Health Economics 101
By PAUL KRUGMAN

New York Times, November 14, 2005
Op-Ed Columnist

Several readers have asked me a good question: we rely on free markets to deliver most goods and services, so why shouldn't we do the same thing for health care? Some correspondents were belligerent, others honestly curious. Either way, they deserve an answer.
It comes down to three things: risk, selection and social justice.
First, about risk: in any given year, a small fraction of the population accounts for the bulk of medical expenses. In 2002 a mere 5 percent of Americans incurred almost half of U.S. medical costs. If you find yourself one of the unlucky 5 percent, your medical expenses will be crushing, unless you're very wealthy - or you have good insurance.
But good insurance is hard to come by, because private markets for health insurance suffer from a severe case of the economic problem known as "adverse selection," in which bad risks drive out good.
To understand adverse selection, imagine what would happen if there were only one health insurance company, and everyone was required to buy the same insurance policy. In that case, the insurance company could charge a price reflecting the medical costs of the average American, plus a small extra charge for administrative expenses.
But in the real insurance market, a company that offered such a policy to anyone who wanted it would lose money hand over fist. Healthy people, who don't expect to face high medical bills, would go elsewhere, or go without insurance. Meanwhile, those who bought the policy would be a self-selected group of people likely to have high medical costs. And if the company responded to this selection bias by charging a higher price for insurance, it would drive away even more healthy people.
That's why insurance companies don't offer a standard health insurance policy, available to anyone willing to buy it. Instead, they devote a lot of effort and money to screening applicants, selling insurance only to those considered unlikely to have high costs, while rejecting those with pre-existing conditions or other indicators of high future expenses.
This screening process is the main reason private health insurers spend a much higher share of their revenue on administrative costs than do government insurance programs like Medicare, which doesn't try to screen anyone out. That is, private insurance companies spend large sums not on providing medical care, but on denying insurance to those who need it most.
What happens to those denied coverage? Citizens of advanced countries - the United States included - don't believe that their fellow citizens should be denied essential health care because they can't afford it. And this belief in social justice gets translated into action, however imperfectly. Some of those unable to get private health insurance are covered by Medicaid. Others receive "uncompensated" treatment, which ends up being paid for either by the government or by higher medical bills for the insured. So we have a huge private health care bureaucracy whose main purpose is, in effect, to pass the buck to taxpayers.
At this point some readers may object that I'm painting too dark a picture. After all, most Americans too young to receive Medicare do have private health insurance. So does the free market work better than I've suggested? No: to the extent that we do have a working system of private health insurance, it's the result of huge though hidden subsidies.
Private health insurance in America comes almost entirely in the form of employment-based coverage: insurance provided by corporations as part of their pay packages. The key to this coverage is the fact that compensation in the form of health benefits, as opposed to wages, isn't taxed. One recent study suggests that this tax subsidy may be as large as $190 billion per year. And even with this subsidy, employment-based coverage is in rapid decline.
I'm not an opponent of markets. On the contrary, I've spent a lot of my career defending their virtues. But the fact is that the free market doesn't work for health insurance, and never did. All we ever had was a patchwork, semiprivate system supported by large government subsidies.
That system is now failing. And a rigid belief that markets are always superior to government programs - a belief that ignores basic economics as well as experience - stands in the way of rational thinking about what should replace it.

