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Health Care Reform Idea

March 17, 2017

The status quo for healthcare in America is uniquely bad, being different than any other healthcare system in the world, and different from any other market in America. It is by far the most regulated and subsidized market in the economy, yet still manages to unsatisfactory outcomes.

Healthcare is different from other markets in many ways, but the biggest difference is that some people need much more of it than others. The way normal capitalist markets work is that you work in exchange for money. You use that money to buy things you need, and most people can earn enough through working to satisfy their needs easily. On the margin, people work and earn more to get luxury. Even a minimum wage job in America is enough that you don’t need to worry about starving or not having a roof over your head. The average person below the poverty line has cable (or equivalent) TV, air conditioning, a washing machine, and a car.

If someone wants a luxury car or a fancy vacation, they can work more for it. One of the great things about capitalism is that the consumer experience is fairly similar for most levels of income. Everyone drinks the same Coca Cola. Everyone watches the same sports games and TV shows, even if some people have bigger TVs or better seats at the stadium. Bill Gates surfs the same internet as the homeless guy using a public library computer. People understand that if you have a good job, you can get fancier versions of things everyone has, but that’s ok.

Healthcare is not like most things. A severe health problem is like somehow out of the blue, if you can’t buy a Lamborghini, you’re going to die. It’s a risk that everyone faces, but one that virtually no one can afford to confront. Whether you work hard or not, whether you have a great job or not, there is nothing you can personally do to protect yourself from a large unexpected health problem.

In the face of large risks that an individual cannot absorb, the traditional answer is insurance. This has not shown itself to be a good model. Obamacare was a valiant attempt, but I don’t think the weight of the evidence has shown it to be a great solution. At best, it is a band-aid on a bullet wound. An insurance company wants to make money. They do this by charging more for insurance than their customer uses in healthcare. Customers know more about their own health than an insurance company and they can strategically enter and leave the insurance market.

Adverse selection makes insurance markets very difficult. Healthy people wait to buy insurance until they are sick, and sick people try to buy as much insurance as they can. The market for good insurance plans become filled up with sick/high risk people, and the insurance companies must price accordingly. Medium risk people no longer think such plans are a good option and leave the market entirely, or only buy cheap plans with high deductibles. No matter how much an insurance company charges, it cannot make a profit selling only to high risk individuals because the costs are simply too high.

Obamacare tried to fix this by having people pay penalties for not buying insurance and subsidizing poor people to buy some insurance. It worked to some degree, but it’s hard to determine how well since there is a lot of conflicting and ideologically biased information out there. I did not like the solution personally because it feels very unfair and legally unconstitutional. The burden is still placed on the individual, and if you can’t afford good insurance, you pay a penalty? On top of that, since when does the absence of economic activity constitute interstate economic activity? I don’t think the government should have the right to penalize you from refraining from economic activity, no matter what the policy advantages of such a law would be. If people don’t want to buy something, it should be their right not to do so. Even if you do force people to buy something, there is the issue of people self-sorting into risk groups and unwinding the whole market anyway. It just feels like a kludgy, ineffective, and ideologically unappealing way to solve the adverse selection problem to me.

In the past, getting a large group together to spread risk was up to employers. Sure, this works ok if you work for a large corporation that is able to manage such a system, but what if you don’t? And what if you move to another company? What if your health is so bad you lose your job? You lose your insurance too and then what’s the point of having it to begin with! Employer provided health insurance is a leaky bucket which creates a insider/outsider problem where some people have great coverage and some don’t get anything at all. To top it off, insurance bought by a company is tax deductible, but insurance bought by an individual is not. I just don’t think employer provided insurance is a good model going forward. It was a historical accident and an atavistic holdover from back when healthcare was a smaller and more efficient sector. Furthermore, any third party payment system incentivizes people to be wasteful with their healthcare money.

As much as I consider myself libertarian, I find the conclusion that healthcare payment must be managed by the government compelling. The government can create a payment system that covers everyone no matter what. The government is bad at provision (of anything really), but it is fairly good at cutting checks. I would be nervous about the government actually running hospitals or hiring doctors, etc, but I am far less so about the government covering some of the costs of healthcare.

