Public vs. Market

I am taking a class at Harvard School of Public Health this term called "Health Care Issues: Public vs. Market."  It is a cumbersome title, but defines the topic and scope of the course well.  Essentially it applies the debate between free markets and government intervention to the Affordable Care Act (ACA). Our first policy memo (which kind of blends into an essay in my case) was about our personal thoughts on the public vs. market debate.  Are there times when government intervention in health care is necessary and if so, when and how?  I offer up a few suggestions.

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MEMORANDUM
To: Speaker of the House
From: Jason Kroening-Roche
Re: Public vs. Market in Health Care Reform
Date: January 30, 2012

            We are at a significant turning point in the history of healthcare in this country.  With the passage of the Affordable Care Act (ACA)in 2010 and the upcoming elections in November 2012 the debate about marketsand government in health care is intense.  In this memo I will explain thebenefits of competitive markets and then explain why the health care market differs. I will finish with a discussion of the ACA and how it addresses theseissues.
            Competitive markets have been the foundation of an Americaneconomy that is the largest in the world.  Competition for profit spursinnovation, contains prices, and gives the consumer choice.  Innovationresults when companies consistently push the envelope with new technologies,products, and production processes in an effort to expand their market share andmaximize profits.  Competition alsoworks to keep prices for consumers low.  Companies search for new, moreeconomical methods of production and reduce inefficiencies in their businessmodels.  Southwest Airlines, for example, has repeatedly reduced operatingcosts by eliminating “frills” and shortening turnaround time between flights inorder to keep their prices competitive.  Lastly, markets give the consumerchoice.  In truly competitive markets, many businesses provide the same orslightly variable products from which the consumer can choose.
            Health care differs from perfect markets in several ways, however. First, many view health care as a human right and believe access tohealth care should not be based on employment status or ability to pay. Second, health care is an unpredictable need and often catastrophicallyexpensive.  An insurance market is a viable solution.  The twoclassic problems in the health insurance market, however, are moral hazard andadverse selection.  Moral hazard is the principle that after obtaininginsurance, patients will seek care they do not need, because it is free at the“point of sale.”  Adverse selectionis the principle that patients know more about their state of health thaninsurance companies and therefore will buy insurance only when they need it. This leads to the third pitfall of a competitive health care market.  Competitive markets assume perfectinformation.  The informationasymmetry in health care is undeniable and unavoidable, both between insurancecompanies and patients (adverse selection) and between patients and theirproviders.  Patients often do not know their medical needs and rely on theprovider (i.e. physician, hospital, etc) for advice, often in times ofemergency and stress.  These issuescannot be addressed in a competitive market for health care and thus requiregovernment intervention.
            The ACA contains solutions to many of these challenges that makesense.  First, the ACA provides access for an estimated 32 of the 50million people in the US for whom the current system was failing, increasing equityin a way the market cannot.  Previously, affordable health insurance was availableonly through Medicare, Medicaid, and employer-sponsored insurance, incentivizedthrough tax subsidies to companies who provide insurance for their employees.  Second, companies were not mandated toprovide insurance to employees, nor individuals to carry it.  This created equity and adverseselection issues, especially for the individual market.  The ACA now implements a mandate with subsidiesfor persons unable to afford to buy insurance on their own.  Third, the ACA places an emphasis onquality and transparency.  Regulatingquality measures gives consumers more information and power to make rationaldecisions about where they will seek care.  The insurance exchanges promote transparency whenindividuals are choosing a coverage plan. These are important interventions to improve information symmetry.

            Inconclusion, markets have been extremely successful in this country.  However, the health care market needsgovernment intervention to correct market failures and there are many models toachieve this.  Working within thecurrent system, however, the ACA does a good job ensuring greater access andequity, mitigating adverse selection, and protecting consumers from informationasymmetry.  I recommend it for yoursupport.

Thoughts on Employer-Based Insurance in U.S.

I fail to understand why corporations oppose moving away from the employer-based insurance schemes which have predominated in the United States the past 70 years. As health care premiums continue to rise and corporations are forced to spend more than ever on their employees' health, I would think that they would jump at the opportunity to shift some of the coverage responsibility to the government. This would free up time, energy, and resources to focus on their business related objectives. Additionally, the government would be better equipped to gain expertise in health coverage compared to corporations which could result in more efficient delivery of care and improved health for the population. The government would be less distracted by profit seeking goals and would instead focus on improving the health of its citizens and delivery of care through a more cost-effective approach.

Despite drastic increases in health care premiums and overall costs for health care, corporations, in general, are opposed to getting rid of the employer-based model. One opposing stance is that by providing health insurance to their employees this increases employees’ loyalty. This is probably true, but if everyone was covered through a government funded insurance plan, companies would be liberated from the expectation to provide health benefits. The fact that employers are expected to provide coverage is a historical accident dating back to the 1940’s. By shifting to a government program, this would free up businesses to increase loyalty through other means, such as increased pay or higher bonuses at year end.

A second view expressed is that corporations feel that they are better at managing health care costs than the government. If this is the case, why are companies spending so much time and energy coming up with new ways to provide coverage? Furthermore, why are corporations continuing to increase cost sharing with employees, who ultimately carry the burden as a result? To me, this suggests that companies are unable to keep up with rising costs and therefore are failing to control costs effectively. Perhaps, corporations would argue that costs would be even more outrageous if the government controlled insurance plans, but I have not seen any actual data to support this. I am not trying to suggest that corporations are at fault for the rising health care costs, but I am arguing that they are not in any better position to curb rising costs than the government.

Corporations may also believe that they would end up paying more in taxes to cover a government insurance program than the costs they incur now to provide coverage for their employees. I find it difficult to believe that the tax burden placed on corporations to fund a public insurance plan would be greater than the amount they pay for their employees right now. The car industry provides a good example of how large the health care burden is on business; Chrysler, for example, spends more on health care than they do on steel. That is probably why the CEO of Chrysler is one of the lone business leaders to support a government insurance plan over employer-based plans.

Lastly, corporations may argue against government plans on principle or ideology. In essence, those who believe this are taking responsibility to make sure that their employees are covered and that they have adequate opportunities to pursue better health. However, as health insurance premiums and overall costs continue to rise, employers are finding it more difficult to provide for their employees. As corporations are less able to provide insurance, the government will have to take on more of the coverage responsibility.

As a result of the numerous ways to reduce health care costs – from full coverage, managed care, preferred provider, cost-sharing, health savings accounts, and more – a confusing web of options have been developed by employers. However, none have proven to be the silver bullet for cost containment within the employer-based model. As fewer companies are able to keep ahead of the costs, a better option may be a single payer public plan. With one agency providing coverage, premiums could be lowered through broader risk pools and administrative costs could be reduced. Additionally, companies would see significantly reduced cost for health care and, most importantly, patients would see more money invested in their health.