"There is always a philosophy for lack of courage."—Albert Camus

Monday, January 30, 2006

Cures for the Ailing U.S. Health Care System

Columbia University economics professor Glenn Hubbard has contributed an excellent analysis of the nation's ailing health-care system in today's issue of National Review Online. Hubbard makes the important point that the central problem with the U.S. health care system is the lack of consumer control over costs and treatment, which is caused by government impediments to private markets:

We found that many of the problems in our health-care system stem not from what happens in the doctor's office or hospital, but what happens in our tax code. If, on the one hand, an employer pays for an employee's health coverage, it is a tax-free cost for both the company and the individual, therefore allowing for generous health-care coverage in large companies — especially those with union-negotiated contracts. If, on the other hand an individual must pay for health-care costs out of pocket and these costs cannot be written-off, the medical expenses are more keenly felt and are, at times, hard to afford. This difference often results in the person avoiding to seek medical care until it is absolutely necessary — if at all.

Hubbard points out that the government's bias toward third-party payment systems is the crux of the problem:

Many policymakers are starting to see the problem. Last fall, the bipartisan President's Advisory Panel on Federal Tax Reform suggested capping the tax deductibility of health-insurance premiums so that employers could extend only so much coverage to their workers. And, if we could do so, removing all tax subsidies for health care would be the best answer. That outcome is most unlikely, and the key is to stop the tax bias against low-cost individually purchased health insurance. In our book, we propose making all health-care spending deductible. The difference in those policy suggestions is significant, but the effects would be similar. For once, all Americans would begin to manage the cost of their health care directly, instead of letting others worry about it.

A further problem, Hubbard notes, is the plethora of different state mandates regarding insurance, and the fact that insurance companies cannot compete across state lines. This lack of competition increases prices further, lowers acesss to insurance, suppresses productive investment, decreases the overall quality of services, and holds back innovation in service delivery:

A greater focus on consumer-driven health care requires further policy improvements: open and national health insurance markets, so that consumers have more choices in the kind of hospitals, doctors, and insurers they use; greater investments into health-information technology to identify and prevent errors before they occur; and reforms of medical-liability rules, so that good doctors and nurses can practice quality health care without being harassed by nuisance lawsuits.

Again, some conservative critics mistakenly think that federalization of our health-care insurance and regulatory markets would inherently be bad for health care. If one's default position is to fight national markets governed by national standards at all turns, I suppose there's no sense arguing the point. But let there be no doubt that national markets would work. Consider the state-by-state standards for gasoline admixtures — a mish-mash of formulas meant to satisfy environmentalists in California and the northeast, to the detriment of national gasoline supplies and refinery capacity. Think that's bad? Look at state-by-state health-insurance regulations. They are far more complex, and in effect create high insurance costs for captive consumers and benefits for some large insurers who alone can either lobby themselves out of trouble or maintain the product lines that each state requires. A few decades ago, banking was run this way, a situation remedied by national banking reform. Instead of the gargantuan national influence on banking that some feared, we have a true national market for a vital financial service — more choices, more products, and more usage. There are other ways to accomplish insurance-market reform, too, but the key is to promote the availability of low-cost insurance to individuals currently subject to costly state mandates.

This is just a sampling of what the article presents, and Hubbard's other writings on the subject provide further support for his approach. Enthusiastically recommended.


Tlaloc said...

You cannot get a working free market system for something as infrastucture dependent and complicated as health care.

Look this is basic economics; in order for a free market to work the consumer has to have a variety of choice and has to be able to intelligently make their choice so as to maximize their return. If the first condition is not met then you have a monopoly and no free market corrections are possible. If the second condition is not met then people choose randomly and there are no free market corrections either.

These are inherent problems with applying capitalism to health care which requires significant infrastructure (only the largest cities have more than a couple major hospitals and most small towns have none but rely on much less capable clinics) and which is complicated enough that the average consumer has no way to judge what they are getting for their dollar.

Changing the tax code won't help that at all. Health care is quite simply a field in which capitalism does not function well.

JC said...

I don't have a problem with a national market for health care. Congress certainly has the right to regulate "inter-state commerce," and I think this is a perfect example of when they should be exercising that right.
I'm not ready to socialize the whole system, though.

Instead of the gargantuan national influence on banking that some feared, we have a true national market for a vital financial service — more choices, more products, and more usage.
The bank system seems to be working pretty well, let's do that :)

So much for my limited opinions on economics.

Kathy Hutchins said...

I wonder sometimes how much the average person knows about how tightly medical insurance is regulated at the state level, and what effect that has on the available choices. I thought I was fairly knowledgeable about these things, but did not realize that I could not buy insurance out-of-state until I went to buy a short-term policy to cover a three-month hiatus between jobs. There was ONE company in the entire state licensed to sell these policies. It cost a fortune, and when I actually had to make a claim, the company resisted paying it. This is in the same state where the AG (Minnesota's showboat Mike Hatch) would sue a ham sandwich for price collusion with a piece of cheese.

Tom Van Dyke said...

Interesting little op-ed from a local woman in the local paper here awhile back. California law mandates health insurance pay for fertility treatments, which are very expensive.

This woman, due to a preexisting condition, would require them if she wanted kids.

But she doesn't. However, no insurer will cover her. She is unable to contract with an insurer in such a way that would exclude fertility, because it's against the law. So, she has no health insurance, at least until she hits menopause.

Anyway, thought I'd pass it on as a unique illustration of how the gummint interferes with what would be a win-win market solution, should any of our scholars wish to make it grist for their mill.

(BTW, as a result of some nifty lobbying, California law also mandates insurers to pay for acupuncture and chiropractic, and considers them on equal footing with AMA-type stuff.)

Rob said...

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