This morning Paul Krugman has a post on his blog in which he lays out the case that a free market won’t cure the problems with our healthcare system. He could make his case substantially better if he had a firmer grasp on how healthcare insurance works:
This tells you right away that health care can’t be sold like bread. It must be largely paid for by some kind of insurance. And this in turn means that someone other than the patient ends up making decisions about what to buy. Consumer choice is nonsense when it comes to health care. And you can’t just trust insurance companies either — they’re not in business for their health, or yours.
This problem is made worse by the fact that actually paying for your health care is a loss from an insurers’ point of view — they actually refer to it as “medical costs.” This means both that insurers try to deny as many claims as possible, and that they try to avoid covering people who are actually likely to need care. Both of these strategies use a lot of resources, which is why private insurance has much higher administrative costs than single-payer systems. And since there’s a widespread sense that our fellow citizens should get the care we need — not everyone agrees, but most do — this means that private insurance basically spends a lot of money on socially destructive activities.
Nowadays most people who have employer-provided healthcare insurance work for companies that self-insure. What that means is that self-insured employers don’t pay premiums to an insurance company but pay claims themselves, presumably from funds that the companies have set aside for the purpose. And most companies who self-insure hire third-party administrators to process claims. TPAs are usually paid for each claim they administer or a percentage of plan’s volume. That means that TPAs bear no insurance risk and TPAs have no incentive whatever to control insurance costs. The higher the costs, the higher the compensation they receive. In my view that’s a better explanation of why insurance costs are rising than either moral hazard or adverse selection. Perhaps Dr. Krugman knows of self-insuring companies that are engaging in the adverse selection process he’s describing. I don’t know of any.
There’s a pretty good primer on self-insurance here.
There are lots of reasons that a free market wouldn’t be good in the case of healthcare and you don’t need to resort to complicated theories to understand that. In a really free market most practitioners would be unqualified quacks, you’d have no way of knowing that the pharmaceuticals you were buying were safe or effective, and you’d have no recourse if anything went wrong. In the 19th century we had a free market system and its results were pretty horrifying. Nobody but the most extreme advocate wants to return to those days.
Like all other modern countries we have a hybrid healthcare system. In the United States the government pays for between 50 and 60% of healthcare costs from taxes levied specifically for that purpose or from general revenues. In France it’s about 80%. In Italy about 75%. I can’t interpret that as the United States having a free market system while France and Italy have a socialized system.
The real question is not whether a free market would be better than a fully socialized system but whether we’d be better off if our system incorporated more market features or had more government involvement. My answer: both.
I think we’d be better off if employers were taken out of the insurance business entirely, health insurance were mandatory, and people had incentives for being prudent consumers of healthcare and healthcare insurance, possibly via health savings accounts and catastrophic care policies, but some people had their insurance subsidized by the government. I’d include the elderly in this. Old people who could afford it should buy their own insurance; those who couldn’t could be subsidized. I see no reason that the elderly shouldn’t have incentives to be frugal in their consumption of healthcare, too.