Pride, Prejudice, Insurance
By PAUL KRUGMAN

November 7, 2005
Op-Ed Columnist

General Motors is reducing retirees' medical benefits. Delphi has declared bankruptcy, and will probably reduce workers' benefits as well as their wages. An internal Wal-Mart memo describes plans to cut health costs by hiring temporary workers, who aren't entitled to health insurance, and screening out employees likely to have high medical bills.
These aren't isolated anecdotes. Employment-based health insurance is the only serious source of coverage for Americans too young to receive Medicare and insufficiently destitute to receive Medicaid, but it's an institution in decline. Between 2000 and 2004 the number of Americans under 65 rose by 10 million. Yet the number of nonelderly Americans covered by employment-based insurance fell by 4.9 million.
The funny thing is that the solution - national health insurance, available to everyone - is obvious. But to see the obvious we'll have to overcome pride - the unwarranted belief that America has nothing to learn from other countries - and prejudice - the equally unwarranted belief, driven by ideology, that private insurance is more efficient than public insurance.
Let's start with the fact that America's health care system spends more, for worse results, than that of any other advanced country.
In 2002 the United States spent $5,267 per person on health care. Canada spent $2,931; Germany spent $2,817; Britain spent only $2,160. Yet the United States has lower life expectancy and higher infant mortality than any of these countries.
But don't people in other countries sometimes find it hard to get medical treatment? Yes, sometimes - but so do Americans. No, Virginia, many Americans can't count on ready access to high-quality medical care.
The journal Health Affairs recently published the results of a survey of the medical experience of "sicker adults" in six countries, including Canada, Britain, Germany and the United States. The responses don't support claims about superior service from the U.S. system. It's true that Americans generally have shorter waits for elective surgery than Canadians or Britons, although German waits are even shorter. But Americans do worse by some important measures: we find it harder than citizens of other advanced countries to see a doctor when we need one, and our system is more, not less, rife with medical errors.
Above all, Americans are far more likely than others to forgo treatment because they can't afford it. Forty percent of the Americans surveyed failed to fill a prescription because of cost. A third were deterred by cost from seeing a doctor when sick or from getting recommended tests or follow-up.
Why does American medicine cost so much yet achieve so little? Unlike other advanced countries, we treat access to health care as a privilege rather than a right. And this attitude turns out to be inefficient as well as cruel.
The U.S. system is much more bureaucratic, with much higher administrative costs, than those of other countries, because private insurers and other players work hard at trying not to pay for medical care. And our fragmented system is unable to bargain with drug companies and other suppliers for lower prices.
Taiwan, which moved 10 years ago from a U.S.-style system to a Canadian-style single-payer system, offers an object lesson in the economic advantages of universal coverage. In 1995 less than 60 percent of Taiwan's residents had health insurance; by 2001 the number was 97 percent. Yet according to a careful study published in Health Affairs two years ago, this huge expansion in coverage came virtually free: it led to little if any increase in overall health care spending beyond normal growth due to rising population and incomes.
Before you dismiss Taiwan as a faraway place of which we know nothing, remember Chile-mania: just a few months ago, during the Bush administration's failed attempt to privatize Social Security, commentators across the country - independent thinkers all, I'm sure - joined in a chorus of ill-informed praise for Chile's private retirement accounts. (It turns out that Chile's system has a lot of problems.) Taiwan has more people and a much bigger economy than Chile, and its experience is a lot more relevant to America's real problems.
The economic and moral case for health care reform in America, reform that would make us less different from other advanced countries, is overwhelming. One of these days we'll realize that our semiprivatized system isn't just unfair, it's far less efficient than a straightforward system of guaranteed health insurance.

