Individual market for health insurance

Many people have suggested that if we mandate health insurance and leave it to the market that the market could be more like auto insurance. As I've pointed out in the blog before, maybe and maybe not. One thing that suggests at least "no so fast" is a recent report from the Commonwealth Fund.

The report suggests that the individual insurance market is not a viable option for most US families. If we reword that a little, we could say that the market as it exists at present is not a viable option for most US families.

What would have to change? Mostly that the plans would be more affordable, at least based on the report. What could possibly make them more affordable--more competition, better information for consumers, and a basic clearinghouse approach for all the information about all the options might be a start. More standardization of plans and claim forms might also help. The key would be to allow people to have some level of choice of plans that can compete on price and service while limiting some choices to help make the market more transparent for all who need to buy in that market. It might make an individual market a little more viable for at least some of the families, and I might be willing to argue that it could make a dent in the uninsurance problem. In that case, a market may work. It just would not be today's market.

How High Can Health Care Costs Go?

I'm going to refer to a column by Jay Hancock from the Baltimore Sun again. Here is how he concluded his July 24th column:

"Families already understand that medical costs have taken over so much of the household budget that in some cases they threaten to crowd out necessities, like food.

Why should the federal budget be any different? Obama is right about one thing: Health costs can't and won't keep growing at this rate. (They've doubled again in the past decade.) If the government can't stop them, there are forces out there that eventually will: the laws of economics and Herb Stein."

The reference to Herb Stein at the very end ties back to the start of his column on July 24. Mr. Stein was a White House economic adviser in the 1970's who said "that if something cannot go on forever, it will stop." While amusing, it is less important to ponder interesting quotes from three decades ago than to consider basic economic principles.

The key question is how much more can the amount that we spend on health care increase? The amount that we spend on health care has increased, seemingly without any barriers, over the past several decades. We see all sorts of projections about spending over 30% of the nation's income on health care. Yet, sooner or later, and probably sooner, we'll find that we don't have enough money for other things--housing, food, vacation, lessons for kids, etc. At some point, individual patients will start asking physicians and nurse practitioners "can't you do this a little less expensively?" (even with more sophisticated care available if we could only pay for it). Even those who are insured may be asking about the price before just accepting care. Individuals' own budgets will force them to become more informed (and more price sensitive) consumers of health care.

This alone will control costs to a degree. It may take longer than more direct policies. This type of break on spending doesn't do anything for the uninsured. It simply means the need to spend on other things will eventually catch up with out health care decisions. Why hasn't it caught up yet? Many people have largely been shielded from these pressures by insurance over time. However, we are approaching a point at which more people are affected and will work on their own to control what they spend.

We ever had a doctoral student who worked on a similar macroeconomic topic for her dissertation and suggested that in the long run health care may take up less of the country's budget than is being predicted now as our country makes fundamental decisions about how we do and do not want to spend our money.

More thoughts on rationing

Anyone still interested in the discussion of whether we have health care without rationing in the United States should consider reading a piece by Peter Singer (a professor of bioethics). It is long, but worth the read. The main point he makes is that every system rations in some way. The system we have right now primarily rations by price--if you can't afford care you won't get it. Regardless of the reform that is adopted, our system almost certainly will continue to ration by price (at least in part) as people who cannot afford certain types of care will not receive it and those who can will.

What I find most useful about Professor Singer's discussion is the following quote:

"Will Americans allow their government...to decide which treatments are sufficiently cost-effective to be provided at public expense and which are not? They might, under two conditions: first, that the option of private health insurance remains available, and second, that they are able to see, in their own pocket, the full cost of not rationing health care."

This is one thing that individuals on all sides of the political debate may be able to agree. People who can afford to buy more than whatever public option is made available should be able to do so. In fact, we probably couldn't prevent it even if we tried. However, people who want more coverage should have to purchase it on their own. Think of what this would achieve. Everyone would have a minimum. The burden to society of the minimum might be controllable. Everyone who had more could buy more if they wanted; and everyone who bought more would be completely responsible for it themselves. Yes, that would create a two-tiered system. But, as I and others have stated before, it is already the case that people get vastly different health care in the United States now as a result of their income or insurance.

And, that last point, is the one thing that no reform is likely ever to change.

One person's overspending is someone else's income...

