22 February 2010

health care debate, what's the deal?

i've been getting asked by many people, "what is the justification of government involvement in the health care market." this answer is very important when trying to craft the best possible health care policy.

those in favor of having the government get involved in the health care market cite 4justifications that make health care different from the auto care market, or the banana market, or most anything else and thus worthy of govt involvement.

1a) health care costs might be too high because the sick disproportionately apply for health care (adverse selection) and it is tough to comprehensively screen all applicants.

1b) the same asymmetric information is present in many markets. in health care, we have informed buyers (potential insurees who know their status) and uninformed sellers (insurers selling their insurance services that don't know whether your hiding a lurking condition).

used car markets have informed sellers, and uninformed buyers. not a big deal. this argument doesn't mandate government intervention. this asymmetric problem is often solved without the government by introducing a new market to inform the uninformed agent.
essentially what car max does, demonstrates car quality to uninformed buyer by guarantee, reputation, and third party validation.
insurance companies could just hire better competitive screening companies to resolve this cause of high costs better assess when folks just want insurance because they are gonna be sick.

2a) health care costs can also be high because once a person gets insurance, they engage in behavior they wouldn't otherwise (moral hazard). if you have good dental insurance, you'll be more prone to get that cosmetic operation you 'need.' if you have insurance, you'll be more prone to go for treatments at fancy facilities offering alluring (and expensive) perks.

2b) the only way the government can mitigate this cost is to place controls on persons' behaviors; ie dictate which hospital you go to, dictate how hospitals operate (disallow quality perks to all those on government insurance programs), or dictate how you live. if the government is paying for your health insurance, it will want you to go to the gym (use tax payer money to subsidize gyms) and not eat candy (tax candy). maybe this sounds nice, but if you are somebody who feels that you make pretty good decisions for yourself it doesn't sound that good. just sounds cleaner when people are responsible for themselves, and realize the costs and benefits of their own decisions.

my own analysis of health care data for a class showed that moral hazard is the real problem among those poor people on medicaid. the story behind the statistical phenomenon is that medicaid costs skyrocket because poor people with insurance check into the hospital too frequently controlling for factors. why not, it's warm and you get a meal. this is hard to deal with. can't really turn folks away. maybe increasing house calls is an option of decreasing the overhead costs of too frequent check-ins.

moral hazard and adverse selection are real problems for any kind of insurance. makes you almost not want to have any insurance. but catastrophes are always possible, and you don't want it to wipe you out (economists, you want to smooth consumption across states of the world), so it's reasonable to buy insurance until your marginal benefit from equalizing consumption across states of the world, equals marginal costs arising from mh and as.

3a) another way health care costs could be lower is if the government insured more people. if the government was buying everyone's medication, then it could negotiate lower prices on medications. it would be only buyer (monopsonist) from many sellers.

3b) the government already insures a lot of people and buys a lot of medications and has pretty good bargaining power. also, the government is the source of high medication costs, and rarely do two wrongs don't make a right.
medication prices are high because the government grants patents to pharma companies protecting them from competition. sure, dissolving these protections reduces the incentive for pharmas to innovate new drugs, but most economic analysis shows that optimal patent protection levels are far lower than current levels. current protection levels probably have to do with the strength of the pharma lobby.
to me a better way to reduce medication costs is to reduce patents and introduce more competition among suppliers and reduce the medication sellers' bargaining power.

4a) the last justification folks use to advocate government involvement in the health care market is expanding coverage. its inhumane and reflects poorly on our society to let those who choose no coverage just die when it's possible to treat them.

4b) many might argue that, if that's what people want, that's what they chose, then they should get that. even if that's too harsh, there is a much more minor government solution instead of government run health care. it's similar to the car insurance market. just as the govt mandates ownership of coverage for an emergency, problem 4a can be handled by requiring (and assisting those unable) to have emergency coverage. now we won't have to leave those uncovered dying folks on the street, when they are treatable and a hospitable er is available.

[this policy has a minor benefit in that once everyone must have this baseline coverage, adverse selection (screening applicants) is not a problem. insurance companies don't have to be fearful that those in gravest danger are those buying insurance because now everyone has to have it. nonetheless, the screening verification service markets and data show that adverse selection isn't a major cost anyway].

in conclusion, the justifications for government involvement in the health care market to reduce costs are weak at best; and a simple policy (already implemented in car insurance markets) can handle the coverage concern.

to add to that, consider these thoughts.
health care costs haven't increased that much considering the amazing increase in health care quality (mri,...). and, now that people are living longer, those extra years at the end of life are the most care intensive.
granted, many goods (think electronics) even though quality increases, prices still drop.
but, recent govt-out solutions have been successful in dropping costs. in particular, hmos have been successful by reducing moral hazard through more effective innovative cost-sharing operations.

do any of these justifications for government involvement in health care substantiate a large government health care solution in your mind?

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