Medicaid storms swirling

- David Lazarus, San Francisco Chronicle
Friday, September 30, 2005
The latest storm to erupt on the Gulf Coast is a political spat over spending about $9 billion on Medicaid health coverage for low-income hurricane victims who otherwise wouldn't qualify for the federal program.
The bipartisan backers of such legislation in the Senate say it's the most effective way to quickly bring health care to uninsured people who need it, no matter where they end up.
The Bush administration says it wants to prevent what it calls "a massive new federal program," preferring instead to hand out limited funds to individual states to cover hurricane-related medical expenses.
All this squabbling could be avoided -- and people in need would already be receiving hassle-free treatment -- if the United States had what it so sorely lacks: universal health coverage for all.
Businesses large and small say their health care costs for employees have become too expensive to sustain, leaving workers increasingly holding the bag for coverage. More than 27 million U.S. workers now lack insurance, according to the Kaiser Family Foundation.
About 45 million Americans, or nearly 16 percent of the population, have no health coverage, according to census figures.
Judy Feder, dean of the Georgetown Public Policy Institute, told me that the dispute over coverage for hurricane victims underlines the dysfunctional nature of the U.S. health care system.
"Disasters highlight those who fall through the cracks," she said. "The best way to fix this would be to have coverage for everyone."
Accomplishing that, however, is the real trick. Feder advocates something along the lines of expanding the Medicare program to take in all Americans, thus using tax dollars to pay for health care for everyone.
This is the so-called single-payer system that's already a mainstay of most other developed democracies. Under single-payer systems, all citizens are entitled to treatment by any doctor at any hospital.
It's not perfect. Critics say single-payer systems can result in long waits for treatment. But that could be addressed through a Fed-like medical oversight body.
Harvard Medical School researchers determined last year that about a quarter of all health care spending in the United States is squandered on bureaucratic overhead, such as clerical staff at doctors' offices to process a vast array of insurance forms.
Under a standardized single-payer system, the researchers estimated, annual administrative costs would be slashed by more than $280 billion. This represents enough money to insure all Americans now lacking coverage and to allow millions of underinsured people to improve their quality of care.
"I believe what we're seeing right now in the gulf is that there are circumstances where you need government to do the job," Feder said. "If we had single-payer, we would not be in this fix."
Helen Darling, president of the National Business Group on Health, a nonprofit organization comprised of some of the country's largest employers, said she, too, favors extending Medicaid to all hurricane victims.
"You need action quickly, and this does that," she said.
However, Darling said, it's unlikely the United States would ever summon the political will to adopt a single-payer system. Therefore, she advocates incrementally providing coverage to various segments of the population that lack insurance.
Stuart Butler, vice president of the conservative Heritage Foundation, sided with the White House in insisting that an expansion of the Medicaid program for hurricane victims would be too pricey.
"You don't want to give states a blank check," he argued. "That's what Medicaid would do."
In fact, it wouldn't. The proposed legislation, S1716, would provide Medicaid coverage for five months, with the option of coverage being continued for another five months at the discretion of the president.
But political bickering aside, the plight of the uninsured in the gulf painfully illustrates the dilemma all Americans face when they're unable to gain equitable access to the country's medical system.
That's the real disaster. And it's only getting worse.
Soothing relief: On a much lighter note, companies send a lot of stuff my way -- pitches, press releases, product samples. I don't often come across anything that stands out.
So the prize for Marketing Ploy of the Week goes to Insight Pharmaceuticals, maker of Anacin and other products that relieve cold and allergy symptoms.
The company used FedEx to ship me a large box via priority overnight delivery. Inside the FedEx box was a fancy blue box embossed with the Insight logo in silver.
Inside the fancy blue box was a bed of packing materials cradling a velvet pouch.
And inside the velvet pouch was ... a tin of Sucrets throat lozenges. (Not just any Sucrets, it must be said, but new Sucrets Complete multisymptom cough/cold lozenges, now available at retailers nationwide.)
Jeff Nugent, Insight's chief exec, told me he learned the fine art of splashy product launches during earlier stints running Neutrogena and Revlon.
"This is what it takes to get attention when you have a big idea," he explained.
Nugent said about 1,000 similarly packaged tins of Sucrets were sent to journalists and others nationwide, at a cost of as much as $30 per mailing.
I asked whether this is the best use of his company's money when people are struggling to get by in the hurricane-trashed Gulf Coast.
Nugent countered that he's asking celebrities to sign tins of Sucrets Complete and that he plans to auction them on eBay. "All that money will go to hurricane victims," he said.
Another big idea, right there.

David Lazarus' column appears Wednesdays, Fridays and Sundays. Send tips or feedback to dlazarus@sfchronicle.com.

