The surreality of health care reform

It looks like the House of Representatives today will likely pass a version of the Senate health care bill, thus clearing another hurdle in enacting some form of the health care reform which Barack Obama has been pushing.

A brief word on the politics first. Any presidential candidate in the future who says that he or she is going to “change Washington” should be openly laughed at and ridiculed. George W. Bush promised to “change the tone in Washington” when he ran for President in 2000 and of course Barack Obama based most of his 2008 campaign on a relatively fuzzy message of “hope” and “change”. And apparently people were somewhat swayed by this romantic notion of a new President-elect riding his white horse into Washington and slaying the demons of partisanship and cynicism. The ugliness of how this health care bill has been pushed through should lay to rest any notions that Obama is a different kind of President in whom we should invest our hopes for the future. I hope people are less romantic in future elections about what the holder of the office of the President is able to accomplish. Whatever you can say about Barack Obama’s successes or failures so far, bipartisanship certainly has not been a major accomplishment.

Now on to the substance of health care reform. I have been thinking quite a bit about this over the past year and I offer up these observations which lead me to the conclusion that the Congress is going in exactly the wrong direction in trying to reform health care in the United States.

Health care is not equivalent to health insurance

This is the most fundamental flaw in my mind with the overall approach that Congress is taking to health care reform (which is often referred to as health insurance reform). Yes, most people obtain health care services through a health care insurance policy administered by an insurance company and most health care insurance policies are provided by the person’s employer. The reason for this historically was that during World War II when wage controls were imposed on employers, companies (primarily defense contractors) had to find alternative ways to compete for workers and thus started adding health insurance benefits as part of their employment offers. Thus a tax-exemption for employer-provided health insurance became part of the law because of the original bad idea of imposing wage controls. A similar tax exemption has not been provided when health insurance is purchased by individuals. (See here for more info.)

But despite this historical anomaly which led to our present-day system which is biased towards employer-provided health insurance, why should health care services be delivered through insurance anyway? My argument against this is that there are many goods or services more important than health care, such as food, clothing and shelter. Without those three basics, a person would have a difficult or impossible time staying alive, much less staying healthy. So why don’t we have food insurance, or government run food stores? Why don’t we have clothes insurance so the government can ensure that we’re all clothed properly? Because insurance is not an efficient way to pay for these goods, and neither is it efficient when paying for health care.

I realize that I quote Milton Friedman a lot on this blog and I promise he is not the only economist that I have read, but during his career he had a way of communicating complex ideas in economics very simply, so I can not resist quoting from his 2001 essay on “How to Cure Health Care“:

We have become so accustomed to employer-provided medical care that we regard it as part of the natural order. Yet it is thoroughly illogical. Why single out medical care? Food is more essential to life than medical care. Why not exempt the cost of food from taxes if provided by the employer? Why not return to the much-reviled company store when workers were in effect paid in kind rather than in cash?

If we want to ensure that the citizens of the US remain healthy, finding a way to ensure everyone gets the health care they need ought to be the primary goal, not expanding insurance coverage. Which brings us to the next point:

Health is not equivalent to health care

This is an even more basic point which I think has been widely overlooked. Having access to health care is not directly correlated with one’s health, and lacking access to health care does not mean that one is unhealthy. I’ll give a simple example using my own situation to clarify what I mean. I am 33 years old and have had health insurance provided either by my parents’ employer or by my employer for as long as I can remember. I am also a relatively healthy person by most measures. Yet I have not been a consumer of health care services (i.e. I haven’t gone to a doctor for a checkup) in over 15 years. (I have gone to the dentist and the eye doctor on a couple of occasions during that time period.) The primary reason that I’m healthy is that I am relatively young and live a healthy lifestyle. I am fortunate that I have not been in any major accidents or contracted any diseases that would affect my health. But as long as I have had health insurance, it has mostly been a waste of money for me (though I didn’t strictly pay for the coverage, what has been paid by my employer presumably would have been paid to me in wages instead absent the health insurance benefit.) I would certainly have wanted to have some kind of health insurance to cover an accident or unforeseen illness during that time, but for basic health care services like going to the doctor for a checkup or paying for prescription drugs, I would have been much better served by paying for any of those things out of pocket if I had needed them.

