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February 11, 2007

John Edwards Leaves The Gate On Health Care

From Dean Baker I learned...

John Edwards jumped ahead of the other designated major candidates in proposing a detailed plan to get to universal coverage.

Hooray for Senator Edwards, who deserves nothing but credit for jump-starting the debate.  His proposal envisions a future with mandatory universal insurance coverage, provided through a combination of public and private sources, and "regional Health markets" designed to resolve the problem of constructing adequate risk pools.

The risk-pool problem has presumably helped (along with tax subsidies, of course) to entangle the provision of insurance with employment, but Senator Edwards is apparently uninterested in moving away from employer-based health care plans:

Businesses have a responsibility to support their employees’ health. They will be required to either provide a comprehensive health plan to their employees or to contribute to the cost of covering them through Health Markets.

This doesn't seem like such a good idea to me.  As Gary Becker wrote not too long ago:

The tying together of health insurance with employment is partly a legacy of World War II, when employers began to offer health insurance as a fringe benefit to help them compete better for workers whose wages were regulated by the wartime government. Employer-provided health insurance expanded over time even after wage controls were abolished because income tax rates rose greatly over time. This artificial incentive to combine health insurance with employment would be eliminated under [President Bush's] proposal.

Or, as Mark Thoma notes (citing an argument by Ezekiel Emanuel and Victor Fuchs that was also picked up by Arnold Kling):

...there does seem to be movement toward universal care, and all sides generally agree that employers should get out of the health insurance business.

An argument for employer-based system might start with arguing that it is the only way to combat the isolate and kill strategy of insurance companies described by Brad DeLong

Insurance companies work like dogs to avoid selling insurance to people who are expensively sick or likely to get expensively sick. As a result, a huge amount of people's work-time and information technology processing power are wasted on the negative-sum game of trying to pass the hot potato of paying for the care of the sick to somebody else. The more people separate themselves or are separated into smaller and smaller pools with calculably different exposures to risk, the worse this problem gets. The way to solve it is to shove people into pools as big as possible.

Tyler Cowen has a response to this, but in any event it would seem that the Edwards regional Health markets gets to that issue independently -- why the insistence that businesses "provide a comprehensive health plan to their employees"?

The best -- or at least the cleverest --argument I've seen for employer-provided insurance comes from Steve Landsburg in his book The Armchair Economist:

Employers typically have less than perfect information about what their employees are up to. This makes it hard to get incentives right. You can't reward productivity that you can't observe...

Many employers provide their employees with more health care coverage than is required by law, essentially giving an extra $500 worth of medical insurance instead of an extra $500 in wages. At first this seems mysterious: Why not give employee the cash and let them spend it as they want?  A partial answer -- and perhaps the entire answer -- is that employees prefer nontaxable benefits to taxable wages.  But another possible answer is that good health care enhances productivity.  If productivity were easily observed and rewarded, there would be no issue here, because employees would have ample incentives on their own to acquire adequate health care.  But in a word of imperfect information, employee benefit packages can be the best way to enforce good behavior.

Interesting argument, but it is, of course, a reason employers would continue to provide health care benefits of their volition -- no mandate, or tax subsidy, required.   

So, I'm not quite sold on the whole Edwards package, but do say kudos again for laying the ideas out in plain view. Now, I think, the onus is on everyone else to explain what they have in mind, and why it is better than what is now on the table.

UPDATE: Arnold Kling lays out his own vision, at TCS Daily.  (Here I offer a wildly unnecessary, but nonetheless obligatory, hat tip to Instapundit.)  As far as I know, Arnold is not running for anything, but some smart candidate might think about adding him to the team.

February 1, 2007

One Health Care Problem I'm Not So Worried About

A week ago Brad DeLong posted a very interesting -- and despairing -- contemplation on the rising cost of health care, offering up this possibility:

... now Marit Rehavi comes by with an additional reason to despair. For according to her reading, as America ages and as American society changes an increasing share of the increase in health care costs is going to be driven not by increases in adverse selection by insurers or by moral hazard driven by doctors ordering inappropriate and barely effective care, but by expensive chronic diseases and risk factors driven by long-term lifestyle choices.

I've been mulling that one over, and my first reaction is that this additional reason to despair sounds a lot like moral hazard to me.  This definition, from The Economist, is pretty serviceable:

Moral hazard means that people with insurance may take greater risks than they would do without it because they know they are protected, so the insurer may get more claims than it bargained for.

So if the problem -- or a big part of it -- is "expensive chronic diseases and risk factors driven by long-term lifestyle choices," then there would seem to be a logical solution: Make people pay for making those bad lifestyle choices.  In other words, higher premiums for smokers and for people who are overweight, lower premiums for those who enroll in certified exercise plans, that sort of thing.  This is after all, just the market answer to Brad's "nanny state" solution.  It wouldn't be perfect, but surely it would go a long way to ameliorating some of the most obvious risks. 

That would still leave "adverse selection by insurers or by moral hazard driven by doctors ordering inappropriate and barely effective care" to fret about, but why pile on other problems if we don't have to?

Other (sort of) recent (sort of) related thoughts: From Andrew Samwick (here and here), from Mark Thoma, from winterspeak.

