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insurance rant

Picking up on this post, as well as Sen. Clinton's announcement of her so-called health-care plan...

People have several objections to single-payer health insurance plans:

  1. it'll cost too much money;

  2. it robs Americans of their freedom of choice; and

  3. it's not free-market; Communism collapsed because the free market works better and produces more efficient allocation of resources.




Answer 1: It'll cost more government money, but less money in total, which is what counts. Who wouldn't happily pay $7000 a year more in taxes in exchange for paying $12000 less a year in insurance premiums? Every country on earth with a universal, single-payer health care system spends considerably less money per capita on health care than the U.S. does... and for less money, they get much better health care for most of their people. In some of those countries, even the high end is comparable to the high end in the U.S.

Answer 2: Americans want freedom to choose a doctor, freedom to choose a hospital, freedom to choose procedures... exactly the freedoms that HMO's don't give them. As for freedom to choose an insurance plan, that's a bad thing; see answer 3.

Answer 3: The free market runs on knowledge of individual differences. If you value something at $10, and I value it at $20, and we both know that, we can work out a mutually beneficial arrangement in which you sell it to me for $15, and we both feel like we've come out $5 ahead. If different people have different preferences in bread, or movies, or computers, each one can buy his/her own preference, and the market will steer the most business to whichever supplier has correctly predicted the preferences of the most consumers.

But insurance isn't like that: it depends on ignorance of individual differences. If one in a thousand houses burns down, and we have no idea which one it'll be, everyone can chip in a thousandth of the cost of a house (plus a little profit for the insurer), and whichever house actually burns down will be covered. If, on the other extreme, we know exactly which house it'll be, none of the other 999 people has any incentive to pay any premiums at all, and the one person whose house will burn down has premiums greater than the price of a house, so that person won't buy insurance either. To take an intermediate position, if 80% of the houses are brick, and the other 20% are straw, the brick home owners will only be willing to pay a small premium, and the straw home owners will have to pay a larger premium, which some of them will be unable or unwilling to pay, so the rest will have to pay even more, which some will be unable or unwilling to pay, so the rest.... In brief, the more is known about who's going to need insurance, the less well insurance works.

As long as we don't have universal coverage, it's in every insurance company's best interest to figure out who is actually going to need insurance, so as to not sell it to them (or price it accordingly, which amounts to the same thing). So we have thousands of highly trained actuaries working to distinguish high-risk from low-risk people. And it's in each individual consumer's best interest to figure out his/her own level of risk, so as not to buy too much or too little insurance, so we have millions of consumers working to figure out their own level of risk. And the better these people do their job, the worse the insurance system works.


To avoid these problems, a workable health coverage system doesn't necessarily have to be "single-payer", but it has to have two properties:

  1. universal: everybody whom we wouldn't turn away from an emergency room is also covered for non-emergency care, checkups, etc, and

  2. single-premium: how much each person pays into the program is not determined by that person's health risk (although it could scale up with income).




Now, I won't deny the danger of runaway costs due to (as jducoeur pointed out) a "tragedy of the commons": if the person deciding what resources to use isn't paying the full incremental cost of using those resources, the resources will be overused. This needs to be addressed, e.g. with deductibles, copays, etc. But remember also that most (sane) people don't actually enjoy medical treatment; any kind of medical treatment carries a cost in time and discomfort to the patient, and this should act as a partial counterweight to the "tragedy of the commons" phenomenon.

Comments

You point obliquely at what I call the philosophy problem of insurance (which is one of many). To wit: mandatory, equalized insurance is an inherently socialist proposition, and that it is at odds with pure capitalism. When you allow capitalism into insurance it becomes market segmented, as you describe, and fails, because premiums become based on specific risk rather than generalized risk and no one can afford two weeks in a hospital and so they become underinsured and get sick and we end up paying anyway because when people die other people start paying attention.

But this isn't solvable easily, because if you point this out, and say that everyone should pay about the same despite their needs, then the capitalist nutjobs point out it looks like commie thinking and people's mind go to mush. (Never mind that economies of scale work just fine for things like education, public transport, utilities, etc., etc. despite the fact some benefit more than others for these public-funded services.) Until someone steps up and says, "Yes, it does mean you are paying for Aunt Edna's medicine, now be a decent human being and pay up", rather than trying to pass it off as some mystifying self-serving motivation ("But you see, it saves you money...by...uh..."), this problem will persist.
The puzzling thing is that people are used to buying insurance; you'd think they would have figured out by now that its central principle is a lot of people who turn out to not actually need it paying for the few people who do.
Thank you - very good point and very well said.

What a phenominal waste of human resources our current system is.... it's astounding the man-hours put into gaming the system.

And for those who cry "socialist" or "communist" I respond, so what's your point?

Capitolism has been fantastically successfully at marshalling a nation-state's resources for competive war. Isn't civilization tired of competitive wars? Frankly a little socialism and communism sound really good to me right now (and no - I do not mean Soviet style totalitarianism - which is NOT communism).
Problem is, we don't have much in the way of models for "true socialism/communism", if you exclude the totalitarian regimes of the Soviet Union, China, North Korea, Cuba, etc. I've read that the anarchist "side" in the Spanish Civil War would have qualified, but nobody's heard of them.

