Friday, October 9, 2009

A morning Email

Before I had my first cup of coffee today, an interesting E-mail chain had formed. Starting with the following quote, curtosy of Professor Jonathan Haughton, a lively debate was set off. Professor David Tuerck, Professor Ben Powell, Alfonso Sancez-Penalver and I, both of BHI, weigh in on the subject of universal health care.

Just this weekend I came across this quote from Hayek (chapter 9 in The Road to Serfdom):
“Where, as in the case of sickness and accident, neither the desire to avoid such calamities nor the efforts to overcome their consequences are as a rule weakened by the provision of assistance — where, in short, we deal with genuinely insurable risks — the case for the state’s helping to organize a comprehensive system of social insurance is very strong.”

Is this not a case for universal health coverage of some sort (and for some conditions)?

Jonathan Haughton
Yes, it is. And I would say, sadly so. Of course, Hayek is talking about a state run insurance system as opposed to the single-pay system to which we are headed. Nevertheless, he did himself no good by succumbing to this one urge to recommend a statist solution.

David G. Tuerck
Agreed. You can find further, misguided, quotes from him in the Constitution of Liberty. I think these off the cuff concessions are inconsistent with the body of his work on knowledge and competition as a discovery procedure.

Ben Powell
Perhaps. I see a somewhat different problem, which I am a bit surprised that he didn't address: some sickness really is not the fault of the individual - alzheimer's, Type 1 diabetes, and the like. But what about illness that results from personal choices - lung cancer (from smoking), Type 2 diabetes (from obesity), for instance. A key problem from an insurance perspective would be how to distinguish between these. In other worlds, how to insure against serious problems that are not one's fault without creating too much of an incentive to go easy on prevention.

Of course we already have universal health insurance (thanks to Ronald Reagan!), in that emergency rooms may not deny care to those who need it. That's appropriate, but one can't help thinking that it is a hugely inefficient way to provide such coverage - it is financed in haphazard fashion (mainly as cross-subsidies from our tax-favored health premia).

I keep thinking that, aside from the best solution, which would be complete government withdrawal from health care, the government should just take care of people who are sick through no fault of their own and who can't pay for their very expensive health care. This is the "high risk pool" of uninsurable people with chronic, unpreventable problems. It should ignore everyone else. People who go to emergency rooms could be chased down and made to pay for their care, and if they can't or won't pay, the hospitals could pass that cost along to the rest of us. In a rational market, young people could contract for health insurance now at rates that reflect the cost of their health care as they get older. By the way, I suspect that emergency room care is pretty efficient. I've gone to the emergency room at least three times to get a quick prescription for bronchitis and gladly paid the premium rather than wait for my doctor to see me. 'We could expand the availability of health clinics, too.

People who don't pay for insurance until they are middle age and then come down with some predictable middle-age disease have nothing to complain about. They rolled the dice and now they're out of luck. The key is health insurance available to the young, who are usually healthy, that they are guaranteed to keep even when they get older and sicker. I would rather let private charity take care of people in the high risk pool than give the government the job of caring for them, but that much government involvement I could take.

Having read all these messages you are almost selecting what the government should cover instead of whether the government ought to cover. Going down that path opens a lot of questions that are not easy to answer. You mentioned before lung cancer from cigarette smoking. It is true that more patients of lung cancer are cigarette smokers but there has not been a definite scientific proof that smoking cigarettes causes lung cancer. What happens with patients of lung cancer that don't smoke? Even if it were to be proofed that smoking somehow caused lung cancer, what if the patient smoked in his 20s but had lung cancer in his 30s, what if he had it in his 40s, 50s or 60s? Continuing with cancer, what is considered to be the individual's fault? As we know cancer patients' descendents are at a higher risk of getting cancer. Is this the fault of the individual? Should the individual pay for the sins of the parents?

Having individually tailored insurance is not effective, either privately or publicly. The high risk patients may not be able to afford the insurance so the low risk patients are the ones who pay for the others' risks. Unless there is some risk poolin, insurance is not affordable by a lot of people. If you want the government to cover these high risk uninsurable patients, this funding is done via taxes. Why shouldn't it be done with a general private insurance plan? In the private plans they take into account whether you present a higher and lower risk at the time they issue the plan, so at least it is somewhat tailored. Private, for profit, companies have a higher incentive to look into a plead for free insurance from the people that claim to not afford the insurance they need.

