Paul Krugman writes:
Mr. Edwards goes two steps further. People who don’t get insurance from their employers would… purchase insurance through “Health Markets”: government-run bodies negotiating with insurance companies on the public’s behalf. …
Why is this such a good idea? …[M]arketing and underwriting – … screening out high-risk clients – are responsible for two-thirds of insurance companies’ overhead. With insurers selling to government-run Health Markets, not directly to individuals, most of these expenses should go away, making insurance considerably cheaper.
If I understand correctly, when it comes to the health markets, private companies would process the payments but government is the residual claimant, bears the financial burden of high-risk customers, and calls the final shots.
This passage by Krugman is an object lesson in why many economists disagree. I read this and think:
"My god, once government covers insurance company losses, incentives for cost control will vanish."
I’m willing to add: "Cost control doesn’t work very well today, I admit," without changing my net assessment: "Yes, things can always get worse, furthermore implicit rationing might be the result. A reformed private option can work better than the American status quo. Let’s not lock ourselves out of those potential gains."
Many economists to the left of me are more worried about saving on the overhead costs.
No one serious believes in central planning any more, but the intellectual roots of this disagreement are to be found in those debates.
Addendum, from the comments: "Huh? Wouldn’t the screening expenses be replaced by the expense of insuring high-risk people who could no longer be excluded from the pool? And isn’t it safe to assume that the latter expense exceeds the former, for otherwise insurers would keep the high-risk people in the pool rather than pay for the trouble of screening them out?"
“No one serious believes in central planning any more, but the intellectual roots of this disagreement are to be found in those debates.”
Well said! This is why it is so important to study and learn from the debate about central planning. I would rephrase slightly though: “Few still believe in complete central planning…” is more accurate.
I did not understand it in at al the way you did. In my reading, the government creates very large pools with which to negotiate health insurance.
The government run bodies wuold negotiate on price, leaving in all of the price incentives, and perhaps increasing them for reasons of specialty and market power, and eliminating all of the incentives to screen out potentially costly people (because of the large pool).
With that said, I think the amount of regulation required in any of these private health insurance markets makes most cost savings initiatives adventures in exploiting temporary or politically gamed loopholes, and that this is a fatal flaw that not even the God of deregulation could save.
Jeffrey Miller – Be careful comparing two countries who differ in so many areas, of which the health care system is only one, and assuming that the only thing driving health care costs is the health care system. Especially when one country absorbs millions upon millions of extremely poor (relative to the rest of the nation) immigrants.
To Auto – the only area where governments have EVER shown themselves to be more efficient than the market are areas where the markets completely break down (such as roads, police, etc.). I’ve not seen any evidence that this is the case for health care. And given that none of us has seen real free market health care, I’m not sure anyone else has either.
Mr. Cowen,
There is solid evidence showing that
in insurance markets government monopolies can be more
efficient than competition due to such screening efforts
that produce costs but no benefits. Your unawareness fits the long tradition to ignore European research
which does not support American free market dogmas (such results are hard to publish in AER, it is of course easier to publish evidence that Indians of the Amazon respond to market incentives).
I think there is already rationing. The best health care is given to the rich, who can pay for it without a health care company. The second best is given to those with health care. The worst is given to those who cannot afford it.
Simply stated, rationing is an inevitable part of a market based system. For example, there are only so many $1,000,000 homes and they are rationed to those who could afford them.
There seems to be a bias for providing the best healthcare to those who can afford it themselves (those who society puts most value in). I am not expressing an opinion for or against this. I am merely observing that the capitalist system, just as much as the Communist or socialist system, rations goods. The systems simply assign different values to the goods.
The commentary from the libertarian economist blogosphere about universal health care sounds a lot like physicists and engineers standing around the wright brothers plane discussing all the various reasons as to why it can’t possibly fly. There are dozens of concrete examples from every other industrialized country in the world that a government sponsored universal health care provides comparable health results at lower cost and with much greater access to care. That is a fact. If our theories say that it can’t work, and reality says that it does indeed work, THEN OUR THEORIES ARE WRONG! We should expend our energies trying to figure out why it does work and adjust our theories accordingly, rather than pointlessly grinding our ideological axes.
Dr. Cowen, why did you pull out and thereby highlight JP’s post? He and
Krugman clearly have a different conception of the word “cost”. For Krugman
they are a waste. For JP they seem to be payment for a sevice provided.
