Sunday, August 9, 2009

Health Reform Made Opaque

Last week I responded to Paul Krugman's inadequate defense of socialized health care. In a recent blog -'Health reform made simple' - Krugman has set out the fundamental basis of the current health care reform effort in Congress.

"The essence is really quite simple: regulation of insurers, so that they can't cherry-pick only the healthy, and subsidies, so that all Americans can afford insurance". If our goal is a system that provides a minimum level of health care (however defined), to the most number of people, at the lowest cost, then it does make sense for government to provide vouchers for those who cannot afford it themselves -as is done with food stamps. But why, if everyone is guaranteed an affordable minimum level of care, should insurers be given mandates? Surely that leads to distortions and inefficiencies in the operation of insurance markets. In practice, the system of mandates has led to privileges for industry 'insiders' who benefit from specific mandates and from restrictions on inter-state purchasing of insurance. One glaring defect of the current system of mandates is that routine and low cost health expenditures are forced into the insurance system and push up administrative costs. If we wish to see insuring costs reduced, we need to increase competition and flexibility in the marketplace, not restrict it. In any event, increased regulation and mandates of insurers is not required to achieve universal health care coverage.

Krugman goes on to state "Everything else is about making that core work". First, he says,"Individual mandates are a way to prevent gaming of the system by people who don't sign up until they're sick". This appears superficially plausible until you consider that anyone who can afford health insurance without a subsidy would be ill advised to play such a 'game', since they will be stuck footing the bill when they become ill (at least until the point where their costs drain all their wealth). As for those who cannot afford health insurance without a subsidy...well, they're going to be taken care of by the State in any event. There is simply no good reason to abridge liberties by mandating that people purchase insurance.

Second "employer mandates are a way to hold down the on-budget costs by preventing a rush by employers to drop insurance". Huh? What would cause employers currently making contributions to do that when contributions to health care is part of the wage bargain? What such a mandate does create is a requirement that small businesses begin to provide coverage. But those are the employers least able to do so and forcing an extra cost onto the most entrepreneurial sector of our economy is inequitable and will reduce potential economic growth.

Finally, Krugman explains " the public option [is] a way to create effective competition and hold costs down further". Suppose that competition from government could reliably "create effective competition", why limit it to health insurance? Why not have a 'government option' in computers, burgers and,well, everything? The only way government can compete effectively is if either (1) it bends the rules of the game in its favor,or (2) the taxpayer subsidizes its operation to allow it to sell output at below cost. Either way, government makes things less efficient.

If the goal of health care reform is to provide universal coverage for catastrophic events and to encourage efficiencies to lower costs, the sensible way to go is to provide subsidies to purchase premiums for those who cannot afford the premiums themselves - whether because of low income or pre-existing conditions - and to dismantle the barriers to free enterprise in health care. So much more can be accomplished by unleashing market forces; as by ending insurer mandates and barriers to inter-state competition, eliminating the employer tax subsidy and instead confer it on individuals - thus making health care patient-centric- and implementing tort reform to limit liability insurance costs.

That would make health reform simple and effective.

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