Paul Krugman: Notes on 1/22 Column, "Gold-Plated Indifference"

Paul Krugman has it largely right on Bush health care, I think:

Additional Notes on 1/22 Column, "Gold-Plated Indifference." - Krugman - NYT Web Journal: Additional Notes on 1/22 Column, "Gold-Plated Indifference." As is often the case, I couldn't fully explain my views in the space available. So I'd like to explain at a bit more length why I'm so opposed to the direction Bush is going.

Basically, everyone agrees that health care is a messed-up sector. But there are two opposing doctrines about what the problem is.

I believe -- and the evidence, I think, supports this belief -- that the big problem is "adverse selection." An insurance plan offered to everyone at the same rate would be a great deal for relatively sick people, a poor deal for the healthy. So one of two things happens to private insurance. Either plans go into the "adverse selection death spiral," as sick people flock in, driving up rates, driving out more healthy people, and so on. Or insurance companies spend a lot of the money they receive in premiums screening out "high-risk" clients, so that the system has huge overhead and the neediest cases are excluded.

The clean solution to this problem is for the government to provide insurance to everyone. Other rich countries do that. So do we, for older Americans, veterans, and others. Actually, government health insurance is already bigger in America, in dollar terms, than private insurance -- it covers fewer people, but that's because the elderly, who cost more, are handled by the government.

Employment-based insurance is a distant second-best, but better than nothing. Large employers, in particular, can spread risk widely, creating the kind of risk pool that dies from adverse selection in the individual market. And the tax preference for employer-based care, more or less by accident, has helped sustain this imperfect fix....

What conservatives in the "consumer-directed" health movement believe, however, is that the big problem is "moral hazard" -- people consume too much medical care, because someone else pays for it. Now, this isn't entirely wrong. People probably do undergo expensive surgery with questionable effectiveness, and so on, because it's not out of pocket. Curbing that was supposed to be the point of managed care. But managed care didn't deliver, because people -- rightly -- don't trust private H.M.O.'s to make life and death decisions on their behalf....

The whole consumer-directed thing is, in my view, just at attempt to avoid facing up to that failure. Rather than admit that private-sector institutions aren't any good at rationing, conservatives now say that patients should be induced to ration their own care by being forced to pay more out of pocket....

The trouble is that the big money is in stuff like heart operations or other areas where (a) people can't pay out of pocket in any case -- they must have insurance or go untreated -- and (b) people really aren't sufficiently well informed to make the decisions. Yet the whole focus of consumer-directed doctrine is on things like routine visits to doctors' offices and annual dental checkups. It's going where the money isn't -- because the advocates just can't believe that markets aren't always the answer.

Now here's the thing: in the name of consumer-directed health care theory, Bush is proposing changes that would essentially encourage people to move into the individual market -- which wastes a lot of money, and doesn't and can't work for those most in need -- while undermining the employer-based system, which isn't wonderful but is still essential. In particular, healthy high-income people would be encouraged to drop out of employment-based plans, leaving behind a sicker risk pool, driving up rates, and pushing employer-based care in the direction of an adverse selection death spiral. The plan we're supposed to learn about tomorrow doesn't sound big enough to have catastrophic effects, but it's a step in the wrong direction.

Comments

[Roger Albin]

"People probably do undergo expensive surgery with questionable effectiveness, and so on, because it's not out of pocket. Curbing that was supposed to be the point of managed care."

Well, yes and no. Its definitely true that the managed care approach in most cases is a failure. There are interesting exceptions. One would be the Kaiser-Permanente system, which is a non-profit. The other, interestingly enough, is the VA system, which actually achieved the goals of managed care and used some of the methods of the best HMOs with a top down approach. The likely conclusion is that many of the cost saving benefits of managed care can be implemented only in large, single payor systems with strong central direction.

[Barry]

One classic explanation (probably *the* explanation) is churn. There was one article relating the VA and private plans in which an executive from a private plan said that their planning assumption was that patients leave after three years (on average). Anything which wouldn't pay off (for care of individuals) until after three years was considered to be handing the savings over to another insurer.

[anne]

"People probably do undergo expensive surgery with questionable effectiveness, and so on, because it's not out of pocket."

Wonderful Paul Krugman has somehow written the worst line I can imagine. Good grief, anyone for open-heart surgery, just because it's not out of pocket?

[Jonathan Goldberg]

What Barry said. Although the last number I heard was two years. This has the result that prevention, the most cost effective strategy overall, is virtually ruled out.
Would some well-informed people chime in on the relative effects of churn vs. adverse selection?
TIA

[Neil B.]

About the proposal to tax health insurance benefits (i.e., "imputed" income in this category): Seriously, if a person's income is X per year, and your employer is paying out Y for health insurance that a person with X + Y income would normally have to shell out of their "income" (whether or not the same exact amount of Y, just consider the principle of thing), isn't it only fair that the first person pay taxes on the total effective income X + Y that they are getting? Why should some workers pay less taxes than others by the subterfuge that their employer pays for some services directly instead of paying them more to begin with, for them to pay out of "their" pockets? Don't most of us complain about not taxing options and exectutive perks as income, etc? Fair play? Forgive me if I'm missing something.

[Frank]

Never forget that patients rarely have the freedom to choose hospital utilization, diagnostic testing, or drug prescrpitions (at least this is the case here in Canada). Doctors choose levels of all expensve aspects of the system and it doctors who are at the heart of a very complicated moral hazard problem. Patients can choose when they visit a doctor but excess physician visits due to a zero price are not a big source of excessive health care expenditures. The patient as consumer view of health care demand is seriously incomplete.

