11.14.2005

risk, selection, justice

Remember back in the old days, when I used to post Paul Krugman columns all the time? Lest you think I've abandoned my columnist-hero, today our friend Mr Krugman is writing about health care.

But first, a few statistics, brought to you by the World Health Organization, courtesy of James, in comments.
WHO Core Health Indicators, US/Canada

US: $5,274 on health care / $2,368 is government spending
Canada: $2,931 on health care / $2,048 is government spending

US: Infant mortality rate, both sexes (per 1000 live births) 7.2
Canada: Infant mortality rate, both sexes (per 1000 live births) 5.1

US: Under-5 mortality rate, both sexes (per 1000 live births) 8.0
Canada: Under-5 mortality rate, both sexes (per 1000 live births) 6.0

US: Adult mortality (per 1000) males 139
Canada: Adult mortality (per 1000) males 93

US: Adult mortality (per 1000) females 82
Canada: Adult mortality (per 1000) females 57

US: Life expectancy at birth (years) total population 77
Canada: Life expectancy at birth (years) total population 80
And now back to the Krugman Show.
Health Economics 101
By Paul Krugman

Several readers have asked me a good question: we rely on free markets to deliver most goods and services, so why shouldn't we do the same thing for health care? Some correspondents were belligerent, others honestly curious. Either way, they deserve an answer.

It comes down to three things: risk, selection and social justice.

First, about risk: in any given year, a small fraction of the population accounts for the bulk of medical expenses. In 2002 a mere 5 percent of Americans incurred almost half of U.S. medical costs. If you find yourself one of the unlucky 5 percent, your medical expenses will be crushing, unless you're very wealthy - or you have good insurance.

But good insurance is hard to come by, because private markets for health insurance suffer from a severe case of the economic problem known as "adverse selection," in which bad risks drive out good.

To understand adverse selection, imagine what would happen if there were only one health insurance company, and everyone was required to buy the same insurance policy. In that case, the insurance company could charge a price reflecting the medical costs of the average American, plus a small extra charge for administrative expenses.

But in the real insurance market, a company that offered such a policy to anyone who wanted it would lose money hand over fist. Healthy people, who don't expect to face high medical bills, would go elsewhere, or go without insurance. Meanwhile, those who bought the policy would be a self-selected group of people likely to have high medical costs. And if the company responded to this selection bias by charging a higher price for insurance, it would drive away even more healthy people.

That's why insurance companies don't offer a standard health insurance policy, available to anyone willing to buy it. Instead, they devote a lot of effort and money to screening applicants, selling insurance only to those considered unlikely to have high costs, while rejecting those with pre-existing conditions or other indicators of high future expenses.

This screening process is the main reason private health insurers spend a much higher share of their revenue on administrative costs than do government insurance programs like Medicare, which doesn't try to screen anyone out. That is, private insurance companies spend large sums not on providing medical care, but on denying insurance to those who need it most.

What happens to those denied coverage? Citizens of advanced countries - the United States included - don't believe that their fellow citizens should be denied essential health care because they can't afford it. And this belief in social justice gets translated into action, however imperfectly. Some of those unable to get private health insurance are covered by Medicaid. Others receive "uncompensated" treatment, which ends up being paid for either by the government or by higher medical bills for the insured. So we have a huge private health care bureaucracy whose main purpose is, in effect, to pass the buck to taxpayers.

At this point some readers may object that I'm painting too dark a picture. After all, most Americans too young to receive Medicare do have private health insurance. So does the free market work better than I've suggested? No: to the extent that we do have a working system of private health insurance, it's the result of huge though hidden subsidies.

Private health insurance in America comes almost entirely in the form of employment-based coverage: insurance provided by corporations as part of their pay packages. The key to this coverage is the fact that compensation in the form of health benefits, as opposed to wages, isn't taxed. One recent study suggests that this tax subsidy may be as large as $190 billion per year. And even with this subsidy, employment-based coverage is in rapid decline.

I'm not an opponent of markets. On the contrary, I've spent a lot of my career defending their virtues. But the fact is that the free market doesn't work for health insurance, and never did. All we ever had was a patchwork, semiprivate system supported by large government subsidies.

That system is now failing. And a rigid belief that markets are always superior to government programs - a belief that ignores basic economics as well as experience - stands in the way of rational thinking about what should replace it.
Of course, beliefs that ignore rational thinking are staples in the US. But that's a post for another day.

8 comments:

James Redekop said...

"But, but, but equal access to health care for all is tyrannical communism and will bring about the end of humanity!"

Or something like that.

I've always had trouble following that side of the argument.

barefoot hiker said...

