The brilliant Kerry Advisor Prof Brad Delong (who should be a Republican) in a very interesting analysis of Health Care finance. I think I agree with him as much I hate to admit it.
The plan seems to basically involve using the treasury as the reinsuror of last resort. The insurance companies act just as they do now but on all claims uop to $20,000 or something like that. Once a claim reaches that threshold the goverment then pays the bills as reinsuror.
Insurance premiums would be much lower so more people would be able to buy it. It actually sounds pretty good to me except that I would want the Republicans to design and implement it so it really works.
May 31, 2004
More Thoughts About Kerry Health Care Proposals
The more I think about the Kerry health care proposals, the more impressed I am. Many of them really are very clever, and likely to (somewhat) work. It is indeed very nice to see a serious policy process once again.
I have spent many months of my professional life sinking into the Pit of Despond and the Slough of Despair. But the deepest I ever sunk was in 1993-1994, when I was working (part time) on the Clinton health care reform effort. We needed to find a way to provide both patients and doctors with powerful incentives to reduce the roughly one-third of medical spending that went for unnecessary and inappropriate care. That meant--in the managed-care Enthoven Jackson Hole-group framework the task force had adopted--finding some way to bring the hard incentives of the market system inside health-care decisions. But that proved remarkably hard to do--without producing a cure worse than the original cost-overrun disease.
The first problem is what hard market incentives threatened to do--and, in the past decade, have done--to HMOs and insurance companies. Only one in 250 of those filing private insurance claims file for more than $50,000 a year. But these one-in-250 account for 20% of private insurance payouts. HMOs and insurance companies have incentives to keep their customers healthy so they don't incur large health bills, yes. They have incentives to induce their customers to get their preventive care, yes. But they have much bigger incentives to figure out how not to be holding the bag when somebody gets really sick--to make sure that those really sick who cost them 50 times the average and more are insured by somebody else, or not insured at all. Ratcheting up the bottom-line pressure on HMOs and insurance companies will also ratchet up their incentive to avoid covering sick people, and they will find a way (and they have found ways) to do so.
The second problem is on the consumer side. If you purchase health insurance, you are charged full freight--including the cost of treating you if you should get really, expensively sick. If you don't purchase health insurance and you get really sick, it is still very likely that somebody will pick up the tab. If you don't own a house and have few other assets people can come after, and if you are relatively young and healthy, buying health insurance can seem like a sucker's game--it's expensive, and although you get a little extra help for small bills the large bills the insurance really covers are bills you weren't going to pay anyway. Ratcheting-up the bottom-line pressure on the system creates big pressures on consumers to simply drop their coverage--unless, of course, they have good reason to believe that they are likely to get very sick.
On the one hand, increasing market pressure on the health care system gets you gains: reduced unnecessary and inappropriate care. On the other hand, increasing market pressure gets you big losses: powerful financial incentives for providers not to treat (or not to pay for treating) the really sick, and for consumers to drop their coverage (and thus make somebody else pay for their bills). One step forward, two steps back. And trying to regulate the market to try to get the forward and not the backward steps lands you in the Pit of Despair and the Slough of Despond.
The Clinton health care reform effort is a decade dead. But now the Kerry campaign has dusted off and brought forward a very clever idea from Brandeis's Stuart Altman to not eliminate but at least diminish the magnitude of these two ways that market-based health-care reforms self-destruct. The idea? Have the government take its task of social insurance seriously, and reinsure private insurers and HMOs: construct a 'premium rebate' pool to pay annual health-care bills over $50,000. This greatly diminishes the cost to insurers and HMOs of covering the really sick. The cost of treating the really sick will then be on the taxpayer rather than on the insurance-purchasing consumer. Insurance rates will fall. And the incentive for the young without many assets to go naked and uninsured will diminish as well.
Thus two of the big problems with our health care system become smaller problems. If this plan is enacted, we will no longer have to worry as much (i) adverse selection--the enormous financial incentives HMOs and insurance companies have to figure out some way not to cover the sick people--and (ii) cost shifting--the fact that those who buy insurance have to pay not only their own routine costs and their own catastrophic costs but the catastropic costs of others and the uninsured as well. The first means that--often--those who need health care the most have a hard time getting it. The second means that--often--those who could afford or would buy insurance if it were priced at its fair actuarial value don't because of this cost shifting.
It's a serious and clever proposal. It's a proposal for the government to do something--risk spreading--for which it has, potentially at least, a powerful comparative advantage. And it's a government program that would significantly diminish the market failures that gum up the private sector health care market.
It's a Kerry campaign idea, but it should be a Bush campaign idea too: the Bush campaign should steal it immediately. And would, if there was anybody in the Bush White House actually interested in a better American health care financing system.
Posted by DeLong