November 14, 2003

#132: Greeks + gifts =

P. Krugman

Medicare expansion is a long standing dream-issue for the US left. They can exploit the health concerns of the elderly with impossible promises and reap a treasure trove of votes in return. The Kennedy wing of the Democratic Party has been doing this for years. But in
The Trojan Horse (11/14/03) Paul Krugman complains that this dream is under threat by a group of house Republicans who, with uncharacteristic backbone, are insisting on injecting a modicum of market competition into the system. The idea that people might shop for health care and insurance in ways similar to cars and appliances would in Krugman's words "force Medicare to compete with private insurers" and "seems intended to undermine the whole system."

Let's hope he's right! Here's a good way to think about it. Leaving aside those who are victims of premature death, the rest of us will grow old, become ill and in need of medical care and then die at some point. Those are facts. However, the medical expense of postponing the inevitable is potentially unlimited. If extravagant promises are made to provide these medical services below cost, overconsumption will result and the volume of unnecessary tests, procedures and drug prescriptions quickly reaches the breaking point. The usual result of all this is to vilify service providers and drug companies, impose price controls and suffer long delays in dispensing medical services. Think Canada or the U.K. None of this is a problem to the Kennedys or the Krugmans of the world since the population receiving such ill treatment soon dies off and the system, in effect, buries�literally buries�its own mistakes and inefficiencies. They then move on to the next oldest living cohort of elderly and begin the scare game all over again.

So what's wrong with setting up a system in which people can take responsibility for their own health care as they do other basic needs, with a safety net for those who can't? Krugman spots HIS problem right away. It's what economists call "adverse selection." If a one-size-fits-all government health insurance system competes along side a private system, those whose health risks are greater than the standard price of the government plan will choose the government plan. Those with lower health risks do better in a private plan that can be tailored to their circumstances. It's no different than a life insurance company requiring physicals to set rates or charging higher premiums to older customers or an automobile insurer rejecting those with convictions of driving while drunk.

We all know elderly people who have good health regimes of diet and exercise. We also know some who smoke, are 100 lbs. overweight and never exercise. Guess which ones will end up in the government plan needing hip or knee replacements and will wait several months for the service? That's adverse selection.

Frankly, we see nothing wrong with such a two tier system even if it does seem a little cynical. But if cynicism is an issue consider Krugman's position. What has him upset comes down to nothing more or less that votes. It's hard to scare people who have incentives to take care of themselves and have used those incentives to provide for their own health insurance. Nothing scares a leftie like self-reliance.

[The Truth Squad is a group of economists who have long marveled at the writings of Paul Krugman. The Squad Reports are synopses of their discussions. ]

Posted by John Weidner at November 14, 2003 4:16 PM
Weblog by John Weidner