How should US policy-makers choose a replacement for the Affordable Care Act? Dan Hausman looks at the values and economic complications guiding health care reform.
With Republicans in control of Congress and the Presidency, presumably Obamacare will eventually be repealed, although deciding on a replacement has not proven to be easy. What will replace it? The choice should depend on both the values of Americans and an understanding of the economic complexities of health-care provision. The values that should guide health insurance reform (and which in fact guide the NHS) are compassion, choice, efficiency, fairness and solidarity. These may conflict. Americans need to ask of any plan: Is it compassionate? Is it fair? Does it protect individual choice? Does it control costs? Does it recognize our common vulnerability to suffering and death?
To design health policy, one must also understand the reasons why health-care markets work badly without regulations, such as Obamacare’s unpopular mandate that requires individuals to purchase health insurance that meets minimum standards. The first reason is asymmetric information: Physicians often know more about how to treat your health problems than you do. The relations between patients and doctors are unlike those between shoe sellers and customers; people know when they need new shoes, but not whether they need an MRI.
Health insurance, which is necessary because many health-care needs are unpredictable and extremely expensive, creates further problems. The first is adverse selection. Health insurance is a better bargain for those who believe they are more likely to be ill. If the less sick opt out, average claims and hence insurance premiums skyrocket, and the high premiums further discourage healthier people from purchasing insurance. Markets for individual health insurance break down unless insurance companies can charge risk-adjusted rates, which effectively deny insurance to those with pre-existing conditions. To escape this adverse selection in a fair and compassionate way requires universal insurance like the NHS here in England or heavily subsidized high-risk pools.
Moral hazard is a second serious problem with health insurance: People seek more treatment and take more risks if their insurance pays than if they pay. More discriminating diagnostic tests, new drugs, or other more efficacious treatments are often extremely expensive, and those with comprehensive insurance have no incentive to economize.
The cures for moral hazard are co-pays and deductibles or limits on what insurance policies will pay for like those that the findings of the English National Institute for Health and Care Excellence imply. Low co-pays don’t solve the problem, while, as Obamacare has shown, high co-pays and deductibles undermine the value of insurance. If insurance policies address moral hazard instead by specifying what they will and will not cover, then they limit choice. There are tradeoffs between efficiency (which requires limiting reimbursements), fairness (which speaks against high co-pays), and choice (which cautions against reimbursement limits).
Many critics of Obamacare favor a greater role for markets. After all, markets are typically both efficient and responsive to individual choice. But the economic complexities, coupled with the moral concerns, are incompatible with leaving health insurance to the market. Unregulated health insurance markets leave millions uninsured. Moreover, compassionate concern for one another gets in the way: Americans will save the life of the individual who arrives at the emergency room with a massive heart attack, even if, overly confident of his health, he did not purchase insurance. That means that there is in the US a second implicit insurance system of charity care and legally-required emergency care, which greatly increases costs and undermines the discipline that the market would otherwise impose. (Why purchase insurance, if you will be treated for the most serious problems without it?) Trusting to markets, while at the same time interfering with them for ethical reasons, Americans would be back to the hodgepodge that preceded Obamacare: tens of millions uninsured, lives stunted and shortened, a large and growing gap between the health and life expectancy of rich and poor, and far greater costs than any other nation. Going back is not an attractive option.
What alternatives are there? The health-insurance systems of other affluent countries, including the UK, present many models. These provide universal coverage at a lower cost than the US health care system, with or without Obamacare. Though none is without its problems, they can guide us in modifying Obamacare. Most severely limit the role of markets, although Switzerland, Singapore, and the Netherlands show that, with very heavy regulation, private health insurance markets can implement universal coverage.
Obamacare attempts to navigate between the concerns discussed above, but the strength of its regulations, which were essential to cope with informational asymmetries, adverse selection, and moral hazard, offended many Americans, while the weakness of its regulations has undermined insurance markets in some areas. The challenge is to find a policy that copes with the market failures while conforming to moral commitments. I personally place a great weight on compassion and fairness and favor moving toward comprehensive universal health care. Whether others agree or not, whatever comes after Obamacare must be both economically sound and morally defensible.
Daniel M. Hausman is a Professor of Philosophy at the University of Wisconsin-Madison and a Ludwig M. Lachmann Research Fellow with the Centre for Philosophy of Natural and Social Science at LSE. His research focuses on methodological, metaphysical, and ethical issues at the boundaries between economics and philosophy. His most recent book is Valuing Health: Well-Being, Freedom, and Suffering (2015).
Further Reading
- The Incidental Economist Blog
- Daniels, N. (2007). Just Health: Meeting Health Needs Fairly. Cambridge University Press.
- Menzel, P. T. (2012).“Justice and Fairness: a Critical Element in U.S. Health System Reform” The Journal of Law, Medicine and Ethics, 40(3): 582-97.
“Americans need to ask of any plan: Is it compassionate? Is it fair? Does it protect individual choice? Does it control costs? Does it recognize our common vulnerability to suffering and death?”