Have you read daviddfriedman's book Hidden Order? It changed a lot of my views about capitalism. If your definition of "the public good" is maximizing the size of the pie (without regard to how it's sliced -- simplistic, but one could do worse), it can be mathematically proven that under certain reasonable assumptions, a free market achieves it. But there are various things that can go wrong with the assumptions: lack of choice, incorrect information about price or quality, transaction costs, and externalized costs spring to mind.

I won't say capitalism is a bad thing, or a good thing; it's a tool, a predictive theory like the law of gravity or relativity. Some people take it as a prescriptive theory ("this is what the free market produces, so this must be right"), which strikes me as an abdication of moral responsibility. If the Wright Brothers had treated the law of gravity that way, they wouldn't have gotten off the ground. A moral course, it seems to me, is to decide what ends you want to achieve (whether flying, or liberating people from health insecurity, or whatever), and then use this tool (among others) to figure out how to achieve them.
I gave this speech at the Federal Trade Commission in February.
Really? Do you happen to have the text available anywhere?
http://htc-01.media.globix.net/COMP008760MOD1/ftc_web/FTCindex.html#feb13_07

Go to the first panel on Feb. 14: State of Broadband Competition. It is part of my larger presentation on broadband competition and policy entitled: "Do We Have Enough Broadband Competition, How High Is UP, And Other Imponderables."
Go with the video not the transcript. I just read the transcript and it has a number of amusing errors (e.g., "walk in" for "lock in").
I am in favor of universal single payer, with a capacity to buy alternate insurance of you prefer (why not?). But the issue of price needs to be addressed separately.

It's not just a problem of the elimination of rationing by cost. There are relatively straightforward ways to address distribution of resources and prevent waste. But part of the problem is that people do not have a sense of what drives health costs.

Here are a few simple things to do that would lower health costs:

1) Government medical malpractice insurance. Doctors pay ridiculous amounts t private insurers, and "tort reform" has proven useless in those states that have impossed caps. Insurance for doctors is a simple, straightforward process and no harder to do than crop insurance, flood insurance or any of a number of federal insurance programs.

2) Free Medicare/Medicaid to negotiate directly with drug companies for cost.

3) Exercise rights under existing federal law to regulate the rates of medication developed from publicly funded research.

4) Patent reform to prevent frivolous patent extensions.

5) Reinstate limits on direct-to-consumer advertising.

6) Develop a decent broadband policy.

7) Tax credits to hospitals that adopt open source medical records/medical retrival systems.
I don't agree that "And the better these people do their job, the worse the insurance system works." Seems that depends on your definition of a "good" insurance system. Your definition seems to assume that everyone paying the same amount is good.

Suppose you are very sickly and everyone knows it, therefore no one will offer you cheap health insurance. You might say that this means that the insurance market isn't working, but I disagree. I don't think you have a right to cheap insurance. Insurance in my view should insure against uncertainty, not compensate for bad fortune. You being high risk for health problems is unfortunate like you being born without legs is unfortunate. In both cases I would say: tough luck. Deal with it. Life isn't fair. Expect to pay high insurance premiums. I wish you luck in recieving charity from others to help you cope with that. You think healthy people are obligated to compensate you for your misfortune by subsidizing you, and that assumption seems to be at the root of your argument. You should be more explicit about that because currently when you claim that free market health insurance doesn't work one gets the impression that you're insinuating some sort of market failure type thing.
Your definition seems to assume that everyone paying the same amount is good.

No, I don't assume that, although I partially conclude that. I do assume, however, that a "functioning" insurance system is one that distributes risk among a large number of participants and gets health care to the few who need it.

It's certainly true that some people are at higher risk than others, due to smoking, obesity, family history, etc. So what do we do with that information? In a free market, insurers exclude the high-risk people, and the low-risk people exclude themselves. Both of these effects increase as more accurate risk information becomes available. Eventually, nobody's left participating in the system; in short, it doesn't function.

Now consider that our society isn't willing to turn away sick and injured people from emergency rooms. Which may be morally laudable, but in combination with the previous paragraph it has two unfortunate effects:

  • people unlikely to need health care see "opting out" of insurance as a realistic, money-saving option, because they're still sorta-covered;
  • and
  • high-risk people who can't get insurance still get health care, but they get it through the most expensive and inefficient parts of the system: ambulances and emergency rooms.


In short, the more information consumers and insurers have about individual risk, and the more choice they have based on this information, the fewer people will participate in the insurance system, the less well it will distribute risk, and the less efficient the whole health care system will be.

This is paradoxical. I'm well aware that, in general, markets work best when everybody has more information and choice. But...

... when you claim that free market health insurance doesn't work one gets the impression that you're insinuating some sort of market failure type thing.

That's exactly what I'm insinuating. Unless we're willing to turn people away from emergency rooms, we don't have a pure market in health care: people who don't buy the good (whether through their own choice or somebody else's) still receive it -- a classic case of market failure, exacerbated by the fact that the non-buyers often end up consuming more (inefficient) health care than buyers.

Which leaves us with two reasonably efficient choices: either

  • routinely turn away sick and injured people from emergency rooms if they can't pay, or

  • don't allow insurers or consumers to choose based on individual risk.


The latter has the added benefit that all the person-hours currently spent on assessing individual risk become unnecessary, saving the system many billions of dollars a year. U.S. society has chosen neither path, but rather a sort of "worst of both worlds": by far the most expensive per capita health care system in the world.