How to Handle Health Care

By , 20 June, 2009, 7 Comments

Here’s how insurance works. You sign up for a plan, and based on how likely to be sick you are, you get a quote for your monthly premium. If a particular insurer has a roster of clients who are 90% sick folk and 10% healthy folk, the base premiums they use will be higher than if the balance were 50-50, because they will need to pay out more funds to cover their clients and need more revenue from premiums to do it. But the people who have an incentive to buy health insurance are A. old or B. sick, precisely the demographics that drive premiums up. Now factor in that we have two insurance companies that are state-run, Medicare and Medicaid, populated ENTIRELY by the elderly and ill. The cost to the taxpayer of maintaining those is even higher.

Meanwhile young people elect not to buy insurance because they are cavalier about their health; by the time they want coverage, they are old or sick, so the cost of a plan is high. Some of them wind up being poor enough that Medicaid covers them, but that only adds to high cost and inefficiency of Medicaid as an insurance plan populated only by the most expensive clients. (Proposals to make Medicaid open to all would only make this worse.) Some of them wind up being wealthy enough that they can pay the high premiums of the private insurers. The rest are our 50 million uninsured.

Why can’t these consumers bid down the cost of private sector insurance? Once reason is that regulatory oddities prevent them from voting with their wallets–if I, a New York resident, see a plan in California that suits me better (maybe it covers more of what I want and less of what I don’t), I should be able to buy it, sending a signal to New York area firms that they should lower their prices to compete. The HMOs have successfully lobbied state and federal governments to prevent that from happening. Certainly lifting such odd regulations would bring private sector costs down, but it wouldn’t solve the tax-dollar-drain that is Medicare/Medicaid, nor would it guarantee costs falling enough to insure everyone.

Why are the costs of insuring the sick so high anyway? Other countries–most of the EU–pay for ALL their citizens out of tax money and still spend less than we do. One reason is that they make sure their state-run insurers don’t cover the silly things some of our private ones do (Viagra) and that they do cover smart preventative care (testing people with the right risk factors for chronic diseases like diabetes, then following through with them on diet and exercise). Granted, preventative care can be done wrong or wastefully, but this is more a matter of improving medical education than one of insurance pricing.

Another reason is that they ration care by buying just one brand of everything in bulk: you don’t get to choose between Prozac and Zoloft. Getting rid of coverage for discretionary things like Viagra and improving preventative care would be smart things to steal from them. Getting rid of drug diversity probably isn’t, because our population is larger and more diverse than theirs and the effectiveness of these drugs has a lot to do with genes. So copying the European model wholesale (ie going for single-payer) is a bad idea.

Moreover, we need a robust drug development sector in this country because it’s one of the few areas where America can still lead innovation and create jobs. Manufacturing is dying, IT is migrating, clean-tech is light-years away from maturity and services (hoteliers, accountants) can only take you so far. We have to make stuff, and this is one thing we’re still relatively good at. So economically, crippling pharma by going for single-payer doesn’t make much sense.

Here’s a better system:

1. Mandate that every individual buy health insurance from a private insurer. If their employer wants to provide it, that’s fine, but employees have to be allowed to keep the plan if they lose their jobs. What you will get is a flood of young, healthy people who bring insurers free money for no coverage costs, subsidizing/bringing down the cost of treating the old and sick and eliminating the problem of people growing old enough to want insurance, then finding they can’t afford it. This, obviously, comes from Hillary Clinton’s campaign proposal and has made its way into Obama’s plan, though he’s cleverly pretending like it was his own idea. What Hillary never pointed out is that this would also incentivize more doctors to accept insurance, since there would be 0 uninsured patients to treat. The efficiency of having more doctors in the insurance system would further drive down cost.

2. Let individuals buy insurance in any state, let insurers offer plans at multiple levels, from the barebones catastrophic insurance to more comprehensive preventative schemes and let insurers buy drugs abroad instead of having patients buy them off-plan and import them like we do now. In particular, for chronic preventative care, many of the best drugs aren’t being developed here, though as I suggested above, I think they could be. The more choice consumers are given, the more insurers have to compete by lowering costs. These are the suggestions offered by a coalition of Congressional leaders who met with the insurers earlier this spring, but they seem not to have made it into the final bill.

3. Guarantee that Medicare/Medicaid will cover those who can’t afford to buy, and by all means, get rid of the benefits tax exemption to fund this. At first, that means the cost of Medicaid will go up as the income cap it covers will rise; as costs fall, the number of people Medicaid covers will fall too. Moreover, as insurers fight for consumers and bid down drug companies to get more drugs at lower prices, Medicaid will see its costs fall too. This guarantee is in the Obama plan, but because he’s endorsed none of the free market reforms (see #2), there’s no mechanism to reduce costs long term. Obama et al want to solve this problem by letting EVERYONE opt in to Medicaid, but as outlined above, this back-door to single-payer won’t work. The expanded Medicaid would have leverage to bid down drug costs, to be sure, but it would do so by limiting options, a bad choice given the diversity of our population and the crucial role medical innovation has to play in taking America forwards.

Instead, health care reform should combine a universal mandate and subsidies for the poor with more competitive markets for drugs and coverage plans. Unfortunately, such centrist solutions rarely survive the legislative sausage process.

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7 Responses {+}
  • rafigagum

    no way, if obama doesn't provide a public option, he is toast in my book and my demographic [over 50]. europe is fine with prozac and benadryl, they don't need zoloft and claritin, and so will we, our genes aren't that diverse, how we finance health care should not be the route to reviving the economy by continuing to keep pharma profitable. health care is about health not profit

  • jsk

    A universal mandate might lower individual premiums, but by increasing the ranks of the insured it would be at most a push in terms of GDP wide cost savings. That fixes the problem of access, but not that of cost.

    I don't know if you've read Atul Gawande's recent New Yorker piece about the causes of healthcare expense, but it argues fairly convincingly that our medicine is costly for deeply rooted, systemic reasons, and that no change in insurer would remedy this. He suggets, and I agree, that until you find a way to incentivize good behavior on the part of doctors, Americans will continue to pay far too much for healthcare.

  • Preppy McPrepperson

    Yes, I did read the Gawande essay, which is stunning. And I agree, most of the problems will be resolved outside the insurance price question.

    We're trying to tackle insurance because we are concerned with access, and I am concerned only with the ADDITIONAL MARGINAL COST of expanding that access. In other words, getting more access will not make healthcare cheaper, but some means of getting access will be more cost-efficient at achieving their access goals than others. I'd prefer to go for those, to do so in a way that leaves room for drug innovation.

    In terms of reducing the broader inefficiencies of our healthcare system, Gawande is right that the responsibility will lie in the medical profession.

  • johnkoppisch

    Very nicely explained. I wasn't aware that HMOs have lobbied against buying insurance across state lines. Would like to hear more on their reasoning. In some states, legislators have forced insurers to cover so many things that the premiums are too high to sell many policies. But I can see that in more reasonable states, insurers would work to protect their market from out-of-state competition.

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