In defense of quality not quantity: the case for better safety nets, not more entitlements

Reading this Will Wilkinson piece (which is a follow-up to pieces by Megan McArdle, Tyler Cowen, and Michael Cannon – all of whom you should also read on this subject) has gotten me thinking once again about health insurance reform, and especially about the way we think about entitlements in this country.  More specifically I’ve been thinking about the ways we can begin to move away from entitlements and start thinking about the government as a provider of safety nets instead.

For instance, one time between jobs my family was left without insurance and without any income.  The fact that we had been living paycheck to paycheck did not help matters, making COBRA impossible to afford.  We had a baby on the way and were left without any means to pay the bills.  So we applied for Medicaid, and were accepted – which was a very good thing, since my wife was also pregnant and since the delivery was fraught with complications that I’m sure would have bankrupt us had we not had any insurance.

Soon thereafter I was once again privately insured and we were no longer were covered by Medicaid.  It functioned as a safety-net just when we needed it most.  My wife and I had, prior to having children, gone quite a long time with no insurance at all.  We were “young invincibles” without a real pressing need for insurance, and we consumed very little healthcare. I’m very grateful that there was some safety net for us to fall back on, but I also realize that Medicaid itself is far from perfect or sustainable (which is to say nothing of its big brother, Medicare).

A few thoughts on Medicaid:

• It is a very tedious process to become enrolled.  It is time-consuming and there is a great deal of paperwork.  I imagine this dissuades a number of people who need it the most from signing up.
• Many low income people do not use Medicaid as a safety net, but rather as a primary means of insurance.  They renew it every year, and have little incentive to become insured via employment or via private insurers.
• Many providers do not accept Medicaid and many more are not paid (or not paid enough) if they do accept Medicaid.

While Medicaid as a safety net against catastrophic medical costs makes sense, Medicaid as an entitlement for the poor does not.  I’ve heard of people who take lower paying jobs or who choose to only have one spouse work simply because the higher paying or second job would disqualify them from receiving Medicaid benefits.  This is quite obviously a perverse incentive.  Furthermore, the care available to Medicaid enrollees is subpar, extending the class divide ever deeper and creating a class of citizens who are increasingly dependent on the state. 

All of which is to say that the government should get out of the business of primary insurance altogether.  It would make far more sense to have the government provide catastrophic coverage only (for health costs above X% of income) and to make the process of enrolling for this coverage as simple and paperwork-free as possible, cutting back administrative costs and red tape.  This would not only help protect people from medical bankruptcy (though people would likely still have some pretty depressingly large medical bills) it would remove the need to remain on government benefits for so long in the first place.

On this note, Jon Henke chastises Republicans for not developing a more comprehensive narrative to frame their own healthcare reform ideas, writing:

At this point, I think we need to do one of two things: Either….

• Government as a Last Resort – Government can insure everybody for any yearly expenses over 20% of annual income, which completely eliminates the problem of unbearable costs, both for consumers and for insurers (and which ought to dramatically lower insurance costs, since the potential risk is far smaller).   That shouldn’t have a major distortive effect on the market, either, because most catastrophic costs tend to be things about which we can’t/don’t often make good cost/benefit calculations.  This would also eliminate the need for Medicare/Medicaid, since this would automatically cover people who have little/no income. While there are undoubtedly problems with this, it seems on the whole better than a system that gets government involved at much lower decision and cost levels.  Or…
• Government as a Safety Net – Restructure our entitlement system along the lines of what (if I recall correctly) Milton Friedman and Charles Murray have recommended: expand the EITC to cover basic costs of living on a means-tested basis, so we can predicate entitlements upon actual need, rather than blanket distribution.

I’m not so sure the two options are actually all that different.  Government as last resort is government as safety net.  Henke is right, however, that conservative healthcare reform ideas not only need to be reframed under a better narrative, but also that those ideas need to become a priority.  The status quo is simply unsustainable.

The experience of losing both a job and health insurance also reveals how utterly dysfunctional the current system really is.  Not only is this potentially disastrous for laid-off workers or for workers moving to new jobs, but it creates a huge disincentive for entrepreneurs in the global market who can’t afford to both start a business and pay for private insurance in the very distorted insurance market, or who simply cannot compete because of those costs.  Self-employed workers also have a massive tax disadvantage.  So adding to the safety net/last resort narrative, I think should be the notion that insurance needs to become personal and portable. 

With government stepping in for catastrophic costs but stepping out of the expensive business of middle-class entitlements, insurance overall would become cheaper.  And by leveling the playing field and taxing insurance benefits as income, we could begin to dismantle the employer-based insurance system.  If someone were to lose their job or go to business for themselves, they wouldn’t have to worry about also losing their insurance or about pre-existing conditions.