Sunday, February 11, 2007

Krugman, Edwards and Health Markets, pt. II

In my previous post I looked at Senator Edwards' health care plan and argued that it could be simplified by getting rid of the regional Health Markets (which, I argued, already exist) and instead simply allowing anyone who wants to sign up for Medicare (on some sort of sliding fee scale).

A number of people objected to that proposal, claiming that ultimately it would serve to undermine Medicare. I think that assessment is deeply mistaken.

Look, let's say that there are X uninsured people out there and that those uninsured people will use, on average, $Y in health care. That means that, when health insurance is mandated, the health insurance market, taken as a whole, now has to pick up $XY in additional costs.

Now that money has to come from somewhere. Clearly the sick people themselves aren't going to be paying it; if they could do that, they wouldn't have needed insurance in the first place. So the funds have to come from somewhere. I see four possibilities.

1. Insurance companies raise premiums on everyone. In this scenario, the extra money comes out of the pockets of healthy people, regardless of their income levels.

2. Insurance companies pass the increased costs along to the employers who are required to provide insurance coverage. Of course, Ford and GM and Wal-Mart aren't going to just eat the costs of those increased premiums. They're going to pass those costs along to the consumers in the form of higher prices for various goods. Increased prices for ordinary goods will hit the poorest the hardest.

3. The government picks up the tab in the form of tax breaks for insurance companies and/or employers. Corporate welfare at its finest here. Plus this will mean increasing taxes. To the extent that our tax system is progressive, that at least means that those who can most afford it subsidize health care, an advantage over (1) and (2).

4. We enroll all the additional sick people in Medicare. Again, this means increasing taxes, so the ultimate effect of (4) is identical to (3). Except that, by adding all the sick people to Medicare, we make Medicare really huge. And that's a good thing, in the end, since huge companies have lots more leverage to negotiate better prices.

In short, it's not clear how, economically, a plan that makes private companies pick up (and ultimately pass along to consumers) the additional cost of insuring the sick is an improvement over a plan that simply enrolls them all in Medicare. They won't magically cost less to insure in private plans, and the costs of such a plan are passed along in non-progressive ways.

(crossposted at John Edwards' blog)

2 Comments:

Anonymous Anonymous said...

Two quibbles:

Minor quibble:
"Of course, Ford and GM and Wal-Mart aren't going to just eat the costs of those increased premiums. They're going to pass those costs along to the consumers in the form of higher prices for various goods."
- or they could pass it on to the employees by paying them less: the same way that as an employee you make less than you make as a contracor (you get a higher hourly wage in place of benefits) when your benefits are increased, you lose cash dollars from your paycheck. This could happen with an immediate cut in wages, but more likely it would be snuck in with more demanding hours, cutback on other kinds of perks and benefits and fewer raises until over time the difference was made up.

Major quibble:
"Except that, by adding all the sick people to Medicare, we make Medicare really huge. And that's a good thing, in the end, since huge companies have lots more leverage to negotiate better prices."

No! Thats a bad thing!
When government subsidizes a program and removes the hard budget constraint and incentive to maximize profits, when government takes the risk so that the organization (in this case the insurance company) doesn't have to, and then this organization has market power - is essentially a monopsony - it produces the same effect as a price control. The same thing that happens in Canada when the pharmaceuticals are forced to charge too low a price for their drugs would happen here where we would be artifically creating similar market conditions by subsidizing the insurance industry until it can weild that kind of market power and force pharmaceuticals to charge an unprofitably low price. In the end we'd force the pharmaceuticals out of business and no new ones would open. Check out all the great new medicines being invented in Canada (hint: none).

9:16 PM  
Blogger Joe Miller said...

You're right about your major quibble. And if I were strictly a libertarian, I'd be right with you there. But my interest is slightly different. I think that, in the world we actually inhabit, some government intervention in health care is bound to happen. If leftists get their way, then what we're going to end up with a single-payer healthcare, and that, I suspect, will be a bad thing.

Ideally what I'd like to see is pay-as-you-go healthcare, with subsidies for those who can't afford to do so. But that isn't all that likely to happen either.

What we're left with is some sort of compromise. So my hope is to create something that (a) satisfies liberals, while (b) works with the market rather than trying to subvert the market. In that sense, I think that opening Medicare to everyone is the way to go. If people really do all sign up for the program, then fine. If it bombs terribly, then also fine. Either way, the market should take care of things.

I do think that perhaps you underestimate the power of the market in your assessment of pharmaceuticals, though. If there is a market for something, then it'll get produced and sold. If there isn't a market, then it probably won't get produced and sold. The fact is that we have a lot of regulation already out there. But things for which there is a genuine market still manage to make it to the market. I suspect that the same would be true of new drugs.

9:54 PM  

Post a Comment

Links to this post:

Create a Link

<< Home