Health Care Policy

One of the biggest political issues of the last year or so has been health care reform. I must admit that I rarely thought about health care policy before 2009. a) I had health insurance through my parents. b) Most of the pundits and intellectuals that I found most interesting and insightful had little to say about health care reform. However, in spring 2009 I took a health care seminar, and so I've spent quite a bit of time in the last 12 months or so thinking about this issue.

Health care strikes me as a particularly complicated issue. I think the disagreements on this issue between different experts tend to be fairly radical. There doesn't seem to be anything close to a consensus. You might think that this is true of most issues, but in fact, say, economists can actually find a lot of policy ideas that they tend to agree on: http://gregmankiw.blogspot.com/2009/02/news-flash-economists-agree.html

It's easy to find policy experts on the left who want a single payer system (i.e. the government is the only insurer, and insurance companies are rendered obsolete) and people on the right who want a relatively laissez-faire system. I actually have some sympathy with both sides on this issue. Luckily, I think there may be a way to compromise. But first I'll explain what I think some of the major issues are.

a) Many people can't afford health insurance.
b) People are afraid of losing their jobs and as a result losing their insurance and as a result possibly going bankrupt due to health care expenses.
c) People wish their health insurance were cheaper, or at least they wish the price didn't increase so much every year.
d) People want skilled doctors and effective medicine. They want the health care quality to continue to improve and for their to be continued innovation.
e) Medicare and Medicaid are already a huge and growing portion of the federal budget, and we have a huge budget deficit.

You might see that there's some tension here. For example, if we could find a way to pay doctors less (maybe the government could set some sort of price controls) or pay less for drugs (maybe control prices or reimport drugs from Canada, which basically amounts to the same thing), we would start to the solve (a) and (c), but (d) might get worse, since lower paid doctors might mean lower quality doctors and cheaper drugs might mean that pharmaceutical companies have less money for research and development. Maybe we could solve (a) through (d) with some sort of government controlled system or government subsidies, but it seems pretty clearly that (e) would get worse.

In my judgment, unless we preserve some sort of private, competitive market system, we will fail disastrously in (d), (e) or both. For example, as good as the European public health insurance systems might be, I think they don't innovate very much, and so they have to piggy back off the US.

One of the big reasons health insurance is so expensive is that employer provided insurance is tax-free. This policy grew out of the wage controls that existed under WWII. Companies couldn't attract employees with higher wages, so they offered health benefits. What grew out of this is a system in which people grew accustomed to employers providing insurance and they grew accustomed to the fact that the government wouldn't tax these benefits. The resulting mess is not so surprising. In economics it is often said that when you tax something you get less of it and when you subsidize something you get more of it. Well, income is taxed, but health benefits aren't, so naturally we see find that people often receive rather lavish health plans from their employers. Think about it: if your employer says "I can give you $10,000, which will be taxed down to $8,000, on top of what you already make, or I can give you a $10,000 insurance policy on top of what you already make." Which will you choose? Maybe you only needed a $6,000 plan, but who can turn down free money? You can see the same phenomenon at work in housing. If you can deduct mortgage payments from your taxes, but not rent, aren't you that much more likely to buy a house rather than rent?

I think this misguided policy of making health insurance tax free has had three bad effects.
a) Demand for insurance goes up, and so the price goes up.
b) Lavish insurance plans mean that the insurance company (but in fact, indirectly, you) pays for almost everything, so you are less cost conscious and you allow the doctor to perform a million expensive tests. This is another reason health care costs so much. (http://gregmankiw.blogspot.com/2009/12/why-health-consumers-are-not-cost.html)
c) You are now dependent on your employer for health coverage. If you lose your job, you are in dire straits. If you think about this, it makes no sense. Would you let a spell of unemployment prevent you from having adequate food or housing or clothing?

As you can see, I think employer provided insurance is one of our main problems. I think my preferred solution would be to tax health care benefits as if it were any other income. I would use this revenue to help pay for a system in which everyone in the country could have a voucher for the health care plan of his choice. Thus, people would no longer have to worry about medical bills leading to bankruptcy. And people would be a little more cost conscious when it comes to health care. Lastly, we'd still have a competitive, dynamic, capitalistic system with plenty of innovation. I'm borrowing from Martin Feldstein: http://www.washingtonpost.com/wp-dyn/content/article/2009/10/07/AR2009100703048.html

As things stand, this plan is probably too ambitious, and it would be hard to convince people who already have insurance to support such radical changes. If that's the case, maybe the next best thing is something like the Wyden-Bennett bill. Also, maybe we should wait until the economy is better before we talk about sweeping health care reform, tax increases, etc.