1. The Washington Post editorial page:
Republicans, many of whom claim to favor market approaches to expanding health-care coverage but oppose excluding patients with preexisting conditions, can’t credibly balk at the natural results of competition organized under those very principles. No one can expect low premiums and near-unlimited service, particularly in a system designed to spread costs around so that the sick and the old can finally obtain decent health coverage from private insurers. That’s not a mistake. It’s economics.
Pointer from Mark Thoma. I wish that he had also linked to John Cochrane’s piece, below.
Of course, I do not think this is very good economics. Spreading costs around is best done through subsidies and taxes, not through mandating that some people buy inappropriate coverage so that others can enjoy subsidized coverage. Also, I am getting really tired of folks referring to government-designed health insurance sold through an exchange as a “market approach.” This approach eliminates what I see as the main benefit of markets, which is the process of innovation and creative destruction.
2. John Cochrane:
Only deregulation can unleash competition. And only disruptive competition, where new businesses drive out old ones, will bring efficiency, lower costs and innovation.
Now that’s economics. As to health insurance, Cochrane writes
Health insurance should be individual, portable across jobs, states and providers; lifelong and guaranteed-renewable, meaning you have the right to continue with no unexpected increase in premiums if you get sick. Insurance should protect wealth against large, unforeseen, necessary expenses, rather than be a wildly inefficient payment plan for routine expenses.
People want to buy this insurance, and companies want to sell it. It would be far cheaper, and would solve the pre-existing conditions problem. We do not have such health insurance only because it was regulated out of existence. Businesses cannot establish or contribute to portable individual policies, or employees would have to pay taxes. So businesses only offer group plans. Knowing they will abandon individual insurance when they get a job, and without cross-state portability, there is little reason for young people to invest in lifelong, portable health insurance. Mandated coverage, pressure against full risk rating, and a dysfunctional cash market did the rest.
Yeah, it is all just “economics” and “winners and losers” now. Funny, at election(s) time, it was all and only “magic” and “winners”.
If it was regulated out of existence it was by the market for it fails to provide for price discrimination. Under such a system, the price would vary with the income of the beneficiary. No doubt the healthy and long lived would prefer it and the ill and short lived would not be able to afford it, but that is the key isn’t it?
The key is that 75% of people would do just fine in a free health care market. The 25% who are authentically poor and/or chronically sick are the problem.
But government keeps writing law and regulation that wrecks the market for the 75% ostensibly to aid the 25%, rather than simply subsidizing or caring for the 25%. And then due to unforeseen (by them) complications of reality they fail at doing even that.
Medicare is only the most egregious example of this, taxing young healthy poor 20 year olds to subsidize millionaires. Obamacare is only the latest example.
In the more than 50 years that I have been closely involved in the legal, financial, and regulatory circumstances of risk transfer businesses (domestically and internationally), with particular concentration in areas dealing with specific medical care expenses, what has occurred is the steady conflation of contracts for (1) the provision of services with contracts for (2) the transfers of risks.
That conflation has occurred in a diverse U S regulatory environment initially established to preserve security for the financial obligations involved in the transfers of risks; basically, the solvency of insurers. Over the past 50 years those regulatory objectives have been superseded by politically determined objectives requiring services to be rendered by insurers issuing contracts for risk transfer.
While there may be some other alternatives of temporary amelioration, the underlying economic problems and conflicts will not be resolved until the two forms of contracts; (1) the contracts for services not arising out of risk transfers and (2) the contracts for transfers of risks of need for medical services – are separated and separately priced, with distinctions in the two for specific methods of performance.
Of course that separation of contracts for their separate specific purposes can be accomplished in one or more different ways, providing “political cover” for the transition that will be required to resolve these issues. Methods can be identified by a close examination of some of the larger “self-insured” enterprises, and the forms of reinsurance and separate services contracts used.
Naturally [?] – none of this can be done through the mechanisms of governments, especially through the mechanism of our federal government which must involve a legislative body that now represents particular interests rather than specific principles.
If I recall correctly, that’s the way it used to work. When I was a child (c. 1950-1960), I believe that my family paid providers directly for medical/dental services, and that my dad had a “major medical” (i.e, hospitalization) through his employer.
Also if I recall correctly, medical/dental expenses were fully, that is 100%, deductible for federal tax reporting purposes (until about mid-1980s tax reform, when a %-of-AGI floor was installed.)
