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Holding the health care conversation to the care and economic fundamentals

posted Feb 12, 2017, 8:00 PM by Norman Eide   [ updated Feb 13, 2017, 5:47 PM ]
When trying to follow the conversation about the Affordable Care Act, it is important to stay focused and to judge the replacement ideas against a few fundamentals.

If we agree that the country’s objective is the equitable distribution of health care to all individuals irrespective of their gender, age, caste, color, urban/rural location and social class (to paraphrase the World Health Organization, see references below) then we in the United States have to grapple with a fundamental fact:

In a given year, 10% of the people incur about 2/3s of the health care costs. That’s about $54,000 for each of these people that year. The average for all Americans that year is about $10,800 each and the lowest 50% about $700 each that year. (See Dean Baker references below.) It is reasonable to assume that those in the 10% and probably many of those that have an average or above year are not able to afford these costs that year. 

America’s approach to this is to have some sort of insurance scheme. This then presents three interrelated dilemmas. All three have to be dealt with. It is like having a three-legged stool, to use a Paul Krugman analogy (see Paul Krugman references below). Not addressing all three will result in the plan falling over.
  1. In a pure laissez-faire market economy, insurance companies are not going to want to insure people who they think are going to get sick, particularly if they have pre-existing conditions. So if we do not want people to be denied coverage because of pre-existing conditions, there is going to have to be a law that says insurance companies can not deny coverage. This is known as community rating. (See Wikipedia references below.)
  2. If insurance companies can not deny coverage, people are going to have an incentive to try to game the system. There will be a tendency for only people who suspect they will need medical care soon to buy insurance so the composition of the pool of people that the costs are spread over will skew toward the people with the highest costs therefore the insurance costs will keep increasing causing the pool to skew even more as even more people delay buying insurance. This is a well studied phenomena know as adverse selection (an introductory article can be found at the Wikipedia references below). Insurance companies will stop providing coverage under these conditions. So if we want a viable insurance market, there is going to have to be a law that says everyone needs to have insurance coverage. 
  3. This then creates the third challenge. Some people are not going to be able to afford the required insurance. As a result, a means tested subsidy has to be implemented.

This is the Affordable Care Act: Community rating, mandatory insurance, and subsidies. 

It is important to stay focused and keep these fundamentals in front of us. How do the replacement ideas address these realities?