Hello, welcome, and health care
Welcome to the inaugural post of the Angry Economist. I apologize for the haphazard appearance of the site – I will fine-tune the theme when I have time but I wanted to get things rolling.
This week’s topic to receive absurd and constant media attention has been President Obama’s health care reform proposal, or “Obamacare”. Quite frankly, I know almost nothing about what’s in this plan, because the discussion has been dominated by apparently insane people – for example, Sarah Palin’s assertion that the plan will create “death panels” that will decide her mentally disabled son should be euthanized, or something like that.
Trying to argue with the insane brings you to their level so instead I thought I’d inaugurate the blog with some economics-based thoughts on health care.
First off, let’s cover the basic problems with today’s system. It’s well known that millions of Americans have no access to health care other than whatever they can afford out of pocket, which tends to be very little. These people may be unable to get or keep a job due to their health problems, worsening their situation. Either the government (i.e. all taxpayers) helps them or they are left to shoulder crushing debt from hospital bills, or both.
Republicans often pursue free market “improvements” to systems, thinking they are doing the economically sound thing, but they fail to understand that economics is less about free markets and more about discovering when those markets fail to properly allocate resources. Health care is one of the better examples of this problem.
Our current private insurance system, as I understand it, was enabled by the Nixon administration as a way to introduce free market competition to the health care industry. There are a few problems with that basic concept.
First of all, health care is not ideally suited to an insurance business model. Insurance is a way of spreading risk – which makes sense when applied to health care – but people need shared risk AND preventative “maintenance” AND guaranteed coverage and other things that do not work in the insurance model. Your car insurance does not pay for your gas or even for blown tires. Homeowners’ insurance companies justifiably avoid insuring pyromaniacs because they are higher risk. On the other hand, health care needs to be provided at a routine level to reduce the risk of more catastrophic health problems later – as a simple example, lowering someone’s cholesterol to reduce the risk of heart attack. And because most people agree health care should be available to all, canceling policies for higher-risk people makes little sense.
Secondly, we as consumers have little to no choice in the health care available to us. The majority of the insured receive their insurance from their employer, who normally offers only one option for a health plan. The employer probably chooses the plan to offer based mainly on its cost. That’s why a company notorious for denying claims even when it shouldn’t, like United Healthcare, can succeed in a market with more member-friendly choices like Kaiser Permanente.
Third, no matter the health care system in place, society has limited health care resources and that scarcity explains why health care costs (a lot of) money. This leads to some decisions that are very ugly. In perfectly competitive markets – say, the market for oil – people’s need or desire for oil is reflected in their willingness to pay for oil, and the oil goes to the highest bidder. Most people would agree this is a fair way of allocating oil.
Does that sound anything like the way health care is – or should be – allocated? Of course not. At some level, someone has to decide how the dollars available for providing care are distributed. Today, those decisions are made by insurance company paper pushers, who balance corporate profit against customer satisfaction and legal obligations set forth in the health plan – a plan made up of rules so complex the insurers can’t apply them accurately, forget consumers trying to understand them. Customer satisfaction doesn’t play much of a part because, as I said earlier, the customers don’t choose their insurer anyway.
In systems where government bureaucrats make such decisions, they balance the health care of one citizen against the health care of another, trying to decide which person is more deserving of society’s resources. That’s not a great trade off either, but it’s better than balancing health with corporate profit. And it’s clear governments don’t simply drop coverage of the most expensive patients.
Some things can be done to reform the current system without obliterating private insurers, though their profits will almost certainly suffer. First is to find some way to give consumers a choice of insurers, and forbid insurers from dropping risky (i.e. sick) customers or denying coverage to new customers – you’re stuck with them, sorry. Second is to provide a government appeal process for insurer decisions, so that insurers can’t declare something as basic as a liver transplant “experimental” and deny it against doctor recommendations. Such a process must not involve private arbitrators that are selected and/or paid by the insurer – such obvious conflicts of interest are common in other environments like credit cards as well. And third is to provide a free, public health care plan to anyone who cannot afford private insurance. This competition will force private insurers to offer lower-cost plans.
However, as long as such a major piece of our health care system is profit-motivated rather than patient-motivated, health care problems will persist. It’s simply a question of incentives.
