How to Solve the Health Care Crisis
I recently got in a bike crash and separated my shoulder, and my trips to the emergency room and various doctors got me thinking about how difficult to navigate the US health care system really is. Going to the ER, in a great amount of pain required me to wait around for hours before before being seen by a doctor. They were quick to make sure I have insurance, and that opened up levels of care not afforded to the myriad of uninsured patients. After visiting the ER, I called my orthopedist, but he no longer accepts my insurance, so I had to go to the website, find a new orthopedist, make an appointment, realize I didn’t like him, find a new doctor, and so on.
Of course, life does not have to be this difficult. When I go buy a car, I don’t have to work nearly as hard, so why should buying healthcare be any different? In his brilliant book, The Undercover Economist: Exposing Why the Rich Are Rich, the Poor Are Poor–and Why You Can Never Buy a Decent Used Car!, Tim Harford lays out the difficulties of health care policy as well as how to overcome many of the problems in the US system. This post recounts his solution with some comments of my own.
Previously, we talked about adverse selection and asymmetric information in terms of insurance markets. The main concept is that nobody knows better about what is best for your health than you do. Since you know more about your health habits, family history, and possibilities of needing health care than the insurance company, they company will need to guess about how much it will cost to insure you. The problem is, whatever price they offer is going to be wrong: if they offer you a price too low, then it will cost more to insure you than they receive. If they offer a price too high, it would not be worth it to insure you. If this were true for everybody, then only people likely to use a lot of health care would choose insurance, and nobody would be worth insuring.
To solve this problem, US insurance companies come up with all sorts of ways to get you to reveal how much you are going to cost. They charge by age. They want to know if you smoke, skydive, or work as a javelin catcher. They charge more the older you get, and they limit costs by agreeing to pricing with their “in-network” doctors. The problem with all this is they it is expensive to administer. Administrative costs in the US are the highest in the world. The result is that even though the US has one of the best health care systems in the world (perhaps the best if you are insured), it is also one of the most expensive system.
Harford lays out a plan, which is one believed in by many economists, to solve many of these problem. This plan is already in use in Singapore, which enjoys some of the best health care outcomes and lowest health care costs in the world. The plan is straightforward: get rid of private insurance and ask everyone to pay for their own health care. Instead of using private insurance, we ask the federal government to provide catastrophic insurance, which is extremely cheap to provide. This insurance would pay for heart or lung transplants or other procedures that costs tens of thousands of dollars. Individuals would receive a $1,500 tax credit that goes into a health care savings account. This $1,500 is about what the federal government pays per person to administer public health care anyways. If a person does not earn enough to pay $1,500 in takes the credit would make up the difference (negative tax).
Each year, a person could spend the money in the account or keep it for the next year. All the health care money would be in a high interest account, and would accumulate over time, because 20 year olds spend almost nothing on health care, while the elderly spend a lot. Over time one could have millions to spend on health care however they choose. If they do not spend it all, they can use it for somebody else (such as a family member), and when they die they can bequeath it to a spouse or child.
The brilliance of this plan is that people can choose to spend health dollars in the way that is exactly best for them without rules and restrictions placed on them by a private insurance company. The administrative costs are next to nothing, and it makes sure that the poor have access to health care even if they do not have a job. Also, because the government provides catastrophic insurance, major medical costs are still covered, but for everybody, not just for the insured, like they are now.
