Wednesday, April 8, 2009

Affording Health Care

Economist Arnold Kling, author of a must-read book on the topic of health-care spending and reform, points out one of the unintended consequences of having our health-care bills paid mostly by third parties:

My view of the American health care system is that it hardly rations health care at all. That is why we spend so much more than other countries. I wish we put more responsibility on individuals. Instead, we have this delusion that we cannot possibly afford health care if we pay for it individually, but of course we can afford it if we pay for it collectively. [Emphasis added.]

Our current system -- where (for the majority of Americans) employers pay for health care -- encourages overconsumption, because the full cost of what we use is spread among our fellow employees. Some people argue that health care won't be overconsumed, because it's different from other services. Since no one wants to be sick, this argument runs, people will only consume as much health care as they need. But there is a lot of difference among individuals as to what amount is "needed." When one more test doesn't cost you much if anything, you're a lot less particular in your calculation of whether the test is really likely to change what you already know.

Here is a short discussion by economist Alex Tabarrok of how a change in incentives in 1984 led to a striking increase in the number of "disabled" in the United States. Here is an article on the much-discussed study finding that a small number of individuals accounted for a hugely disproportionate number of ER visits in central Texas.

I prefer the solution proposed by Arnold Kling in his book Crisis of Abundance (linked to above). Simply put, we would have (1) a government-funded safety net to provide essential care for the truly indigent; (2) private insurance available to individuals for unpredictable, high-cost health problems; and (3) individuals paying out of pocket for everyday health care. In addition, employer-provided health benefits would be treated as a taxable form of compensation, with the result that employers would stop providing them and cash compensation would increase instead. There might also be a tax break for health savings accounts.

(Relatedly: Hit & Run highlights inconsistency on health care reform in the New York Times.)

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