We talked about the case that Krugman and Wells make for either a public health insurance plan (where the government runs the insurance plan, like Medicare) or a public health plan (where the government runs the hospitals, like the VA).
We kicked around some old questions about why our health insurance system is a first-dollar system rather than a high deductible one. You all had a lot of great suggestions about possible reasons why people prefer this. For example, Remy said that we might prefer to separate finance from health care, so we prefer that a financial company handle all financial arrangements. Jennifer reminded us that hospitals might give favorable rates to people with standard health insurance plans. Finally, we’re averse to cheap health care. That is, we’re suspicious of the cheapest plans as being, well, cheap. And who wants to treat their health shabbily?
It’s also possible that there is a historical explanation. Our modern health insurance policies were started by doctors to drum up business, after all. Our history leaves us thinking that this is just what health insurance is, so we don’t consider alternatives.
There were other good points too: these are the ones that stuck in my mind.
Krugman and Wells make what looks like a good point to me. Suppose have a tendency to overconsume small services with our current first-dollar health insurance plans. This can’t explain the growth in health care costs, since the big bills are racked up by the 20% of the population that really needs care.
We considered the possibility that wasn’t articulated in the article: that the consumer-directed economizing was meant to apply to these people too. We regarded that as an ethically inappropriate way of saving costs. But it’s a logically possible response to the point at hand.
There’s little doubt that private health insurance involves a lot of overhead that has little to do with health care. Here’s old friend Reinhardt with some slightly more up to date figures:
The United States spends nearly 40 percent more on health care per capita than its G.D.P. per capita would predict. Given the sheer magnitude of the estimated excess spending, it is fair to ask American health care providers what extra benefits the American people receive in return for this enormous extra spending. After all, translated into total dollar spending per year, this excess spending amounted to $570 billion in 2006 and about $650 billion in 2008. The latter figure is over five times the estimated $125 billion or so in additional health spending that would be needed to attain truly universal health insurance coverage in this country.
One thing Americans do buy with this extra spending is an administrative overhead load that is huge by international standards. The McKinsey Global Institute estimated that excess spending on “health administration and insurance” accounted for as much as 21 percent of the estimated total excess spending ($477 billion in 2003). Brought forward, that 21 percent of excess spending on administration would amount to about $120 billion in 2006 and about $150 billion in 2008. It would have been more than enough to finance universal health insurance this year.
The McKinsey team estimated that about 85 percent of this excess administrative overhead can be attributed to the highly complex private health insurance system in the United States. Product design, underwriting and marketing account for about two-thirds of that total. The remaining 15 percent was attributed to public payers that are not saddled with the high cost of product design, medical underwriting and marketing, and that therefore spend a far smaller fraction of their total spending on administration.** Uwe Reinhardt, “Why Does U.S. Health Care Cost So Much? (Part II: Indefensible Administrative Costs)” New York Times Economix Blog, November 21, 2008.
Earlier in the term, I had said that I didn’t think there was that much to be harvested from private insurance companies. I was wrong about that.
But before we rush off to a public plan, we would do well to think carefully about how government works. Its overhead is low, but it doesn’t follow that it spends efficiently. On the contrary, it has a lot of expenses that also have little to do with health care. It has a 10% fraud rate, makes no effort to assess the effectiveness of the treatments it pays for, and pays obviously excessive prices.†† Ezekiel J. Emanuel, Healthcare Guaranteed (2008, PublicAffairs), pp. 53–7. We know the last point is true because Medicare pays vastly different rates for identical services at different hospitals, even when they are very close to one another.
It’s not because Medicare administrators are incompetent. It’s because our elected officials block them from trying to do better. Krugman and Wells themselves provide excellent examples of this phenomenon but don’t reflect much on what this means for their favored system.
The problem with reforming the health care system, it seems to me, is this. The only party with the ability to rein in costs is the government. But the only parties that might have the motive to rein in costs are the insurance companies. I say “might” because this is only one way that private insurance companies might make money. Refusing to write policies for risky patients and rescinding coverage are two others.
I said that I had a newfound appreciation for the rationale behind trying to preserve the employer based system. If we can regulate private insurance companies to eliminate some of their socially undesirable overhead, perhaps we can use them to keep costs in line. That seems to me to be the big idea, at any rate. We’ll have to see if it can be done.