David Cutler on mandates

Cutler is very smart, tenured at Harvard, arguably the leading health care economist, and yes he is an advisor to Barack Obama.  He says mandates are not the way to go, and no I do not think he is just "falling in line" here.  Read the whole thing.  Yes, the key is to make insurance cheaper, not more expensive.  Yes, mandates are a political loser.  Yes, ex post fiddling can make up for a lot of the problems in the "no mandate" approach and there is going to be lots of ex post fiddling anyway.

Of course Ezra is right that the non-mandate plans, such as Obama’s, don’t do much to lower the cost of insurance.  But I would like to make a more general point about the correct direction to move in.

The way most goods and services become excellent — I mean really excellent — is through competition.  Yes, right now health insurance has lots of screwy incentives, most of all cost shedding.  But if you stifle competition and write off hope of getting a better-functioning private insurance market…well…I believe you have not thought long and hard enough about just how much of the social value on Planet Earth has come, ultimately, from competition in the provision of goods and services.  How do you think we got from subsistence agriculture to super-cheap food?  By mandates?

Mandates, of course, tend to require minimum coverage and thus they limit competition in the content of policies and also the expense of policies.  It’s unclear if they are truly cheaper, all things considered.

I might that mandates make social cost less transparent and they encourage government to commit societal real resources outside of the usual budgetary process.  Those were two good general criticisms of the last eight years of the Bush administration; let’s not carry those principles of governance over into our health care policy.

If someone needs covering, for whatever reason, give them some stuff.  If need be give them some government stuff.  Some kind of plan.  Give them whatever.  But don’t overregulate private insurance companies and take them off the table as a source of future productivity improvements and super cheap coverage, however partial it may be. 

The pointer is from Brad DeLong.

By the way, if you’re looking for a ray of competitive good news on the health care front, start here.  We need something similar on the insurance front and yes I know that means not every illness will be covered.  Given the Grim Reaper, it’s all about marginal choices anyway.


If we get mandates, might not a 1-800-safe-auto of health care emerge? Wouldn't that be a positive competitive despite mandates?

Comments for this post are closed

Yes, governmental mandates drive up the cost of insurance and health care in general. States with the most mandates generally have the most expensive health care insurance. For example, some states require that all health insurance plans offer coverage for chiropractic care. So, even if you think chiropractic equals quackery and never use it, you still pay for the coverage. Freeing up the insurance market to allow true competition without these idiotic mandates would help to reduce costs.

Comments for this post are closed

I remain unconvinced that the healthcare system is rational. large numbers of people who can afford insurance dont buy it and the insurance companies have not responded by providing a lower cost product. It isw a service industry that makes more money by not providing services. People are most unable to pay for this service when they need it the most.

Government interference is rampant, often in collusion with the private insurance companies. We regulate high levels of care and persecute (not a typo) when people dont meet those. We then laud the Wal-Mart stuff you link to because we want cheaper care and ignore the fact that those "high cost" providers are required to give a higher level of care. Obviously, we need to resolve the issue of whether its ok to provide lower level care if its cheaper.

The issues I think we need to resolve and I would like to see it done by the market but I havent seen many real proposals are as follows. 1) Portability. People dont stay at the same jobs anymore. They move around a lot. Many people dont leave jobs they hate ( and probably work inefficiently there) for fear of losing insurance. When the inevitable job changes come people go bare for a while sometimes leading to bankruptcy risk. Might the countries which have universal health care actually have an economic advantage as potential entrepreneurs are free to take risks w/o fear of losing their insurance?

2) Uninsurability of those already ill. What is the incentive for insurance companies to enroll people with chronic illnesses? We either need to decide its ok to let these people die (any libertarians here?) or make sure there is a way for them to get insurance.

3) Address some way for those who lose their jobs due to illnees to not lose their insurance. Again, we may choose to use natural selection to resolve this but lets be honest about it.

4) Cost reductions of medical care. People write whole books on why our care costs so much but we do nothing about it. Governmental solutions often make things worse (price controls e.g.). Free market attempts at price reduction often fail because its just not really a fre market.

5) We need a solution for those who opt out. They are clearly letting everyone else pay for the maintenance of a system that will provide them care when they actually need it, emergency services being an obvious example. maybe they should have bankruptcy rules similar to the student loans rules.

6) Failing to address childhood health issues inflict long term costs for many years. Much of these "health' costs are actually social issues that need to be addressed out of the formal medical system.

Ive written too much.


