Health is the War of the State

Healthcare is a political football in every Western country to some extent.  In countries with extensive government healthcare the debate is about what the government should pay for, in the US it’s about whether the government should provide broad services at all.  Cost is a constant source of frustration everywhere and despite the significant differences between the US Frankenstein’s Monster system, the French government-subsided system and the British government-runs-everything system, each country seems remarkably fond of it’s own version.  I have a hard time beleiving this is simply due to differences in value judgements between countries.

In the case of the US system I think health care is causing some other notable economic problems.  Consider the stagnation of the American middle class.  The economic growth the US has had since 1970 is going somewhere, and there’s too much of it to all be going to the top 1%.  But consider this: the cost of US healthcare is rising rapidly, and the majority of healthcare costs for working people is borne by employers.  Since the healthcare cost is a cost of hiring workers, employers are just going to pass that cost onto workers.  And so as healthcare becomes more expensive, more of the employee’s growing compensation package is diverted from wages & salary (which is captured in the income stats) to benefits (which isn’t).  If I’m right (and I don’t have the data to check whether the magnitudes fit to make this work as an explanation), at least some of the reasons that only the very richest are getting real pay rises is that the healthcare system is consuming the residual.

But that still leaves the question of what to do about it.  I’m pretty sceptical of single payer as a solution for the US, partly because it doesn’t work as well as you’d think (it’s really expensive for one thing, and that’s without accounting for the fact that the US is bearing the burden’s of the world’s R&D expenses by paying higher prices), and the US doesn’t have the culture or institutions to handle it (as the “death panel” hysteria indicates, I don’t see the US government successfully telling people they can’t have a treatment they want).  That doesn’t mean I like the system you’ve got now either – if I didn’t know better I’d assume it was the product of a deliberate attempt to sabotage the health care market.

Now as much fun as it is to throw bricks, if I’m going to dump on both available options, I really should suggest an alternative.  And to do that, I first need to figure out what’s wrong with the health care market – why interevene at all?  Well, as far as I can see there are two potential problems for the would-be healthcare services buyer:

1. Nasty Surprises: The major thing that separates healthcare from other essentials like food and shelter is that the future costs of your healthcare are risky.  Like owning a house, your expected medical expenses might be small, but there is a small probability of a very large loss.  This is what insurance was created for, and in the absence of a few truly perverse policies (I’ll go into detail below) I would expect health insurance to do the job here, just as it does for other large risks like your house burning down.  But that’s not the only problem.
2. Poverty: By this I mean people who can’t afford even the expected cost of their future healthcare.  Maybe they’re really sickly, or already have a serious illness (since it would make no sense for insurance to cover a risk that has already eventuated) or just have really low income.  Whatever the reason, this isn’t all that different to people who can’t afford to buy enough food.  Insurance won’t help these people, their problem isn’t risk, it’s certainty.  The only solutions that will work here are those that work for any poverty problem: charity and welfare, and in all likelihood welfare will have to handle the bulk of it.

Where I think most systems go wrong is that they try to find one solution to both problems, when really what is called for is two different solutions, each tailored to one problem.   In the US, the solution is a twisted monstrosity you call “health insurance”, though it is no such thing.  Health insurance, real health insurance, is a risk management tool.  The insurance company works out how much it will cost to cover you on average, and charges you that, plus a bit to cover their overhead and margin.  Coverage only extends to unlikely but severe costs, if a loss wouldn’t ruin you you shouldn’t be insuring against it.  Basically the only true health insurance is what is known in the US as catastrophic health insurance, the rest is an attempt to make private companies pay welfare (say by making insurance companies charge less for insurance than they can expect to pay out), which works about as well as you’d expect it to.  Also, since insurers are contracted by the employer, there are 2 or more intermediaries between the health care provider and the consumer).  No wonder market signals are so weak.  And since price is hidden from the consumer, consumers have an incentive to over-consume healthcare services (aided by doctors who, understandably, want nothing but the best for their patients).

A lot of the reason for this is that health insurance is tax-deductible.  So what I’d do is either get rid of the deduction, or at least make employer contributions to a Health Savings Account equally deductible (but that’s a second-best option, there’s no reason you’re employer should be your health care provider).  After that I’d get rid of mandated items in insurance coverage (hell, I’d mandate catastrophic cover only if necessary, but I’d prefer it not come to that), and get rid of price controls that prevent insurers actuarially matching premiums to expected costs.  That way they won’t have an incentive to drive sickly people out of the health insurance system like they do now.

That should leave you with an insurance system that does what insurance is supposed to do, cover extreme risks.  But what of the people who need help that has nothing to do with risks?  That’s where welfare comes in.  The government could contribute money to a Health Savings Account for people on low incomes, or who have certain chronic conditions.  Alternatively the government could provide top-up insurance for certain conditions that are hard to insure (like diabetes, which has continuous costs for the rest of the person’s life), so as to ensure people are adequately covered.

So how would this help?  This is what I’d expect to see:

1. No longer chained to their employers by their health insurance, it would be easier for people to quit their jobs.  This should make it easier to be an entrepreneur.
2. With less distance between consumer and producer, price signals should be much clearer.  This would make competition on price a much bigger deal, doctors won’t recommend the more expensive option just because the insurer is paying for it, because that will come back to haunt you in your premiums.  Plus more expenditure will be out of pocket or through HSAs, fully disintermediating parts of the market.
3. The health insurance market will be much less perverse.  Young people won’t be simply cash cows to be used as a way of covering older, sicker people.  This means young people might actually buy health insurance.  Also insurance companies won’t be constantly looking for ways to drive away their sickest clients since they can still make money from them.

As it happens this system has a pretty good parallel in the real world – Singapore, which by all accounts has a cheap and efficient health system, much more so than France or Canada (Murali, if you think otherwise set me straight).

I honestly don’t know know if this system represents an expansion or contraction of your government’s involvement in the healthcare system.  But either way, the involvement will be more sensible (more writing cheques, less central control of market mechanisms).

So what do you guys think of this approach?  I’d be interested to see how it rates with different ideological perspectives.