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February 08, 2006

This Week In Entitlement Reform

In this the federal budget week, blogland brings a couple of interesting discussions on social security and health policy reform.  First up (in reverse chronological order) is the latest Econoblog installment featuring Mark Thoma and Andrew Samwick.  This, from Andrew, neatly summarizes my thinking about the foundation on which social insurance reform must be built:

As global trade increases, the U.S. loses its ability to be the least-cost producer if it stipulates that employment contracts must include taxes for all manner of redistributive programs. If we are to purse both social insurance and economic growth, we need to consider alternatives to the employment relationship as a way to deal with our health and retirement needs.

Mark agrees, but is skeptical about solutions that rely primarily on the private sector:

There are substantial problems -- market failures -- in the private-sector provision of health and retirement insurance that are not easily overcome with market-based regulatory schemes.

For example, adverse selection issues, where high medical-cost individuals are excluded from coverage or are forced to pay extremely high premiums, plague health-insurance markets. High administrative costs of private health insurance are another problem, and there are problems in the private provision of retirement insurance as well. When markets fail, the insured often pay for the uninsured, and for these and other reasons I believe it's best to share the burden more generally through government programs that require individuals to contribute insurance premiums.

I confess that I don't quite buy that one.  As Andrew points out, there is a distinction between government regulation of an industry and government production of the service that the industry supplies:

The first mistake is to make insurance voluntary when we don't subsequently exclude those who need care from getting it at the public's expense. We should make health insurance mandatory, but we should do so by putting the mandate on the individual, not the employer...

The second mistake is to allow the tax code to distort the type of insurance offered. Premiums are fully excludable from taxation, but out-of-pocket expenses are only imperfectly tax deductible. This generates extremely generous, first-dollar coverage and little incentive for individuals to economize on the care they receive. Rather than the Bush administration's proposal to make out-of-pocket expenses deductible via expanded medical savings accounts, I favor removing the excludability of health-insurance premiums from taxable income.

The third mistake is to force young workers to subsidize older workers in group health-insurance markets. Insurance is supposed to transfer resources from those who have unpredictably low expenses to those who have unpredictably high expenses.

I agree with Mark that the government should mandate coverage, but that doesn't mean the government should centralize the provision of services or dictate their terms. I would prefer to fix some of the obvious mistakes before making such radical changes to the system.

Andrew's diagnosis gets a second from Dr. Becker in this week's installment of the Becker-Posner Blog:

...many of the problems in the health system are correctable with the right policies. I believe the three most important defects are the over 40 million Americans who are not insured, the weak incentives to economize on unnecessary medical spending by most people covered by some form of health insurance, and the tying together of health insurance with employment as a result of special tax privileges provided to employers.

Arguably the best parts of President Bush's State of the Union address are his suggested reforms in the health care system. They do not fully attack all the problems, but they do offer significant improvements. I will concentrate particularly on his proposals to extend Health Savings Accounts (HSAs), and to improve the portability of health insurance when workers change jobs.

Professor Becker goes on to an extensive discussion of the HSA proposal, the benefits of such a plan, and a very wise observation about at least one of the costs:

President Bush has proposed changes in the health care system that initially will reduce tax collections and increase federal spending at a time when the US government is already spending too much and running a sizeable budget deficit. However, by making the health delivery system more efficient, this important set of proposals in the State of the Union address might end up raising tax collections, and certainly would improve the efficiency of the American economy.

There are plenty of other interesting things in these two items -- the discussion, for example, of the Liebman-MacGuineas-Samwick social security reform proposal which I have endorsed (and which was met with a resistance I find as baffling as members of Congress giving themselves a standing ovation for doing absolutely nothing about fixing a system that clearly needs to be fixed).

Really, I beg you.  Read the whole things.

UPDATE: William Polley agrees the key question is "How much social insurance should be provided by the government and how much should be provided by markets." 

There is much relevant discussion at Angry Bear: here, here, and here.  It's fair to say we've taken different sides on this one.

Kevin at Truck and Barter points to research by Alice Zawacki and Amy Taylor on the relationship between employer characteristics and the provision of health insurance benefits. 

You'll find some thoughts about the Posner half of the Becker-Posner conversation at winterspeak

Max remains a consistent reform-skeptic (at least as it relates to social security).

February 8, 2006 in Health Care , Social Security | Permalink


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Not exempting healthcare costs from income is not unreasonable, but decoupling healthcare from employment, as is increasingly being done, would expose all of us to the prevalent market failures. If government determines how much should be spent on it, they had better be prepared to pay for it for all those that can't, and this is the largest portion of the population.

