, even in the interim.

So there are two questions:

What would be better?

What would I like to see?

The first question is easy. As Milton Friedman has pointed out in the past, both a market-oriented system of delivery, or a single-payer insurance plan would be better than the status quo. Ostensibly leftist-liberals favor the latter.

I favor the former. What is called insurance in the United States and throughout the world is a perversion of the word “insurance”. What it amounts to is pre-paid medical care. Under these type of systems, there is little incentive to keep costs from ballooning. Nearly everywhere in the developed world, growth in the price of medical care is an unsustainable portion of public budgets. Many leftist-liberals bandy around levels of spending:

This looks like a large anomaly…but what you should be looking at is rate of growth. Ceteris paribus, levels are misleading here, as the richer the country becomes, the more it spends on health care. Here are the growth rates:

It is hard to see, but the US is at the end, in orange…with an average annual growth rate of 3.66%, less than the OECD average…and much less than OECD outliers like Greece, South Korea, and Turkey. The rub is, we may be getting more health care, but it is highly unclear that we are getting better health care.

So what do we need to do to improve the situation? My first answer will not sit well with leftist-liberals — we should turn routine care over completely to the marketplace, with payment on delivery of service (in cash). This is one area of care where price should be falling. There is very little new technology that you encounter when you go to get a yearly physical, or get checked out for a bad cold, the flu, or strep throat. Indeed, in my 25 years on this earth, the same tools have been used to administer tests for every one (besides digital scales…but tons of people have one of those in their bathrooms today). This is a portion of medicine that should behave like retail. Call it retail medicine. In fact, bundling it with chains could provide for loyalty incentives that included free checkups, like your Safeway Card gets you discounts on gas. These services should be advertised on TV, complete with prices! I have heard it said that insurance should lead to lower prices…but that does not follow from the economics. In this market, insurance companies exist to extract rents, and then use monopsony power, along with the provider’s monopoly power to fix prices. It doesn’t matter to the insurance company what that price is, because it will just extract the rent from its customer base.

The next sector of health care that we have to deal with is catastrophic care. This is where insurance should step in. To make an insurance market functional, there needs to be competition with adequate information. It’s very hard to understand exactly what an individual health care plan covers, and the levels of coverage — indeed, if you do happen to get an advertisement for insurance, notice that not a single price will appear. State-level regulations prevent a large marketplace from forming. As much as right-wingers will hate it, this is best organized as a Federal issue (or a free trade issue under my favored structure of the US). Markets should be clearly transparent. Tax preference should be given to individuals that encourage saving. These accounts should allow for long-term savings, and should be convertible into cash (taxed) or other forms of investment (i.e. bonds, IRA, etc.) at any time. Singapore mandates savings at 30% of gross income. I don’t want to go that far, as it is very illiberal…but I, personally, have no problem with nudges that encourage participation. This money could be spent for routine care, or used to cover the large deductibles that accompany catastrophic insurance. You could even allow for a government subsidy to the savings account. This would decrease price in the long run, and provide for a range of coverage options that suit the taste of individuals. Government would exist to regulate actuarial practices, and ensure financial health of firms…the government, however, would NOT mandate coverage.

And the final portion of the market is chronic illness, and long-term care. Much to the dismay of my right-wing friends, this is the one portion of the market that should be fully subsidized by government. Much of this portion of health care involves Medicaid and Medicare. I do favor turning both programs into voucher programs (a la the Ryan plan)…however, it is hard to discuss this, as I have a very conflicting idea of the structure of the US…so predicated upon what I would like to see — the specifics would change.

The Republicans should use this type of structure as the “compromise” they may be seeking.


8 thoughts on “Health Care and Functional Markets

  1. To be honest, this does sound more interesting and promising than a single payer system. It does make a lot of sense but the surprising thing is liberals have walked half way down this path, inquiring why we need insurance at all. I say half way because, true to their liberal preference and outlook, they can’t fathom the alternative to no insurance (since the government would be the insurer [enter cognitive dissonance, considering their inquiry]).

    For many people, insurance is nothing more than catastrophic insurance. I’m not sure what the true median price (including employer subsidy) for health insurance is but my in-laws pay over $1300 a month for their health insurance as they near Medicare age. Neither of them are the type to see their doctor frequently, unwilling to pay a penny (co-pay) more than necessary for medical attention. I’ve always told them that they should go to the doctor as much as possible despite the co-pay since regular check-ups are good for preventative care and can help avoid catastrophic medical problems but they’re reluctant despite that advice. I’m fairly certain, without data to prop up that certainty (I’ve been up all night, sue me!), there are plenty of people like this. At $1300 a month for mediocre insurance for two, it’s a huge waste of money — they could simply not have insurance at all since they never use it except for assurance they’d have it in case something terrible happened. That money could be put into a savings account for catastrophic care. The only situations where long-term savings would dry up would be due to long-term care needs or extremely expensive care needs.

    The savings account is the length of the road I didn’t travel — blame my liberalness. I would love to see a serious, unbiased and independent study on this type of setup and see how well it would do. I know it’s far too late for anything to be done even in Obama’s second term if that happens but if he’s really open for better ideas and studies show this would be superior to single payer, let alone the refurbished goods they’re trying to pass off as reform, it should be on the table as a brand new health care proposal.

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