Health Care and Individual Mandates
In this post on Hillary Clinton’s proposed health care plan commenter Grewgills had comments that require rather extensive answers (and I did write a lengthy reply, unfortunately when I tried to post it, the operation timed out eating the comment). Anyhow, this post is to provide some additional commentary and a response to Grewgills as to why I don’t like Clinton’s health car prosposal.
Like Ronald Bailey mentioned in the linked article I think individual mandates could be part of a reform of health care that could make health care more consumer driven. My biggest problem with Senator Clinton’s plan is that it doesn’t do this. Senator Clinton’s plan will force employers to provide health care for employees and for those firms that can’t do this due to cost constraints Clinton’s plan will offer subsidies. People will also have the option of enrolling in the same health care plan members of Congress have access to or Medicare.1
The problem here is that this restricts choice for consumers, and when you restrict choice it usually goes along with reducing consumer welfare. Imagine going to the movies and you have only three movies: a comedy, and action movie, and a documentary; vs. going to the movies and having 6 choices: a comedy, a horror movie, an action movie, a documentary, a romance, and a second comedy. In which situation do you think you’ll be more likely to find the movie that you’d prefer?
Employer plans are limited in choice, they are ultimately paid for by the employees (or in the case of the subsidized plans the tax payers–which means consumers) and they are usually selected to benefit the company. Thus, if health care costs go up, then your wages might not grow as fast, wages could even stagnate or in some instances decline. And for the subsidized plans your tax bill would go up. So to the extent that these kinds of policies induce over-consumption it actually would add to the problem not decrease it.
Why would employer provided health care result in over-consumption? The tax deferred nature of benefits. Suppose your tax rate is 20% and your health care costs $1,0002. Now if you were paid that $1,000 and then required by law to purchase an insurance policy you’d have only $800 with which to go buy insurance. Under the current employer-provided system you’d be allowed to purchase a $1,000 policy. Hence you’d be more likely to consume health care resources especially since this tax deferred status would also provide an incentive to move more and more things under “health insurance” such as pregnancy care, child delivery, eye glasses and other low cost and common health events. This would allow the employee to consume a larger amount of resources while at the same time avoiding taxes. Or more simply your glasses are now paid for via tax deferred dollars. To the extent that this effect is on-going you’d see upward pressure on the prices for health care resources, all other factors being held constant.
One solution to the above problem is to make the tax benefit of health benefits symmetrical. That is tax the benefits as income, or if a person opts to take the cash and go buy health insurance of some sort that expenditure is treated as a tax credit. Thus, people are now indifferent to where they get their health care benefits provided that equivalent policies are available both through the employer and in the market place.3
Another part of Clinton’s plan that I don’t like is the vague rhetoric about using the coercive power of the State to secure price discounts for pharmaceuticals. While this might sound like a good idea, it sounds too much like price controls or government expropriation of profits. The effect of these two things would amount to pretty much the same outcome over a long enough period of time: fewer new drugs. Basically under either scheme the rate of return on the investment a drug company would make would be reduced. As such, drug companies would curtail their investments and hence fewer drugs.
While one could argue that private insurance firms can do something similar they lack the coercive power of the government. Insurance companies do not have paramilitary units that they can send into terrify your work force, arrest your managers and executives, seize your records, or even freeze bank accounts and enforce asset forfeitures. Thus I find such comparisons rather inapt.
Another point to consider: just about every country out there has a problem with its health care spending. Canada, England, France, Germany, etc. All of them are looking at serious fiscal issues in the not too distant future. And one of the things many of these countries are doing to address this looming fiscal problem is to…limit access to health care. Sure in theory access is free and available to everyone. The reality in places like Canada and England is that you’ll likely end up on a waiting list and wait weeks maybe months depending on what sort of treatment you need. This kind of thing distorts statistics on health care costs since most governmental statistics deal only with dollar costs and not the costs of having to put up with a painful medical condition that limits your life and reduces your welfare for four months while you wait for treatment.4
One comment in particular from Grewgills is one I hear often and always sets my teeth grinding,
It is true that any comparisons will be obscured by other factors. Every other Western industrialized nation has managed to implement universal care and pays considerably less for care and gets measurably better results than we do.
While this maybe true, it isn’t immediately obvious from the official statistics industrialized nations produce. Take infant mortality for example. In the U.S. any birth where the fetus shows signs of life at the time of birth is considered a live birth. This isn’t the case in other countries:
- In Austria and Germany, fetal weight must be at least 500 grams (1 pound) to count as a live birth
- in other parts of Europe, such as Switzerland, the fetus must be at least 30 centimeters (12 inches) long
- In Belgium and France, births at less than 26 weeks of pregnancy are registered as lifeless
- And some countries don’t reliably register babies who die within the first 24 hours of birth.
All of these factor can distort infant mortality statistics and these factors should be controlled for when making cross-country comparisons. That is you should consider infants that are considered as “live births” in all countries you are looking at. For example, if you are looking at infants in the U.S., France and Belgium you might want to exclude infants in the U.S. that are born at less than 26 weeks of pregnancy. When we do this how do the infant mortality statistics look? Closer? Statistically indistinguishable?
And when it comes to life expectancy it is a rather gross statistic that can incorporate lots of other factors unrelated to health care. How is a homicide victim treated when it comes to statistics on life expectancy? If the U.S. has a higher homicide rate than another country how exactly does that relate to the health care system in either country? And what about the infants and the differences as to what counts as a live birth mentioned above. If a premature baby in the U.S. dies and the age of death is listed a zero whereas in another country it wouldn’t be included at all, then you have a pretty serious measurement error issue.
1Technically, this isn’t quite the case, but people will have the option of entering a public plan “similar to Medicare” (link).
2Yes, yes I know this is totally unrealistic, the point isn’t to paint reality which would be cumbersome and obscuring, but to provide a simple example of how the tax status of benefits can be playing a role in higher health care prices.
3I am ignoring, at least for this post the effects of pooling that employer provided health care can pose for this issue.
4Please note that I am not saying that because of this the U.S. system is great, good or even better. What I’m pointing out is that there does not seem to be a simple and easy solution…at least one that makes everybody better off.