Who Pays?

Something that particularly caught my eye in this exchange is the title of Jonathan Cohn’s as-yet-unpublished book, Sick: The Untold Story of America’s Health Care Crisis — and the People Who Pay the Price. Not having seen the book, I am curious whether he has really focused, as the title promises, on “the people who pay the price” – namely, the payers of health insurance premiums (and payroll taxes). Or has he instead, like most commentators on the political left (and his comments here), focused only on the plight of the uninsured? My curiosity arises in part because I, too, have a work in press (to be released this month) that addresses the question of who pays the price.

I and a colleague, Barak Richman, have edited a symposium issue of Law and Contemporary Problems that bears the title “Who Pays? Who Benefits? Distributional Issues in Health Care.” Our lead article in that symposium, entitled “Distributive Injustice(s) in American Health Care,” argues forcefully that far too little attention has been given to how the extraordinary costs of health care are borne by the subset of working Americans who still have health insurance. In our view, lower- and middle-income premium payers may reasonably be viewed as the system’s primary victims.

Although the uninsured certainly deserve sympathy, many of them are uninsured more or less by choice and, as a direct consequence of not paying health insurance premiums, have more resources to spend on other things. To be sure, they are sometimes hit with large bills, and some are bankrupted. But, in literal terms, the uninsured are not the main class of “people who pay the price.” Indeed, much of the sympathy expressed for their plight originates with providers whose real concern is that the uninsured are not paying their share to support the system. In truth, both premium payers and the uninsured are victims of the same overblown system, which artificially inflates the cost of medical care and deprives people of meaningful opportunities to economize in purchasing it – except by going bare. Richman and I believe lower- and middle-income premium payers are being victimized far more than they know. And therein lies the problem.

Our first key point is that Americans with health coverage pay not only for their own families’ health care but also to sustain a vast enterprise that primarily benefits others, many of whom are more, not less, affluent than themselves. The system is able to finance itself in part because U.S.-style health insurance – the kind that Kling abhors – greatly amplifies price-gouging opportunities for the many health care firms, including hospitals and pharmaceutical companies, that enjoy a degree of monopoly power. Although monopoly profits are often applied to caring for the uninsured or providing other public goods, the burden of paying for arguably (but not necessarily) valuable goods and services falls ultimately on premium payers more or less equally and without regard to ability to pay, like a severely regressive “head tax.” This is the wrong way to finance the production of public goods. Likewise, the burden of inducing health-sector R&D (some valuable, some wasteful) should not be borne disproportionately by America’s premium payers.

Richman and I also observe that insured consumers bear excessive costs for their own health care, both because many unit prices are supra-competitive and because the coverage they must buy, if they are to have any coverage at all, necessarily includes an entitlement to what Kling calls “premium medicine.” Among the many explanations we offer for the failure of the marketplace to offer significantly lower-cost insurance options is over-regulation, including the professionally dictated standards of medical care that are both incorporated by reference in insurance coverage and enforced in malpractice litigation. To be sure, consumer-voters have generally favored cost-increasing health sector regulation, just as they have demanded overly costly coverage from their employers and resisted employers’ efforts to economize. But, as emphasized in my earlier essay in this series, the preferences thus revealed exist only because consumer-voters do not see with any clarity the high cost of the coverage they enjoy. Richman and I emphasize not only the market effects, but also the political effects, of a tax system that induces consumers to believe that the cost of their health coverage falls mostly on their employers, not themselves. In addition to the usual advantages enjoyed by special interests in influencing legislative choices, the tax subsidy makes it especially easy for the health care industry to accomplish its political agenda. This agenda includes not only keeping consumers ignorant about how, and how much of, their money flows into health care but also greatly limiting their opportunities to economize in purchasing it.

Much of the discussion so far in this series focuses, as usual, on whether the market can solve the problem of giving consumers good value for the money they choose to spend on health coverage or health care. The argument that consumers might make poor choices, while valid, is not in itself a reason to deny them opportunities to make any consequential choices at all. It does point, however, toward trying to structure a system in which subsidies and rules against fraud and malpractice prevent them from making truly bad choices. A key point, briefly made in my initial essay, is that consumers should be free to reject paying for health services at the point of service and to choose instead a sophisticated corporate agent – a health plan – to help them make those difficult choices. Mark Hall and I wrote not long ago in Health Affairs about the potential benefits of combining health savings accounts with well-designed and well-administered health coverage. As Matthew Holt also believes, there is still much virtue in the managed-competition model as Enthoven originally put it forward. And managed care – although it needs a new name, more honesty and openness in its execution, and greater integration of providers in the project of offering consumers good value – could be expected to make a comeback if insured consumers were finally made aware of the costs they bear.

