Thursday, November 08, 2007

"Universal Coverage:" A Most Brilliant Analysis

[Welcome Industry Radar and City Journal readers!]

No, not ours: Peter Huber's. IB readers may recall our last post about one of his articles, "Cherry Garcia, Lipitor & You (and me, too!)." Well, as terrific as that article was, his recent IBD piece on Universal Care is even more insightful (and that piece is actually a shortened version of one in City Journal).
Since starting this blog (coming up on 3 years in a coupla months), I've read literally hundreds (if not thousands) of articles and blog-posts on health care and health insurance. Some have been really, really good. And some have been, well, awful.
This, though, may be the most brilliant, perfectly crafted, well-reasoned article on the folly of "universal care" yet. Now, with a set-up like that, there's a real danger that any given piece will fail to meet one's expectations. But having re-read it now for a fourth time, I really doubt that will happen.
Okay, to the chase:
One of the most important observations that our Mike Feehan has made, and which has become something of a mantra for us here at IB, is that "health insurance costs increase because health care costs increase." While this may seem self-evident, many people continue to conflate the two, and others still believe (erroneously) that health insurance drives health care. The point of Mike's assertion is that, unless and until we find a way to control health care costs, we're never going to rein in health insurance costs.
And that is completely of a piece with Peter's observation that "(t)he cost of health care has a big, direct impact on both the cost of labor and the marginal tax rate. If California defies the new medicine's economics by requiring insurers to ignore everything but age and geography, firms can flee to Texas or Shanghai." Think of health care costs as a balloon: squeeze it at one end, and the air moves to the other. Squeeze it in the middle, and the air moves to the sides. But it's still the same volume of air: you've done nothing to shrink the size of the balloon (or the amount of air inside of it, for that matter).
What Universal Coverage (UC) doesn't do is to contain costs; it simply controls access. Anyone who's bought gloves knows that "one size fits all" is only half a sentence: the rest is "but not very well." And so it is with UC, or socialized medicine, or whatever the current buzzword happens to be. Put more simply, "universal health requires steadfast public support...[but] you have the pedestrian problem of costs that rise forever."
A key element in Peter's deconstruction of UC is that it fails to take into account "the human factor." That is, the choices we make, and whether or not we're ready and/or willing to live with the consequences of those choices. An example: "For health-conscious people, skipping the Cherry Garcia may be difficult, but it's cheap, and Lipitor at almost any price is much cheaper than a heart attack."
The point is, it costs very little (in fact, it's a net savings) to just not buy (or eat) a carton of ice cream (I prefer Graeter's), and the cholesterol pill is relatively inexpensive. Of course, downing the whole pint (or quart) isn't terribly expensive either, but the results are part of what continues to drive up health care (and hence health insurance) costs. But unless we pass laws banning ice cream ("if double-fudge swirl is outlawed, only outlaws will have double-fudge swirl"), folks who don't think these things through, or have direct costs (like higher deductibles and/or premiums) aren't going to be motivated to change their behavior. It will fall to the rest of us to "rescue" them.
The problem with that, of course, is that, as Peter observes, "(t)he health-careless skip only the pill, not the ice cream, and end up in desperate need of what helps the least and costs the most." And, eventually, those who are what Peter calls "health-healthy" will begin to resent, and resist, paying for the poor choices their less responsible fellows make.
In short [ed: yay!], a Universal Care system must find a way to control the costs of care, or risk major shortages (which we've documented many times here at IB). But such a system, which is mandated to cover everyone, simply can't do that by fiat, and so costs will continue to rise. Again, think of the balloon. And it affects other segments of the economy, as well: "Efficient labor markets require efficient health insurance, which will be found only where actuaries are allowed to find out as much as the rest of us can, and craft policies accordingly."
But in a nationalized system, where does one go? Well, those that can afford to will take advantage of the burgeoning world of "medical tourism." But what of those who can't?
In the insurance business, we see a certain phenomenon play out over and over again: XYZ Mutual sells health coverage. Thousands of folks (most of whom are reasonably healthy) sign up. As the years go by, people have claims, and the rates go up. Pretty soon, the rates go up enough that most (if not all) of the healthy folks find cover elsewhere, leaving the sickest (who can't move) in an ever-shrinking pool with ever-increasing claims. We sensitively call this the "Death Spiral."
Is that what awaits us at the end of the UC tunnel? Peter has some thoughts on this, as well (although he doesn't use that particular term). As they say, read the whole thing.
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