I think the argument that always astounds me is the one where they say "you'll be told what doctor to go to!" I've never in all my life been told by OHIP what general practitioner I could or could not see... but I've known three or four Americans whose HMOs were quite specific about which doctors they would, or would not, pay for their clients to see. I know our system isn't perfect, but I really do believe it's better. And it frankly amazes and distresses me that, as long as the rest of us have been doing it, in all these decades, the US still hasn't joined up and the lies can still be told unopposed.

laura k said...

I've always had trouble following that side of the argument.

There's a reason for that. It's hard to follow illogic...

I think the argument that always astounds me is the one where they say "you'll be told what doctor to go to!" I've never in all my life been told by OHIP what general practitioner I could or could not see... but I've known three or four Americans whose HMOs were quite specific about which doctors they would, or would not, pay for their clients to see.

Oh yeah, lousy health insurance in the US is very dictatorial. The insurance companies are guilty of practicing medicine without a license. They direct what doctors you can go, what procedures they will pay for, what drugs you can take.

After a huge uproar over HMOs forcing patients to use only certain doctors, many insurance plans began offering more leeway - and increasing numbers of doctors signed up with more plans, since that's where the paying patients were. So for people with decent insurance (always the caveat), it did get somewhat better. But still, the insurance companies call all the shots.

And obviously, people without any insurance would (probably) rather be told what doctors they could see through a single-payer plan than technically be able to see any doctor, but not be able to afford any of them.

I know our system isn't perfect, but I really do believe it's better. And it frankly amazes and distresses me that, as long as the rest of us have been doing it, in all these decades, the US still hasn't joined up and the lies can still be told unopposed.

I couldn't agree more. It's criminal.

James Redekop said...

I think the argument that always astounds me is the one where they say "you'll be told what doctor to go to!"

Under OHIP, I can go to any doctor in Ontario. I'm pretty sure I can go to any doctor in Canada if I need to -- I would expect that the provinces can cross-bill as necesssary.

On the other friend, I have a friend in Florida who, after several years of agony under an incompetent doctor trying to treat a brown recluse spider bite, was told that no, he can't have a different doctor, and he should be thankful he has any coverage at all.

Andrea said...

What I find most amazing is how health care dominates our lives so totally regardless of what country you come from, how in Canada it is a HUGE topic of discussion at election time, yet I heard almost no peep about it during the American election.
Maybe in canada we have just made our politicians realize how important it really is for us, but south of the border priorities are very different, for the politicians that is.
I dont know, just babbling.

David Cho said...

Somewhat off topic, but I got this via email.

US Presidency to be outsourced to India

Congress today announced that the office of President of the United States of America will be outsourced to India as of November 19th, 2005.

The move is being made to save the President's $400,000 yearly salary, and also a record $521 billion in deficit expenditures and related overhead the office has incurred during the last 5 years.

"We believe this is a wise move financially. The cost savings should be significant," stated Congressman Thomas Reynolds (R-WA). Reynolds, with the aid of the Government Accounting Office (GAO), has studied outsourcing of American jobs extensively. "We cannot expect to remain competitive on the world stage with the current level of cash outlay," Reynolds noted.

Mr. Bush was informed by email this morning of his termination. Preparations for the job move have been underway for some time. Gurvinder Singh of Indus Teleservices, Mumbai, India will be assuming the office of President as of December 1st. Mr. Singh was born in the United States while his Indian parents were vacationing at Niagara Falls, thus making him eligible for the position. He will receive a salary of $320(USD)a month but with no health coverage or other benefits.

It is believed that Mr. Singh will be able to handle his job responsibilities without a support staff. Due to the time difference between the US and India, he will be working primarily at night, when few offices of the US Government will be open. "Working nights will allow me to keep my day job at the American Express call center, "stated Mr. Singh in an exclusive interview. "I am excited about this position. I always hoped I would be President someday."

A Congressional Spokesperson noted that while Mr. Singh may not be fully aware of all the issues involved in the office of President, this should not be a problem because Bush is not familiar with the issues either. Mr. Singh will rely upon a script tree that will enable him to respond effectively to most topics of concern. Using these canned responses, he can address common concerns without having to understand the underlying issues at all.

laura k said...

What I find most amazing is how health care dominates our lives so totally regardless of what country you come from, how in Canada it is a HUGE topic of discussion at election time, yet I heard almost no peep about it during the American election.

There was lots of talk about health care during the US election, but no one making any bold statements towards change. It's all tinkering. The closest we got was Howard Dean, who figured out ways to get everyone in Vermont insured when he was governor of that state, saying he would do the same nationally. It's a pipe dream, but at least he was talking about it.

laura k said...

Mr. Singh will rely upon a script tree that will enable him to respond effectively to most topics of concern. Using these canned responses, he can address common concerns without having to understand the underlying issues at all.

This is great. It's almost too true to be funny. Thanks, David.