August 30, 2006


There is a little something for everyone -- that is to say, things to cheer about, things to frown about -- in the Census Bureau's report on Income, Poverty, and Health Insurance Coverage for 2005.  MarketWatch summarizes:

Real U.S. median household income rose 1.1% in 2005, climbing for the first increase since 1999, but inflation-adjusted incomes still have not recovered fully from the 2001 recession, the Census Bureau reported Tuesday.

Real median incomes for 2005 rose 1.1% to $46,326 but were down 0.5% from 2001's $46,569. Median income means half of the 114.4 million U.S. households earned less, half earned more. The figures have been adjusted for inflation.

Income inequality continued to increase, with the top 20% of families accounting for a record 50.4% of all household income, just the third time since the mid-1960s that they've taken more than half. For the top 20%, the median income rose by $3,592, or 2.2%, to $166,000.

Meanwhile, the bottom 20% captured just 3.4% of income, matching their lowest share since the mid-1960s. Median incomes for the bottom 20% increased by $17, or 0.2%, to $11,288...

The poverty rate declined for the first time since 2000, nosing down to 12.6% from 12.7%, but this amounted to a statistically insignificant change, the government said. The poverty rate was 1.3 percentage points higher than 2001's 11.3% but was lower than the 13.8% average in the 1990s.

A couple of things I found interesting in details.  A few facts: About 27 percent of people 25 years of age or older had incomes less than twice the poverty level.  For prime working-age folks -- those between 25 and 65 -- with at least 4 years of college, your chance of having income that low was, in 2005, between 8 and 12 percent (depending on your exact age group).  Among those with high-school degrees only, the chance of being in the low income group ranged from 25 to 39 percent.  And without a high-school degree?  Your chance of having an income less than twice the poverty rate was in excess of 50 percent.
When thinking about income inequality -- especially among those away from the extremely high and extremely low levels of income -- there is just no escaping this picture:


The second thing I found interesting was the reasons that people who were not employed gave for not working:
Conclusion?  If you are poor and not working -- which is the most common circumstance for those under the poverty line -- the reasons are not obviously related to the state of the labor market.
UPDATE: The comment by kharris below made me realize that that last sentence is pretty silly. It is clear that choosing retirement rather than work, work at home rather than work in the market, and choosing educational investment over employment are inherently related to conditions in the labor market.  I was thinking in terms of conditions related to unemployment, and so the phrase probably should have read:
If you are poor and not working -- which is the most common circumstance for those under the poverty line -- the reasons are not obviously associated with a lack of jobs for those who choose to remain in the labor force.
Stated that way, it is clear that judging this to be a good or bad thing is pretty tricky.  Those who are retired or have decided to stay home to attend to family may simply be discouraged by the lack of opportunity.  And we might lament that the return to working is so low that poverty is associated with separation from the labor force.  On the other hand, we might be encouraged that such a large fraction of those under the poverty line appear to be making a deliberate choice to acauire human capital.  This is one of those cases where each of theose reactions is probably justified.
BLOGLAND UPDATE: Mark Thoma has an extensive round-up, the dominant theme being that this is a bad report.  Daniel Gross is not so impressed either.  John Irons declares the increase in the number of Americans without health insurance "bleak." 

February 11, 2006

A Case Against Medical Savings Accounts

Courtesy of Gerald Prante at Tax Policy Blog,  we are informed that former Congressional Budget Office director Douglas Holtz-Eakin is not a fan of the President's proposal for tax-preferred medical savings accounts:

In response to the idea of adding a tax exclusion for individually purchased health care expenses -- in addition to the current one for employer-provided care -- Holtz-Eakin had this to say:

I think it's bad tax policy. We ought to have in this country a tax system that means something. I am less in favor of tax systems that are designed to do things other than raise revenue. We are likely to spend a lot of money in the future. The government is likely to be bigger than it is now -- I don't know how much -- and we need a tax system that raises those revenues efficiently and doesn't muck up our economy too much. Things like this are a recipe for mucky up the tax system and the economy and so I really am nervous about that as -- from a tax-policy perspective, and implementation perspective.

In general, I am the picture of sympathy for this sentiment.  The best tax code is one that has low marginal tax rates and a broad base.  That latter requirement means that there should be minimal use of the tax code as a tool for social engineering (or, worse, political gain).

But I make an exception for health care.  The fact is that we are not talking about simply adding a distortion that was previously nonexistent.  Distortions are already present in the form of tax preference for employer-provided health insurance expenditures.   As Andrew Samwick emphasizes in his related Wall Street Journal debate with Mark Thoma, the idea of the tax-preferred accounts to finance out-of-pocket expenditures is designed to eliminate the perverse incentives created by subsidizing insurance with low deductibles, and to improve the portability of health care provisions. 

I gather that Dr. Holtz-Eakin would prefer that we address the problem by eliminating all tax preferences of this sort, and there I am somewhat sympathetic.  A preferable course might well be to address some of the regulatory issues that Andrew discusses (such as making health care coverage mandatory) and dealing with the availability of coverage to the poor through a straight system of transfers (although it would be mistaken to claim that this isn't mucking up the tax system to some degree).  But absent the social consensus to move in that direction, something like medical saving accounts seems like a reasonable second-best strategy.