More on health insurance

Jane Galt, a writer at The Economist, has a theory why the market for health insurance does not work that well in the United States.

My suspicion is that the employer health insurance system has prevented the emergence of reliable brands. Almost no one has any control over their health insurance, so there is no incentive for companies to develop a reputation for speedy resolution of problems. You can't ask your friends about their insurance. There's not even good reason for companies to give you good service as a private consumer, since you will leave them as soon as you get a job with benefits, regardless of how well they perform. And if you move across state borders, you'll hit a new regulatory regime, which means you'll be buying an entirely different produce anyway...

So I'm not sure how big a problem adverse selection would be in a normal health insurance market. The problem is, we don't have one; we have a system where a few desperate and unreliable consumers are trying to buy insurance from a few desperate and unreliable companies.

The big question that is currently unresolved is whether a market can be established that would allow consumers and producers to replicate an optimal market outcome for health insurance. The current problem with the US is that health insurance is tied to your employer. Most people under the medicare age limit are insured via their employer (as are there kids). If you do not participate in the employer based health care system, you are at a loss because there is no pooling mechanism to lower the cost of insurance. Add in state and federal regulation and, depending on the state, individual premiums can be very costly (although on average this may not be the case).

So, we either dismantle the entire system and put a government run system in its place (an idea that the original article I posted below dismantles, I believe) or we come up with another way of pooling consumers so that we can have an individual market. I have heard of at least two ways to do this.

a) Have the government provide a health adjusted voucher to consumers to purchase insurance (that is, if you have cancer you get a large voucher. If you are healthy you get either a small or no voucher). Then let the market work its magic

b) Set up a pooling mechanism where customers can purchase insurance. Customers would not purchase insurance directly from the insurance company. Instead, they would purchase the plan via the pool and then the pool would aggregate the customers and negotiate terms with the insurance company.

Of course, the Ideal libertarian/free market solution would be to remove any and all incentives for health insurance and use tax free health savings accounts (perhaps with government matching/funding for the poor) and then let consumers buy their health care directly. However, while interesting I believe that this solution is not politically realistic.

Economist reviews "Sicko"

Austan Goolsbee, the Economics advisor to Barack Obama, reviews Michael Moore's Sicko here.
Here is one snippet.

So, to do as Moore wants in the United States, you would need to do more than just overcome the insurance industry. You would need to cut the salaries of doctors, reform the legal system, enrage our allies by causing their prescription drug costs to escalate, and accustom patients to a central decision-maker authorized to determine what procedures they are and are not allowed to get. Unless every one of these changes comes together, Moore's new system would end up costing an enormous amount of money.

One problem hinted at, but not addressed, in this article is the idea of rationing. As health care costs escalate someone has to pay for this stuff. If its solely the government's responsibility then people will have to accept waiting lines. End of story. The alternative, and much more politically realistic option, is to set a "health care floor" that we do not let people fall below and then allow insurance to provide alternative health care plans at differing prices. You want more coverage and less wait, then pay more for it. There are ways around the asymmetry problems discussed in the article that would allow this type of market to work.

Update: An Economist reviews an Economist's review of Sicko

Economist Arnold Kling objects to a good portion of Austin's review.

Preventive care is like motherhood and apple pie, but we don't have any hard evidence that we can use preventive care to save money. I would argue that some types of preventive care, such as cancer screening, tend to have a very high cost per life saved.

To "reward doctors for doing a good job," you have to know what a good job is and you have to be able to measure it from far away. This is extremely difficult. Imagine trying to run a system in Washington to pay professors for "doing a good job."

Forced-pooling health insurance is not a solution, because "dump and deny" is not the main problem. A bigger problem with the individual health insurance market is that there are 50 state regulatory fiefdoms, and insurance companies are not allowed to market products across state lines. The biggest problem is that most people think that employer-provided health insurance is "free." So when they do not get insurance from an employer, they cannot bring themselves to pay for what other people get for "free."