More importantly — is the replacement fiscally efficient?
You can control costs by providing barriers to spending.
Or – you can make it Fiscally Efficient by spending more up front, that creates cost savings down the road.
Aka – support daily nurse visits to a person’s home – rather than a hospital stay.
“Moral hazard is a second serious problem with health insurance”
90% false
Prices are hidden to consumers.
Consumers can’t push for the higher priced product – because they don’t know how much it costs.
For example – in my city – the price of a pregnancy isnt’ available.
How can I choose the more expensive hospital – if I don’t know what any of the hospitals charge?
The moral hazard problem is not the problem that people will seek out the most expensive treatment. It is instead that, having insurance, they will not economize. Not knowing the costs aggravates the difficulty. It is a symptom of moral hazard. If people had to pay the costs out of pocket, they would demand to know the prices.
Coming in late to this post, but I really think that Obamacare is a textbook example of how contemporary policymaking has gone so wrong. Firstly, criticisms that emanate from a normative preference for free markets are not simply that – a preference for free markets. Rather, those criticisms are really suspicioning towards such ambitious consolidations of industry in being responsive to all the many “complexities” entailed in healthcare, and though this criticism is typically levelled against those favouring a market approach, it somehow always fails to occur equally to our high-minded betters in government, ostensibly immune to intellectual and moral fallibility.
That aside, the main criticism I would make is that all of this is simply not insurance. It is a cross-subsidy programme. Let’s call a spade a spade, or else the prognosis of the programme is sure to be wrong when the programme itself is misidentified (or more probably, misrepresented). Cross-subsidies are one of the most indefensible means of operating anything, when simple tax and transfer methods achieve the same end but without (or at least to a far lesser extent) the inefficiency, distortions, cartelisation and potential for regulatory capture. If you know ex-ante that you are going to pay an artificially higher price to cross-subsidise those who will artificially pay a lower price (the healthy and the unhealthy, respectively) then you are not going to contract with that insurance provider. Instead, you’d opt for a competitor who’d bid you away by offering you a lower rate. Cross-subsidies break down so long as there is competition and choice to not participate in the cross-subsidy. Forcing everyone into the scheme with a mandate (“universal coverage” in compassionate newspeak), requiring insurers to provide mandatory minimum coverage (“comprehensive coverage” in compassionate newspeak), and consequently being left to die out in unprofitable exchanges are logical bad responses to a programme bad to begin with. (And so much here for caring about “choice”). The ACA dropout rates as well as the growth in the number of states/counties with just a single insurer are revealing evidence to these points.
Price and cost controls are generally an area where basic economic literacy ought to be instructive. But good economics is rarely good politics. Fixing (putting a ceiling on) medical loss ratios as well as limits on the ratios between the highest and lowest premiums (both a floor and a ceiling) are de facto price and cost controls. Unprofitability and the resulting market dropouts, as well as general dislocations are predictable outcomes for anyone who has studied a supply and demand graph for more than 5 minutes. And again, how is any of this even remotely resembling “insurance”? It is increasingly evident that political rhetoric (demagoguery) about “affordability”, “protection”, “choice”, and indeed, “insurance”, are all verbal obfuscations for the typical hidden tax and redistribution scheme that characterises virtually every bright idea on the compassionate left, as well as being a verbal trojan horse to gain greater centralised control of the industry as a whole.
But don’t take my word for this, just check out this little doozy from Jonathan Gruber, the economist widely regarded as the chief architect of Obamacare: https://www.youtube.com/watch?v=Adrdmmh7bMo
From the horse’s mouth, “this bill was written in a tortured way to make sure CBO [Congressional Budget Office] did not support the mandate as taxes. If CBO supports the mandate as taxes the bill dies.” Further, if it was “made explicit that healthy people pay in and sick people get money it would not have passed. The “lack of transparency [in the bill] is a huge political advantage”, and that “the stupidity of the American voter . . . was really, really critical to get the thing to pass.” These are the people who are supposed to have an understanding of our “moral concerns”. The blatant moral issues regarding policymakers intentionally deceiving the people, ruining private businesses, and eliminating consumer choices, are pretty obvious, regardless of however much these people may claim to serve the values and morals of the public.
There is so much wrong with Obamacare, and these are just some of the low hanging fruit on a very abundant tree. Yes, we should be compassionate and caring. But in light of all the concerns for “compassion, choice, efficiency, fairness and solidarity”, the more obvious and first-order priority is whether or not the policy even works. There is no point being compassionate in dispensing with a programme that does not deliver. Can we help those who struggle to get healthcare? Sure – that is not my disagreement. The disagreement is in how it is currently being done, the self-congratulatory attitude of its proponents, and the increasingly tiresome dismissal of critics as seemingly unable to grasp the “economic complexities” and “moral concerns” of healthcare. What heartless dummies we all are! Ultimately, the painful irony is that the proponents’ own proposals are themselves economic and moral travesties, even if that fact isn’t so easy to discern amidst all the kind talk about “compassion” and “fairness”.