They are not comparable so that dispute is really just semantics. Surely
you know this. Not to say that Krugman is right and you are wrong, but JP
does not support your case much.
I am naive on this matter, but could’nt a counter argument regarding cost controls be that government rarely wishes to pay more for services. i.e would not govt pressure insurers to write off some of the costs of high risk people? I agree that govts can be inefficient, but they are equally inefficient at paying out sums of money. Of course, this also depends on the extent insurers can lobby for lack of government “oversight” on cost controls.
So far, the discussion has left me relatively enamored of Edwards’ plan, and not so much enamored of total single payer.
If you have mandatory insurance coverage and mandatory insurance purchase, it looks like you solve some of the major problems in health care. First, screening may be profitable for insurers, but they are a deadweight cost.
In addition, I believe that if healthy people could sign a contract saying they’d pay more for health insurance in exchange for the guarantee that they’d still be able to get health insurance if they were sick, they’d take that deal.
So it looks like you get quite a few of the benefits of single payer, without the one major negative of harming Research and Development through price controls on pharmaceuticals and other such nonsense. Don is right that the rest of the world, especially the rest of the world’s national health care systems, benefits from the American market’s shouldering of the R&D burden through enticing (and socially beneficial) patent-generated profits.
In addition, if people have to get insurance and have to start shopping, there’ll be some good deals with insurance companies who offer lower premiums in exchange for the insured’s willingness to go overseas for care. I fear that Edwards, with his Neanderthal attitudes towards trade, would then want to discourage this beneficial innovation.
1. Allen: If it goes through the price mechanism with demand equalling supply than it is not rationing, in the common use of the word. What it the criteria is that if you have the money you can buy a million dollar house with no waiting.
2. The defining characteristics of the American health care system is not that is it more expensive per unit of health, but that Americans (about 50% richer than Europeans) consume much more health care, compared to other countries and compared to the past.
This includes more comfort, more state of the art technology, more specialist doctors, more marginal care, and most importantly no rationing. Another part of the European system that you cannot replicate in the US by going socialist is low pay for doctors and nurses, and free-riding on American spending on drugs.
3. There is simply not that strong of a link between health and health-care, above a certain point. This should really be obvious, life style, genes, substance abuse, body weight, crime, accidents, eating habits are much more important than which hospital you go to. But people do not only buy health care to get a few more months of life expectancy.
Japanese Americans have the longest measured life expectancy on this planet. Mormons live 10 years longer on average than Europeans. Black men in the US live 8 less on average than Hispanic men (I am sure it is the racist health care system).
4. What idiot Krugman will not tell his readers that they can get “cheap† European care if they like, just create extremely bad American HMO insurance, or don’t buy health care at all and go to Public hospitals. The reason the Euopean systems are cheaper is not that they magically have less costs, it is that they give the consumer much less health care. Of course the people in the US that go to Public hospitals in the US are not the same kind of people that consume government health care in Europe. This makes the health outcome different, even if the quality of the health care is not.
Public-private is not the key here. If you go down to the health provision that you have in Europe whiting your private insurance the price will be equally low. But American consumers would never accept that. So if you want to combine an American system (lots of expensive care) with a European model (inefficient centrally planned provision) you get the worst of both worlds.
But hey, here we have a populist leftwing politician who tells us corporations are bad, and that we can have something for nothing. Hurray! Onward proud liberaltarians.
People that continue to draw comparisons to other countries, such as australia, are victims of the vagaries of partial equilibrium analysis. Much of health care is a global market, typified by large fixed costs and low marginal costs. Not unlike movie theaters. Imagine what would happen to theaters if everyone tried to get the same deal senior citizens get. Improving health care is not and will not be as simple as adopting the european model.
… There are dozens of concrete examples from every other industrialized country in the world that a government sponsored universal health care provides comparable health results at lower cost and with much greater access to care.
The argument isn’t about whether it can be done or not. And, in fact, you’re right about more access to care than the current US system, with the important asterisk of MA, which has the potential to get both capitalistic and access advantages. I don’t expect MA to work out too well – it tends to take 3 or so experiments to get this kind of thing right, but I see it as the right direction.
Nor is the argument about govt, per se. Let’s face it, BCBS is only slightly better. No, it’s more about bad results of lack of competition. In fact, I’d like to see a law passed giving any private insurance plan the same safe harbors as employer-provided insurance.
