Monday, August 17, 2009

Is ANY health insurance a good idea?

While there is a battle raging over the "public option," a kind of Medicare for all, there is so much disinformation and so many outright lies being spewed into the air, there are some fundamental truths that are being lost. Here are a few facts for anyone who still cares about facts.

There are roughly four ways countries can run their health systems, to wit:

  1. Nationalized medicine
  2. National health insurance
  3. Regulated fee-for-service medicine
  4. Unregulated fee-for-service medicine

Some countries have one or the other. The U.S. has all four.

First, there is nationalized medicine. This is what they have in the UK. The government runs the hospitals and pays the doctors, who are government employees. Despite what some town hall goons are yelling at the tops of their collective lungs, none of the five bills floating around Congress propose anything remotely like this -- even though we're already doing it. Our own Veterans Administration runs something pretty close to this, with government-run hospitals and care. While some failures (e.g., at Walter Reed hospital) have been well documented, few veterans are calling for the system to be chucked out as socialism in disguise.

Second, there is national health insurance. This is what Canada has. Canadian doctors and hospitals are private (or run by local or provincial governments). Basically, the system is fee-for-service, but with everyone covered by the national government. In other words, the insurance system has been nationalized but the medical system itself is largely private. What the government does is pay the bills. Medicare works like this.

Third, there are countries where the system is entirely private (e.g. Switzerland, as Paul Krugman pointed out in the NYT). Another example is The Netherlands, which Krugman didn't mention but which illustrates model 3 very clearly. The government's role there is largely to set the ground rules and make sure they are enforced. In a nutshell, the key rules are:

  • Nobody forces any company to offer health insurance. They do it only if they can make a profit on it.
  • Health insurance companies must offer a basic plan covering a list of government-mandated costs (doctors, hospitals, etc.), and they can't use tiny fine print to explain that some procedures are covered only when the operation is performed by a barber-surgeon using leeches.
  • Companies must insure anybody who shows up for the same price, regardless of medical history
  • All companies operate nationally, set their own prices, and compete on price
  • There is an individual mandate; anyone not insured must pay a tax of about what the basic plan costs
  • For items not covered (e.g., alternative medicine), companies can do whatever they want
  • Employers can bargain with companies to get small (e.g., 10%) discounts for their employees

The fact that all companies operate nationally and employers play only a small role means there is real competition, which provides something of a brake on premiums. The Massachusetts health system is similar to this.

Fourth, there is the fully free-market based system, where individuals, insurance companies, and health providers can pretty much do whatever they want to. Most of the U.S. falls under this regime.

Changing the the paradigm

With all the noise about the public option, almost no one asks the most fundamental question of all: "Is insurance even the right model to think about for health care?" At least not until David Goldhill wrote a must-read article in The Atlantic. Goldhill's point is that the purpose of insurance is to pool a large number of people together and get them to pay small premiums to cover a catastrophic event that will not happen to most of them. As an example, car insurance covers the costs of accidents, which most people don't have very often. No company offers full automotive insurance that covers accidents, gas, routine maintenance, parking fees, new tires, and all other automotive-related costs. Instead, individuals buy these other items on the open market and as a result tend to look at the price and quality of the products and services closely. Fire insurance is another example of true insurance -- pooled risk against an unlikely event.

Goldhill argues that the fundamental problem with the U.S. health system is that since consumers largely do not pay for their own medical expenses, they don't care how much they cost. This simple fact leads to excessive costs, bloated bureaucracies, and inefficient delivery. Consumers think that medical services are free, since some distant and much-hated insurance company is paying for most of them, so they never weigh need vs. cost.

True reform might go something like this: Employers simply get out of the health insurance business altogether and give the $12,000 or so they currently spend per employee on insurance as more salary. The government enacts laws like The Netherlands has to keep insurance companies honest and make them compete nationally, and then people go out and buy insurance on this newly competitive market. No public option is needed. If the government chooses as a matter of public policy to subsidize health care, then the first $12,000 (or some other amount) anyone spends on health care could be tax deductible, and direct subsidies could be given to poor people (health stamps, sort of like food stamps) to enable them to pay their medical bills.

The intention would be to have health insurance cover only catastrophic illnesses with normal medical costs (seeing family doctors and specialists or short hospital stays) being paid out of the $12,000 raise now-covered employees get. All of a sudden, people care about how much that MRI costs. Goldhill describes how when his wife needed an MRI, multiple hospitals refused to tell him the cost. If consumers were paying for things like this out of pocket, you bet they would be telling. Many would be advertising their prices.

Could something like this work? Goldhill talks about LASIK (eye surgery that eliminates the need for glasses). This procedure is almost never covered and there is vigorous free market for it. The cost has dropped ten-fold since it was introduced as clinics are forced to truly compete. If all medical providers had to compete for consumers' business, prices would be driven down, too. The government's main job here would be to certify providers to make sure they met high medical standards and publish the results. Getting a "D" rating wouldn't be good for business and providers would act accordingly.

Goldhill's main point is that all the incentives are wrong now so we need to rethink the whole idea of "insurance" as the model (except for catastrophic illness, which is like having a car accident or your house burning down).

None of the bills in Congress attack the problems of bad incentives and the customer being insulated from the cost of what he is demanding. As a result, the percentage of GDP being spent on medical care is only likely to increase and become even less sustainable.

About those "Death Panels"

One issue Goldhill doesn't discuss (because it is totally taboo) but is crucial to the debate is the imaginary "death panels" Sarah Palin and Chuck Grassley are against. A huge amount of money is currently being spent to keep Grandma, who is 85 and has Alzheimer's, alive. Families want no expense spared to give her a couple more months--since they are not paying for it. Suppose Goldhill's system were implemented and Grandma, or more likely, her children and grandchildren, had to decide how much expensive care she was going to get--knowing that some or all of the care was coming out of their expected inheritance. It is likely that in many cases 85-year-olds with Alzheimer's would not be getting quadruple bypass operations. The family wouldn't stand for it if they were footing (part of) the bill. They would be making god-like judgments about quality of life vs. cost and probably in many cases would be a lot stricter than any imaginary government death panels would be.

If you have gotten this far, now go read the article. Agree or disagree, it certainly raises some key points about whether insurance is the right model here.