Medicare not easy to salve David Lazarus Sunday, February 20, 2005

There's no simple or straightforward solution to Medicare's funding woes. At least with Social Security's looming troubles, the remedies can be narrowed down to three fundamental (albeit unpleasant) options: raise taxes, reduce benefits or borrow a big pile of money. It's not so easy with Medicare. "We cannot solve the problems that face Medicare without dealing with the broader problems that face health care in America," said Robert Reischauer, president of the nonpartisan Urban Institute -- a Washington think tank --and former director of the Congressional Budget Office. Medicare and Social Security are plagued by the same demographic challenge-- the pending retirement of millions of Baby Boomers. Both programs face huge funding shortfalls as fewer workers pay into each system and more retirees take money out. In the case of Medicare, however, the fiscal difficulties come sooner and are considerably larger. Also, Medicare's situation is greatly exacerbated by runaway prices for medical treatment and medication. "You can't solve this by looking at Medicare alone," Reischauer said. "There are systemic issues that have to be addressed as well. That's the real problem." Medicare is the $350 billion-a-year federal health insurance program primarily for people over 65 or those with disabilities. It has about 42 million beneficiaries. (Medicare's sister program, Medicaid, provides health coverage for about 44 million low-income recipients.) As I reported Friday, Medicare costs are expected to surpass those of Social Security by 2024. By 2078, Medicare's annual expenditures will be twice as large as Social Security's. The portion of Medicare that pays for hospital stays -- the largest component of the program -- is expected to be in the red five years from now. It will then have to start spending reserve funds. By 2019, those reserves are expected to be gone and the program will no longer be able to pay full benefits. Medicare's deficit over the next 75 years is projected to run as high as $27.7 trillion, compared with a $3.7 trillion shortfall for Social Security over the same period. Leslie Norwalk, deputy administrator of the Centers for Medicare & Medicaid Services, the government agency overseeing Medicare, said a funding gap of nearly $28 trillion appears daunting, but "within a 75-year window, a lot can happen." "There's a long time between now and then," she said. "When you think about how much the health care system has changed, it's very hard to sit in my chair and imagine how things will be 75 years from now." Much could happen, Norwalk believes, that could bring down the cost of health care for future generations. But Robert Moffit, director of the Center for Health Policy Studies at the conservative Heritage Foundation, said it's far more likely that researchers will come up with new drugs and new treatments that will further extend people's life spans. "These kinds of breakthroughs will be terribly expensive," he said. "This will only add to Medicare's costs." Reischauer at the Urban Institute said he would tackle Medicare's issues by effectively reinventing the nation's health care system. "I would start at ground zero," he said. "I would spend a significant amount of money on an independent body charged with evaluating all the procedures and devices in health care and writing practical guidelines." By following such national guidelines, Reischauer argued, health plans and health care providers throughout the country would be able to eliminate redundancies and introduce new efficiencies. "We need to begin building a new system brick by brick, and the system needs to be evidence-based," he said. That's all well and good, responded Heritage's Moffit, but it's not politically realistic to think that the United States can simply throw its existing health care system out the window and start again from scratch. "We can't do it all at once," he said of fixing Medicare's problems. "It's too big to do all at once." Moffit's solution involves changing the Medicare program at first only for the Baby Boomers -- those turning 65 after 2010. He would replace the average $6,500 now spent annually on Medicare beneficiaries with a yearly subsidy, perhaps in the form of a tax credit. Recipients in turn would use the money to choose their own health care plan based on individual needs. If someone wants to spend all his cash on Viagra-- which is covered under President Bush's costly new Medicare drug benefit -- that would be his decision. "This would address some of the long-term cost issues," Moffit said. "It would not be an open-ended entitlement. "We're going to be spending a lot more on the Baby Boomers than we did on the World War II generation," he pointed out. "There's just a lot more of them. " Medicare's Norwalk called Moffit's suggestion "a very interesting proposal." But, she added, "I don't see it as politically viable." Ida Hellander, executive director of Physicians for a National Health Program, a Chicago advocacy group, said Medicare's woes demonstrate the need for universal medical coverage in the United States. The clear solution, she said, is a so-called single-payer system similar to national health plans in Canada and elsewhere. "You can't control costs," she said, "until you have a uniform system." Under a single-payer system, any citizen could be treated by any doctor at any hospital. Payroll taxes would replace all existing premiums, deductibles and co-pays. Medicare could serve as the bedrock for creation of a single-payer system. Between that program, Medicaid and Veterans Affairs, Hellander said, taxpayer funds already account for about 60 percent of U.S. health spending. In California, state Sen. Sheila Kuehl, D-Santa Monica, plans to introduce legislation this week that would establish a single-payer system for state residents. A recent report by the Lewin Group, a well-regarded health care consulting firm, determined that universal coverage along the lines of what Kuehl is proposing would reduce health care spending in California by $8 billion next year alone. It also would provide coverage for the nearly 6 million uninsured people statewide and result in lower costs for virtually all California companies now providing insurance to employees, Lewin found. Heritage's Moffit rejected the notion of a single-payer system in this country. "That's exactly the way to go if you want to reduce quality and personal freedom," he said. However, Reischauer at the Urban Institute said single-payer may ultimately hold the answers not just for Medicare but also covering the 45 million Americans now lacking health insurance. "If push came to shove, I would want a single-payer system instead of the system we have now," he said. "But the political obstacles to that are considerable." There it is again -- politics. Proposals for improving health care from both the left and right are routinely dismissed as being politically unrealistic. All that remains is a sense of chronic crisis and a leadership vacuum when it comes to tackling some of the most important issues facing this country. Medicare, like Social Security, can be salvaged. It won't be easy. It will be damned painful, in fact. But we'll never know how painful unless we try.

