Monday, January 01, 2007

A Healthy New Year. Part I, from Paul Krugman

Paul Krugman (sadly, behind the paywall) has written an interesting column arguing for the need of a single-payer health care system in the United States. Why? Because several payers (insurance companies, insurance plans, various levels of governments, consumers themselves) don't create a system of price competition in health care markets; what they create is a system of bloated administrative costs and reduced incentives to cover preventive care.

The latter is because the benefits of prevention may not accrue until some point in the future and might not help the current payer, and the former is because competition in medical care is largely based on quality (or the contents of the package sold), not on price. The administrative costs are high as each payer tries to exert its own controls on what is to be covered in great detail and as the different payers struggle not to become the ones who are burdened with the largest costs. The providers of health care then fight back with their own administrative systems which try to extract the maximum payment possible. The ultimate reason for all this is the uncertainty and lack of information we have about what is truly necessary in medical care. I've written earlier about the difficult characteristics of the medical care as a market, and many of these characteristics mean that the price system doesn't cause as much "good" competition as we would like to see.

The usual counterargument for a single-payer system is that such a system reduces choice. But as Krugman points out, choice of physicians and other health care providers could be written into a single-payer system. What he doesn't point out is something equally important: Choice in the multipayer system may often not be much more meaningful as most payers limit consumers' rights to seek alternative sources of care and in any case consumers are often unable to judge the quality of care very well.

This does not mean that a single-buyer system wouldn't have its own problems. All systems have them. But a single-buyer system would certainly give us a better chance to provide health care insurance which would cover all Americans. The current system allows over forty million Americans to be without health care coverage. These people are the working poor, the medically indigent and the young, and the reasons why they have no coverage vary by group.

The working poor are not covered because health insurance is seldom provided as a perk in low-paying jobs and to buy insurance separately is extremely expensive. The medically indigent are individuals who already have health problems. Private firms are reluctant to cover such individuals as they are more likely to cost money than those who are currently healthy. The young judge their own likelihood of needing health care to be too low to justify the large deductibles often required, assuming that they have access to insurance in the first place. Yet the whole idea behind insurance is to pool risks in order to average them out across people and time periods, and the removal of the low-risk young individuals from the pool raises the average costs to the rest. It also leaves the young uncovered and some of them do get ill.

Note that "choice" is not working very well here, except perhaps for the last group mentioned, and even there only in a very short-run sense. But it is possible that other aspects of choice in a multipayer system are more important for the average American. Still, I agree with Krugman that a serious discussion of alternatives is overdue.