The real question is, however, should we have universal insurance? The problem of answering yes to this question is that there are people who cannot afford it. How do they get it then? This may lead to government intervention, which is inefficient since government administration is not as efficient as private. The problem with answering no to that question is that some people cannot have their sicknesses treated. There are nonprofit health practices, but I'm not sure if they would cover open heart surgery.

Not a topic to be easily solved.

Alfonso Sanchez-Penalver
I agree there has to be risk pooling; otherwise why bother with insurance. But if one forces everyone to buy insurance, this represents a very regressive tax. A solution would be to provide everyone in the country with (say) a $4,000 health insurance voucher, and people could pay more for fancier coverage; but this provides an incentive for insurance companies to spend a lot of money figuring out ways to not insure high-risk individuals - surely a directly unproductive activity. Increasingly, I get pulled toward some sort of "basic medicare for everyone" solution with fairly high copayments, with scope for individuals to buy additional coverage (private hospital rooms, lower deductibles, etc.).

David may be right that emergency room service may not be as inefficient as all that; but if we were to encourage more "doc in a box" outfits, a lot of the relatively routine stuff could be handled more cheaply. More generally, I think we need to address restrictive practices in medical education and practice (excess certification; requiring a bachelor's degree before strating medical school; limited use of nurse practitioners and nurses for routine stuff).

On a related, but different issue; if a generic drug is available for, say, $20, and the brand drug costs, say, $50, why do insurance companies not limit reimbursements to ($20 - deductible)?

The core problem here is that health insurance as it currently exists is no longer insurance, but prepaid health care. Insurance is a contract voluntarily arrived at according to terms voluntarily agreed upon in which the person insured is promised benefits, given a specified, adverse turn of events. Moral hazard makes it uneconomical for such contracts to cover events over which the insured has control. That's why my car insurance doesn't cover oil changes, tire rotations and minor accidents. Also, to be economical, insurance must cover events that occur with increasing probability over the lifetime of the insured, provided the insured buys into the insurance when he is young. In this respect, health insurance is exactly like life insurance.

So what's wrong with the status quo? For one thing, mandated benefits mean that I am insured against the cost of taking my Nexium, this for a condition that I could alleviate by the simple expedient of eating fewer spicy foods - the equivalent of insuring my car against damage due to not changing my oil. The second problem is the push to insure people against "pre-existing conditions." It is one thing if a patient is 22 and poor and has a pre-existing chronic problem like ALS. It's another thing if the patient comes down with diabetes at age 50, when he is wealthy but hasn't bothered to buy insurance. In my judgment, both patients should have to turn to charity for help. Presumably, a charity will take more pity on the first patient than on the second. But it doesn't matter since contributions to charity are voluntary. On the other hand, since I'm only 99% conservative, I'd be willing to go along with using taxpayer dollars to help the first patient, as long as I didn't have to help the second.

Anything wrong here?

You bring a good point. Here's my question, what should happen to the 50 year old who is poor, not wealthy, and comes down with diabetes? I believe in your mind you have a clear path where people are born poor and end up wealthy, but this is not necessarily the case. Even when it is, you are saying that in you 1% liberal mind, the government who is primarily financed by those wealthy 50 year olds to cover the 20 year old case... why? Well... because the 50 year old can afford to pay himself!!! Why should he have to when he is paying more taxes than the 20 year old??? That would be making him pay twice for insurance. That one percent mind of yours is very liberal!!!

My question on this, is in relation to what should insurance actually cover, regardless if its by the state or a private company. If I found out tomorrow that I was going to have a child, would I take out an insurance policy to pay for his or her first car in 16 years? Or would I start a small savings account, and put cash aside here and there. I know today that in 50 years time I will inevitably have medical issues. Should the insurance plan that I have cover there medical costs that I know will occur? Should I just expect insurance to cover actual random events (car crash injury, ect?) or above a certain expected level?

Mickey Head

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