killer buffalo

The American health care system is a lot like Former President George W. Bush: it has a soft spot for the private sector, it costs the nation dearly, and it was a lot more popular seven years ago.

It’s also similar in that it exists in a world unburdened by basic economics; where the American system has a public program—Medicare—that will use federal money to treat cancer in a retired sixty-eight-year-old who no longer pays income taxes, it has no such program to help a fifteen-year-old buy antibiotics for pneumonia, even though local and state governments have invested tens of thousands of dollars in the fifteen-year-old’s education and even though the fifteen-year-old has decades of income taxes yet to pay.

It has been two months since Mr Bush fled from Washington, and yet the United States’ health insurance system—dreamed up by depression-era businessmen in rooms full of cigar and cigarette smoke—has continued to plague Americans like a self-induced lung cancer, that is, from the inside, out.

While President Obama’s proposed health care plan broadens eligibility standards for Medicaid—the public insurance program for low-income Americans—and mandates health insurance for children, it doesn’t socialize medicine, so some citizens will remain uninsured.  These people, who will be between eighteen and sixty-five, and in jobs which don’t provide health care benefits—often ones that pay below the national average—will be forced to pay more for health insurance if they want it.

As long as there exist public health insurance alternatives, private companies will be allowed to charge outsized premiums to risk-heavy customers—those likely to need significant medical attention in the near future.  Meanwhile younger, healthier Americans, and those employed in high-income jobs, will opt for the private plans which they will rarely use.  Federal plans will, therefore, either offer insurance at uncompetitive rates or hemorrhage money.  In the second and far more likely case, healthy citizens, some of whom won’t have insurance, will subsidize the care of aging and unhealthy ones, much like they do now with current Medicare policy.

If instead federal plans offer insurance that reflects true costs, it will leave a price gap that private insurance companies will eagerly fill.  Thus Americans now uninsured will be left sponsoring public insurance in addition buying their own or buying insurance at above current prices, which begs the question—why does Mr Obama think people who aren’t currently buying health insurance will buy it after his policy is implemented and it’s, effectively, more expensive?

Among health insurance companies, it’s no secret that those who purchase health insurance are more likely to need it than those who don’t.  This process of adverse selection, customers subscribing to insurance because they know something insurance companies don’t, makes insurance prices higher than if they were mandatory—a situation where adverse selection couldn’t take place.

Whereas Mr Obama could decrease insurance premiums by proposing Congressional legislation requiring Americans to purchase insurance and subsidizing those who truly couldn’t afford it, he has opted to continue a policy of optional, more expensive insurance.  If he believed in his argument that providing more Americans with health plans lowers health care costs by discovering health risks before they grow, then he would ensure that all citizens become covered and help close the budget deficit at the same time.  That Mr Obama is looking to implement no such policy makes the argument look more like a fragile justification in the face of conservative opposition than a legitimate cost analysis.

As recent health care reforms in Massachusetts have proven, mandatory health insurance requires increased government funding in Medicaid as a result of a gap between those who now qualify for Medicaid and those who are able to fully pay for insurance.  Ceteris Paribus, that would mean higher taxes.  However skirting the so-called “death spiral”—healthier individuals dropping insurance because of rising costs leading to a higher proportion of insured individuals who utilize health insurance leading to rising costs—might cancel the costs of broader Medicaid coverage.

Without taking into account the risks of optional insurance, it will be difficult for Mr Obama’s health care reform plan to work.  As Mr Obama may soon learn, leaving the health care industry partially private and partially public will result in a situation similar to that of the U.S. military and military contractors in Iraq: the private companies earning the profits and the public entities assuming the risk.

In any case, his plans do suggest an important trend—that health insurance costs rising by an average of nearly 7% percent per year have gotten the nation’s attention and motivated system-wide reform.  Indeed, America is waking from a long and expensive coma.

-David Lamb

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