A blog entry from John Cochrane. JR is on target.
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Whenever I advance one or another view of how a relatively free health care and insurance market could work a lot better than the mess we have now, the obvious question comes up: Well, what about the homeless person with a heart attack? You won't let him die in the gutter will you?
No. Of course not. We are a compassionate society. We will provide for poor people, very sick people, those with diminished mental capacity, the unfortunate, the incompetent, or the merely improvident. People don't die in the gutter. Any half-reasonable health care reform proposal, including mine, provides some system of charity care; whether via medicaid, government run hospitals (VA for everyone, county hospitals), premium subsidies or vouchers, support for charity hospitals, and so forth; and in our society the government will have a big part in this; I do not appeal to private charity alone. Such systems will also always be a thorn in our public side; as the tension between cost, effectiveness, quality, moral hazard will not magically disappear no matter how nice the promises of their architects, and the fraud, inefficiency, and bureaucracy of anything run by governments will not disappear as well.
But the great puzzle of health care policy: Just why is it, to accommodate this worthy goal, must your and my health care and insurance be so deeply regulated and so thoroughly dysfunctional? As one small example, why does a 20 minute skin check with the resident of my dermatologist generate a phoney baloney bill for over $1000, meaning a cash and carry market for such a simple, elastically demanded, and perfectly predictable service is impossible?
Why, in order to provide for the unfortunate, do we not simply levy taxes, and pay for charity care, and leave the rest of us alone?
Regular Americans have jobs, buy houses, buy TVs, cars, and smartphones, negotiate the complexities of 401(k) and IRA plans, cell phone contracts, frequent flyer programs; hire the complex professional services of contractors, car mechanics, lawyers and accountants, and deal with the insane complexity of our tax system.
Why do we not leave such Americans (you and me) to a largely free market (as much as anything is a free market anymore) in dealing with their health care and health insurance? Dealing with a free-market health insurance, offered by companies competing hard for your dollar, is surely no more complex than dealing with Obamacare exchanges with their constantly shifting plans and networks, and the impossibility of finding out actually what doctor takes what.
I think the answer is relatively simple. Our political system is allergic to the word "tax." Instead of straightforwardly raising taxes in a non-distortionary way (a VAT, say), and providing charity care or subsidies -- on budget, please, where we can see it -- our political system prefers to fund things by forcing cross subsidies.
Medicare and medicaid don't pay what the service costs, because we don't want to admit just how expensive that service is. So, large hospitals make up the difference by overcharging you and me instead. The poster child (though not really a cost driver) is emergency room care. The government passed a law saying hospitals must provide emergency room care for free. But money does not grow on trees, so again you and me (via private insurance) must get overcharged to cross-subsidize. The ACA tried to force young healthy wealthy (not getting subsidies) to vastly overpay for insurance, to cross subsidize the poorer and sicker.
This might seem like a wash. OK, if instead of paying taxes, it makes you feel good to pay business class prices for health insurance, what the heck. Economically, a cross-subsidy works the same as a tax. In fact, we do have Europe-size taxes and subsidies, we just hide them.
But it's not a wash. Cross-subsidies are dramatically less efficient than taxes. Choosing cross-subsidies over taxes is indeed the second original sin of health care and insurance regulation. Cross-subsidies cannot stand competition.
If as now you and I are grossly overpaying for health care and insurance, to cross-subsidize others, a competitive market would come along and peel us off. A local skin-check clinic could offer that service for $50.
Low prices, efficiency, and innovation in the provision of services like health care come centrally from competition, and especially disruptive competition. With no competition -- especially no entry by new doctors, hospitals, clinics, insurance companies -- costs spiral up. As costs spiral up, the cost of the charity care spirals up. As that spirals up, the size of the cross-subsidies spirals up. As that spirals up, the need to restrict competition spirals up.
In a sensible world, government assistance lives beside a free market, where innovation and price discovery happen. That keeps the cost of government assistance somewhat in check. But when we choose assistance by cross-subsidy, then kill off competition and force us all in the regulated system, that check disappears.
We do not force you and me into government housing in order to cross-subsidize housing assistance for the poor. (Well, "affordable housing" mandates are going that direction, with predictable results.) We don't force you and me into buses to cross-subsidize public transit for the poor. (Well,... And I don't want to defend the rather atrocious public housing and public transit systems.) We don't force you and me into government-regulated grocery stores and restaurants to provide food stamps and other nutrition assistance. And housing, transportation, and food remain functional markets.
Bottom line: Much of the pathology of health care and health insurance comes from this second original sin, choosing cross-subsidies rather than straightforward taxes. Cross-subsidies require the government to stop competition, so an initially clever way of hiding taxes eventually builds into a monstrously inefficient system. (That's a key point. Initially, it is about the same. But the cross subsidy system gets more and more inefficient over time.)
We would be far better off to admit this; raise explicit taxes enough to provide the charity end of our care, and let health insurers and care givers compete for the rest of us, as airlines, computer makers, and everyone else does. The politician's job is to explain to people that what they pay more in taxes they will more than make up in lower health care and insurance costs.
The principle goes more deeply. For example, the government wants to provide free birth control. I think that's a great idea -- given the personal and social costs of unwanted pregnancy, and the political turmoil over abortion, sure, every pharmacy should stock free birth control. It would take a very small tax to cover it, and I would gladly pay. But no, the ACA decreed that insurers must "pay" for it, from a cross-subsidy, that people opposed to birth control objected to. Are annual checkups good for public health? If you think so, tax and spend (on budget!) and send people vouchers. And so forth.
What happens in a free market to people who fail to buy health insurance? Don't we need a mandate? On economic grounds, a mandate for extremely high deductible catastrophic coverage makes some sense. People who don't buy health insurance and get some rare cancer cost a lot of money. However, such people are not really the heart of health care costs (or the government's health care costs). There is no real case for forcing such people to buy insurance with lots of first-dollar services, if they choose to pay for those out of pockets. We mandate car insurance, but not that it covers oil changes (to cross-subsidize oil changes for poor people.)
In a free but compassionate market, people who fail to buy health insurance and get sick suffer the same fate as people to fail to buy home insurance and their house burns down, or people who bet on the stock market and lose. The demands of a compassionate society are to make sure everyone gets reasonable health care. But it is not to protect the wealth of relatively well off people who choose to take risks. So, the average person with a job, house, etc. who fails to buy health insurance and then gets sick receives health care -- but also personal bankruptcy. With that stick in front of us, I'm not persuaded that a mandate is going to be necessary for average Americans like you and me. Any more than a mandate is necessary to get us to buy home insurance.
(This isn't really a new thought; it's in After the ACA, for example. But a bunch of correspondence following my last health post makes it worth punching up,.)
(And the first original sin? The tax deduction for employer provided group insurance, but not for employer contributions to individual, portable, guaranteed renewable, individual insurance. That caused the preexisting conditions problem pretty much by itself.)
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