Why Reform Health Care?

Amidst all the preoccupation with the procedural details of how health care legislation is likely to be implemented, I was glad to see Paul Krugman make the case for why reform is needed in the first place.

Krugman writes:

Americans overwhelmingly favor guaranteeing coverage to those with pre-existing conditions– but you can’t do that without pursuing broad-based reform. To make insurance affordable, you have to keep currently healthy people in the risk pool, which means requiring that everyone or almost everyone buy coverage. You can’t do that without financial aid to lower-income Americans so that they can pay the premiums. So you end up with a tripartite policy: elimination of medical discrimination, mandated coverage, and premium subsidies.

I find it helpful in thinking through these issues to consider two polar extremes of what the objective of health insurance is taken to be. In the first case, consider a group of people, all of whom are healthy at the moment, all of whom have the same risk of needing significant assistance with medical expenditures at some point in the future, and none of whom know whether they are the one who is going to need assistance. If the individuals each pool their resources, with the funds subsequently used to assist those for whom the needs arise, each of them would perceive themselves to be better off as a result of being included in the pool. Such health insurance is Pareto improving– everyone perceives themselves to be better off with insurance than without. And precisely because it is Pareto improving, private insurance markets have no difficulty delivering this kind of financial product.

Now consider the opposite extreme, namely a group of people each of whom already knows with perfect certainty who is going to need medical expenditures and who is not. In this case, if the funds of the group are pooled, with payments going from the healthy to the sick, it is not Pareto improving– those receiving the funds are better off and those supplying the funds are worse off. For this reason, the private market would never produce a financial product to implement this outcome, and describing such an arrangement as “insurance” is mislabeling. It is instead a pure income transfer policy.

We might make various arguments in favor of such an income transfer, such as going back to an earlier point in time before people knew the conditions to which they might be susceptible, and reason on this basis that the two cases are strictly comparable. This is the essential Rawlsian perspective on social justice, which argues that we should seek a distribution of resources that each member of the society would advocate if they could not know in advance which position in the society they would occupy.

But I think instead the more fundamental argument in favor of assisting the needy in the second example is one of compassion. Are we really prepared to insist, conditional on knowing who is who, that medical assistance only be provided to those who are able to pay? I think Krugman is correct that the vast majority of Americans would answer “no” to this question. Most of us want to help others we perceive to be in need, even if there is no direct benefit to ourselves from doing so.

But the question then becomes a very practical one– exactly how many dollars should the healthy surrender, and what’s the limit on what the funds will be used to pay for? Do the same moral principles call on Americans to provide health care for everyone in the world, or just those within our borders? And if the latter, do we cover those who came into the country illegally, or only legal residents and citizens? For whatever subset of humanity we do decide to cover, we’re still going to have to draw the line somewhere, and say no to certain procedures. When, where, and how shall we draw the line?

Now reality of course is a mix between the two polar extremes I’ve sketched above, though the discussion of “pre-existing conditions” suggests to me that we’ve definitely moved into the realm of issues raised in the second example rather than the first. And that’s why I believe it’s important for Americans openly to face the core underlying question that confronts us in that second example– how shall we make a determination of who is going to receive medical services, and which services are going to be provided?

Why reform health care?

About James D. Hamilton 244 Articles

James D. Hamilton is Professor of Economics at the University of California, San Diego.

Visit: Econbrowser

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