July 9, 2004

#161: Sane and rational (for a change), also wrong...

P. Krugman

Finally! In Health versus Wealth (07/09/04) Paul Krugman gives us a serious account of his views on health care and, specifically, of the Kerry plan which he enthusiastically supports. The heart of that plan would have the government solve the problem of catastrophic health care expenses by assuming the role of a "re-insurer" and pick up 75 percent of all medical bills over $50,000. By relieving private carriers of this risk, so says Krugman, insurance premiums would decline 10 percent or more. Here's how he summarizes the Kerry proposal:

"This is a truly good idea. Our society tries to protect its members from the consequences of random misfortune; that's why we aid the victims of hurricanes, earthquakes and terrorist attacks. Catastrophic health expenses, which can easily drive a family into bankruptcy, fall into the same category. Yet private insurers try hard, and often successfully, to avoid covering such expenses. (That's not a moral condemnation; they are, after all, in business.)"
As good as it may sound, in our view, this is a truly bad idea. It not only fails to address the central flaw in our current health care system – a lack of incentives for cost control – it actually exacerbates that flaw by pushing us further down the road to politicized control of health care spending decisions and away from a market-based system in which consumers make spending decisions themselves.

Currently, nearly 80 percent of all dollars spent on health care are spent by someone other than the consumers who generate the bills. This situation is a prescription for disaster. Anytime a good or service is touted by politicians as a "right" that someone else should pay for, the result will be the same – over-consumption. Since price rationing can't occur in such a system (because consumers don't have to worry about prices), rationing will occur eventually by non-price means, e.g., shoddy service, treatment refusals and long delays.

The only solution we see is to move toward a market-oriented health care system that allows consumers to break out of the third-party-payer mess and take control of their own health care spending. There are two general approaches underway that are mutually inclusive. One is a defined-contribution plan that is being undertaken by some employers. Briefly, the employer buys a high deductible group plan and combines it with defined cash contributions to individual employee health accounts. The latter puts employees in control of routine health care decisions (bumps, mumps, bruises and skinned knees) and the former allows employers to cap their total contribution exposure. A more general approach is the Medical Savings Account (MSA) plans which work somewhat like an IRA. Contributions are tax deductible and accumulated investment earnings in the accounts are tax exempt. MSAs can be used either for routine medical expenses or the purchase of catastrophic insurance.

Both approaches could use some facilitation by Congress with regard to consistent tax treatment and more flexible rules governing account operations. However, they both achieve the most fundamental health care objective – bringing down costs and improving quality and service by putting the consumer in control.

Even though we totally disagree with Krugman, he should get some credit for initiating the discussion in a sane and rational manner.

He didn't mention Halliburton once!

[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 July 9, 2004 2:24 PM

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