Let’s start by accepting President Obama’s general goal of attaining sufficient health care for every American as sound. Given this general goal, we should then move on to a more specific goal, one that President Obama would hopefully agree with: tailoring health care policy to most efficiently achieve universal coverage. Perhaps President Obama believes we have done so; however, I am not convinced, and I think the potential ramifications of the recent legislation are troublesome. Indeed, I think President Obama failed to utilize his immense political capital to overhaul the entire health care system to benefit our country in the next few years and into the future.
Before we decide which makes the most sense, we need to define “efficiency” and "sufficient" in this context. The most efficient option will be the one that accomplishes our goal of sufficient universal care with the least cost. Costs are two-fold: (1) direct costs and (2) indirect costs. Direct costs to society mainly include taxation to pay for health care that the government must subsidize and money that the public spends inefficiently in the general market based on health care policy. In other words, people spend L in the market to pay for health care and M on taxes to pay for the new policy. By spending L+M on health care, people will be unable to spend L+M on other goods within the market. Indirect costs, N, will be the cost to future medical innovation. We can calculate N by considering how a policy either encourages or discourages future innovation. A policy that fully encourages innovation would minimize N, and a policy that fully discourages innovation would maximize N. To meet our specific goal, a policy should be the one that minimizes L+M+N.
Sufficient health care, in my opinion, is one where people can purchase a plan that provides them with the benefits they are interested in receiving. Unfortunately, we run into the problem that, given no price constraints, most people would love to have any and all medical procedures done to increase their quality and length of life. Sadly, people do not have unlimited funds. Just like everyone may wish that they could have a hug e house with central air or eat caviar and filet mignon daily, they don’t have the money to do so. However, if someone eats oats or rice for every meal or lived under a bridge, both he and society would likely consider this insufficient food and shelter. Similarly, an inability to purchase health insurance that provides coverage of basic health care goods would not meet general goal. We can debate over what those basic health care goods are, but I don’t plan to get into it here. In the end, we have to remember that an efficient point of health care is where an individual can purchase health care goods to the point that the marginal benefit of the goods equals the marginal cost of the coverage.. At this point, the added benefit of an additional unit of care will equal the added cost of such a unit. Theoretically, a completely private health care market will give you the most efficient allocation of health care resources, as people will pay for health care up to the point where the marginal benefit they receive from it equals the marginal cost of buying it. Any more health care, and the costs would outweigh the benefits of buying further care; any less, and they would be missing out on net benefits they could receive by purchasing further care. However, it is important to note that because of health insurance, the MB=MC equation is somewhat skewed. Instead of thinking of it as the marginal benefit and cost of an additional unit of health care, we need to think of it as an additional unit of health insurance.
Despite what you may have heard politicians say about the “private market failures” in health care, it is important to understand that the current market is severely flawed by one major feature: third parties pay for health insurance. In other words, many people do not purchase their own health care but instead rely on employers or the government to pay for the good. In 2004, for example, over 59.8% of the population received health care through employers and 27.2% received it through the government, meaning 87% of the population did not directly pay for the insurance they received.
The government has recently adopted a plan to attack the problem in three main ways: (1) extending Medicaid coverage to more people; (2) increasing subsidies to individuals and families to purchase health care; and (3) calling on employers (50+ employees) to increase coverage of employees by fining them if they fail to do so. I think that the first and third efforts run contrary to our specific goal; and that the second effort should have been greatly expanded upon and adopted as the main thrust of Congress’s new policy.
This reliance on third-party payers is a serious problem for health care because it negatively affects the costs associated. Ideally, like in any other market, we want a person to pay for the goods and services he is interested in receiving. This way, he is able to effectively determine whether the benefit he receives from the product is equal to or less than the cost he has to pay to receive it. Health care is no different. Because people are not paying for the services they receive directly, they are not reflecting on the benefits they receive from their care as they relate to the costs of buying it. Instead, the third-party payer is determining what is the most cost efficient scenario for the individual.
You may be wondering, though, whether the third-party payers will be minimizing costs in the same way that individuals would. I contend that they do not for two reasons: (1) the health care goals of an employer differ from the goals of an employee; and (2) the government discourages the third-party payer market from doing so.
The health care goals of a company are to insure many people, meaning they have to include benefits that will make a large group of people happy. This means that some of the benefits in your employer’s health care package do not actually benefit you, as an individual worker, or that the health care package lacks some benefit that you would like to see. This is an inefficient allocation of resources for you, but not for the company. Intuitively this makes sense: If we allowed the 1,000 people who work for company X to purchase individualized plans, the aggregate benefit would be maximized, as each individual would maximize his benefits from his insurance. If, however, we allowed company X to purchase one plan for all 1,000 workers, surely some would not be happy and others would receive extra care that they were indifferent towards, meaning the aggregate benefit would not be maximized. So, on the aggregate, the company is better off buying the plan it purchases, but society’s benefit is not maximized.
Additionally, the government discourages third-party payers from reducing costs because it allows business to deduct the money it spends on employee health care from its profits, meaning the companies do not pay taxes on the money it earns that it puts towards paying for health insurance. If the government taxed this amount, companies would be incentivized to spend the least amount possible on health care that would make their employees satisfied. Without such a tax, the companies may be offering health care benefits to their employees at a cost that exceeds the benefits those employees receive from the goods. This is a problem because it means we are spending more, collectively, on health care than we should.
