derifatives

Izmirian's first proposal.

Izmirian commented with a simple version of his own health care plan.

Everyone would pay for health-care expenses out of pocket. This would generate much more cost awareness of the health care provided and generally promote all the efficiency benefits that you get from a free-market. Once your annual costs had reached 10% of your income the government would pay the rest of your health care for that year. To retain some of the cost awareness even after that point had been reached, a certain fraction of your costs past the 10% threshold would accumulate in a bill that you would have to pay back in subsequent years.

My initial reaction is that this system is a lot better than what we have now in the US, which in turn is better still than what we're going to have in ten years. There are still substantial problems.

It gets some things very right. For most people, most of the time, most healthcare expenses would be out of pocket. This would encourage people to shop on price and service, and would encourage providers to compete. The taxation limit of 10% is distortionary, but not heavily so; the lack of a sharp cutoff means that the incentive to not work and earn is fairly low. The requirement that money beyond the 10% threshold accumulates in a bill removes some of the incentive to strongly manage your income across years.

On the other hand, I think there are difficulties. The idea of a "10% of income" requirement seems designed to have the rich pay more than the poor before government expenses kick in, but this leads to tricky tradeoffs between income and wealth. These issues will be especially acute when they are related to expensive care at the end of life, where there is no prospect of future income to pay off the bill. If the bill is not passed on to your estate, then this will strongly shift incentives towards expensive end of life treatments, paid for by the taxpayer. If the bill is passed on to your estate, we are now taxing wealth instead of income, which leads to a large and expensive monitoring regime.

Your proposal doesn't talk about what treatments are covered, how treatment is provided, or spending limits. Based on the idea of a bill that will in theory be paid back at least in part, I think the proposal is that people could decide for themselves what treatments they wanted, and that treatment would be provided without government price controls. So far so good. But spending limits are a problem. I think we have to recognize that it is impossible to guarantee the most expensive and newest and best treatments to everyone, and that the best bang for our buck comes from subsidizing access to moderate cost treatments that have been proven effective.

Thinking about it more, a variant of the proposal with an overall spending cap per year that isn't way out in the tails of spending [say $25K-50K/year, although we'd have to look at stats to argue about the number more], and with the provision that people could buy whatever supplementary insurance they wanted to in a purely voluntary market, would not be a horrible system. Medical expenses would be somewhat higher in total than in a purely open system, taxes would be higher, there might be other unexpected consequences, but at first glance, I think this would work at least OK.

I will note in passing that the European systems that work relatively well [e.g. France] do feature substantial cost-sharing; I will discuss in detail in later posts. I will also note that the bill we are getting in the US is moving us much farther from the market rather than closer to it.