6.4.17

THE GREAT PUZZLE OF HEALTH CARE POLICY.

Give John "Grumpy Economist" Cochrane the Necessary Question of the Day.  The context: arranging institutions in such a way that nobody dies alone and unattended in the street.
Just why is it, to accommodate this worthy goal, must your and my health care and insurance be so deeply regulated and so thoroughly dysfunctional? As one small example, why does a 20 minute skin check with the resident of my dermatologist generate a phoney baloney bill for over $1000, meaning a cash and carry market for such a simple, elastically demanded, and perfectly predictable service is impossible?

Why, in order to provide for the unfortunate, do we not simply levy taxes, and pay for charity care, and leave the rest of us alone?

Regular Americans have jobs, buy houses, buy TVs, cars, and smartphones, negotiate the complexities of 401(k) and IRA plans, cell phone contracts, frequent flyer programs; hire the complex professional services of contractors, car mechanics, lawyers and accountants, and deal with the insane complexity of our tax system.
Are markets for health services so repugnant that trade-tested betterments are off limits, no matter how cumbersome the Approved Institutions turn out to be?
Why do we not leave such Americans (you and me) to a largely free market (as much as anything is a free market anymore) in dealing with their health care and health insurance? Dealing with a free-market health insurance, offered by companies competing hard for your dollar, is surely no more complex than dealing with Obamacare exchanges with their constantly shifting plans and networks, and the impossibility of finding out actually what doctor takes what.

I think the answer is relatively simple. Our political system is allergic to the word "tax." Instead of straightforwardly raising taxes in a non-distortionary way (a VAT, say), and providing charity care or subsidies -- on budget, please, where we can see it -- our political system prefers to fund things by forcing cross subsidies.

Medicare and medicaid don't pay what the service costs, because we don't want to admit just how expensive that service is. So, large hospitals make up the difference by overcharging you and me instead. The poster child (though not really a cost driver) is emergency room care. The government passed a law saying hospitals must provide emergency room care for free. But money does not grow on trees, so again you and me (via private insurance) must get overcharged to cross-subsidize. The ACA tried to force young healthy wealthy (not getting subsidies) to vastly overpay for insurance, to cross subsidize the poorer and sicker.

This might seem like a wash. OK, if instead of paying taxes, it makes you feel good to pay business class prices for health insurance, what the heck. Economically, a cross-subsidy works the same as a tax. In fact, we do have Europe-size taxes and subsidies, we just hide them.

But it's not a wash. Cross-subsidies are dramatically less efficient than taxes. Choosing cross-subsidies over taxes is indeed the second original sin of health care and insurance regulation. Cross-subsidies cannot stand competition.
Precisely, which is why "cross-subsidy" and "regulated industry" (framed more precisely, cartelized industry) often go together.  And where there are subsidies, there will be attempts by the people paying more than the opportunity costs of the services to bypass the cartel, and attempts by entrants to bust the cartel, and you'll see the rent-seekers griping about cream-skimming and unqualified entrants.  I never lacked for work when the rent-seeking involved transportation companies or liquor stores or college fraternities, and I can summon up the same analytics when it's the medical cartel.  Now whether we see the full implosion of the health insurance exchanges followed by nationalization (Penn Central gives way to Conrail, but the employees wear scrubs rather than work shirts) or whether something more sensible takes place is yet to be determined.
Much of the pathology of health care and health insurance comes from this second original sin, choosing cross-subsidies rather than straightforward taxes. Cross-subsidies require the government to stop competition, so an initially clever way of hiding taxes eventually builds into a monstrously inefficient system. (That's a key point. Initially, it is about the same. But the cross subsidy system gets more and more inefficient over time.)

We would be far better off to admit this; raise explicit taxes enough to provide the charity end of our care, and let health insurers and care givers compete for the rest of us, as airlines, computer makers, and everyone else does. The politician's job is to explain to people that what they pay more in taxes they will more than make up in lower health care and insurance costs.
In a world where it's easier for politicians to summon images of Oliver Twist than to offer sensible suggestions, and where the bias of the political class is to "do something" for the sake of Getting Something Done, how likely is that?

2 comments:

Unknown said...

One answer is that back in the '40's we developed a system of tax subsidizes for health insurance for those employed in large firms and nada for everyone else so we did not start from a tabula rasa in 2008. Another is that only approximate half of the political establishment has an extreme aversion to the word "tax." After all, ACA is mainly about expanding Medicaid (which would have expanded more except for that half) paid for with higher taxes, not cross-subsidies. My guess is that if the half that IS allergic to “tax” suggested straightforwardly raising taxes in a non-distortionary way (a progressive consumption tax, say), and providing charity care and subsidies -- on budget where we can see it, the other half would agree.

Stephen Karlson said...

The author of such a thoughtful comment ought not be hiding behind the Tarnhelm.

Substantively, though, business as usual deprives patients of the benefits of trade-tested betterments. Expanding Medicaid and hoping to bend the cost curve by screwing down reimbursement rates will be distortionary, no matter what taxes support it. Continuing to rely on insurers experience-rating employers state-by-state, also distortionary, also because of the presence of constraints on operating across state lines, likely preserving subsidies.