Although there are serious practical problems (e.g., adverse selection), there is no definitive reason why private health plans could not offer consumers all the cost-containment services that Cohn says government could provide. Indeed, with less regulation and more freedom of contract, competition among different types of health coverage is the only way to avoid the one-size-fits-all problem that is the principal reason for objecting to a single-payer system of the kind most likely to be created in the United States. Whatever the case in other countries, it is hard to imagine Congress enacting a program that does not nominally guarantee access to all care meeting professional standards of quality and necessity. Yet many consumers would be better off with more money in their pockets and less access to “premium medicine.”

As to political reality, I see no reason why a populist of the Right or Left should not finally tell voters the truth about who pays for American health care and about how its benefits accrue disproportionately to industry interests and high-income consumers and taxpayers rather than themselves. Out of the scandalous unfairness of the present system, skillful politicians should be able to fashion a movement for fundamental, market-based health reform. Here is a chance for Republicans to seize the populist banner and offer something other than a socialist remedy. At a time when lower- and middle-income workers are having trouble keeping up, income-wise, with the Joneses across the tracks, it is nice to know that there is a way to increase both their disposable income and overall welfare while at the same time enhancing, rather than further undermining, the efficiency of the overall economy.

Also from This Issue

Lead Essay

  • Insulation vs. Insurance by Arnold Kling

    In this month’s lead essay, Cato Institute adjunct scholar Arnold Kling draws from his book, Crisis of Abundance, to argue that the health coverage most Americans enjoy is not insurance at all, but what he calls “insulation.” “The problem with insulation,” Kling argues, “is that it is not a sustainable form of health care finance… Insulation leads people to over-consume health care services. Americans make extravagant use of services that have high costs and low benefits.” Kling explains how real health insurance would work, and how it would help solve the crisis in health care, and explores how we could transistion to a system over time institutionally and culturally in order to resolve the inconsistent demand for insulation and affordable, effective care.

Response Essays

  • Abundance Is Insulated from a Crisis—For Now by Matthew Holt

    According to health care strategist Matthew Holt, Arnold Kling is correct that consumer insulation from the costs of “premium medicine” is partly responsible for the rising cost of health care, but Holt dissents from Kling’s solution. Holt examines what he takes to be the three main strategies for dealing with “the insulation and overuse of medical care in the U.S.”: a nationalized “single payer system; a system of “managed competition”; and “individual consumer control of spending at the point of service.” Holt argues that the latter two options face deep problems, and that a nationalized single-payer system “is the likeliest outcome in perhaps a decade or so,” even it is not politically feasible at present. “Kling has provided a decent analysis,” Holt argues, “but has proposed a solution that both ignores the political and cultural realities of the health care system, and probably wouldn’t even work in theory.”

  • Unhealthy Subsidies by Clark C. Havighurst

    Clark C. Havighurst agrees with Kling’s “diagnosis of what’s wrong with health care” in the U.S. “as far as it goes.” Havighurst goes further and digs into the reasons the U.S. health system “has evolved into an entitlement program under which everyone expects nothing less than the very best that ‘modern medicine’ has to offer.” Havighurst lays the blame at the feet of the government’s choice to subsidize the purchase of health care by “excluding the cost of employer-sponsored coverage from employees’ taxable wages and income” and lucidly details three different mechanisms by which the tax subsidy insulates workers, consumers, and voters from the costs of health care. Havighurst proposes that “something approaching [liberals’] goal of universal health coverage could be achieved by ending the current tax subsidy and offering refundable tax credits of, say, $6000 to families that spend at least that amount in health plan premiums or contributions to a health savings account.”

  • Yes, We Need Real Insurance … Real Social Insurance by Jonathan Cohn

    Jonathan Cohn, a senior editor at the New Republic, agrees with Kling that our current health care system doesn’t function according to the widely understood principles of individual insurance, but he doubts we’d do better at fighting rising costs and maintaining quality if citizens with “real” insurance were free to take price into account in their choice of care. “We have precious little evidence to believe that people can distinguish good care from bad care,” Cohn writes. And the notion that consumer choices will improve over time is, according to Cohn, “a lovely idea, but one that seems highly dubious.” Cohn argues that we need a broader notion of insurance — social insurance — to shield people not only against unexpected illness and harm, but against “genetic and economic bad luck.” Cohn argues that many nations do just fine in managing the cost/quality tradeoffs inherent in a state-controlled system of universal coverage, and that Americans would be happy with such a system “if only they knew how those systems really worked.”

The Conversation