Single-payer health care and transparency

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There are systematic reasons why health care in the USA, especially for the not-wealthy, is a lottery.

The system used to be built on insurance, which is a simple concept: if only 14.6 out of every 100,000 people is going to get hit by a car and thus potentially incur a hundred thousand dollars in medical bills, it is an entirely reasonable risk-sharing scheme for all 100,000 to pool their funds so the unlucky few can pay their bills. You don't need me to explain the concept of insurance.

But pretty much everybody is going to get old. In fact, those .015% who get hit by cars are doing us all a favor by dying young. The other 99.985% of the pool is going to grow old and eventually suffer any of the usual chronic conditions that your grandmother talks about every time you call her, and those conditions are pricey no matter what.

What does insurance mean in a world where almost everybody needs the big money to pay the bills? If everybody puts in $10,000 and has a 99% chance of needing $100,000, the books don't balance.

That gets the ball rolling, but for many reasons, health insurance is no longer about catastrophic events that incur massive bills, but about general access to the health care system.

In our world, it no longer makes sense to even call the insurance company an insurer, because everybody is making claims, and either those claims are more than what you paid in, or you're a sucker and should be taking better care of your kids. The insurer is simply a financial intermediary: you send money to them every month, they throw it all in a giant salad bowl, and then they pull money out of the salad bowl to pay doctors and hospitals.

On the upbeat side, if we think that people are too irresponsible to save for their later health needs, then a lifetime of insurance is a form of payment smoothing. And hey, sometimes people do suffer catastrophic medical events that really do look a lot like what insurance is meant to cover.

Also, the insurers do provide other services beside time and risk smoothing, such as collective bargaining. For every medical procedure, there is a limit that the insurance company will pay for that procedure. The larger insurance companies can keep that low thanks to the bulk of customers that they carry.

On the other hand, health insurers have proven to be pretty incompetent at the basic tasks of financial intermediation. I've got a pile over there of eleven separately-mailed statements from my insurance company regarding a surgery from a few months ago--plus the bills from the hospital, the doctor, the anæsthesiologist, and I'm afraid to look to check who else. If you've been to a hospital lately, then you no doubt have your own folder somewhere with a title like medical bills that I don't quite understand and I hope will go away. The insurance companies--i.e., the financial intermediaries--are seriously dropping the ball here, because simplification of complex information is up there among the main roles of an intermediary, and they are clearly not succeeding at that. According to one California study, 20% of health care spending goes towards billing and insurance paperwork.

The agency problem

The payer and the consumer are distinct entities, which is a simple recipe for overcharging, and it is inherent to the current structure of health insurance. You're a hospital or drug company, and most of your customers have health insurance. How do you set prices? You couldn't care less what the individual can pay, because they couldn't care less: they've got their fixed copayment and don't even know the cost beyond that. The insurance company, however, has a balance sheet of a few billion dollars, and has little control over whether a customer chooses to receive care or not. So you price to the insurance company, not the consumer.

This also leads to overconsumption of care. Overuse of fire insurance isn't a real problem, because nobody but a few fraudsters are going out of their way to burn down their homes. Seriously, moral hazard is not a major issue for catastrophic insurance, and I think it's silly that econ textbooks spend so much time on it. But for health care, we can't define when a treatment is for a catastrophic, unavoidable medical ailment and when it's an elective by the consumer. Some people ignore that little cough as just part of life, and some people make frequent visits and persist through increasingly expensive treatments trying to track down its cause. We're stuck with people who insist on the $5,000 MRI when two minutes with a stethoscope will do, because those people will see a bill for a thirty dollar copayment either way.

Further, there is an externality to pricing for the insurer rather than the consumer: because hospitals are pricing to insurance companies, those without insurance must pay insurance company prices for their health care. I.e., once most people have an intermediary paying their bills, those who don't can't keep up. To a great extent, this is the crux of the current mess, why you can't really step foot in a doctor's office without insurance anymore, and why we need to care that (as of last year) 15% of the US population doesn't have health insurance.

Incomplete markets, incomplete information

Economists describe this situation as the incomplete market problem. For a complex good like a telephone service, a mutual fund, or an insurance plan, there are a thousand variables that could go different ways, but only a handful of packages to choose from. That means that you have to accept a trade-off where a few hundred variables will be set the wrong way for your tastes no matter what you choose. There are various proofs about how the usual market-optimality can fail in an incomplete market.

Further, all contracts are incomplete, meaning that if you ask sufficiently detailed questions, you'll eventually find something that the contract doesn't mention. In the case of health insurance, you hit against that level of incomplete information very early. Say that you have a persistent goiter, and so seek a goiter-friendly intermediary. The glossy brochures don't say anything helpful, so you call the company:

You: I have a goiter, and may need surgery. Do you cover that?
Them: What's the six-digit procedure code for that?
You: How the expletive am I supposed to know that?
Them: Well, we have a list of six-digit procedure codes for every medical procedure. If you give me a procedure code, I can tell you how much you might have to pay.
You: Can I see that listing somewhere?
Them: No. We don't release that to consumers.
You: Why do you say you could tell me how much I might have to pay?
Them: We constantly revise the payment schedule, so any coverage I tell you about right now could be changed or eliminated tomorrow.

Outside of a broad notion of some plans offering better or lesser coverage, it's a total crapshoot as to whether a given plan covers what you need as an individual with a unique health situation.