At least in my experience, separating routine & foreseeable medical/dental expenses from their opposite, catastrophic & unforeseeable expenses, used to be the norm.
HSAs are/were similarly constructed, except that the beneficiary received the tax advantage on the front end. However, they accomplish(ed) the same thing: putting spending decisions in the hands of the consumer of the goods and services, while providing financial protection from the unexpected.
Dang it. I wish we could edit.
*had a “major medical” INSURANCE POLICY*
Without any other context, this reads perfectly as an argument against the “Affordable” “Care” Act. I doubt that’s how the Post meant it. Nor do I think they would have run this paragraph four years ago.
Seeing “designed” and “economics” in such close proximity brings Hayek’s aphorism right to the fore:
“The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.”
John Cochrane calls for lifelong health insurance. Actually I think that Germany has this. So does American “whole life” insurance.
However I cannot imagine how any American health insurance company could offer this. The whole history of commercial health insurance in the last 50 years has been to raise premiums and hopefully get sick people off your plan.
The companies with lifelong health insurance include General Motors and many school districts — and their costs become enormous.
Mr Cochrane is a good writer, but I think he is trafficking in an economic pipe dream here.
Obamacare tries to shift the costs of insuring people who are unhealthy to people who are healthy using crude, costly, indirect , statist mechanisms. It is essentially a static approach that relies on people ignoring incentives and disincentives built into the law. As such, it does nothing to reduce the costs of health care and incentivizes unnecessary spending on healthcare by mandating the purchase of insurance.
Most of us want to help people who cannot afford medical care because they have low incomes and people with pre-existing conditions that are too expensive to insure. This should be the focus of government policy and the costs should be covered through general taxation.
The costs of medical care, on the other hand, can be reduced through deregulation and ending the subsidies that encourage third-party payment.
The costs of insurance can be reduced through deregulation and facilitating interstate commerce in insurance products.
Health care spending, as compared to health care costs, is not a legitimate concern of government. Boob jobs, hair implants, in vitro fertilization, sex-change operations and orthodontia are the sorts of things people choose to do as incomes rise.
Note to Charles Williams:
You are correct that deregulation will decrease the cost of health insurance. This happens in my field of life insurance all the time. Carriers have come up with lower rates by shortening the guarantee period….i.e. one year term is cheaper than whole life for about 10 years.
However, I have to be the bearer of bad news. This would be completely contrary to the vision of John Cochrane, who wants stable lifetime personal insurance.
Cochrane’s goal will require very intelligent regulation….sorry there libertarians.
And Mr Williams, why do you (and others) keep dragging out the old carcass of selling insurance across state lines?
All that this old chestnut ever meant is that a younger resident of a state like Massachusetts or New York (which had guaranteed issue) could go to a less regulated state like Arizona that offered full underwriting and fewer mandates.
Once again I bear bad news. Letting the states compete on underwriting regulations does not solve our health insurance problems….it never did, and it really doesn’t now since it seems even Republicans endorse not enforcing pre-existing conditions.
Bob, helping people avoid guaranteed issue rules is exactly the point of allowing the sale of insurance across state lines – along with allowing people to avoid coverage for mandated services. Guaranteed issue is an Obamacare-style solution to a problem that should be addressed through direct subsidies or re-insurance funded by general taxation.
“Republicans, many of whom claim to favor market approaches to expanding health-care coverage but oppose excluding patients with preexisting conditions”
This description is like a chupacabra mated with a jackalope. I favor reducing “health-care coverage” for the same reason I favor reducing “insurance” on the Monster cables you buy from best buy.
They have re-defined the objective of what they are calling “insurance” to be wealth transfer.
Who are these Republicans supposed who want market-oriented wealth-transfer solutions that ultimately accomplish things exactly how Democrats would prefer? I’d like to talk to them.
Note to Charles Williams:
I think we actually agree on guaranteed issue for the truly uninsurable.
We should let those persons join Medicare, and leave other insurance markets alone.
Let’s say that 4 million persons under age 65 then join Medicare, and the net cost of caring for them averages $12,000 a year apiece.
That is an extra $48 billion a year in Medicare costs.
That is about 3/4 of one per cent of payroll. Not a back breaker. I would pay it.
But there will be a huge resistance from the Grover Norquist anti-tax types and the Michael Cannon Medicare-doom types to overcome.