Economics Professor Addresses Common Questions About Health Care Reform

Oakland University economics professor Miron Stano is co-author of the textbook Economics of Health and Health Care, The (6th Edition). I asked him these four common questions about health care reform, in hopes that he could provide some clarity on these complicated issues.

1. Would government run health care cause costs to get out of control, and lead to the government rationing care because of a large increase in demand for health care?

There is no question that national health expenditures will be substantially higher than otherwise. This is due principally to two factors: (1) the uninsured will have coverage and consume more heath care; and (2) many others will have more comprehensive coverage resulting from the minimal benefit standards that Congress will establish. It is also possible that health care prices will increase faster as a result of the additional demand. At the moment, it is not clear how the added expenditures will be financed. Projected cost savings from improved coordination of care, greater use of electronic medical records, and greater emphasis on preventive care are very tenuous. The various revenue enhancing proposals are unlikely to generate substantial dollars. This will result in growing budgetary gaps that will probably require implementation of utilization controls or guidelines. Bear in mind though that some of this is already happening through managed care and other cost containment programs. If implemented properly, the “rationing” actually adds to society’s welfare by eliminating cost-ineffective procedures and treatments.

2. Would passing health care reform now slow down or stop the economic recovery?

A sudden restructuring of 1/6 of the U.S. economy would be a shock to the economy especially in its current fragile state. The health care reform package ultimately approved by Congress will be phased in. I hope that a recovery would be well underway within the next two quarters. While an additional $100+ billion or so per year when the health program is fully implemented is more than pocket change even for the U.S. economy, the potentially negative work and savings effects resulting from the redistributions from higher to lower income households, in my judgment, are unlikely to be large.

3. Is it impossible for the government to run a health care program (or any program) as well as or better than private industry?

A government “run” program can take on different forms. For example, goods or services could be produced by government, e.g, national defense, NASA, police and fire protection, water; or government could outsource administration of the good or service to the private sector, e.g., prisons in some states and Medicare, the largest health program. Private insurance companies, known as Medicare carriers, handle the claims processing and all the attendant issues that are associated with traditional Medicare. There is even a private insurance market for the Medicare Advantage component (Part C of Medicare).

The cost and efficiency issues associated with government programs are very complex but there are circumstances in which well conceived programs “run” by government can be very efficient. As an example that is easy to relate to, I will use the single waste hauler program adopted recently by Rochester Hills, [Michigan] after years of debate over the issue. Rochester Hills contracted with Allied Waste to provide [waste management] services that are mandated for property owners who are billed directly by Allied Waste at a rate negotiated by the City. A private market, in which households contracted with private haulers at unregulated rate, existed prior to this program. My subdivision had three trucks (waste, compost, recycling) for each hauler coming on several different days of the week creating all sorts of nuisances (noise, road deterioration, and garbage on display almost every day). Some liked the system arguing they had more choices regarding their own collection day and whether to have full or partial service. I’m sure that some Rochester Hills residents even illegally dumped garbage to avoid paying for service. And all of these negative “externalities” came at a high price. My current rate for full service is nearly one-half the rate I was previously paying for the same level of services with the same hauler.”

4. Do you think the way health insurance companies currently run their business is good, bad, or neither. I am thinking in terms of denying claims, and not taking people with pre existing conditions.

Insurance in general is associated with two important concepts: moral hazard and adverse selection. Moral hazard refers to the idea that one doesn’t take care of one’s property as carefully as otherwise with insurance coverage. There is reason to believe that behavior with regard to health also follows this pattern Moral hazard is why more health plans and employers are developing wellness and other incentive programs to get people to adopt healthier lifestyle behaviors. Adverse selection refers to the idea that a higher risk person would likely be part of a lower risk group and pay a lower premium than reflected in his actual risk. Private insurance tries to mitigate both phenomena. Deductibles, penalties for frequent claims, and incentives for alarm systems help reduce moral hazard in property insurance. Risk rating is used by insurers to deal with adverse selection.

The insurance system will break down unless there are mechanisms to deal with adverse selection. For example, there would be very little reason for healthy people to buy health insurance if they could get it at low rates once they have a serious disease. By its very nature, a national health system avoids adverse selection. In its absence, a mandate for individuals to have insurance reduces the adverse selection phenomenon. This is why the insurance industry now supports reform legislation.