Monday, February 11, 2008

Our bizarre discourse on health care

In her campaign for the Democratic nomination, Clinton insists that her health care plan is "universal" where Obama's is not. It's often her biggest applause line -- sadly, the word alone is enough to work crowds into a frenzy, regardless of the policies underlying it.

After all, what makes Clinton's plan "universal"? Simple: she makes it illegal not to have health insurance.

There are, of course, valid reasons for supporting an individual mandate to purchase health insurance, and I'll delve into them later in this post. But I think it's critical to first stress how bizarre and tautological Clinton's "universality" taunt is. If the mere inclusion of a mandate is enough to make health insurance "universal," then it's easy to make almost anything universal: simply require everyone to purchase it.

Admittedly, Clinton's plan includes other provisions, including a vaguely defined subsidy regime that limits premium payments to a "percentage of income." But Obama's plan -- despite its similar lack of detail -- has all the same elements: subsidies, an optional government-administered plan, guaranteed eligibility, and a barrage of cost-savings measures. The only significant difference lies in Clinton's inclusion of a mandate.

Amusingly, in places where she's supposed to explain policy in greater detail, Clinton barely stresses the mandate. Her website's main page on health care, for instance, rhapsodizes about giving Americans "the same choice of health plan options that members of Congress receive," and "creating a new small-business tax credit" -- somehow failing to mention, anywhere, the one quality that Clinton believes gives her a crucial edge over Obama. The reason is obvious enough: the idea of forcing people to buy health insurance doesn't sound particularly attractive. Its only political value comes when it can be twisted into a claim of "universality."

And what about those subsidies -- which, in Clinton's opinion, should allow anyone to comply with the mandate? She provides only one detail: the subsidies will limit health payments to a "percentage of income." This is a horrible way to administer a subsidy regime.

Why? Say that the percentage is 10%. This is fine, obviously, for a family making $100,000 a year; $10,000 is a lot, but it's an affordable chunk of their income. It's probably still doable for a family making $40,000 a year. But for a household at poverty-level income -- say, around $10,000 a year? (7.7% of our population makes less than this, by the way.) It's still almost impossible: $1000 is an absolutely crippling total.

How can this possibly be enforced? Massachusetts, despite having an infinitely more sensible subsidy arrangement that eliminates premiums for those making less than the poverty level, still hasn't enrolled almost half the uninsured population. Clinton, almost always evasive and vague on the topic, has admitted that garnishing wages or collecting money through the tax system might be necessary. These are hardly the makings of a politically credible plan.

When the consequences are so uncertain and the means of enforcement so unclear, you'd think that supporters of a mandate would have extremely compelling reasons for their preferred policy. The usual argument is that today's uninsured population is a drain on the entire health care system -- that we're faced with a crowd of "free-riders," who should be compelled to get insurance rather than receive free emergency room care.

The main problem with this argument is empirical: uncompensated care simply doesn't comprise a big portion of nationwide health care expenditures. In fact, the best estimate I can see pins it at about 2.8% of total health care costs. This isn't a trivial fraction, to be sure, but it's hardly a compelling data point for the necessity of a mandate. Moreover, even without a mandate, it's likely that proactive policies could substantially reduce the 2.8% figure. Subsidies make coverage more affordable to the poor, remedying the main factor causing Americans to be uninsured. Prodding -- but not coercing -- uninsured young people to cover themselves will also make a substantial difference. (As a card-carrying "young person," I'm convinced that young people are mostly uninsured because they're apathetic about the concept, not because they have a deeply held desire to cheat the public health system. An opt-out employer-based system, or even just a government mailing of enrollment forms to uninsured young people, would work wonders.)

The other argument for the necessity of a mandate is adverse selection: the possibility that healthy people will broadly drop out of the system, pushing up premiums for those remaining. Theoretically, this holds the potential for a destructive cycle -- increased premiums will induce the next relatively healthy sliver of the population to go without coverage, raising premiums yet further, causing more to abandon their providers, and so on ad infinitum.

