Making the case for national health care.

A reader responds to my entry on HSAs with a detailed discussion on the benefits of a national health care system:

I am for a national healthcare system. However, maybe not for the same reasons that most people are…. I have a very informed position, but understanding takes a lot of background in economics and the healthcare sector….

First, healthcare (HC) and Healthcare insurance (HCI) costs are not high because of greedy HCIs. Many HCIs are not-for-profit (like the Blues). They operated on margins of less than 2%. Many for profit companies are in the same boat. Many are sinking financially.

Second, HCI is a litle different than other types of insurance. Coverage is bounded by wealth/income (eg a if you can afford a $150k house you can generally afford to insure it *and you can only insure it up to its appraised value*. You cannot insure a $150k house for $300k. That is a "moral hazard".

With HCI everyone is paying the same rate, but the amount of coverage is not bounded by normal economic limits (on the upward side). Thus, rate/premium setting in HCI insurance very much is like making book or projecting finances for a casino. It's like gambling.

How do we (HCI) do this? We use statistics. Now, it's a law of statistics that precision of analysis increases with size of sample (or population). The bigger the risk pool (the set or subset of consumers in question for a HCI plan) the more precisely we can calculate our risk and the more precisely our premiums can be set to match expected benefits incurred (claims). This need for larger risk pools speaks to an advantage of a pool consisting of the entire nation, but, more immediately to other issues - specifically, market segmentation.

Any time you segment a market, say to introduce a new HCI product or to offer some experience rated premiums, you are playing with fire. Caution is advised. Market segmentation decreases the size of your risk pool; making risk harder to calculate with accuracy. Market segmentation also introduces opportunities for adverse selection problems to creep into your system.

Adverse selection involves a skewing (often unexpected) of the characteristics of those in a risk pool such that they have a tendency to cost significantly more (or less) than expected.

Example: An HCI co. wants to capture the 18 to 30 yr old market. It figures out this group is healthy and could be insured for very low cost...so the HCI co. creates a product only for that age group. The original product for all ages cost $400/month. The new youth product costs $100/month. Great! What a deal!

But what happened to the product for those 31yr and over? The premium now rises to over $700 to keep pace with claims. The older group is being priced out of the market.

**A fundemtal law of HCI is that the healthy must subsidize the sick**.

HSAs and those things will attract certain market segments like the healthy and wealthy. You get the rest. Another point in favor of, in my opinion, national health. One system fits all without market segmentation.

Though supplemental policies would be pricey because of adverse selection. Those most likely to buy the supplemental would be those most likely to use it.

Moving along the spectrum of HCI issues we arrive at information. As you have probably gathered, HCI is an intensely information driven sector. Every time HCI cos. merge there is an information crisis. It seems as though no two companies use the same database technology, nor the same informational terminology, etc. Hospitals do not either. Nor do other providers. The entire HC system is informationally fragmented.

HCI cos. do not share information, meaning HCI cos go into new market territory "blind" as to risk. This costs money. The lack of sharing also decreases the size of risk pools being analyzed. This costs money.

This state of affairs costs all stakeholders. And not just dollars, but quality as well. A national system would, presumably, have standardized IT and terminology. I see the resulting savings from this one aspect of HCI alone as being in the hundred billion $ per year range (some say much more).

Finally, I see national HCI as decreasing some of the market failure aspects of the sector (re: skewed incentives). The main reason HC costs are increasing is that consumption (utilization) is increasing. More people can be treated for more conditions (expansion on the intensive and extensive margins). This because science/medicine keeps cranking out more and newer technology.

This is a good thing to some extent. It can be bad because much of what's new does not involve marginal benefits equal to the marginal cost (the benefit is less, eg drug brand X cost ten times the amount of the old generic, but it only provides 1.5 times the pain relief).

However, in a free market where HCI divorces consumers from price at the point of consumption, decisions are not made based on value. I believe that a national system (like in Australia) would rein in costs by not covering new products where marginal benefit is not equal to cost.

Such products could be purchased out of pocket. The system could encourage development of true cost saving technology.

HC costs will continue to rise because of expanding consumption on the intensive and extensive margins. Even cost saving technology may raise costs because the volume of consumption increases. A surgery that used to be deemed to risky/not worth the complication for most people may now be performed for most people because new surgery techniques make it safe, quick and cheap. Good news, yet still cost increasing overall.

No one is in control of these processes right now. I'd like to see some guidance. There is too much asymmetry of information for the private sector to work this out alone. Again, nationalized system could be more efficient.

I am for national as opposed to state programming. I strongly urge you to research the Tiebout economic modeling theory. Tiebout was concerned with - among other issues - how the mix of services provided effects the re-location decision making of populations.

I am very suspicious of state based programming in place of federal. Federal can spread revenues. State based can lead to development of worsening poverty pockets; especially in the poorer states. A phenomenon much, on an even more localized level, like the plight of the inner cities/urban decay.

I do have a concern that I don't see often discussed. That is the politicking of HC under a national system. Example: The system denies coverage of a certain procedure becuase it is not found to be cost effective. Maybe only a small percentage of the population receiving the treatment gets a benefit (and that benefit is small). However, the producers of the technology and/or physicians want to use the treatment. Consumers start to bellyache.

Some politician runs on a platform of increasing HC coverage to include this (and other) denied treatments. Ill informed consumers vote for the politician.

I see politicians as causing cost increases in this way. Also, good old fashioned campaign funding schemes by producers, etc could have an impact. I don't know if this is endemic to the American lifestyle/politics. Other systems in other countries seem to manage....

I haven't had the chance to look too deeply into the Australian system he mentions above…but I will share my immediate concern regarding standardized IT and terminology. The federal government, time and again, has shown an alarming inability to master IT programs and the flow of information.

Exhibit A:

After the attacks of Sept. 11, 2001, Mueller made improvement of the agency's computer systems a priority. Members of Congress and the independent Sept. 11 commission said the overhaul is critical to enabling the FBI and intelligence agencies such as the CIA to "connect the dots" in preventing attacks.

[…]

But Fine noted that each phase of the Trilogy project "has been plagued by delays." Even when Congress provided an extra $78 million to rush completion of the first two parts of the project, the FBI managed to beat the original target date by just a month, he said.

Trilogy has so far cost taxpayers $581 million, $200 million more than originally budgeted. The FBI has yet to say how much more money will be needed to put an up-to-date case management system in place.

Exhibit B:

Experts blame poor planning, rapid industry advances and the massive scope of some complex projects whose price tags can run into billions of dollars at U.S. agencies with tens of thousands of employees.

"There are very few success stories," said Paul Brubaker, former deputy chief information officer at the Pentagon. "Failures are very common, and they've been common for a long time."

[…]

The bureau's mess -- the subject of an investigation by the Justice Department and an upcoming congressional hearing -- was the latest black eye among ambitious technology upgrades by the government since the 1990s.

The Internal Revenue Service sought $388 million last year for its $1.7 billion "Business System Modernization" program, which congressional investigators said continues to be over budget and 15 months late. The plan will modernize the IRS systems for collecting taxes, auditing returns and helping taxpayers with questions.

The Federal Aviation Administration has doubled its cost estimates to $1.69 billion for its "Standard Terminal Automation Replacement System" since 1996, according to the Transportation Department's inspector general. The new system would replace the outdated computers that control air traffic within five to 50 miles of airports.

How do we take advantage of the larger pool discussed above without layering the system in so much bureaucracy that it fails to address the problems a national system is meant to alleviate?

Healthcare