Krugman produces this "add-on" to his recent Op-Ed, I think it is a very clear explanation of the issues...
…Basically, everyone agrees that health care is a messed-up sector. But
there are two opposing doctrines about what the problem is.
I believe — and the evidence, I think, supports this belief — that the
big problem is "adverse selection." An insurance plan offered to
everyone at the same rate would be a great deal for relatively sick
people, a poor deal for the healthy. So one of two things happens to
private insurance. Either plans go into the "adverse selection death
spiral," as sick people flock in, driving up rates, driving out more
healthy people, and so on. Or insurance companies spend a lot of the
money they receive in premiums screening out "high-risk" clients, so
that the system has huge overhead and the neediest cases are excluded.
The clean solution to this problem is for the government to provide
insurance to everyone. Other rich countries do that. So do we, for
older Americans, veterans, and others. Actually, government health
insurance is already bigger in America, in dollar terms, than private
insurance — it covers fewer people, but that’s because the elderly, who
cost more, are handled by the government.
Employment-based insurance is a distant second-best, but better than
nothing. Large employers, in particular, can spread risk widely,
creating the kind of risk pool that dies from adverse selection in the
individual market. And the tax preference for employer-based care, more
or less by accident, has helped sustain this imperfect fix — which is
why I’m highly skeptical of anything that might erode that preference.
What conservatives in the "consumer-directed" health movement believe,
however, is that the big problem is "moral hazard" — people consume too
much medical care, because someone else pays for it.
Now, this isn’t entirely wrong. People probably do undergo expensive
surgery with questionable effectiveness, and so on, because it’s not
out of pocket. Curbing that was supposed to be the point of managed
care. But managed care didn’t deliver, because people — rightly — don’t
trust private H.M.O.’s to make life and death decisions on their
behalf. Successful managed care only takes place in institutions like
the V.A. where there’s more trust in the institution’s motives.
The whole consumer-directed thing is, in my view, just at attempt to
avoid facing up to that failure. Rather than admit that private-sector
institutions aren’t any good at rationing, conservatives now say that
patients should be induced to ration their own care by being forced to
pay more out of pocket. And that’s where Bush’s attack on gold-plating
comes from: reduce the tax advantage of employer-based care, and
deductibles and co-pays might go up.
The trouble is that the big money is in stuff like heart operations or
other areas where (a) people can’t pay out of pocket in any case — they
must have insurance or go untreated — and (b) people really aren’t
sufficiently well informed to make the decisions. Yet the whole focus
of consumer-directed doctrine is on things like routine visits to
doctors’ offices and annual dental checkups. It’s going where the money
isn’t — because the advocates just can’t believe that markets aren’t
always the answer.
Now here’s the thing: in the name of consumer-directed health care
theory, Bush is proposing changes that would essentially encourage
people to move into the individual market — which wastes a lot of
money, and doesn’t and can’t work for those most in need — while
undermining the employer-based system, which isn’t wonderful but is
still essential. In particular, healthy high-income people would be
encouraged to drop out of employment-based plans, leaving behind a
sicker risk pool, driving up rates, and pushing employer-based care in
the direction of an adverse selection death spiral. The plan we’re
supposed to learn about tomorrow doesn’t sound big enough to have
catastrophic effects, but it’s a step in the wrong direction.
I might add I don’t think adverse selection is the major problem, nor for that matter would I cite moral hazard. I would cite the (temporary?) difficulty in evaluating procedures and outcomes, plus consumer irrationality, noting those same consumers still could be rational in choosing insurance plans, even if they screw up their on-the-spot medical decisions. In my preferred but still imaginary model, consumers rationally choose insurance companies ex ante, those insurance companies make and fund key medical decisions ex post, and other third party intermediaries keep those insurance companies honest.