Comments for this post are closed

I'd add that the mere campaign promises of mandates and government intervention harm productivity. No one invests when they see the end of their industry on the near horizon. Their goals become much more short term (see e.g., Venezuela).

Comments for this post are closed

David Cutler talks about healthcare being "affordable". Using affordable in this context is meaningless. Does he mean affordable in the sense that people won't starve to death? Or affordable in the sense that it won't crimp people's standard of living?

Many poor people are poor because they make bad decisions. For example, I know somebody who didn't get birth control pills because "she couldn't afford it". She already had one child she couldn't afford. Guess what? She now has two. In retrospect, she really couldn't afford not to buy it.

Health insurance will be the same way. Nobody will be able to afford it until they have to go to the emergency room.

Comments for this post are closed

From Stan:

The insurance model does not fit the problem of health care. Insurance only works if the probability of, lets say wrecking your car, is less than 1. In the case of health care, the probability that you will need health care is indeed approaching 1.

The validity of this depends on what you mean by healthcare, doesn't it? The insurance model works fine if we are talking about health emergencies that you simply cannot afford for yourself. Indeed, insurance is the proper mechanism to address such risks-for home fires, automobile accidents, and health emergencies. If you are talking about routine checkups that are affordable out of pocket, then I agree with you- insurance is not the proper model.

And if your point was that the probability of almost all of us needing catastrophic healthcare, then, again, I agree with you that insurance of no use. However, if that is the case, then letting most people die of their ailments is the only alternative.

Comments for this post are closed

We have a model for private services in this country that are necessary for public survival. This model can be found in the way costs and services of electric utility corporations are regulated by FERC and various state agencies. Why can't the activities and services of the private medical insurance industry be similarly regulated, except only at the Federal level?

In the utility industry, the idea is to limit competition in order to avoid uneconomic duplication of facilities and costs by creating limited monopolies. What would prevent a similar model from being used in the medical insurance industry?

An insurance company could be given a territory large enough to make economic sense in which it can provide exclusive insurance services. If the insurance company failed to provide its services in accordance with regulations at a cost that guarantees a reasonable rate of return fixed by the governing agency (which could be lower than when the risk of competition is higher), the regulatory agency could revoke its certificate of convenience and necessity and award it to a company willing to meet its rules. Of course, everyone would be required to participate, just as everyone living within a certificated territory is required to buy electricity from a serving utility.

This concept would certainly require some tweaking, but the fact that it has existed for years and is familiar to the public would lend itself as a starting point.

Comments for this post are closed


Utilities (or at least the distribution of them) are generally considered natural monopolies by most people, which to some warrants state ownership or regulation. I don't know how sound this argument is for complex industries, as most of the customer satisfaction numbers I've seen for the legislated monopolies of cable companies is extremely low (50-60%).

Insurance is not a natural monopoly. Although insurance agencies benefit from economy of scale, the market process leads to firms large enough to benefit that scale. However, I often wonder if the insurance market were free, if we would see the securitization of insurance contracts which might help out the smaller insurer. Of course, little of this matters since I'm not sure if there has ever been a free enough market in health insurance to allow this sort of thing.

To me, the system you propose sounds like it would be a complete disaster (though sadly enough, maybe not more of a disaster than we have now?). It would give insurance companies huge incentives to rent-seek politicians for coveted monopoly power. The public is probably informed enough to be able to judge the quality of the insurance they would be getting, but they aren't informed enough to be able to understand the causes of problems (not even economists and health care professionals agree on those). Politicians could then pander to all sorts of false causes of health care woes without actually working to fix the real issues, because the public would be ignorant (like they are now). This plus very high incumbency rates don't provide much incentive for politicians to ensure good health insurance.

Then there is the Austrian critique of central health planners not having the proper information to make rational decisions. I'm not sure how that would play out in insurance, but I'm no economist.

Comments for this post are closed

Sorry to come so late:

The place to begin is to separate the function of INSURANCE


The concept of "HealthCare."

The function of INSURANCE is Transfer of Risk.

The concept of HealthCare covers physical needs, rather than the risks that may give rise to them.

As long as the two remain entwined insurance will never be the mechanism to resolve the economic problem.

Comments for this post are closed

Of course things would work easier if insurance prices wouldn`t go through the roof. At least for now, when situation is so precarious. I happened to contract an afforbable travel insurance from a company last month, but this, as many others, is only an exception. Mass action should regulate this system of prices so that we can reach and purchase these services.

Comments for this post are closed

Comments for this post are closed