Why did the HMO revolution fail?

Mark Thoma cites this passage from Paul Krugman:

During the 1990’s it seemed, briefly, as if private H.M.O.’s
could play that role. But then there was a public backlash. It turns out that
even in America, with its faith in the free market, people don’t trust
for-profit corporations to make decisions about their health.

Read the whole link for a recap of Mark’s debate with Arnold Kling.  In my view what people objected to was not the for-profit status of HMOs per se but rather that they could be told they can’t get all the care they want.  That view will remain.  That’s one reason why covering 45 million or so additional Americans will lead to rising rather than falling health care costs.

On the administrative expenses of private health insurers, that is, at best, a one-time savings and health care costs still will be rising.  It’s also hard to argue that a) the really sick people are often denied care or coverage by private insurance, and b) we can pick up those same people and still lower total costs.  It’s the sick people who account for most of the costs, at any margin, and most of those costs come from medical procedures.

As the possibility of a real Democratic majority draws closer, expect to see more and more cognitive dissonance on this issue.  There’s a perfectly coherent case for greater government involvement based on the desire to spend more resources to alleviate the financial insecurity of many sick Americans.  But you are going to hear the "free lunch" version of the argument instead, based on the belief that the properties of American and European health care systems are somehow interchangeable at will.

That said, people on my side of the issue should admit that we could lower overall health care costs (or at least slow their rise) by having a true single-payer plan and putting most doctors on fixed salaries in small cooperatives, thereby altering their incentives to spend on wasteful capital expenditures.  (How many years would it take for costs to fall?)  That’s not, however, what we’ll be getting, so beware the bait and switch.  Under any plausible health care reform scenario, health care expenditures in America will rise rather than fall.  If only we had a betting market on this…

Addendum: Here is Arnold’s more direct reply.  Here are related remarks from Megan McArdle.


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