Can I inject a little dull economic theory into this thread? In order to understand the policy issues involved in this area it is useful to get to grips with the workings and problems of markets. A number of factors interact, so bear with me for a little.
First off the health market is dominated by insurance. Almost everyone is willing to pay to limit the potential spread of outcomes in the health market. A perfect insurance market would insure everyone who was willing to pay the actuarially fair premium (the expected cost of health care). The two limitations to the working of insurance markets are moral hazard and adverse selection. Moral hazard is fancy term meaning people change their behaviour once they are insured. They do this in a number of ways: [ul][li]they will use more health services[/li][li]they will take less care about their health[/li][li]they will not monitor service providers for value for money.[/ul]In other words being insured completely takes away the incentive for consumers to do the things they ordinarily do in normal market transactions. People are more likely to go to the doctor for trivial things; more likely to go skiing; and less likely to care whether they are being ripped off -all for the simple reason that insurance company (public or private) is paying.[/li]
Adverse selection means that insurance companies are unable to effectively control their risk pool because the market mechanism works adversely to them due to asymmetric information. An example: suppose a car insurance company found out that the average risk of all Dopers meant that a $100 premium would cover their costs. So they offer that premium here. Those who would accept the policy would on average be worse risks than $100, because those who were better risks than average would decline the policy. Now suppose the company did a serious assessment of each Doper individually an offered its best guess as to risk. It is still the case that there is some information that they do not and cannot know. For some people they will have slightly overestimated the risk, for some slightly underestimated. The people who take up the offer will systematically be the latter. Adverse selection means that a proportion of the population willing to pay a premium based on risk will be uninsured or underinsured in a private market.
Next feature: the government (at least in a rich country) will inevitably end up being the insurer of last resort. Governments cannot credibly say “those who fail or refuse to insure and who get in serious medical trouble can go without treatment.” Note that this will exacerbate the tendency under adverse selection for people (particularly the poor, the healthy young and the medically indigent) for people to drop out of private health insurance.
Now doctors and hospitals. Unless constrained by insurers, these people have a pretty clear incentive to push up costs. One reason is that there is a buck in it, the other is that they want to give the best available treatment to their patients regardless of costs. Given that there is new and expensive technology constantly coming on to the market, this is likely to be a problem. There are also strong anti-competitive element in the behaviour of medical professionals.
So after all that, how will a fairly crude market function? [ul][li]First, due to adverse selection, many people will not have health insurance. This is a really big deal - without coverage at least for the catastrophic risks it is hard to make much of life. []Secondly, assuming that the government takes up its role as insurer of last resort there will be substantial government expenditure on the poor, the uninsurable elderly and the otherwise medically indigent. []Private insurers will spend a great deal of money trying to improve their risk profile, further exacerbating adverse selection. []Insurance companies will try to control expenditure by using expenditure caps, and coinsurance. These are demand-side attempts to deal with moral hazard. There are two concerns about this:[list][]it reduces the extent to which they are doing their job, which is reducing risk[/li][li]it doesn’t work very well, because patients are ill equipped to monitor doctors’ behaviour regardless of the incentives and because empirical studies show that the demand for health care is not very responsive to price (in economists’ terms it is highly inelastically demanded)[/ul]Insurance companies will be fairly poor at controlling the behaviour of doctors and hospitals, since in a fairly competitive health insurance market they lack bargaining power.[/list][/li]Okay, that’s the setup. In countries like Australia (and almost all of the developed world except for the US) policies of universal compulsory health insurance funded by taxpayers have been established. They do provide a partial solution to these problems. There is no adverse selection problem, because everyone is in the pool. This means two things: First, everyone is covered. Nobody has to worry that they or their children will be denied access to basic health care. Secondly, all the costs incurred by private health insurers trying to maintain the quality of their risk pool by trying to attract good risks and exclude bad risks are saved. Thirdly, the government has bargaining power and can clamp down on costs.
If you look at the literature from, say 15 years ago, the general conclusion was this: with a national health insurance system you get better health care (in terms of mortality and morbidity statistics) that covers more people for less money. This is not to say that there aren’t serious problems. Whilst acute and trauma care are typically good, chronic and non-urgent matters tend to get stuck in queues due to the difficulty in effectively managing hospital budgets. Costs in Europe, Canada and Australia remain much lower than the US, but they may merely be catching up rather than permanently lower.
The big change has been the emergence in the US of managed care, which shows real promise in controlling private sector health expenditures.
The real problem in both systems is that the payer of the bill is not in the room. More sophisticated private insurers like HMOs show an increasing capacity to deal with this problem, and in the near future will probably surpass compulsory government-funded systems in this regard. Once this is the case, targeted provision of insurance services by the government can probably deal with the casualties of adverse selection. But there is no general presumption that private insurers will deal with the problems, since there are significant failures in the insurance market whose effects spill over and indeed dominate the medical marketplace. I’m very glad we have the universal system in Australia as a starting place for reform.
Sorry, this ended up a bit long.
