An Economist Argues That Single-Payer Healthcare is Inevitable

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Stephen Cecchetti, professor of finance at Brandeis’ business school and former director of research for the Federal Reserve Bank of New York, makes an elegant and persuasive argument at VoxEU in favor of a single payer medical system: it’s inevitable.

Why? Cecchetti starts from the premise that improved genetic testing will provide foreknowledge of an individual’s health prospects. Those with robust constitutions will seek only accident insurance; the sickly rest will be rejected by private insurers. Hence the government will have to step in. This is the core of his argument:

The fact that private insurers can accurately compute customer premiums to reflect expected future payouts means that the insurance market will break down. Insurance is about shifting risk, pooling large groups of undifferentiated individuals. When either the insurer or the insured can forecast future events, and accurately distinguish one person from another, the rationale for insurance disappears.

I doubt that genetic testing will become accurate and comprehensive enough to have the forecasting accuracy that Cecchetti anticipates any time soon. However, if we had good genetic tests that could predict the predisposition to develop even a few costly and common ailments, say type 2 diabetes, cancer, and Alzheimers, the dynamics that Cecchetti describes would come into play.

From VoxEU:

Technology will force private health insurance to disappear; social pressure to provide equal access to care will remain. The inevitable result will be that health care systems everywhere will provide universal coverage and be publicly run.

Economists believe in markets. Market-determined prices allocate scarce resources efficiently, encouraging individuals to put them to their best possible uses. This improves everyone’s welfare. But there are times when private markets break down, and insurance is one of them. When markets fail, the government inevitably has to step in and provide insurance. That’s the case with deposit insurance as well as with insurance against the devastation from natural disasters. The future is one in which health care will fall into this same category. Even in countries like the United States, the government, not the market, will ultimately control the level and cost of the medical care we will receive.[1]

A single-payer, publicly run, health-care system is the inevitable consequence of the nearly continuous scientific revolution in molecular genetics that began a half century ago. One day it is James Watson, one of the discoverers of the structure of DNA, being handed the complete genetic code inside his own cells. The next day, researchers tie yet another chronic disease to the presence of specific patterns on individual chromosomes. And then, a few days after that, we learn that scientists are learning to make stem cells from skin cells.

The time is fast approaching when we will have an inexpensive test that is capable of revealing a person’s genetic propensity to contract a broad array of chronic diseases. That means that we will be able to accurately assess the cost of medical treatment over their lifetime.

I grant that there are a number of things about my medical future that I would rather not know. For example, I am not anxious to learn about my genetic predisposition to develop Alzheimer’s disease or my propensity to contract heart disease or type 2 diabetes.

While I may shy away from knowing the details, I am interested in the medical equivalent of my credit score – call this my “health score.” Without revealing the specifics of any future diseases I am likely to contract, a health score will summarise my overall health-care risks. And, each year, with new information on my weight, blood-pressure, and the like, my score will be refined.

The fact that we will all have health scores has profound implication for insurance; or, more accurately, for the failure of market-based insurance.[2] If I have the information revealing that I am likely to be healthy, living a long and low-medical-care-cost life, this knowledge alone will create adverse selection, causing me to forgo insurance for everything except treatments arising from accidents, which can never be forecasted.

To understand the problem, think about a simple case in which there are only two kinds of people, those with high and low expected future medical-care-costs lives. Imagine that the insurance company can’t distinguish the two types, so it charges all comers the average cost across the entire population. For the healthy people, the cost of the insurance will look very high, so they won’t buy it. That means that the only people who will buy the insurance are the unhealthy. Realising this, the insurance company will have to raise their price further to compensate for the fact that only the high cost people are willing to buy insurance. This is the classic “lemons” problem that causes markets to fail and was first described by George Akerlof.[3]

Alternatively, if my insurance company can obtain my health score, then, in the same way that lenders use my credit score to calibrate the interest rate they offer on a loan, they will adjust my health insurance premium based on their precise estimate of the cost of my future medical care. And, importantly, a clever insurance company that is precluded from learning my health score directly will find a pricing scheme that leads me to reveal it to them through the choices that I make.[4]

The fact that private insurers can accurately compute customer premiums to reflect expected future payouts means that the insurance market will break down. Insurance is about shifting risk, pooling large groups of undifferentiated individuals. When either the insurer or the insured can forecast future events, and accurately distinguish one person from another, the rationale for insurance disappears.

In thinking about the provision of medical care, it is important to realise that we view it differently from other goods and services. When it comes to housing, cars, vacations, and the like, we are fairly tolerant of disparities between rich and poor. Our focus is on equal opportunities, not equal outcomes.

