Hoisted from the Archives: The Health Care Crisis
Paul Krugman and Robin Wells on the health care crisis:
The Health Care Crisis and What to Do About It - The New York Review of Books: [H]ealth care spending is rising rapidly.... "[N]ew medical technology" is the major factor in rising spending: we spend more on medicine because there's more that medicine can do. Third, in medical care, "technological advances have generally raised costs rather than lowered them": although new technology surely produces cost savings in medicine, as elsewhere, the additional spending that takes place as a result of the expansion of medical possibilities outweighs those savings.
So far, this sounds like a happy story. We've found new ways to help people, and are spending more to take advantage of the opportunity. Why not view rising medical spending, like rising spending on, say, home entertainment systems, simply as a rational response to expanded choice? We would suggest two answers.
The first is that the US health care system is extremely inefficient, and this inefficiency becomes more costly as the health care sector [grows].... The inefficiency of our health care system exacerbates a second problem: our health care system often makes irrational choices.... American health care tends to divide the population into insiders and outsiders. Insiders, who have good insurance, receive everything modern medicine can provide.... Outsiders... receive very little.... In response to new medical technology, the system spends even more on insiders. But it compensates for higher spending on insiders, in part, by consigning more people to outsider status—robbing Peter of basic care in order to pay for Paul's state-of-the-art treatment. Thus we have the cruel paradox that medical progress is bad for many Americans' health....
In 2003 only 16 percent of health care spending consisted of out-of-pocket expenditures by consumers. The rest was paid for by insurance, public or private.... [I]n any given year, most people have small medical bills, while a few people have very large bills.... 20 percent of the population accounted for 80 percent of expenses. Half the population had virtually no medical expenses; a mere 1 percent of the population accounted for 22 percent of expenses.... [I]f people had to pay for medical care the way they pay for groceries, they would have to forego most of what modern medicine has to offer, because they would quickly run out of funds in the face of medical emergencies.
So the only way modern medical care can be made available to anyone other than the very rich is through health insurance. Yet it's very difficult for the private sector to provide such insurance, because health insurance suffers from a particularly acute case of a well-known economic problem known as adverse selection.... [I]magine an insurer who offered policies to anyone, with the annual premium set to cover the average person's health care expenses.... Who would sign up?.... Healthy people, with little reason to expect high medical bills, would probably shun policies priced to reflect the average person's health costs.... The insurance company would quickly find that... actual costs per customer were much higher than those of the average member of the population. So it would have to raise premiums to cover those higher costs. However, this would disproportionately drive off its healthier customers, leaving it with an even less healthy customer base, requiring a further rise in premiums.... Insurance companies deal with these problems, to some extent, by carefully screening applicants... [which] tends to screen out exactly those who most need insurance.
Most advanced countries have dealt with the defects of private health insurance in a straightforward way, by making health insurance a government service. Through Medicare, the United States has in effect done the same thing for its seniors. We also have Medicaid... But nonelderly, nonpoor Americans are on their own... [and] get insurance, if at all, through their employers.
Employer-based insurance is a peculiarly American institution... the result of historical accident.... Employer-based insurance has historically offered a partial solution to the problem of adverse selection.... 63.1 percent of Americans under sixty-five received health insurance through their employers or family members' employers.... [T]he whole system of employer-based health care is under severe strain.... Providing health insurance looked like a good way for employers to reward their employees when it was a small part of the pay package. Today, however, the annual cost of coverage for a family of four is estimated by the Kaiser Family Foundation at more than $10,000.... Now that health costs loom so large, companies that provide generous benefits are in effect paying some of their workers much more than the going wage—or, more to the point, more than competitors pay similar workers. Inevitably, this creates pressure to reduce or eliminate health benefits. And companies that can't cut benefits enough to stay competitive—-such as GM—-find their very existence at risk.
Rising health costs have also ended the ability of employer-based insurance plans to avoid the problem of adverse selection.... [E]mployers are starting to make hiring decisions based on likely health costs....
Notice that this unraveling is the byproduct of what should be a good thing: advances in medical technology, which lead doctors to spend more on their patients. This leads to higher insurance costs, which causes employers to stop providing health coverage. The result is that many people are thrown into the world of the uninsured, where even basic care is often hard to get. As we said, we rob Peter of basic care in order to provide Paul with state-of-the-art treatment...