The concerns are that single-payer would raise service times, decrease service quality, and reduce health-care innovation from our current system. High costs are partially a result of provision of better treatments and higher service levels not previously available. E.g., we pay more for more and better drugs.
“we pay more for more and better drugs.”
Lucky you, apparently you never had to worry about drug costs.
If you check any number of Canadian and Euro online pharmacies, you will
find that by and large they have the same drugs for sale.
A few drugs available here are no available in some other countries, there are also
a few drugs available abroad but not here.
So, better statement is: We pay more for the same drugs.
“Others are suggesting that the US is subsidizing the rest of the world. If that’s true, it’s all the more reason to move toward universal health coverage.”
Not necessarily. Even if the rest of the world free rides off of our willingness to pay for R&D in our drug costs, the benefits could still outweigh the costs for us internally. It actually makes sense that a very large and wealthy nation would end up being the nation with the health care market that supports Research and Development. After all, our market internailizes a large enough proportion of the benefits from R&D so that our political system achieves the public good
of allowing patent-protected profits, while other nations, who capture a smaller percentage of the benefits of any given R&D investment, have much stronger free-rider incentives.
Maybe we could argue that politics are endogenous in this case, so if the US moved towards a national health care regime and put price controls on drugs, that other nations would have an incentive to do a better job of suppoting R&D by allowing their markets to bear the patent-protected prices of drugs. I’m doubtful that we’d be able to achieve this global public good, however.
In short, we’re likely better off with a health care system that doesn’t choke R&D with price controls, and the rest of the world is better off because of that aspect of our health care system, also.
There is, however, a lot of room for reforms, like Edwards’ proposal, that solves some of the US health care problems without moving us towards price controls.
If the government is going to foot the bill for high-risk customers, health care is not going to get cheaper. The government cannot play god with risks, doing as if they not exist. The only thing government can do is to have others pay for the high-risk customers. So your insurance premiums might end up lower, but don’t expect that your tax bill won’t increase.
I wonder if one argument being made here is: 1) that I, a healthy person, should not pay for the health care of you, a sick person, and that a universal health care system would be a redistribution of wealth; 2) Redistribution of wealth is contrary to capitalism; 3) Therefore, universal health care is bad.
If that is true, we will have to reconfigure almost every service provider industry other than, perhaps, the legal profession.
What is the difference between paying for the service of a mechanic, a plumber, or a doctor? Each provides a specific service for a specific price. There are two ways to pay for the services: by the job or by the hour. If I want my transmission fixed, I will not be charged an hourly rate. I pay by the job. So does my neighbor, Joe. If it takes 10 hours to fix my car, but 6 hours to fix his, he is in effect paying for work done on my car. If both take 10 hours (and the standard is 8 hours) the mechanic will lose money.
This whole thing depends on who will assume the risk. In health care, the risk is assumed by health care providers, who must care for anyone who walks into the emergency room. If the problems that go to the emergency room would be more effectively treated during routine visits, we all lose, because, now, emergency room costs are up. Yes, those of us with health insurance already pay for treating the uninsured.
The question is how to make health care more efficient and equitable.
“I wish the healthy me (and all the possible future healthy mes) could write a contract with a possible post-illness me to pay more for health insurance if I’m healthy in exchange for the right to continue to buy insurance if I develop a pre-existing condition. But absent government intervention, I can’t write that contract.”
Well, you can’t write that contract with your future self but perhaps you could write such a contract with an insurance company.
There are a few practical problems with this approach — the incentives line up completely wrongly for employer provided health insurance, some pre-existing conditions arise too young for a person to reasonably have purchased insurability insurance, and you’re relying on a particular insurance company to have not gone bankrupt.
These are problems but not necessarily big enough problems to kill the concept.
-dk
Actually, my life insurance contract is “level term” which means that I get a guarantee of a specific rate for a specific time even if I contract HIV and take up bungee jumping, and in long term care insurance contracts it’s relatively common to have your future premium adjustments based only on the increases if any faced by your age and your risk category on date of contract origination. It’s hard to argue that large sums are not en prise in these categories of insurance.
-dk
1. “So, better statement is: We pay more for the same drugs.†
Mik I pray to god you are not an economist.
The cost of drugs is almost entirely development, not production. Drug companies can charge high prices in the US but largely not Europe (because of regulations, and also because of the fact that Europeans are poorer than Americans). Thus most of drugs get developed essentially with American money. Europe free-rides, the same way those downloads computer games illegally freerides (a better example is students that get the software cheap, because the software producers can charge firms and regular costumers more).
