October 13, 2006 | Volume 3, Issue 2
Redesigning the US' Healthcare Model
We must take steps towards solving the nation’s health care crisis, without employing elements of failed private managed care.
American healthcare is reaching a crisis point. Senior citizens’ use of direct government compensation for medical bills and contracting entities such as HMO‘s to provide drug coverage means that large subsidies for managed care have been locked in to private health care providers. Partial privatization causes confusion due to the inherent inconsistency of private company insurance and government mandated healthcare policies. Lapses in drug coverage, called the “donut-hole1” by the Bush Administration, (originally remedied through Medigap2) have added to the confusion. This donut-hole payment made to private-entities increases emphasis on marketing health care rather than increasing coverage.
We must take steps towards solving the nation’s health care crisis, without employing elements of failed private managed care. One solution is for Congress to stop partially subcontracting its responsibilities. Instead, it should work with the current administration to fully publicize the health care system as is common practice in much of the developed world.
Rationale behind private/public partnership
The rationale for government-subcontracting stems from the economically revered notion of competition. The idea is that HMO‘s and other entities providing private health plans could increase the efficiency of healthcare provision by increasing competition with government fee-for-service plans3, leading to cost savings without decreasing benefits or raising taxes.4 At the same time, the close alliance of many private health care providers and government officials is complicating the government’s mushrooming deficit and diminishing competitive incentives, resulting in sub-optimal competition. To solve the problems of this flawed system, we must observe the government and private sector components involved in healthcare provision and determine how their confluence creates inefficiency and waste.
Disaggregated analysis (the government)
The government fee-for-service system is sub-optimal because:
- its compensation schemes are calculated through “risk-adjusted” formulas, which quantify risk a priori to health care provision, and are balanced with higher-than-average health costs
- the government plans may lack the flexibility requisite to compete with the private sector efficiently4
The risk-adjusted plans, based on certain mutable economic factors, may not be appropriate for certain recipient segments, and may not be useful because of the existence of privatized entities. Second, private players, since they are contracted at the federal level, have interests in providing certain drugs at specific prices, which may not be accounted for in the risk-adjusted government plan. Third, supply and demand price drivers are muddled by inherently inelastic demands for drugs necessary for good health and basic survival.
Disaggregated analysis (private sector)
Private sector entities may have better, more direct access to prescription drugs, but the vast array of private plans confuses recipients. With a small portion of the population accounting for the bulk of the total value of prescription drug coverage (seniors), the risks from private sector healthcare are serious:
- Risk is exacerbated by adverse selection, whereby returns to good risks are dwarfed by the negative returns to bad risks
- Private healthcare enrollees are self-selected as likely to have high medical costs, which means that private entities are likely to charge higher prices for insurance and drug coverage.
- Screening to target insurance-recipients comprising the lowest risk means that the private sector expends resources to deny high risk applicants. This cost is not incurred by Medicare, which does not screen out applicants.5
Consequences of private/public confluence
This partnership exacerbates government problems of funding Medicare as denied (high risk) applicants are shirked by private providers, to then be supported by the government. When this does not happen, participants may be accommodated in the private system through higher bills for all insured individuals. In addition, under Medicare, people spending $2000 on drugs this year will receive a coverage of 66%, while those spending $5000, and more likely to need medical coverage, will receive only 30%.6 Adverse selection is, thus, present in the current Medicare formulation as well, and this inefficient spiral transfers the burden of higher drug costs onto the American taxpayer.
There can be no true free market in healthcare
The “free market” has been used in this generation as a two word catch phrase capable of justifying almost any policy. However, the current format of the healthcare system is not left to the free market; rather it is a confusing mixture of private and public health provisions. And, further, a number of factors ensure that conditions would not be any better if providers operated in a free market.
Fist, health-care and drug provision has a fairly inelastic supply and few substitutes. Second, failure to acquire drugs today can mean exacerbated problems tomorrow and more burdens on the individual citizen and the system. Third, if private players are allowed to compete amongst themselves for medical care, an oligopolistic competitive landscape such as that characterizing the financial services industry might be the result. Fourth, there is no guarantee that the government will exercise the right to monitor unjust practices due to differences in disclosure policies amongst firms. These factors suggest that allowing the private sector to provide for the nation’s health is dangerous at best.
Policy prescriptions
An increasing number of American citizens are overwhelmed by the price of drugs and have turned to generic options abroad – a trend that can hurt health care innovation. The inability of a policy to reach the neediest constituents is evident, and the need to redefine government responsibilities is evident: the current role of the government under private-public partnership has been suboptimal, and, importantly, the former is guided by profit and the latter by the welfare of constituents.
Most developed countries currently employ state-sponsored heath care and drug provision. As medical insurance costs are even straining employers in the US’ private sector, the Canadian government has managed to insure its people with medical coverage at half the price that America faces. Senator Ted Kennedy’s prescription7 is a viable solution – an extension of the single-payer program, currently available to the elderly, to Medicare for all Americans. This would allow for employers to target specific services outside the realm of Medicare, to offer complementary health services and drug coverage. The implementation should be phased in gradually and cater to the neediest recipients first (i.e. children, the late middle-aged, and elderly). This will allow for the reduction of health insurance and administrative costs nationwide. Not only will this reduce costs, but it will also promote better preventative care which will minimize the government’s burden of expensive care for the future elderly.
1 The donut-hole refers to the gap in drug-coverage causing theoretical recipients of subsidies under the system to pay for drugs themselves
2 “Issue Summary: Medicare Reform and Prescription Drugs (General),” Centrist.org, available online at http://www.centrists.org/issue_summaries/health_medicare.html
3 According to the FEHB Glossary, the fee for system plan is coverage where doctors and other health care providers receive a fee for each service (e.g. office visits, tests, etc)
4 Krugman, Paul. “A Private Obsession,” November 18, 2005. The New York Times
5 Krugman, Paul. “Health Economics 101,” November 14, 2005. The New York Times
6 Krugman, Paul. “The Deadly Doughnut,” November 11, 2005. The New York Times
7 Kennedy, Ted. “Medicare for All,” February 1, 2006, available online at: http://www.eat4today.com/?p=103