Health Care Reform: Counting on Fewer Choices at Higher Cost
“We will pass reform that lowers cost, promotes choice, and provides coverage that every American can count on.” - President Barack Obama, Press Conference, 22 July 2009
In his press conference last week, President Obama laid out the success criteria for health care reform: cost, choice, and reliability. It is instructive to weigh the various proposals in front of Congress against these criteria. A good summary of the proposals appeared in the Wall Street Journal (“Your Stake in the Health Overhaul”, 22 July 2009, http://online.wsj.com/article/SB10001424052970203946904574302401417970322.html). Some common elements are:
Mandated Coverage. The proposed reforms will require every American above some income threshold to obtain insurance. The government will provide subsidized insurance to those below the threshold. In addition, the government will dictate the services that every insurance policy must cover. Congress is still hammering out the details, but some of the mandates under discussion are maternity care, prescriptions, mental health, chiropractors, and abortion. Combined, these mandates increase costs by creating additional demand for medical services without increasing supply. Furthermore, mandates reduce choice by preventing consumers from opting for a lower cost policy that provides fewer services.
Reduced Out of Pocket Costs. The best way to lower medical costs is to increase out of pocket expenses, thereby rewarding consumers who control spending. The proposed reforms do the opposite by dictating maximum annual out of pocket costs – $5,000 per individual and $10,000 per family in one version. Furthermore, this idea is based upon a poor understanding of what insurance is for. You don’t buy insurance to cover out of pocket costs that you can afford; you buy insurance to cover the catastrophe that you cannot afford. The most rational choice, therefore, is to buy a policy with the highest deductible you can risk without courting financial disaster. If passed, the new law will prohibit you from making that choice.
Requirements for Employers to Provide Insurance. This proposal will raise costs and reduce options by taking the choice of insurance policies out of the hands of employees of all but the smallest companies.
Reduced Payments to Health Providers. This measure does have the potential to lower costs, but at the expense of choice and reliability. Doctors and hospitals aren’t exempt from the laws of economics – to continue in existence they have to charge enough to cover their costs. Those who cannot break even under the new government-imposed schedule of fees will have no alternative but to close their doors. Patients will not be able to count on them being there when needed. With fewer providers in business, there will be fewer choices and longer waits for their services.
In short, when measured against the criteria of cost, choice, and reliability, the proposals in front of Congress fail miserably. But then, how could they succeed? The criteria are in conflict with each other.
posted by Li Kim Grebnesi at
8:22 PM
4 Comments:
"You don’t buy insurance to cover out of pocket costs that you can afford; you buy insurance to cover the catastrophe that you cannot afford. The most rational choice, therefore, is to buy a policy with the highest deductible you can risk without courting financial disaster."
You are right. The key is a large deductible based on what you can afford yearly. This way routine procedure costs would be competitive since the consumer would directly be paying for routine care, and shopping for the best price. Or at least complaining about costs directly to the care giver, keeping cost increases at a slower pace, or even decreasing costs in some instances. The only way that could work, however, is if all employers gave their employees health insurance with high deductibles. The reform cannot just be based on consumers, like me, who have to purchase their own insurance. Perhaps the $5000 per employee who makes over a certain salary should be mandated? Think that will go over well?
Thanks for the comment, Suzie. Glad to see we are finally finding some common ground! But not with respect to your last point, however. As a libertarian, I generally think nothing should be mandated except prohibitions on hurting other people.
You don't shop around for health care. Do you tell the doctor what tests to run? Do you ask the doctor for particular medication? Do you pick the surgeon based on price? This is ridiculous. Not all fundamental rules of the market apply to the health care delivery system. What we really need is a change in the incentive structure. Fee for service has got to go. There are some clinics that already do that. A different incentive structure reduces the number of expensive tests without sacrificing quality and results.
Hi, Sasha. Thank you for sharing your thoughts. The opportunities to shop around for health care are broader than you may think, and I will write an entry about that in the near future. In the meantime, I am interested in hearing what sort of incentive structure you recommend to reduce the number of expensive tests. If you look at where health dollars go, you will find that diagnostic testing has driven the increasing costs over recent decades, so any viable attempt at cost reduction must address this problem.
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