But if America would go the same path as Europe and regulate drug prices, like the Democrats want, a lot of drugs would simply not be developed.
As usual the left relies on the ignorance of the electorate and the smug stupidity of the elites to promises them a free lunch.
2. “Any supporting data?†
Just do the math pall. If administrative costs are 15% of total US costs, and we magically make them 0, that brings you to 2800$ per capita – vs. 5200, instead of 6100. The difference is simply too large to be explained by administrative costs (ignoring for now the fact that there is no evidence whatsoever that administrative costs are lower in Europe).
3. “is there any evidence private sector health insurance is automatically better than a gov’t-run program†
One of Stockholms largest Hospitals, S.t Göran hospital, was privitised a few years ago. The firm managed to cut costs by about 10-15%, with maintained of increased quality.
By the way, just as an indication of how great socialized health care is:
More than 200.000 Swedes purchase private health insurance. Let me explain: you pay for government (“universal†) health care through your taxes. The quality is so low that those who can than take money from their pay check, or indirectly through their employers, buy private health insurance. The only reason more people (such as me) do not do this is that they can’t afford it. Afteral, you are paying twice.
Did Edwards mention this?
4. Reading your comments is very disheartening. You have essentially been sold a lie by Krugman and the like. Please just listen carefully, and at least understand one fundamental part of this discussion:
The fact that health care costs less cheaper in Europe is not primarily because it is cheaper, per unit of health (even the two instances where prices are lower, the costs of drugs, and the lower salaries of doctors and nurses, cannot be costless replicated by the US).
Cost=Price x Quantity.
In the US the Price component is not higher, either compared to Europe, or compared to 40 years ago. What has happened is that Quantity has skyrocketed, partially due to the reduction of the price of health, partially due to higher income, and perhaps due to various distortions.
THE ONLY WAY TO GET DOWN TO A EUROPEAN HEALTH CARE COSTS IS TO LOWER HEALTH CARE PROVISION TO EUROPEAN LEVELS.
Now it is clear that this can be done, without taking much of a hit in terms of say life expectancy. Life expectancy is simply not that much effected by the expensive parts of health care, above a certain minimum.
A simple example are the Hispanics in the US, who live as long as the whites, even though the majority either do not have health insurance and get public health or get Medicaid.
But Americans already have the options to get lower quantities of health care. They don’t want it. They seem to be willing to make the tradeoffs, high (in terms of life expectancy unneccerary, luxery good) health spending, and high costs.
If you are willing to forgoe the luxery and pay less for less quality, why on earth are you complaining about the uninsured? This is exactly what they are doing. They major difference between an expensive American hospital and the essentially free public hospital that the uninsured go to is similar to the difference between US and Europe: more waiting, less comfort, less likely to get state of the art treatment, not very difference health outcomes.
The bottom line is that Krugman, Edwards, Obama and the like are promising you American quality and quantity health care with European costs. As two second of thinking would tell you it is just a scam.
Another example:
The average salary for a Doctor in the US is about 200.000 $, a nurse 70.000 $. In Sweden, using OECD PPP adjustments, the average is only 65.000$ for a doctor and 32,800$ for a nurse. (direct salary, the total copensations including benefits a and employer contributions are about proportional).
Both Sweden and US have 2,4 doctors per 1000 people, and 8/10 nurses per 1000 people. Americans per capita have to pay 91% more than Swedes for this large segment of health care costs. (on the top of my head something like a quarter to half of US health costs, taking into account other workers and specialists, dentists etc, that have similar wage differences).
Maybe American doctors get more paid partially because they are better educated and work more hours. But it really doesn’t matter: How is Krugman/Edward/Obama populist plan going to cut American health care costs to European levels, with no loss of quality, without cutting health care workers wages to European levels?
Have all of you gullible commentator who seem to have bought into their nonsensical free lunch promises even considered this?
Re: Australian Immigrants
The vast majority of people who migrate to Australia are from wealthy, industrialized nations and are usually highly skilled. Australia’s influx of poor, unskilled workers is extremely small, as opposed to the vast human waves that enter America.
“No one serious believes in central planning any more, but the intellectual roots of this disagreement are to be found in those debates.”
Perhaps I didn’t catch the sarcasm in the text? It seems a lot of people that can be described with the word candidate are throwing around the term “single-payer”.
