Policy Court

Opinion of the court, delivered by David Lamb:
The American health care system is a lot like Former President George W. Bush: it has a soft spot for the private sector, it costs the nation dearly, and it was a lot more popular seven years ago.

It’s also similar in that it exists in a world unburdened by basic economics; where the American system has a public program—Medicare—that will use federal money to treat cancer in a retired sixty-eight-year-old who no longer pays income taxes, it has no such program to help a fifteen-year-old buy antibiotics for pneumonia, even though local and state governments have invested tens of thousands of dollars in the fifteen-year-old’s education and even though the fifteen-year-old has decades of income taxes yet to pay.

It has been five months since Mr Bush fled from Washington, and yet the United States’ health insurance system, dreamed up by depression-era businessmen in rooms full of cigar and cigarette smoke, has continued to plague Americans like a self-induced lung cancer, that is, from the inside, out.

While President Obama’s proposed health care plan broadens eligibility standards for Medicaid—the public insurance program for low-income Americans—proposes another national plan to compete with private insurers, and mandates health insurance for children, it doesn’t socialize medicine, leaving the possibility that some citizens will remain uninsured. These people, who will be between eighteen and sixty-five, and in jobs which don’t provide health care benefits—often ones that pay below the national average—will be forced to pay more for health insurance if they want it.

As long as there exist public health insurance alternatives, private companies will be allowed to charge outsized premiums to risk-heavy customers—those likely to need significant medical attention in the near future. Meanwhile younger, healthier Americans, and those employed in high-income jobs, will opt for the private plans which they will rarely use. Federal plans will, therefore, either offer insurance at uncompetitive rates or hemorrhage money. In the second and far more likely case, healthy citizens, some of whom won’t have insurance, will subsidize the care of aging and unhealthy ones, much like they do now with current Medicare policy.

If instead federal plans offer insurance that reflects true costs, as they do in the first case, they will leave a price gap that private insurance companies will eagerly fill, which means that Americans now uninsured will be left sponsoring public insurance in addition to buying their own or buying insurance at above current prices. It begs the question: why does Mr Obama think people who aren’t currently buying health insurance will buy it after his policy is implemented and it’s, effectively, more expensive?

Among health insurance companies, it’s no secret that those who purchase health insurance are more likely to need it than those who don’t. This process of adverse selection, customers subscribing to insurance because they know something insurance companies don’t, makes insurance prices higher than if they were mandatory—a situation where there’s no selection process.

Whereas Mr Obama could decrease insurance premiums by proposing Congressional legislation requiring Americans to purchase insurance and subsidizing those who truly couldn’t afford it, he has opted to continue a policy of optional, more expensive insurance. If he believed in his argument that providing more Americans with health plans lowers health care costs by discovering health risks before they grow, then he would ensure that all citizens become covered and help close the budget deficit at the same time. That Mr Obama is looking to implement no such policy makes the argument look more like a fragile justification in the face of conservative opposition than a legitimate cost analysis.

As recent health care reforms in Massachusetts have proven, mandatory health insurance requires increased government funding in Medicaid as a result of a gap between those who now qualify for Medicaid and those who are able to fully pay for insurance. Ceteris Paribus, that would mean higher taxes. However skirting the so-called “death spiral”—healthier individuals dropping insurance because of rising costs leading to a higher proportion of insured individuals who utilize health insurance leading to rising costs—might cancel the costs of broader Medicaid coverage.

Without taking into account the risks of optional insurance, it will be difficult for Mr Obama’s health care reform to work. As Mr Obama may soon learn, leaving the health care industry partially private and partially public will result in a situation similar to that of the U.S. military and military contractors in Iraq: the private companies earning the profits and the public entities assuming the risk.

In any case, his plans do suggest an important trend—that health insurance costs rising by an average of nearly 7% percent per year have gotten the nation’s attention and motivated system-wide reform. Indeed, America is waking from a long and expensive coma.

William Leich, Concurring:
Indeed, socializing health care is the most sure way to avoid the type of adverse selection that fed the “death spiral” and driven health care further out of reach. However, socialized medicine will effectively eliminate price signals, spreading the cost of personal use across the nation’s tax base.

This creates a moral hazard where citizens who could resolve certain health issues, like obesity or type II diabetes, through behavior change and medications won’t carry the burden of more expensive solutions like gastric bypass surgery. Over the course of a decade, more patients using expensive but comparatively easy surgeries to take care of health problems, however trivial, will drive up the cost of health care.

In order to incentivize cheaper solutions, any socialized health plan ought to provide more limited benefits and require larger copayments than the typical private plan currently does.

Nicole Adams, Dissenting:
Meritocracy—where the most innovative, diligent, and skilled workers rise to the top of industry—seems to be at the core of America’s workplace identity. And responsibility seems to be a cornerstone of the American Dream; although America has bankruptcy laws, they are far less forgiving than their European counterparts. Yet when it comes to health, Americans like to regard it as if it were out of one’s control.

Quite often, it isn’t.

America has the ninth highest rate of obesity in the world, and some of the highest rates of heart disease and type II diabetes. America also has the forty-fifth highest life expectancy in the world.
But the reason our life expectancy isn’t on par with Japan’s and Singapore’s isn’t because of any lack of quality in our health care—rather our health care is among the best in the world—it’s because of the way our health care system is constructed.

That system, which features coverage for the wealthy, the indigent, and the old, offers the insured little motivation to lead healthy lives. Low copayments combined with the nation’s high quality care means that insured citizens can live an irresponsible lifestyle—whether that consists of smoking, binge eating, or deliberate self-harm—and get expensive treatment when it catches up with them. The negative externality is the bill, and it’s imposed on the rest of the country.

What America needs isn’t reform. It needs to continue on its current path to losing insurance. As the “death spiral” continues to make insurance an increasingly more expensive program for the unhealthy, the countries uninsured will grow. Since these people will be directly paying for any health care they use, they will be motivated to live responsibly and won’t visit doctors when they think it’s unnecessary.

Insurance comes with moral hazard and creates externalities. When it’s for something where the buyer knows more than the seller—a kind of information asymmetry—adverse selection will ultimately trigger an upward price spiral. For something as important and easily influenced as a person’s health, insurance doesn’t make sense.

The federal government should encourage its citizens to be as healthy as possible. The best way to do this is through an uninsured health care system where users pay for their use. If wealthy citizens want to overspend for escaping responsibility they can continue to do so.