This is part of a broad series of posts continuing to examine the issues remaining before us on healthcare. Regardless of how you feel about PPACA (HIR), I believe strongly it is a beginning to this wave of reform, not an end. There are some fundamental issues which we have left unaddressed. You can read the introduction to this series here.
Don't let your eyes glaze over. How we allocate risk in society can actually be a very fascinating discussion. This is not going to be a mathematically heavy post that only an actuary would appreciate. Rather, it's important to contemplate the conceptual role of pooling risk - how we lump together different people for the purpose of calculating insurance rates.
There are different ways of utilizing insurance, and this is one of the core decisions that still needs to be 'fixed'. In short, we passed a health insurance reform bill that didn't actually answer the basic question of what health insurance should be.
What are our options?
There are three broad categories into which you can lump various insurance products. One approach to insurance is solely for the purpose of spreading one's own risk out over time. The insured's premium costs are based on the insured's expected risk, end of story. A second approach to insurance spreads some of the risk over time, while segregating a special category to be billed separately. This typically happens at either the low end of the spectrum - say, with a deductible - or at the high end, say, with a third party covering 'catastrophic' events. A third approach is to spread costs across the population, rather than tying them to specific individuals' expected costs. Here, premiums would be the same, regardless of the expected costs represented by any one insured person.
Why does it matter how this is set up?
It really comes down to money. The approach we take to health insurance has a direct impact on who pays for healthcare and how healthcare is allocated. Some people have much higher expected costs than others. What we have left unresolved is the extent to which the individual is responsible for healthcare and the extent to which society is responsible for healthcare. We are talking a huge amount of money, thousands of dollars per person per year, so this has to be resolved at some point. Not doing anything is of course one course of action: that will simply result in poorer people getting poorer quality care than richer people, ie, simply continuing our present course.
What's wrong with our current system?
Currently, we have an incredibly inefficient approach. We manage to make individuals responsible for enough risk that the pricing mechanism rations healthcare by willingness/ability to pay, yet we still have to have massive government expenditures on healthcare as well. This is just one of the many hilarities of the Teabaggers over the past couple years: government was already the largest spender in the healthcare market, responsible for more of the cost than private-sector employers, individual consumers, philanthropists/not-for-profits, or any other nongovernmental category you care to examine. What this does is it makes the total cost higher, which is wasteful - somebody has to pay for that waste, either through lesser quality care, or higher premiums, or higher taxes, or some other form of giving something up for nothing. We spend an inordinate amount of time and energy shuffling papers around instead of actually providing healthcare.
What are the market failures specific to health insurance?
Each insurance product is a little different. One problem with home insurance, for example, is that a lot of damage occurs in catastrophic events, and such events tend to bring political pressure to socialize the losses. This is moral hazard: getting others to pay the downside when you enjoy the upside. For example, when a hurricane destroys beachfront property, those property owners often seek governmental assistance, even though those same property owners go out of their way to make sure their property is private rather than accessible to the public. No one is saying government shouldn't help in a flood or tornado or hurricane or earthquake or mudslide or whatever, but the point is that the people who benefit from the private property are the people who should pay for the help. Public dollars should support the public commons, not private property. We even have national insurance - for flooding - and when's the last time you heard somebody call that socialist?
In health insurance, a major challenge is that small numbers of people account for much of the healthcare spending at any particular point in time. Some treatments are simply very expensive, and on top of that, the expenses throughout life are disproportionately clustered near the end of life, when the 'bang for the buck' is at its lowest. To keep someone in intensive care, on 'life support', for another day, or another 10 days, or another 100 days, is very expensive. Now, it could be that expense is worth it - just because something is expensive doesn't mean it shouldn't be done. The question is, who should pay; should that risk be allocated based on an individual's health condition, or should it be allocated across society more broadly?
Complicating this, we have a pretty good idea of precisely who is likely to incur higher costs and who is likely to not need as much medical care. To give a specific example, we know men don't get pregnant. Should women of child-bearing age pay for the risk of a pregnancy complication, or should that risk be spread out over the whole population? There is also the issue of personal responsibility; there are a wide range of acts which translate into higher or lower medical costs. This means that hybrid systems (like we have now) are extremely inefficient. They neither address the moral imperative of covering everyone, nor do they address the economic imperative of lowering total costs, nor do they address the discomfort of the perspective which opposes 'big government'. The market failures in health insurance are so pronounced that it's a terrible system for everyone who's not working for the drug dealers, health non-insurers, and hospital franchises.
What would be a better system?
