John Edwards on health care, part II

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?"


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