Many might say that’s fine for me, but for the vast majority of Americans, we need to provide a better way of providing them with health care, but my basic point that increasing access to health care won’t somehow automatically make us healthier as a nation still stands.

Health insurance encourages unnecessary spending on health care and discourages efficiency because consumers aren’t spending their own money

Again from Milton Friedman:

Two simple observations are key to explaining both the high level of spending on medical care and the dissatisfaction with that spending. The first is that most payments to physicians or hospitals or other caregivers for medical care are made not by the patient but by a third party—an insurance company or employer or governmental body. The second is that nobody spends somebody else’s money as wisely or as frugally as he spends his own.

Arthur Laffer called this the “health care wedge” and it seems like such a basic observation, it is amazing that it’s not treated as common sense; rather it almost seems counterintuitive to people used to the present system.

The health-care wedge is an economic term that reflects the difference between what health-care costs the specific provider and what the patient actually pays. When health care is subsidized, no one should be surprised that people demand more of it and that the costs to produce it increase. Mr. Obama’s health-care plan does nothing to address the gap between the price paid and the price received. Instead, it’s like a negative tax: Costs rise and people demand more than they need.

Insurance companies need to make money

One part of the health care debate that really gets to me is the relentless vilification of the health insurance companies. People routinely complain that health insurance companies deny coverage to people who are sick and really need the coverage or that they deny coverage for “pre-existing conditions”. Imagine for a moment we were not talking about health insurance but automobile insurance. If I buy collision insurance for my car and then take my car in for repairs from an accident, will the insurance company care if the accident occurred before I purchased the insurance? Of course they would. That’s a form of “pre-existing condition”. I ask: why on earth would a business knowingly offer you an insurance policy with a low premium if it was guaranteed that they would have to pay more money out to you (or your auto mechanic or your doctor) than they would be taking in through the premiums they charge you? It’s absurd to think that. Yet that is what we expect from health insurance providers. I agree there’s a moral component to the argument here, i.e. it’s a little cruel to say that someone with cancer shouldn’t be treated if they lose their job and thus their insurance coverage. But the point is that we need to find a way other than insurance to provide for these types of costs. All that will happen when insurance companies are forced to cover people who would not normally be eligible for insurance coverage according to their normal criteria is that premiums will have to go up for everyone else.

We don’t know who the people are who currently lack health insurance coverage

According to the Census Bureau, there are approximately 46 million people who do not have health insurance. Though this likely includes some foreign nationals, that’s not the important point here. My point is, who are these people who don’t have health insurance? It seems likely that they fall into several categories:

  • People who are too poor to afford health insurance and don’t have a job which provides health insurance as a benefit.
  • People who chose not to have health insurance, (either because they pay for their own medical care or they are young and don’t feel like they need coverage) but otherwise could afford it.
  • People who are in between jobs or have a gap in insurance coverage (it seems likely this rate would be close to the unemployment rate, i.e. people who are in between jobs are more likely to be lacking insurance coverage at least temporarily.

Maybe there are some additional categories, but it seems like those would pretty much cover most of the reasons for people being uninsured.

For the first category, I have a simple question: what the heck is Medicaid for if not to provide access to health care for people who can not afford it? If the response to that question is that Medicaid doesn’t work that well, then I would follow up by asking: why on earth would a brand new middle class entitlement work any better if we can’t get Medicaid to work well?

For the second category, it seems that if people can afford insurance but choose not to buy it, the rest of us should not go out on a limb to force subsidize payments for something they didn’t want bad enough to pay for it themselves. Of course the biases toward employer-provided medical care make purchasing your own policy tougher and more expensive but many people have done it.

For the third category, I believe if we addressed the more fundamental flaws of the tax preferences and biases toward employer-provided medical care, this category would not be as prominent. It does seem fair to provide some assistance to folks who are temporarily jobless in the same manner that we compensate for lost income with normal unemployment insurance.

So how many people are in each category? I know there have been some studies done, but it’s hard to say for sure. My point is we should not focus on this group until we know more about who they are and what are the reasons that they currently lack health insurance coverage. And again, simply not having health insurance doesn’t mean they lack access to health care.

I have some more thoughts which I will try to type up later, but that is all I have for now. I’m sure there will be lots more to come on this topic even if the Congress sends a law to the president and it gets signed and becomes law.

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