A post by Stan Zin
We’re all focused on yesterday’s Supreme Court decision, but whatever they decided we would still face some daunting problems. Healthcare is an inherently difficult issue, both in theory and in practice. I don’t know any country that gets it right, and I lived in Canada for thirty years and have close relatives there now. In the US, the symptoms of dysfunction include: individuals over-consume (because the price for them is low), providers over-supply and over-charge (because it generates more revenue for them), and insurers get stuck in the middle and create enormous additional administrative costs. It’s a mess, a modern-day Rube Goldberg machine. It’s easier to lay out the problems than suggest solutions to them, so that’s what I’ll do.
The US makes this harder by linking health insurance to employment. That’s unique — or at least unusual — and it’s a complete accident. In World War II, when the government imposed wage and price controls, employers started using fringe benefits like health insurance as a way to raise compensation without violating wage controls. After the war, there was an tax incentive to keep this system in place, since neither firms nor workers were taxed on the cost of this insurance, and income taxes were rising to pay down the war debt. The result was what you might call a tax arb, which is still in place. The result is that insurance bought by individuals is more expensive than insurance provided by firms, because individuals miss out on the tax break.
One good feature of employer-provided healthcare is that it allows insurers to pool people together in fairly sensible ways, thereby avoiding the problem of “adverse selection.” Large employers, like NYU, presumably have both high and low risk employees in numbers that roughly reflect the population as a whole. Small firms and the self-employed are another matter. At the time, no-one noticed the big flaw in the system: when someone changed jobs, they would have to change health insurance as well, and if they had one of those dreaded pre-existing conditions, they were out of luck. This bundling of health insurance and employment is completely artificial, an accidental byproduct of wage controls 70 years ago, but it’s now a central part of our healthcare system.
So what can we do? One option is to force insurers to ignore pre-existing conditions. But if you do that, you’re likely to make adverse selection worse. Why? Healthy people can then save money by opting out of insurance, then buying it if and when they contract a serious illness. With healthy people opting out, the cost of insurance rises, which then drives more healthy people out of the system, and so on. The word “insurance” is now a misnomer, because you don’t buy insurance till after you’re sick.
That leads us to the mandate: if everyone has to buy insurance, then the insurance pool will include high- and low-risk, sick and healthy, in whatever numbers they appear in the population. We’ve solved the adverse selection problem by selecting everyone. But if you mandate it for employers, you’ve now made labor more expensive unless wages fall to make up the difference. That’s particularly true for low-wage workers, for whom health insurance is likely to be a larger fraction of total compensation. It now acts something like a minimum wage, which (as we know) prices workers with low skill out of the market. So we’ve turned a healthcare problem into a labor market problem.
The last issue, of course, is inherent in any system in which a third party pays: there’s little incentive to keep costs down. In most industries, a low-cost new entrant will attract customers and gain market share. In healthcare, the customer doesn’t see the lower cost, so that doesn’t work. Moreover, entrants are often prohibited, with the curious argument that with fewer providers there will be less to pay. And finally, providers who prevent problems actually lose money they would get by solving those same problems.
Where does that leave us? You tell me! If you’re interested in more, I can send a set of links to things I’ve found useful. Or you could take our “Economics of Healthcare” course, taught by Professor Cliff Bluestein, an MD and consultant in PwC’s health industries practice. Next offered in Fall 2012.