[Byrne Hobart]

"he big problem is "adverse selection." An insurance plan offered to everyone at the same rate would be a great deal for relatively sick people, a poor deal for the healthy. So one of two things happens to private insurance. Either plans go into the "adverse selection death spiral," as sick people flock in, driving up rates, driving out more healthy people, and so on. Or insurance companies spend a lot of the money they receive in premiums screening out "high-risk" clients, so that the system has huge overhead and the neediest cases are excluded."

If this argument implies that the industry in question needs to be nationalized, doesn't it apply to any industry with asymmetric knowledge? Should we be allowed to sell used cars, when we're certain to know more about the car than the potential buyer?

[Rob]

Byrne-no it doesn't. Lets look at used cars. When you go used car shopping you know what you want, a car that is free from defects. You can take that car to your mechanic, at most $20-$50 later and you know what shape the cars in. You can compare prices across the area. Searching for lower prices isn't free, but its not too expensive.

Now look at health care. You want to get healthy. You have a sore throat. Is it viral, bacterial or fungal? Is it part of a larger infection? Is it a symptom of cancer? You have no clue. So you don't even know what treatment you want. Say you want to price search, you think any doctor will heal you without examing you themselves? Thats at least another $100 in search costs before you even start any treatment.

Anyone who argues for a free market appraoch to health care just doesn't understand the role information plays in markets (and that means Arnold Kling).

[rea]

"Fair play?"

Well, of course it isn't completely fair, but it works--sort of. Not very well, but better than nothing.

A policy that increases tax "fairness" by making health insurance less affordable for most people would be a disaster. We can't junk the present employer based system until there is something in place to replace it that does at least as good a job of meeting people's health care needs.

[Neil Bates]

"... at the same rate"... or not... Well, why not arrange for all health insurance to be charged a percentage of income, like Social Security?

[Jon Fernquest]

Krugman: "The clean solution to this problem is for the government to provide insurance to everyone. Other rich countries do that."

We can pay for it, like other rich countries, by not running off and getting entangled in never ending wars like Iraq.

If steps like this are taken, and the American worker finally feels like s/he is not living in a third world country anymore, then maybe they will will be more open to free trade. Right now, how can you blame them?

In fact, offshore medical services, a form of free trade, might reduce the lines that will inevitably come from government health care rationing.

[bakho]

The Bush plan is to allow low income people to purchase high dedcutable insurance. Currently low income people don't buy insurance. They go bankrupt if hit with a major health problem. So the hospital and Medicaid eat the costs. So in a sense low income people with few assets are covered by a kind of perverse insurance already. WTF

What percentage would be better off buying high deductable insurance (tax break or no tax break) compared to the lack of insurance that is prevalent today? The micro-economic considerations are completely different than middle class families with assets like homes. Therein lies one failure of the Bush proposal which according to best case models would insure at most 10% of the currently uninsured

BushHealth STILL does not address a major problem- unaffordability of out of pocket health care expenses not covered by high deductable insurance. A good friend is a nurse practitioner in a low income clinic that is flooded by all types of patients that would not be covered by high deductable. The preventative costs savings of the clinic to the entire system is enormous. BushHealth does nothing to fix lack of primary care.

Low income people often put off going to a doctor to avoid a $100 or less fee that can lead to thousands in treatment costs. The US routinely spends several hundred thousand per premature infant birth while refusing to provide pregnant women with preventative pre-natal care for a couple thousand dollars. Given that some of these infants have lifetime health issues and associated costs, the policy is penny wise and pound foolish. This would not be fixed by high deductable policies for the low income people because the co-pays are a huge disincentive.

How to provide low cost medical services to low income people? How to provide health care services at all to rural areas that lack critical mass to support a private practice? The big issue is not low income people needing heart transplants, but delivering and affording timely primary care.

ElderCare is a different issue separate from this debate because they are covered by Medicare.

[JonF]

Re: Or insurance companies spend a lot of the money they receive in premiums screening out "high-risk" clients, so

How much does this cost to do? Given that there’s a central database to which insurers report, it should be as easy and no more expensive than when a lender checks a potential borrower’s credit report. (And just as prone to error too, as I once had occasion to learn!)

[CN]

"How much does this cost to do? "

Jon, what drives the cost up is that the insurance company customer is not usually the consumer, but the company he works for. They are offering insurance to their employees because the empoyment market drives them to do so. As the customr, they want to have the insurance company tell them they can offer this to their employees without regard to their state of healh, becasue if they don't, they just buy themselves administrative headaches from employees who want to know why Joe gets insurance for X dollars, while it costs them X+20% (or something). So the insurance companies spend money crafting plans that tend to hide the process of adverse selection.

[ideogenetic]

Regarding moral hazard increasing demand...

I can't wait for the cost of heart bypass surgery to come down. I'll have it done every week!

:P

According to a Rand Study:
{Despite a wide variety of empirical methods and data sources, the
demand for health care is consistently found to be price inelastic....The demand for health [sic] is also found to be income inelastic....Although the price elasticity of demand for medical care in general is relatively low, certain types of care are found to be somewhat more price sensitive. Preventive care and pharmacy benefits are among those medical services with larger price elasticities.} - "The Elasticity of Demand for Health Care: A Review of the Literature and Its Application to the Military Health System" (Ringel, Hosek, Vollaard & Mahnovski)

(http://www.rand.org/pubs/monograph_reports/2005/MR1355.pdf)