Therefore, by allowing individuals to buy their own care, we would be encouraging individuals to consider fully the costs and benefits associated with their health care purchases. In doing so, the theoretical market situation described above can be achieved and, importantly, further costs can be averted. For example, if more people bought individual insurance on an open market, private insurance companies will compete to provide individuals with benefit packages at prices those people will be willing to pay for. This would reduce inefficiency on the part of insurance companies. Similarly, insurance companies would look to ensure that inefficiency by medical care providers is also avoided. Thus, there will not only be an increase in net benefit by individuals, but a reduction in the cost for those services.
How does an individualized insurance market (Policy A) offer us the lowest L & M while still achieving our goals? It offers us the lowest L because people who receive health coverage from an employer already pay for it, even if they do not realize it. Companies, even though they claim to offer great health benefits, fail to tell employers that the companies do not actually want to spend the costs to do so. Instead, the companies defer the costs to employees by offering them less compensation. You pay for your insurance in the form of lower salary. Thus, you are paying for a health care plan that you did not select. This is not good for the efficiency reasons described above. Let’s say a company that spent $10,000 on you for a health package now gives you that money in income but does not provide you insurance. Now you go to the market and pick out a health care plan that matches your preferences that costs $8,000. You now have $2,000 surplus to spend on other goods and services. Even if you spend more than the $10,000 your company spent, you will only do so if the marginal benefit you receive from the care does not exceed the marginal cost. Thus, you will be spending the money efficiently. On the aggregate, I suspect that an individualized plan will result in less overall spending on health care because the majority of employer health care packages are ill-fitting to the preferences of their employees and because the new private insurance market will cut costs as a whole.
Before we get to M, you may be wondering how Policy A will actually attain our general goal: sufficient universal coverage. Under Policy A, the government could subsidize individuals who fall below a certain poverty, and those individuals will be able to purchase individualize plans. For instance, the government could give impoverished individuals the same amount of subsidy that it pays its employees to buy health insurance. This would mean that impoverished people, at worst, could have the same spending power on health care that federal employees have.
Overall, M will be at its lowest point because the government benefits from the fact that private insurance companies will drive down overall costs of insurance to meet the needs of private individuals. Under a system dominated by government-based insurance, which is undoubtedly where we are headed, the President and Congress fail to address the problems described above with third-party payers because, ultimately, they would be third-party payers. As third-party payers, the government will likely be spending more on insurance than if each of the individuals it provided for paid for the goods themselves. This means that society, as a whole, is paying more in taxes to support the plan than it otherwise would.
Furthermore, any policy that encourages more government-based insurance, like the one recently passed by Congress, naturally poses a threat to our goals regarding N. As the government continues to pay for more aspects of the health care market, it will attempt to reduce costs by either reducing benefits or artificially controlling the cost of the service it provides. Reducing benefits is highly unlikely, as the government tends to shy away from taking away services it has provided its constituents in the past for political reasons. Similarly, the government also shies away from raising taxes to cover the costs of benefits it is providing. Thus, the government will have to shave costs by implementing price controls or rationing care to reduce spending. Either way, they will be reducing the demand for new medical products. This reduction in demand, in essence, increases N because the government is paying medical innovators (drug companies, medical tool companies, etc.) below the market price for their products. An Increase in N in this fashion, ultimately, costs future productivity, meaning we are less likely to see new drugs or medical tools that save or improve lives than we otherwise would be under a policy that did not increase N as much.
Policy A, on the other hand, allows the market to control N. The market controls N because the health insurance market accurately reflects the market price of providing medical services. The marginal benefit of medical services equals the marginal costs of those services. Medical innovators will perceive the demand for new goods and services as they come from the market. When the people are willing to pay for innovations, the medical innovators will provide them. But, unlike under a policy where third-party payers, specifically the government, produce the demand for medical products, Policy A will allow the purchasers of medical services to determine the demand for new products. Thus, N will be minimized because medical innovation will be at its most efficient point.
In essence, Policy A will allow us to minimize L+M+N on all fronts. You may be wondering how this could be achieved? For starters, Congress could repeal the tax benefits that it offers. Second, it could actually ban third-party insurance. Third, it could mandate that individuals buy their own plans, forcing companies to free their employees to buy health care on their own to meet the law. This would be met by serious objections from unions, who negotiate employer-based health care plans for union members, and other big players in the political scene. As such, it would be quite the political feat to push through Congress. Furthermore, the American public may have a hard time swallowing such a major change. However, President Obama had the political capital to demand Democrats got on board; and, I suspect, this policy is more in line with Republican views on how universal coverage could be obtained, so he could garner support from across the aisle. Equally important is the understanding that President Obama has the political charisma and leadership to ensure that the public understands and allows such a change. Sadly, Congress and the President did not adopt this route. Perhaps this is for the reasons highlighted in Peter’s post: the control of the democratic party has fallen to the leaders of the “far left.” Either way, it is never too late to for the government to establish efficient policies for the American people, especially in health care.
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