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WWWD, Health Care Edition

By Jack M. Balkin

What would George W. Bush do about health care? His former advisor, N. Gregory Mankiw, provides a clue in his article The Pitfalls of a Public Option. Like Bush assuring consumers that "you can go to an emergency room" if you need health care, Mankiw argues that no public option in insurance is necessary: "We don?t need government-run grocery stores or government-run gas stations to ensure that Americans can buy food and fuel at reasonable prices." Here is Paul Krugman's response:

Economists have known for 45 years ? ever since Kenneth Arrow?s seminal paper ? that the standard competitive market model just doesn?t work for health care: adverse selection and moral hazard are so central to the enterprise that nobody, nobody expects free-market principles to be enough. To act all wide-eyed and innocent about these problems at this late date is either remarkably ignorant or simply disingenuous.

Krugman actually understates just how unconventional the economics of health care can be. Given these divergences from standard market models, Brad Delong may well be right to say that even Friedrich Hayek could approve the idea of a public plan: it's a way "to use the market as an institutional discovery mechanism."

Of course, most modern-day Hayekists are more likely to take Mankiw's view than Delong's; namely, that "private insurers, lightly regulated to ensure that the market works well, would offer Americans the best health care at the best prices." We have a sense of how concentrated the private insurance industry and providers are. What exactly does "light regulation" look like in that context?

One clue can be found in Reed Abelson's excellent article in today's NYT, Insured, but Bankrupted by Health Crises. The story of the Yurdins conveys just how risky such a market can be:

[M]any . . . people . . . have coverage so meager that a medical crisis means financial calamity. One of them is Lawrence Yurdin, a 64-year-old computer security specialist. Although the brochure on his Aetna policy seemed to indicate it covered up to $150,000 a year in hospital care, the fine print excluded nearly all of the treatment he received at an Austin, Tex., hospital. . . .

At St. David?s Medical Center in Austin, where he went for two separate heart procedures last year, the hospital?s admitting office looked at Mr. Yurdin?s coverage and talked to Aetna. St. David?s estimated that his share of the payments would be only a few thousand dollars per procedure.

He and the hospital say they were surprised to eventually learn that the $150,000 hospital coverage in the Aetna policy was mainly for room and board. Coverage was capped at $10,000 for ?other hospital services,? which turned out to include nearly all routine hospital care ? the expenses incurred in the operating room, for example, and the cost of any medication he received.

In other words, even the hospital couldn't understand (or anticipate) the tactics of Aetna. I wonder if Mankiw disapproves of Aetna's approach here--or if he'd like to see Gotcha Capitalism further extended into the health industry.

Before ditching the public plan option, politicians should think hard about what the world of health care will look like without it. Jon Cohn provides a projection:

Fast forward a few years to the first day that [a weak] reform bill--signed with much fanfare in the Rose Garden, with a beaming bipartisan coterie--takes effect. The bill's crown jewel is not the public option, but a "national insurance exchange," a benefit clearinghouse that is supposed to sign up private insurers to provide choices to people without workplace insurance. These choices vary based on the region you live in, to reflect the plans in the local market.

In many markets, however, the choices turn out to be roughly as limited as they are today, when the dominant insurer enrolls at least half of privately insured people in 16 states and at least a third in 38 states. The national insurance exchange is meant to create greater competition, but for most of the country, the choice is basically between WellPoint and UnitedHealth--gargantuan for-profit insurers each about the size of Medicare. Yes, there is more than one choice in most areas, but not choices that meaningfully differ from each other, or from what is on offer today. . . .

Not surprisingly, the premiums that most plans offer within the exchange are just as high as they are today. Without a public plan offering coverage that, estimates project, would be around 25 percent cheaper, the private plans in many markets are free to gouge consumers without much concern about losing business. And without pressure on these plans to control costs, they aren't about to cut back their administrative waste or high profits or excessive executive salaries, much less bargain aggressively with drug companies and hospitals demanding ever higher prices.

Not a pretty picture. I've addressed the "ostrich economics" of Mankiw before. I hope that he will recognize that, just as many supply side positions are not supported by current economic research, "markets uber alles" is not a good slogan for genuine health reform.

X-Posted: Health Reform Watch.

Full post as published by Balkinization on July 01, 2009 (boomark / email).