Many of you are reacting emotionally rather than analytically. You might favor various foreign systems, and think they are cheaper and better than America, but that does not necessarily constitute a defense of the Edwards plan.
Neither does the emotional reaction of libertarians constitute a valid criticism.
Professor Cowen as always has done a great job of getting people to think. Alas, you are not thinking clearly. Please provide an example of a program promoted and implemented by a U.S. presidential that a.) works b.) is not a sop to special interests. As an american living in Australia and an economics professor have to agree with the poster on immigration. this goes to what may be a cost driver in U.S. health costs–the subsidization of low cost labor by the public in the form or health care for illegal immigrants (consider case of children born in LA or Houston–tax payers/charitable organization bear the cost). Issue larger than can be meaningfully adressed by the nostrums offered by a former trial lawyer running on a populist ticket.
Tino, points out that the incomes of health care professionals in Sweden are much higher than in the U.S. The implication that a large portion of the cost differential between US and other industrial countries is attributible to (real) wage differences for professionals. There is good research to demonstrate that this implication is correct. Administrative costs are higher in this country but the wedge between payments and premiums is only about 15%. Underwritting costs are a substantial factor only in the individual market and to a lesser extent the small employer market. Higher relative incomes for US health professionals compared to their counterparts are not necessarily an indication of higher quality. An alternative hypothesis is the higher relative incomes in the US for competing professionals (lawyers, MBAs, hedge fund managers, and full professors) are responsible for the higher incomes of US health professionals.
A key issue only touched on above is the extent to which the cost of health care should be shared by all an how much should be the responsibility of the individual. Even with lower admisistrative costs and salaried professsionals the health cost including premium and out of pocket cost for a single FEHB Kaiser plan in Washington DC is close to $4000. A worker with compensation in the range of e.g. $20,000 would be paying in the neighborhood of 20% of income for health (in the employer system much of the premium is excluded from income but this is of little benefit for the low wage worker particularly when the offset against later Social Security benefits is considered).
Since many of the posts assume that more or less the US subsidizes drug R&D (which seems likely) to the rest of the world, I would like to know on what data people are basing this assumption. I just do not think it is an outright freebie and it should set the stage for how less generous the US can be. Japan itself is 11% of the global drug market, can Europe be that small? Maybe it would not be so bad if the US stopped subsidizing the rest of the world. But I do not know the figures.
There are a few things that will generally increase the costs of drugs in the US, and not necessarily to cover the added expense of R&D, but the relatively onerous FDA approval process and changes in the drug use procedures to account for the litigiousness in the US. Many drugs that would take extra years to get FDA approval (or not approved at all) are available in other rich countries before the US. Frontloaded cash flows should count for something given the high cost of risky drug development capital, and I am sure it is accounted for by drug companies risk and economic viability studies of R&D investment.
And don’t drug companies cite use in other countries to the FDA to demonstrate a drug’s safety before approval? That could be a significant subsidy in speeding up development and reducing approval costs from the world to US health consumers.
If drug companies have it so much better and do better research in the US, why so many of them are of European origin? Seems to me that know-how and capital accumulation will have better returns in the US. Also its market size and homogeneity should increase efficiency and help to create the overwhelming majority of drug companies with critical mass in the world. But that is not the case.
Do government-provided health care systems in other countries assume the liability risks that drug companies take in the US? My guess is that as with their health care systems, most of them are socialized. That would provide an incentive to make them available cheaper in those countries, and not necessarily assume that US health consumers are covering all of the difference in cost.
I thought there was an article out there somewhere saying that “the world” has said they’ll break the patents if they have to raise prices.
Added: Friday, 9 February, 2007, 20:34 GMT 20:34 UK
Its a total disgrace, I visited the dentist with tooth ache and was refered to hospital,after waiting 3 months for consultation I am told there is a 4 month waiting list to have a wisdom tooth removed.
I will visit India in Feb and have any necessary work done there. After all you get better health care in India for a fraction of the cost here. I have worked for 28 yrs since leaving school and this country really sucks.
Jose, your contentions that the rest of the world receives newer drugs sooner than the US does and that non-US pharma companies are doing more innovation than their US counterparts are not supported by the data.
Grabowski and Wang show that the US has become the primary “first” market for drugs, and that US pharma companies are developing more and “better” drugs than their non-US competitors. Their data covers 1982-2003.
See: http://fds.duke.edu/db?attachment-25–1301-view-165
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