Earlier this week, the Baltimore Sun featured a column entitled "Look out, Baltimore, health care reform is on the way". This article demonstrates one of the many reasons that the discussion regarding health care reform is likely to get more complicated as more details about reform plans become available and people truly appreciate what the impact will be.

A lot of jobs depend on health care in Baltimore (and in many ways throughout all of Maryland). Physicians. Nurses. Even construction workers who have built the many buildings that are affiliated with medical centers all over the city. The Baltimore Sun columnist, Jay Hancock, noted that Baltimore has some similarity (and only some) with New York during the housing/finance boom. New York has had difficulty since the housing/finance collapse. The housing/finance collapse was at least somewhat unexpected. In contrast, we hear all the time about the desire to control health care costs. So, we should anticipate that there will be less money to go around for jobs in Baltimore. Notably, Mr. Hancock suggests that Baltimore (despite a port and a great number of educational institutions) will have no obvious engine of economic growth if the spending increases slow down. What does that create? An incentive for many in Baltimore to oppose any spending controls that threaten their livelihood.

A final interesting point regarding Mr. Hancock's column--despite the degree to which the Baltimore economy is based on health care, that does not lead to the people of Baltimore being particularly healthier, Baltimore was rated 83rd among US metropolitan areas based on 2007 data. The key is that we must consider the things on which we are spending all the money that has gone to training physicians, building incredible cancer centers, and attracting people from around the country and around the world. Then we must figure out how to use those resources to make the local population healthier or how to use the money that might be saved under reform to bring about economic growth in alternative industries.

Car Insurance and Health Insurance

Well, at least on the Facebook feed of this blog, there was a good bit of discussion on yesterday's blog--talking about reform. One point that came out--and this is not the first time it has come out--is personal responsibility and the comparison between the personal responsibility for car insurance (with no one suggesting a public financing option) and the question we have about the appropriate degree of responsibility for health insurance.

With car insurance, driving is a choice. Consequences of not driving--probably some places it would be hard to live, but you could still do okay in many places. What type of car we drive--a choice. How well we maintain our car--a choice. What type of gas we use--a choice. Everything is a choice. Everything is the individual's responsibility. If you have an accident, in most cases if you remain a safe driver for long enough after the accident your rates will go back down.

Does health insurance work the same way? Let's begin with whether being healthy is a choice. We might say "Sort of". Some people choose to behave in ways that are truly and clearly unhealthy. Individuals need at least some minimal level of health or they will become a burden to others that someone (or society as a whole) will have to pay for. So that's a bit different than driving.

Otherwise, many things about our health and health care utilization are a choice--but some are purely random. And some are hereditary--clearly not a choice. If you have an illness early in life that predisposes you toward being more likely to be ill later in life, you can take steps to keep yourself as healthy as possible, but there are simply some things that cannot change. You essentially become high risk for a lifetime rather than only high risk until you have proven that you deserve to be considered low risk again.

So, while there is a lot to be said for personal responsibility and accountability, we still need to recognize the differences between car insurance and health insurance and think about how that would lead to the need for a market that might look more like the car insurance market but is likely to maintain a variety of unique elements.

Health care reform

I was at a professional conference last week (part of the reason for my brief blogging hiatus) and listened to a speech by Julio Frenk. He described five features of any health care reform that is likely to be successful. First, he proposed that the agenda for health care reform cannot stand on its own--it should be noted that it is a part of a larger agenda for economic recovery. This makes economic sense. In a country like the United States in which one of every six dollars is spent on health care, it will affect the whole economy.

Second, he proposed that the budget be carefully considered. He noted that many health care systems are underfunded. In the United States, we can debate whether we are spending enough right now--although most people thing we are spending too much--but we certainly do not have enough public funds to meet the future commitments we have at the moment.

Third, he suggested that we consider capacity. As an economist, I would simply want to clarify--capacity for what? As importantly, who will decide what capacity is being developed? Will it be a centralized government decision or something left to the market or something in between?

Fourth, he commented that we need to focus on deliverables. If nothing else, as an economist I can't even begin to ponder a cost-benefit analysis in which we compare the costs with the benefits if I don't know what the deliverables are.

Finally, he suggested that we focus on evidence. I don't know anyone who would argue with that--in principle. Sometimes the debate gets stuck on whether there should be any room for physician judgment.

These principles seem reasonable to consider (and make good economic sense) no matter what type of health care reform we end up with. What we still need to determine is the best way to get the system to achieve the goals our society (and we as individuals) have.

Click here for an audio version.