Again, for any other financial intermediary this would be entirely unacceptable, but it is the norm in health care, to the point that there are zero health care providers who do any better. The mortgage market is a good example where things work, because a mortgage is a set of building blocks that fit together in standardized ways. The amortization schedule is not up for debate: it's the same for everybody, which is good because most people don't even know what an amortization schedule is, let alone how to compare several of them. If you get an adjustable-rate mortgage, there are about five variables that change from vendor to vendor and the rest is fixed. This is a trade-off between having complete markets and having transparency, and I would say a successful one, because a normal human with any of several dozen human-friendly mortgage calculators can process the few variables as chosen by various vendors and make an informed choice. There are no friendly cross-vendor health insurance calculators, because every step of the pricing the system is so far from transparent.

For health insurance, you are alreadly guaranteed a limited range of choices because of the complexity of the system, but on top of that, pricing so lacks transparency and is so un-standardized that the concept of informed consumer choice among insurance plans is basically a myth.

The summary so far: (1) Health insurance is no longer about catastrophic events that happen to 0.015% of us. Thanks to the medical advances that let us live to a hundred and thanks to #2 and #3 below, a few hospital visits over what are now routine problems are more than what many people can afford. (2) Requiring an intermediary for all health care transactions induces a disconnect between the consumer and the payer, which creates an arbitrary mess with regards to who's paying what. (3) The intermediaries have demonstrated no real interest in producing transparency, so #2 aside, it is impossible to determine what a procedure will cost after the intermediary runs its internal pricing schemes.

I won't address #1 much below; the gist is that yes, health care is fundamentally expensive, and that won't change any time soon. But #2 and #3 create a disconnect between consumer and prices, that allows providers to raise prices almost without limit, and that's the sort of market failure that economists can readily address.

No intermediary

The goal of the HSA is to eliminate the intermediary (problem #2), and its users do wind up writing more personal checks. But it isn't any revolution, because the HSA still needs to be backed by an insurer who negotiates the prices you wind up paying, and who provides the catastrophic insurance for the day you get cancer and your capped-at-$2,850/year health savings account is exhausted after the third hospital visit.

In short, the HSA doesn't eliminate the intermediary, and that intermediary still goes through its still-not-transparent process of determining the prices you pay. So the HSA makes the consumer the payer in the sense of writing the checks (problem #2), but not in the sense of making the pricing system any more transparent (problem #3).

Single payer

For health care, the U.S. government is already the financial intermediary of last resort, because the system is committed to helping people who run out of money. Sorry, neoclassicists, but that's just the way it's gonna be in a reasonably well-to-do Democracy. There are laws that emergency rooms can not turn people away for lack of funds, but beyond the imminent-death situations, public health is a legitimate interest of government. So government is already a financial intermediary--a central one--and always will be. The question of single-payer health care is only of extent: should government provide intermediary services that are sufficiently complete that the average middle-class person would want to use that service, or should it remain the intermediary of last resort?

In some ways, government can be better at being an intermediary than private companies. First, having a single intermediary means that it has more negotiating power than multiple intermediaries.

But more to the point of this essay, the U.S. government is much better at solving the transparency problem than most private businesses. I know you're not used to statements that begin government is better than business at..., but businesses are in the habit of providing exactly as much information is legally required of them and no more, while government agencies that exist only to provide information and make allegedly objective decisions realize that their survival depends on the volume of information they can put out. Even the most hard-nosed neoclassicists acknowledge that government bureaucrats are very good at maximizing their goals while minimizing their costs--the problem with a bureaucracy is just in making sure their goals are what they should be. But transparency is consistently one of those goals throughout U.S. government.

You know how much people complained about the new Medicare drug pricing, and how it's too confusing? That debate was fabulous because it actually happened. We simply don't have enough information to have a similar debate for private insurance pricing, and even if we did, there's no reason to think that the private insurers would change anything after receiving feedback about a lack of transparency. Try sending a Freedom of Information Act request to a private insurer.

Also, it would bring us all great joy to see the Paperwork Reduction Act applied to the medical system. Private insurance companies do nothing but shuffle papers, they've have had a few decades to smooth out kinks in the paperwork system, and the above study is still finding 20% of medical costs wasted on filing papers. For comparison, the IRS, everybody's favorite bureaucracy that does nothing but shuffle papers, spent a little over 10% of its budget on processing forms: out of a $10.8 billion budget, $1.2 billion is spent on processing to take in $2,000 billion in taxes.

Because transparency has to be created before consumers can truly shop and choose, a more transparent system gives us good odds of eliminating the intermediary entirely for many situations. We'd have a public schedule of fees for procedures, and because government agencies are skinflints and have high bargaining power, the fees for many procedures would be down to a level where human beings can pay out of pocket, so after doing its bargaining, government may be able to step aside entirely and let consumers write the checks and decide what services to receive. That is, government intervention can bring us a long way to a functioning health care market.

This wouldn't eliminate private insurance. In countries that have a national health care system, those who want better treatment can pay extra for it on top of the well-established baseline payout, and there's no reason why you couldn't hire an insurance company to pay your well-established out-of-pocket payments for you. The point is not to eliminate different levels of service or catastrophic insurance, but to establish a baseline for pricing that is transparent and allows those without insurance or access to preferential treatment to still get basic care as they grow old and ill.

Could we regulate transparency into the private health care intermediaries? Maybe; we did it with mortgages. But the human body is much more complex than a loan, and the problem is not in establishing pricing guidelines, but the thousand-page list of prices itself. Why not just standardize the price list and be over with it? There's little difference between having a transparent price list administered by government or by a private corporation. Given the extent to which private companies have mucked up the job of being a financial intermediary to date, and the extent to which this is the one thing government is competent with, the usual we should default to private provision wherever physically possible arguments just aren't holding water here.

Summary paragraph

Conversely, governments are good at being intermediaries: they can collectively bargain like nobody else, those in the developed Democracies have a strong history of striving toward transparency, and those two points together already bring us a long way toward having a health care system where consumers can select their care based on the checks they will be writing--a real health care market.

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