Health Savings Accounts, though, really focus on the wrong end of the problem. If we broke the costs down by occurence and treatment we would see the majority of the costs are those that would fall under catastrophic coverage. They would do little to increase efficency.

Posted by: Lord | February 08, 2006 at 01:05 PM

Lord, Irespectfully disagree. I have a family of four, and a good income. I have elected to get the cheapest insurance I could and pay for medical out of pocket(I am self employed) The HSA account is great for me, because I get to put money away tax free, and if I don't get sick I don't use it. the only thing that worries me is a catastrophic event or illness. I have insurance to cover that.

I agree that the health system of this country is in need for reform. I think that we need to thinking terms of market based reforms and competition, and not of insurance and deductables. there needs to be tort reform as well.

If we went to a simple fee for service system, I think costs would go down, and we would get better service. Vouchers could be given to peopel that couldn't afford it.

Posted by: jeff | February 08, 2006 at 10:02 PM

I agree with the principle people should pay for the benefits they receive, but realistically fewer than half the people out there are able to do so. Nor do I have any illusions that reducing costshifting will materially alter who pays nor how much they pay. Government is probably the largest costshifter of all and it is unlikely changes along these lines will decrease costs. Government will continue to pay for something like half of all healthcare. Therefore I think it misleading to think of this as a private versus public problem, it is a question of the best way to pay for and provide a public benefit.

We all like tax breaks. It can be structured as accounts plus catastrophic coverage for those with adequate incomes, but what do we do with the other half of the healthcare system, those that don't? Does the government fund their accounts? Does the government cover the catastrophic coverage after your insurer has dropped you, or more likely after you have had to drop it when you could no longer pay the costs? What proportion of the premium did you save over a full coverage plan?

While coverage may be separated from employers, it cannot be separated from employment as that is the only means the vast majority of people have of paying for it.

Posted by: Lord | February 09, 2006 at 12:23 AM

Lord -- I'm not sure I understand what makes health insurance special here. In the state I live in, automobile insurance is mandatory, and you darn well better have it. Yet nonone suggests that the insurance ought be provided by the government. You might say the example is forced because people can opt out by not driving -- something that would not be available if health insurance is mad amndatory (or at least the opt-out route would totally unacceptable). But that is where government transfers and such come in. My point is simply that there really is a choice between government provided services and government subsidized services and, in most cases I can think of, if one is feasible the other will be as well. And I strongly prefer the latter.

Posted by: Dave Altig | February 10, 2006 at 02:14 PM

Government doesn't pay for auto insurance; we all do when people without it have accidents. Let them eat cake is a nice sentiment but hardly deals with the problem.

The difference is government is half or more than half the market. If you don't talk about about how that challenge is met, then you aren't talking about healthcare.

Here is an alternative. Tax healthcare 100% and redistribute the revenues to cover the other half. This would be consistent with proposals suggested and have many socially desirable effects.

Posted by: Lord | February 11, 2006 at 11:58 AM

The idea that health insurance isn't enough like auto insurance now, and that HSAs move us further in that direction, is baloney.

You don't pay an "annual deductible" on car insurance - you pay a "per-event deductible". And the stuff that auto insurance covers isn't things that changing your oil would have any effect on, so the oft-claimed perversity of health insurance "covering the equivalent of oil changes" is also baloney.


Posted by: M1EK | February 12, 2006 at 10:29 AM

In comparison to pharma drugs herbal medicines have less adverse effects...

so visit and buy herbal medicines only

Posted by: khosla | February 12, 2006 at 11:38 PM

Lord and M1EK -- I think I made my point poorly. I was only trying to say that the heavy involvement of government in health care is a measure of the social value placed on access to the service, not an intrinsic quality of the moral hazard and adverse selection problems associated with the insurance being provided. The oil change analogy is a clever one, but there are all sorts of other preventative measures that are involved in the types of events that automobile insurance does cover ... not talking on cell phones while driving, not eating when operating a motor vehicle, and so on. Or take homeowners insurance. Fire prevention can be greatly facilitated by the addition of smoke alarms, an appropriate number of well-maintained fire extingushers, regular servicing of furnaces and fire places. Some of these things can be factored into prices, of course, but so it is also with health insurance (in the form of rate reductions for nonsmokers, participants in "wellness" programs, and so on). Or let's get started on life insurance...

Posted by: Dave Altig | February 13, 2006 at 06:37 AM

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