While this is a problem today, it's hardly the main flaw in our health system. Still, it's possible that the "guaranteed eligibity" provision in both candidates' plans would make this somewhat worse. Once insurance providers are legally barred from discriminating on the basis of preexisting health conditions, they will no longer be able to provide special, cheaper options for their healthiest customers. Those customers, in theory, will be more likely to drop out, leading to a much narrower risk pool.

Why am I not convinced by this case? Again, the empirical evidence is limited at best; it's unclear whether adverse selection will actually be significant enough to toss healthy Americans out of the system. And even if this does become a problem, mandates are decidedly not the best fix. Rather, we should increase the subisidy given to health care. If insurance costs only 50 cents on the dollar, any incentives driving healthy Americans away from purchasing coverage will rapidly diminish. Providing this subsidy in a clever "voucher" package will make it even more appealing. Just as behavioral economics tells us that consumers are far more likely to spend a "bonus" than a "rebate" (even if the two are functionally the same), it's psychologically much harder to waste a "voucher" than to ignore a "subsidy."

In fact, continuing "vouchers" to their logical conclusion, we can make a plan that is the functional equivalent of a mandate but lacks the unwieldy enforcement problems. Simply give everyone a voucher sufficient for basic health insurance, and finance the policy through an increase in tax rates. By changing the tax system appropriately, we can make this identical in financial terms to a mandate-subsidy regime. Higher marginal tax rates reflect the taxes implicit in means-tested subsidies -- if earning $1 more lowers your subsidy by 10 cents, you're effectively being taxed at a rate of 10% -- and no one is going to go without health insurance when a pile of money is available solely to purchase it. (If desired, we can even tighten this further by automatically enrolling anyone not using his voucher in a standard plan priced at the voucher amount.)

Yes, such a plan would require an increase in tax rates. But the money would have an clear and politically salient purpose: giving everyone the means to purchase health insurance. With sufficiently progressive changes in the tax base, it would redound to the financial benefit of the vast majority of Americans, making it an easier sell than a mandate.

Oddly, some observers seem to think the opposite: since the only basis for favoring a mandate over this kind of voucher scheme is political, they've apparently judged that partially funded mandates will be politically easier to implement. It's possible that they're right, although it's important to note that the same aversion to anything containing the word "tax" would have killed Social Security and Medicare. But even so, at this stage a mandate is an unproven and potentially reckless expansion of government coercion. Massachusetts, whose political and economic climate are particularly favorable to a mandate, still hasn't managed to get it right; until the policy has succeeded at the simpler state level, it's irresponsible to push it nationwide.

Frankly, I'm a little tired of writers who hail the mandate issue as a policy masterstroke for Clinton's team. At this point, Obama has the more reasonable and carefully considered position. Perhaps after every preferable option has been exhausted -- as I've mentioned, there are many -- and Massachusetts has managed to implement a functional mandate, we can consider a nationwide requirement to purchase health insurance. Until then, we have plenty of safer and better ideas to try.


Anonymous said...

I can't say that I agree with your policy alternative to Clinton's proposal, but I must say that you're an excellent writer and communicator of economic concepts!

If you don't mind me asking, what are your plans after undergraduate schooling?

Matt Rognlie said...

Thanks for visiting!

I'm not certain about my plans after graduation, but I think that I'll go into grad school in math, economics, or computer science. I've taken a number of graduate-level classes in all three at my current school, and they all seem interesting to explore at the research level. If I had to choose at the moment, I'd probably say that I was going into economics, but I have almost two years more to decide...

Ellen Cheng said...
This comment has been removed by the author.
Ellen Cheng said...

I am pretty sure you will be a great economist!

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poured with some water, which might be caused from sea-level rising. So so so central government should order factories to stop emitting gas into the earth, otherwise the Great FireWall will go into ashes.

and why not continue to write? your blog could be described with the best adjectives I am able to add to. Like marvelous, spectacular, gorgeous, splendid,resplendent, magnificent, or other GRE words I fail to recognize currently.

heyheyhey but really wish you could work on your blog when you have some time...and yes, I totally agree with the anonymous' words: excellent writer!