Wednesday, June 17, 2009

"Crowd Out"

One concern with a lot of public plans for health care is referred to in health economics as "crowd out". If we look at the Congressional Budget Office's (CBO's) analysis of the Kennedy-Dodd bill, we see a great example of this.

The bill will end up spending $1 trillion over 10 years. Over 30 million people will be covered under the plan funded by the government. Only 16 million of those will be from those who are uninsured at the present time. That leaves 2/3 of the problem with the uninsured unsolved for spending $1 trillion dollars. We could give every uninsured person (and there are nearly 50 million at this point) $2,000 of care a year for 10 years and spend only $1 trillion. Maybe that would only partially solve the problem for 50 million individuals (i.e. they would still be underinsured), but it would at least provide some coverage for everyone.

However, that is not what the plan is doing. The plan solves about 1/3 of the uninsured problem and then is projected to attract people who have private insurance at present. That is the situation called crowd out. It would be one thing if the government took over all health insurance. However, having a simultaneous public and private system there is a risk that some things will be taken out of the private market's hands (which usually operates more efficiently and has those who benefit from the insurance paying for it) and shifting it to the government which often acts less efficiently and spreads the cost to the taxpayers.

A great example in the past was influenza vaccination--so this really can be said to apply not just to insurance but to health care in general. Before Medicare covered flu shots, about 50% of older adults were getting the shots and paying for it themselves. A decade and a half later we still are not vaccinating all older adults on Medicare. Thus, the majority of what has been spent by the government has been for services that would have been provided anyway.

When we have public policies that only partially solve problems, we should be very careful to look out for "crowd out", assess how much there is likely to be, and assess whether we really want our tax dollars to be used this way.

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