Pursuit of Truthiness

my gut tells me I know economics

Health Care Solutions: The Free Lunch is over here, what are you eating?

with one comment

After a few months of reading about this bizarre health care debate, I think I finally understand things well enough to put my thoughts on record.  (Was the wait against the spirit of blogging? I probably should have written a ill-informed post to respond to each twist, turn and dumb remark)

First, I should say that the market for health care is weird.  Very weird.  Last year I wrote 20 pages about how weird it is and how much it necessarily differs from ideal, perfectly competitive markets.  This means that the government should be involved in the health care market more than in others.  I don’t think a “free-market” is ideal in this situation, nor would I say French-style “socialism” is ideal, though interestingly either extreme might be better than our current badly regulated mix.

So what does the Obama administration think is wrong with the current system?  I think a fair characterization (after reading Obama’s OpEd) is:

1) Health care has too high a share of GDP

2) Insurance is too expensive / 47 million people are uninsured

3) “Bad practices” by insurance companies like recission, refusal to insure expensive-sounding patients; the industry is not competitive enough to improve quality on these counts

4) Waste, abuse, “pointless” high administrative costs

The Obama administration thinks it can solve all four of these problems at the same time.  This would actually be easier than solving only the first three problems.  It sounds crazy to want think you can reduce the cost (1 and 2), increase the quantity (2 and 3) and increase the quality (3) of health care all at the same time.  It sounds like the left-wing’s answer to the right’s supply-side tax cuts; they think they found their own free lunch.  So it is the job of the sober-minded economists to do what they did with the supply-siders and remind everyone that There Is No Such Thing As A Free Lunch.

Right? Right.  But also wrong.

I think there is a free lunch to be had with health care, but that Obama & Co are looking in the wrong place.

Obama’s basic solution is as follows (though it is in fact hard to say exactly what his plan is since he is letting Congressional Democrats write the bill and they can’t agree on much):

1) Improve the quality and quantity of private insurance through mandates on insurance companies (cover anyone who asks) and individuals (buy insurance!).  Result: higher prices for insurance.

2) Have the government cover more people (either through a Medicaid expansion, or a “public option”, or something).  Result: Much higher government spending

3) Pay for it all: “We’ll cut hundreds of billions of dollars in waste and inefficiency in federal health programs like Medicare and Medicaid and in unwarranted subsidies to insurance companies”

So costs will definitely increase immediately, both for the private sector and the government; but somehow enough “waste and inefficiency” will be found and eliminated so that total costs will actually fall.  It is of course easy to cut off medicare payments for inefficient treatments, as seniors don’t really vote and no one will shout about death panels.  In reality, the small amount of “waste and inefficiency” the government will be able to find will turn out to be very politically difficult to eliminate.

My plan, of course, is even more politically infeasible; but in an honest way.  I don’t propose expensive changes and say they will be payed for later by things which turn out to be politically impossible.  I propose regulatory changes which will cost the government no more than the ink needed to write new laws, all while netting the government a large sum within one fiscal year and reducing costs in the private sector.

If there is a free lunch to be found, it is in the judicious reduction of regulation.  Take a look back at the Problems with Health Care According to President Obama.

We can deal with #1 right away: is overall health care spending too high?  In principle, no.  I don’t worry about how health care and education have been rising as a percentage of GDP; in fact in so far as the greater spending leads to better outcomes this is a very good thing.  As people get richer it is great that they want to be healthier and more educated rather than, say, spending more on a bigger house and better TV.  Of course, the extra health care spending might not be doing so much; this seems likely after reading international comparisons, and the RAND study.  Read much of Robin Hanson’s work and you will hear that much health care spending does nothing or less, but most people don’t really mind that.  But this is not a problem in principle of health spending as a percentage of GDP being too high; it is more another way of stating problem #3, that quality is too low.

So we are left with problems #2 and 3, that the price of insurance is high (and so many are uninsured) while its quality is low.  So lets fix it!

The Solution:

1) Think insurance should be cheaper?  Stop making it illegal for people to buy cheap insurance.  Most states have hundreds of mandates stating what health insurance must cover.  Politicians think they are doing a good deed (or think that voters think so), helping out consumers by making insurance companies cover more; but of course consumers end up paying for it.  If everyone is forced to buy a Cadillac or nothing at all, then we will spend a lot on cars and lots of people won’t be able to afford a car.  The same applies to health care.

2) Think the insurance industry is an oligopoly and needs to be more competitive?  Allow people to buy from out-of-state providers, and the market gets almost 50 times more competitive.  This competition will itself drive down costs, plus allowing people to buy from companies based in states with fewer regulations and mandates goes a lot of the way to implementing Solution #1.  Federalism is a barrier to both of these; I don’t know how easy it would be for national legal or political institutions to override this.

3) Think medicine itself is too expensive?  Allow med schools to train more doctors. Currently there are tight limits on the number of students both public and private med schools can accept, courtesy of the government and the AMA.  Allowing the quantity of doctors to increase is a good thing even apart from the price decreases that would result.  Many other rich countries have many more doctors per capita, leading to better served populations and lower prices of seeing doctors.

4) Think seeing a doctor is too expensive? Stop making it illegal for people to use cheaper alternatives. The government at the behest of the AMA will prosecute people without the right degree and license for practicing medicine.  I think all licensing requirements should be drastically scaled back or eliminated, but I think even normal people who looked at the list of things only M.D.s (and sometimes D.O.’s) are allowed to do would say that many of them could be done as well and much more cheaply by R.N.’s, P.A.s, et al.

5) Lower costs, increase competition and quality: End tax subsidies for employer-provided health insurance. Why did tying health insurance to employment ever seem like a good idea?  There are lots of strange combinations for sale but most aren’t enshrined in the tax code.  Now people get to lose their insurance when they lose their jobs, and businesses find it more complicated to hire people (it is debatable whether this makes it more expensive to hire as well).  If the subsidy went away, more companies would supply individual plans and people would choose plans that better conformed to their desires, reducing average spending while increasing average quality.

6) Worried about inequality, social justice, and the uninsured?  Well, lots more people can afford health care after solutions 1-5 brought massive cost reductions.  A few million people still can’t afford good coverage?  The government has a bunch of new tax receipts after solution #5 closed the tax loophole, so they can afford to expand Medicaid to cover slightly better off poor folks.

Wasn’t that free lunch delicious?  The health care system could be higher quality and more equitable at a lower cost.  Now all we need to do is get the political system to agree.  It shouldn’t be too hard to overcome status quo bias, the AMA, insurance companies, Republicans who don’t want Democrats to get credit for a successful reform, and the majority of Americans who benefit from employer-provided health insurance!


Written by James Bailey

September 11, 2009 at 3:38 am

One Response

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  1. Comments on your solutions:
    1) The car analogy might not be the best because I know that in a lot of states cars must past an inspection to ensure that they meet minimum safety requirements. A car that doesn’t meet these requirements would likely be cheaper, but it wouldn’t do much good as more accidents would occur. If people bought cheap insurance, it would likely not be much better than not being insured. It’s hard to determine how much insurance you will need unless you have pre-existing conditions or are psychic.
    2) The logic here is the same as 1. If 1 is enacted 2 I don’t see the point of 2.
    3) If this can be done without resulting in improperly
    trained doctors…
    4) Makes sense
    5) My personal favorite as it is one of the primary reasons why buying health insurance as an individual is so unaffordable and will encourage people to make more choices. Since I get my health insurance through my employer, noone had to compete for my business as an individual…
    Do you think a mandate is required as well?


    September 16, 2009 at 1:05 am

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