Okay, let’s stop talkiing in generalities and get down to details. Let’s look at what’s wrong with the U.S. system, and what’s wrong with government health care, and look at where we stand:
What’s wrong with the U.S. system?
There are two fundamental problems as I see it: The first is that there’s a real market failure in the insurance system. Not just health insurance, but all kinds of insurance markets. There’s a fundamental asymmetry of information. The insurer wants to take a fair bet with a profit margin for assuming people’s health risks and spreading out the cost. If an insurance company’s customers were taken from a random sampling of the population, then it could use actuarial methods to determine how much to price the insurance. And you as a customer could be happy knowing that you’re paying the average cost for health care in return for eliminating the risk of major financial catastrophe. In this case, the market would function correctly.
But we have a situation where the insurer is lacking information about your health, while you have lots of information. Given that, if the insurance company charged premiums based on the average risk of an American, what would happen? People with above average risk would seek out the insurance, and people with below-average risk would avoid it. So the insurance company has to build in an additional premium to cover its increased average payout. Which drives the next healthiest marginal patients out of the insurance market, which drives up prices even more for the rest.
Insurance companies work around this problem in a couple of ways: One is that they try to learn more about you by requiring medical exams and histories. The other is that they try to pull random samplings of people as their customers by offering group plans to unions, employers, and other large groups that can be evaluated as a group and a premium assigned accordingly.
That’s why the U.S. system has evolved into large employer and union health plans, along with much more expensive health insurance for individuals, with a large number of people left without any health insurance at all.
This is the problem single-payer health plans like Canada’s try to solve. By mandating health insurance and providing it from one source, you completely eliminate the problem of information asymmetry. Then you don’t have problems with job mobility, individuals without coverage, and ‘managed care’ plans (the entire country is one big managed care plan).
But government health care has major problems. The first is that by removing market prices from health care, it lacks the information needed regarding relative demand of health care goods and services, and therefore has a hard time allocating resources. So you wind up with periodic gluts and shortages. Especially for long lead-time resources like doctors and nurses. But also for bed space, MRI machines, and other essential items.
The next problem is the moral hazard problem. By making health care ‘free’, you remove a critical market component required to limit demand on finite resources. People want more free health care than they do expensive health care. So your costs will skyrocket unless you find another way to control health care. Since you’ve broken the demand side, all you have left is supply. So you control costs by establishing waiting lists, creating schedules of treatments that aren’t available to certain groups of people, etc.
Finally, there’s just the general mismanagement and waste of government. Governments suck at managing finances and running industries. They just do. My wife is a manager in a hospital, and the stories she tells of the bureaucratic tomfoolery that goes on just make my jaw drop. And politics enter into it: hospitals get built in regions that have the most political clout rather than the greatest need. Funds are diverted around according to the polls or latest ‘fad’ scare in the news. There’s no profit incentive, so there’s no incentive to innovate or to take risks.
I wouldn’t trust the government to make quality shoes for me, so why would I trust them to manage my health care system? Do you want a health care system that looks like the DMV or has the successful outcome of the Dept. of Education?
So both systems have problems. What’s the solution? First, we should ask what problem we are trying to solve. What is it you really want? That health care be utterly free for everyone? Or that poor people have access to good care? Or simply that everyone is protected from the risk of a major health incident causing them to go into bankruptcy?
To me, I’m aiming more at the latter. If there’s going to be a government system, I think it might be best for the government to maintain a universal catastrophic health care insurance. Put a high premium on it indexed to a person’s income: For poor people, the deductible might be $1,000. For rich people, it might be $500,000. Where the exact line is, I’m not sure, but it should be priced such that it only covers the real big spikes, not the bulk of everyday health care.
Then let the private market compete for gap coverage. This should lower the price of health insurance dramatically, and the price would also scale with income because the insurance company is on the hook for less of a gap with poor people and can price its coverage accordingly. This also reduces the risk of information asymmetry because the gap coverers are never on the hook for the truly devastating economic shocks, so their risk premium goes way down.
A poor person might get gap coverage for $50/mo. A rich person might have to pay $500/mo. If a person goes uncovered, it might really sting to get sick or be severely injured, but it won’t be a life-ruining event.
Now add in medicaid coverage for poor people. And that’s it. Keep the government out of the management of health care. The bulk of the economic activity remains in the private market. Prices still work. There’s still an incentive to stay healthy and avoid physical risk, and a cost involved for using the system so it doesn’t get over-used for trivial things.
It’s not perfect, but you’re not going to find perfect. An important thing to keep in mind: We can’t afford all the healthcare we want. Period. Health care is a scarce resource. You will never have perfect health care coverage for everyone. So you have to restrict its availability somehow. You can do it with prices, or you can do it by restricting the supply of health care. Or a combination of both. So if you wait for your ‘ideal’ health care system, you’ll be making the perfect the enemy of the good and get no change at all.
I’d prefer even less government involvement than what I proposed above, but I think the writing is on the wall that the government will get involved one way or the other. Better that it get involved in the areas where there are true horror stories, and avoid meddling in the general day to day business of health care.