Granted, Americans accept greater inequality than the citizens of many other countries do. Not so for health care. Members of wealthy societies share the view that their members are entitled to high quality medical care. Social justice demands that the rich and poor among all of us receive roughly comparable treatment.

Over the past decade, there have been several attempts to reform the American health care system. The US spends nearly 15½% percent of our GDP on medical care, roughly 50% more than countries like France, Germany and the Netherlands. And, as measured by life expectancy and infant mortality, Americans’ health outcomes are worse than those in much of the industrialised world. Something has to change. But change is politically and socially difficult, so in designing the new system we should make changes that are likely to last.

Looking into the future, we see that technology will force private health insurance to disappear at the same time that the social pressure to provide equal access to care will remain. This makes it inevitable that health care systems everywhere will provide universal coverage and be publicly run. Governments will replace markets, insuring that the poor and uninsurable receive medical treatment at the same time that the healthy are forced to participate in a comprehensive system.

Unfortunately, we will be forced to restrict access to the most expensive treatments, but even so, everyone is going to receive adequate health care. The operation replacing my disintegrating brain and over-worked liver with the new ones grown from my skin cells may not be covered; but then again, maybe it will. Regardless, I’m off to my wine cellar to ponder the best way to design a publicly run, single-payer health care system.

[1] For a description of how the U.S. health care system operates today see Jonathan Gruber, “Health Insurance I: Health Economics and Private Health Insurance,” Chapter 15 in Public Finance and Public Policy, New York, N.Y.: Worth Publishing, 2005.
[2] Insurance problems are discussed in most intermediate microeconomics textbooks. One example is Robert Frank’s Microeconomics and Behavior, 6th edition, New York, N.Y., 2006, pages 208—214.
[3] See “The Market for ‘Lemons’: Quality Uncertainty and the Market Mechanism,” Quarterly Journal of Economics (August 1970).
[4] Insurance companies can create pricing schemes in which differing individuals signal their type through the choice of what they choose to purchase.

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  1. burnside

    I consider the basic research directed towards genetic predispositions for diseases and adverse chronic conditions to represent leading indicators for genetic interventions addressing those same diseases and conditions.

    Firms like Elixir Pharmaceuticals are approaching non-invasive, genetically-based, non-surgical means to reverse late-onset, type II diabetes in humans.

    Cecchetti’s argument focuses closely upon the social/economic implications of the initial stages of progressive genetic research, but to the exclusion of outcomes leading to treatment and outright cures. The future shape of insurance may well change considerably, but his model is too restricted to be predictive.

  2. Anonymous

    One CEO’s Health-Care Crusade
    A lifelong believer in free markets, Safeway’s Steve Burd now believes government must step in to rescue U.S. medical care

    …Once, he severed a fingertip. After a long lunch hour getting it stitched up, he returned to his post. “Famous old Midwestern work ethic,” he laughs.

    He proved just as tough while running companies over the past three decades, first as a turnaround specialist at buyout firm Kohlberg Kravis Roberts and then as chief executive of Safeway (SWY). During most of the 14 years that he has led the grocery store chain, Burd slashed jobs, perks, and even executive bonuses to stave off threats from lower-cost competitors such as Wal-Mart Stores (WMT) and Costco Wholesale (COST).

    Then came the day in 2004 when he realized he just couldn’t keep doing the same thing anymore. After hearing a Harvard University economics professor describe the breakdown of the American health-care system, Burd dispatched his top lieutenants to provide a full accounting of his company’s health costs. Poring over financial reports, they stumbled on a sickening statistic: Their spiraling health expenditures had hit $1 billion, 119% of Safeway’s net profit. “We started to do the rudimentary math,” recalls Senior Vice-President Ken Shachmut, “and concluded that if this keeps happening, we were going out of business.”

    Burd first tried wellness and preventive-care programs. But it wasn’t enough. His frustration grew so strong that he underwent a fundamental conversion: The lifelong believer in keeping government out of corporate affairs became convinced that, to rescue the U.S. health-care system, government had to get involved. Ultimately, all Americans needed coverage, and CEOs had to lead the charge. “I’ve become a bit of an evangelist on this,” says Burd…

  3. Greenie

    It is not ‘rising health care’ cost, but inflation caused by greenscam, bernanke is the problem. If healthcare could be outsourced like our manufacturing, the cost would not have gone up. Same is true for college education. As long as people continue to cure the symptoms instead of diseases, the cancer will contiue to grow.

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