With that background, we can ask the interesting question: what should health insurance look like? At this juncture, this is where we leave the realm of data and move to the realm of philosophy. What sort of insurance system we want depends upon what outcome we want. There are wrong answers, but there is no one right answer.
Private insurance companies do an excellent job of allocating risk based upon the actual risk posed by the individual purchasing the insurance. For example, when you buy car insurance, several factors matter. Your driving history. Your age. Your gender. The location of your residence. The type of vehicle you drive. How much you drive. What sort of coverage you want. And so forth. If you don't own a vehicle, there's no value in insurance at all. If there are social consequences to risk pooling - like poor urban neighborhoods decimated by the drug war who pay higher insurance premiums because their zip code sees more car thefts and more uninsured drivers - those costs are externalized outside of the insurance system. There is a legitimate philosophical argument to make that health insurance should operate the same way. You should be pooled together with other consumers who have similar health risks to you and who desire similar levels of coverage as you, and thus your insurance premium should reflect your personal risk factors. When the more intellectually honest GOPers talk about health insurance, this is what they're describing. We should dismantle Medicare and the employer-based health insurance system so that the health insurance market functions more similarly to other insurance markets. If that results in uninsured drivers, so speak, that's just a social cost we have to eat because it's less than the alternative.
The alternative is to suggest that what we want is universal coverage. In that case, the only thing that makes sense is to put everyone in the same risk pool. Everyone would have the same coverage, and everyone would pay the same premium for that coverage - mostly, by foregoing premiums entirely in favor of taxation. In healthcare, this requires younger, richer, and healthier folks to subsidize older, poorer, and sicker folks. This has to be a social contract into which we enter knowingly and approvingly; you can't force this kind of thing or sneak it in under the radar.
And this is where PPACA's straddling of both sides of the fence causes problems. On the merits, state-based exchanges are a terrible idea. Same for having a high risk pool or locking people into Medicaid via the Federal Poverty Level guidelines. Yes, you have to mandate that everyone participates, otherwise you'll have people who wait until they have large medical bills to participate, but you also have to have people participating in the same thing. PPACA doesn't create one standardized plan; it creates lots of different plans. These are all things that segregate the risk pool, which drives up total costs. We have to directly answer the question about whether younger, richer, and healthier people should subsidize the costs of providing healthcare to older, poorer, and sicker people. Otherwise, we will continue wasting money while failing to meet the healthcare needs of every American.
Even the existence of Medicare itself is a direct contradiction of PPACA. Medicare, while not quite a single payer system, draws upon many of the same philosophical and economic justifications as universal health insurance. Taxation, not insurance premiums, funds the vast majority of Medicare costs. PPACA, and the discussion leading up to it, leaves Medicare in a very precarious state. Indeed, if PPACA is progress, then the logical thing to do is to dismantle Medicare entirely and put Medicare recipients onto the exchanges. After all, if exchanges and subsidies and so forth are good mechanisms for allocating risk for 30 year olds and 50 year olds, they would be good for 70 year olds and 90 year olds, too. Allow a transition period of, say, 10 to 15 years, and by 2025, everyone in the US could be governed by PPACA. Is that what we want? If you think I'm exaggerating the potentiality of that, running parallel to the healthcare discussion has been the deficit fetishism of the fiscal responsibility commission - filled with folks who have spent their careers looking to gut the Social Security Act. (note: PPACA, like all major healthcare legislation over the past 7 decades, is essentially an amendment to the original Social Security Act of 1935. Medicare is essentially TITLE XVIII - HEALTH INSURANCE FOR THE AGED AND DISABLED. Medicaid is basically TITLE XIX—GRANTS TO STATES FOR MEDICAL ASSISTANCE PROGRAMS. And so forth.)
There is one other point worth discussing about risk. We could decide that healthcare is such a moral obligation that the problem is insurance itself; government could simply nationalize the healthcare system directly (the whole system, from hospitals to pharmaceutical companies to equipment makers). I don't consider this a very likely/realistic outcome for the US, but it's worth mentioning to see the full range of options. Even the most die-hard single payer advocate is proposing a mainstream compromise - insurance - just like old age insurance, survivor's insurance, disability insurance, unemployment insurance, hospital insurance, and all the other kinds of insurance products that the government already provides via the Social Security Act. Very few Americans advocate for government to run the healthcare industry or retirement programs the way it runs highways and courts and so forth. Even the phrase 'VA for all' isn't exactly rolling off anyone's tongues.
Or to paraphrase those annoying credit card commercials, who's in your risk pool? For me, I vote everyone. This is one of the core 'fixes' that still needs to be made with respect to health insurance.
You can read this again at The Seminal at FDL.