Code Red: Two Economists Examine the U.S. Healthcare System

October 26, 2009

Stop Presses: Free Market Economist Says Nice Things about Single Payer System

Filed under: Health insurance,Health Reform — David Dranove and Craig Garthwaite (from Oct 11, 2013) @ 4:31 pm

Like a lot of academics, I sometimes find it easy to find the faults with other people’s arguments but have a much harder time being positive. This may be why I am so quick to jump on supporters of a single payer system. Indeed, some of the arguments on behalf of single payer make me cringe. The most facile of these is that we shouldn’t trust anything as important as healthcare to the “greedy” private sector.  If living in Illinois has taught me anything, it is that opposition to greed is no basis for supporting government involvement in anything.

Yet single payer has many virtues and those who quickly dismiss it because “the government can’t be trusted” do a disservice to an important debate.  So let me offer what I believe are the strongest arguments in favor of single payer.  Next week I will put things back into balance.

The best case for a single payer system?  That’s easy.  An unregulated health insurance system will not cover everyone.  Not even close.  Some folks who could easily afford insurance will simply choose not to buy it.  If they fall seriously ill, they might free ride off the largesse of providers (and, eventually, all of us.)  Most of the uninsured, however, will find that they would rather spend money on rent and food.  And who could blame them?  They will still receive care if illness strikes, again free riding on the system.  Perhaps most troubling is that the seriously ill uninsured often face premiums so high as to defy the very meaning of the term “insurance.”

It is possible to dramatically reduce the number of uninsured in a market system through a combination of tax credits, mandates, and insurance market reforms.  But all rules carry baggage including  administrative costs and taxes.  And tax credits for low income individuals that are big enough to make mandates workable will entail increases in effective marginal tax rates (because tax credits decline as income increases.)  At the same time, insurance market reforms drive up premiums for the healthy while rules designed to encourage insurers to sign up high risk enrollees, such as risk corridors and reinsurance, also discourage insurers from trying to reduce spending by the chronically ill.

The second strongest case for a single payer system?  That is even easier.  A single payer system has direct control over the purse strings – the payer writes whatever size check it wants.  HMOs were the private insurance’s last best chance at containing costs, but these were savaged from folks across the political spectrum.  Under single payer, the political process is the final arbiter on the size of the health sector.   If the public doesn’t support the government’s cost containment efforts, it can replace the government.

The third case is tied to the second.  Get rid of private insurance and you get rid of private insurance administrative costs, executive compensation, and profits.  The latter two are not that big in the grand scheme of things, but expenses for medical underwriting, sales and marketing are enormous – perhaps 5 percent of total health costs. (Other costs, such as for claims processing, do not go away with single payer but could be substantially reduced thanks to the simplicity that comes with having just one payer.)

Let me make one more case that comes in the form of a sort of counter-argument.   One of the strongest arguments for free market anything is that markets are usually terrific at rewarding innovation.   In principle, we should support free market insurance for the same reason.  Except when you try to find great innovations in health insurance, you come up fairly empty.  Payment reform?  The government started that in the 1970s. Disease management?  Ditto, and again in the 1970s.   Report cards?  Medicare in the 1980s.   There are exceptions –HMOs and integrated delivery systems developed without government help and were embraced by private insurers.  But the track record on private insurance innovation is spotty at best.

These are sound arguments that do not go away just because the government is, well, the government.  A single payer approach would not be the end of the world.  At least I hope not, because once we have it, we almost surely wouldn’t go back.

The other side next week.   One nice thing about debating myself – I can’t lose!

1 Comment

  1. “One of the strongest arguments for free market anything is that markets are usually terrific at rewarding innovation.”

    However, in the presence of enormous asymmetric information, like in, well, medical care and insurance, the innovations can be not in providing greater utility to the consumer, but in deceiving and scamming the consumer better.

    It also depends largely on vigorous competition of many providers, but in the presence of enormous economies of scale, like in, well, medical care and insurance, it can be far more efficient to have few or one provider, and then there goes the competition; hello enormous inefficiency from oligopoly or monopoly.

    And, it depends on there not being large externalities, like in, well, medical care and insurance, where the innovations can be ones that benefit those internal to the transaction, but can impose great uncompensated costs and inefficiencies to those external to it.

    Comment by richardhserlin — December 2, 2009 @ 1:43 am

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