David Lazarus' column appears Wednesdays, Fridays and Sundays. He also can be seen regularly on KTVU's "Mornings on 2." Send tips or feedback to David Lazarus

New tack for health insurance David Lazarus <mailto:dlazarus@sfchronicle.com> Friday, February 11, 2005

So we learned from President Bush's budget this week that the new- and-improved Medicare prescription drug benefit won't cost Americans less than $400 billion over 10 years as originally proposed, but instead nearly twice that amount. A pig in a poke? Quite possibly. A lousy health care system? Definitely. Boston University researchers released a study this week concluding that about half of all health care spending in the country is squandered on administrative waste, excessive pricing and fraud. Yet Californians may soon have an alternative, at least if a state lawmaker succeeds in her latest effort to introduce universal health care. State Sen. Sheila Kuehl, D-Santa Monica, told me Thursday that she plans to unveil her California Health Insurance Reliability Act on Feb. 23. It will be Kuehl's third stab at getting a universal-care bill through the Legislature. But this time things are a little different. For one thing, disenchantment with the existing health care system continues to grow among both ordinary people and businesses saddled with skyrocketing insurance premiums. Meanwhile, advocates of universal coverage have brought a new level of seriousness to their cause by hiring a prominent political operative, Andrew McGuire, to spearhead fund-raising and lobbying efforts.

Less money, more coverage And most importantly, a new report by the Lewin Group, a well-regarded health care consulting firm, finds that a system along the lines of what Kuehl is proposing would reduce health care spending in California by $8 billion next year alone. It also would provide coverage for the nearly 6 million uninsured people statewide and result in lower costs for virtually all California companies now providing insurance to employees. "This is an independent report proving that we can achieve universal coverage in California while reducing health spending," Kuehl said. "It's a very important development." It's not a slam dunk, though. Kuehl acknowledged that almost as soon as she introduces her legislation this month, the insurance and drug industries will unleash all their political firepower to protect their interests. "When they do, I plan to raise questions about the obscene profits these companies are making," Kuehl said. "I love a good fight." Her bill would create a so-called single-payer health system in California-- the first in the nation (although similar efforts are under way in other states). Single-payer systems have existed in Canada and other nations for decades. Under a single-payer system, any California resident could be treated by any doctor at any hospital anywhere in the state.

Commissioner to oversee The state's medical resources would be overseen by a newly created health commissioner, who would ensure that money is spent wisely. According to the report issued last month by Virginia's Lewin Group, funding for a California single-payer system could come in part from an 8.2 percent payroll tax for employers. The tax would replace all current health care benefits paid for workers, dependents and retirees. Lewin estimates that 16 percent average saving in 2006 for all employers now offering health benefits. Meanwhile, salaried workers would pay a 3.8 percent payroll tax that would replace all existing insurance premiums, deductibles and co-pays. According to Lewin's projections, this would reduce the $2,788 expected to be paid by the average California family next year for health services and insurance by about $340 per family. Exact funding breakdowns in Kuehl's legislation are still being tinkered with.

Industry likely to oppose "If people can get past industry's propaganda, I think they'll see that this is really good for them," said McGuire, who was hired several weeks ago to serve as executive director of Health Care for All -- California, a grassroots organization backing universal coverage. McGuire's past political efforts have included campaigns for gun control and safer cigarettes. He also serves as head of San Francisco General Hospital's Trauma Foundation, which seeks to prevent serious injuries. "If people in the corporate world get religion and realize this is in their best interest, we could really have a chance," McGuire said of Kuehl's bill. That may be true for many companies, but not for the health insurance business, which would be effectively decimated by creation of a single-payer system. Bill Wehrle, acting president of the California Association of Health Plans, which represents about three dozen HMOs statewide, said people should be wary of single payer. "There could be some amount of administrative savings under a single- payer system," he acknowledged. "It all depends on what trade-offs people are prepared to make to get savings."

Long waits in Canada In Canada, for example, Wehrle said the country's single-payer plan has resulted in longer waits for treatment and lower pay for doctors. "We think higher quality at lower cost is achieved when you have competition in the private sector," he said. Perhaps, but a poll this week by Research America, a Virginia nonprofit organization focusing on medical issues, found that nearly two-thirds of respondents believe most Americans are not getting the health care they need. And a study last month by the Kaiser Family Foundation revealed that 63 percent of adults believe that lowering the cost of health care and insurance should be a top priority for political leaders. Kuehl said her bill stands a good chance of passage in the state Senate. The Assembly might be rougher sledding as the legislation's tax components are scrutinized by various committees. As for what California's unabashedly pro-business governor might do when presented with a single-payer bill to sign, that's a whole other matter. "We have to show him the data on who would save money here," Kuehl said. "Eight billion in savings is a lot." It is. And with the stakes this high, an open mind on everyone's part isn't too much to ask for.