Solving America’s Health Care Problem

February 5, 2007

Some economists have neatly explained their views on America’s health care problem here, here, here and here. Essentially, they are divided on the issue of adverse selection and moral hazard, which is explained in those links. I think they are mixing two very different forms of insurance: catastrophic vs. routine health care. A simple example of the difference is getting your teeth kicked out (catastrophic) vs. a bi-yearly dental cleaning (routine). Everyone needs catastrophic care, but people differ on their needs for routine care. For example, I haven’t had a physical exam in 15 years (routine), but I went to the ER when I jammed a knife through my hand (catastrophic). Some would argue that routine care reduces some catastrophic care, but I’m not convinced. Anyway, a little routine care is fine, but simply losing weight would result in a huge reduction in catastrophic care (diabetes & heart disease).

People on the left are concerned about adverse selection: sick people need insurance, which drives up rates; healthy people drop insurance because of high rates, which drives rates even higher. The solution is to force everyone to purchase catastrophic health care, and adverse selection disappears. The only mechanism we have to force everyone to pay is with taxes. This is also nice because rich people can subsidize the poor with a progressive tax. This money should be used to subsidize private hospitals, though the details are tricky. Everyone will be covered for any catastrophic health needs.

People on the right are concerned about moral hazard: if health care is free, then people use lots of resources inefficiently. Instead, people should be forced to pay for things out-of-pocket so they will become smart shoppers. This solution only applies to routine care. People don’t know enough about medicine to make smart decisions about anything more complex than the flu. Instead, the market inefficiency is with doctors and hospitals: the incentives allow them to charge a lot for routine and unnecessary care. Of course they do this because they are greedy. But they also do it to subsidize their extremely inefficient and wasteful bureaucracies. Somehow medical institutions must be forced by shareholders, insurance companies and government, to reduce costs and waste. Medicare and the Veteran’s Administration are experimenting with some techniques to get better results with lower costs. More can be done in this vein. In the end, I don’t think moral hazard for consumers is a big deal. I think doctors are responsible for wasteful medical procedures and patients are not in a position to second-guess them.

The basic failure in health care markets is that health it isn’t optional. I can sell my car, but I can’t skip a heart transplant. I think we should expect health care costs to climb regardless of what we do because health care actually works and extends our lives. We are getting a very good bargain for our money. How much would you pay for another year of life? That’s the problem with treating health care as a purely economic issue: everyone will pay anything to save their own life.

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