Costs have gone up an insane amount.

The average 1960 worker spent ten days’ worth of their yearly paycheck on health insurance; the average modern worker spends sixty days’ worth of it, a sixth of their entire earnings. Unless the prices stabilize, it doesn’t matter how you shuffle the money around, it’s going to be expensive. Making the government pay for something doesn’t make it free – it *increases* the overall cost of the good to society since you have to run everything through bureaucracy and get the money from deadweight loss inducing taxation. Running everything through an insurance company likewise dramatically increases the overall cost. The cheapest way to pay for anything is direct, two party payment (buyer and seller only).

The next priority would be to implement a wide array of supply side reforms to make the healthcare sector bigger and more competitive. Make it easier to become a doctor. Allow PAs and nurse practitioners to do more. Reform (lower liability for) malpractice lawsuits. Deregulate whenever possible. Lower barriers to opening new hospitals and other healthcare facilities. Reduce doctor’s residency periods to let them get to work sooner. Open up off-patent drug imports and competition. Reduce the costs of drug approval at the FDA. Make hospitals publish and stick to fixed prices instead of charging an insanely high, undisclosed amount after the fact. There are hundreds of reforms that could be done.

The Plan

If you spend less than 10% of your income in a year, the health care market looks completely free market. You pay cash out of pocket for all of your expenses, and get no government assistance whatsoever. The vast majority of people fall into this category. Most people don’t spend 10% of their income on healthcare, and if you don’t, you should be able to pay for it yourself. Individuals can be expected to pay for this amount out of pocket. Car insurance doesn’t and shouldn’t pay for you to fill up your gas tank. Health insurance/welfare shouldn’t pay for small routine healthcare expenditure. I’m not persuaded by the “preventative healthcare” argument, but I’d be open to arguments in that direction in the comments.

As your expenditure on healthcare increased, the government would match more and more on the margin, until it reached a maximum of paying for 95%. I think it might be good to have the individual pay for at least some of their healthcare. I wouldn’t be opposed for some 100% category for the destitute or extremely ill. As written, if you spend 40% of your income on healthcare, you’d personally be liable for 25% (10% + 7.5% + 5% + 2.5%). Above that, the government would cover most of your expenses. This would allow mostly free market to dominate and reduce costs, but for the very ill and very poor, they would be covered by a plan more generous than the status quo, and it would be universal. There would need to be some conversion ratio of wealth-income for people with a lot of wealth but no income, such as the elderly. Perhaps wealth/(years remaining until age 100) could be the effective “income” of such people. It’s a first draft, but this is the general direction I’d like to see. I realize it’s never going to happen, but an economist can dream.

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3 Comments leave one →
  1. Chris permalink
    March 18, 2017 12:17 am

    I think the flat dollar amount that a person can spend before the government kicks in should also be capped. It is reasonable to expect someone to plan for up to $5,000 in medical expenses for example. Number chosen at random. It is not reasonable for someone with say, major burns, to cover $50,000 after a million dollars in surgery, reconstruction, and burn unit stay. That’s a direct road to bankruptcy, which is part of what we are trying to avoid.

  2. Chris permalink
    March 18, 2017 12:33 am

    How would you ensure reasonable quality while deregulating? It’s not like surgery is something you expect to be a repeat customer on, and the likely outcome of a bad purchase decision is death. So it’s not a normal playing field for normal capitalism pressure on quality. Thoughts?

  3. March 21, 2017 1:42 pm

    I like it. It is similar to the plan that I came up with (http://un-thought.blogspot.com/2009/09/healthcare-compromise.html). In my plan your deductible is based on your prior year income. One goal would be to get the most capable people to seek lower cost healthcare, like maybe in Mexico or on Cruz ships. I once had a minor operation done in Honduras where I have relatives, and I have read that the Amish have a network of MD’s that they use in Mexico. Another thing would be to get the capable people to push state and local governments to regulate with the trade off between cost and quality in mind.

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