The fundamental problem of health care costs, which is never discussed by either side

Here is the basic truth of the health care issue, succinctly stated by Arnold Kling (via the Corner). I agree completely with his main points:

There are two ways to approach reducing the use of high-cost, low-benefit procedures. You can have the government tell people what they can and cannot have. Or you can have individuals pay for a larger fraction of the medical procedures that they consume. It really comes down to those choices.

Advocating either one of those is political suicide, and talking about anything else is a waste of time. The Democrats will not advocate government rationing, and the Republicans will not advocate scrapping most of our current system of third-party payment in medicine. Instead, the summit, like the entire “health reform debate” this year, will be a waste of time.

I disagree with Kling’s notion that the entire health care debate has been a waste of time. That would be like saying that if a horrible disaster was coming your way, and with great effort over months you fended it off, that was a waste of time. It may have been a waste of time from the point of view of solving the underlying problem; it most certainly was not a waste of time from the point of view of preventing the occurrence of a horrible disaster which would have made things infinitely worse.

The underlying problem which no one wants to face is this. In the long run we must make an either-or choice between the elimination of third-party payment for health care (except perhaps for catastrophic coverage) on one side, and socialized medicine on the other; between freedom, along with a certain amount of insecurity and inequality, and the encroaching political slavery and spiritual death we see in Europe.

- end of initial entry -

LA to Kristor:

I remember that weeks ago you sent an alternative healthcare approach. It was complicated and I can’t say I took it all in. Perhaps it offers something better than the stark choice I outlined here.

Kristor replies:

Did you go too far? Yes and no. No, in the sense that any Federal legislation addressing health care delivery is going to be another step down the slippery slope to tyranny (but NB that this is true of any domestically oriented extra-constitutional legislation; health care is no different from federal involvement in energy or education, in this respect). Yes, in the sense that there are highly evolved notions among health care economists about how to set up a system so that individuals are insured in the private sector against catastrophes over which they have no control, but also held responsible financially for run of the mill, predictable medical expenses over which they do have some control. The problem with insurance is that in insuring against concrete perils it increases the moral hazard of those perils. If catastrophe is made less catastrophic by insurance of some kind, we will naturally be less vigilant in avoiding behaviors that make such catastrophes more likely. And all Federal activities can be understood as insurance of one form or another. The more that individuals are forced to bear the costs of their behavior—including the increased premium costs that in a perfect market would be the natural result of risky behavior such as smoking or promiscuity—the more is such moral hazard reduced. Any proposal that reduces moral hazard vis-a-vis our health is going to ameliorate the situation, reducing costs by rewarding us financially for healthy, prudent behavior—exactly the policy goal that we should be aiming for.

The set of ideas I sent over a couple weeks ago is one such proposal. And it might be a good idea for you to read it over carefully. It will take some rumination to see how each element of the proposal would work with the others to set up a virtuous cycle that would lower costs and increase welfare, in the broadest sense of that word. But the problem with my proposal, as I see it, is that it sets up the Federal government as the central collection and distribution facility for premiums. While I think the scheme would actually work to solve the current problems with our health care system, I think also that as night follows day, that one feature of the program would surely result in an eventual total Federalization of health care.

It would help a little if the Federal Reserce—which is not an agency of the U.S. government—or a similarly ‘independent’ body were put in charge of the clearing house. It would help a bit more if the Federal agencies now competing with insurers (e.g., the Social Security Administration) were sold off to the private sector. It would help even more if the program were entirely private, established via a change of laws that inclined private insurers and their customers to naturally select a more virtuous way of doing things. And that should be possible. After all, the current vicious way of doing things is a result of Federal law, and state law; why not hit the rewind button? We could probably solve almost all the problems in health care if we simply revoked all the laws now on the books, and started over with a clean slate. But since that would be almost impossible to do in all 51 jurisdictions, the simplest way forward is Federal legislation, however repugnant that may be; so I proposed Federal legislation that would I think do the job, and that quite inexpensively.

Kristor continues:

In that entry I said that our policy goal should be a situation of minimal moral hazard, wherein we are financially rewarded for healthy, prudent behavior. But this situation is what obtains in the total absence of policy; i.e., it is the state of nature. The closer we can get to that, the better we will be, and therefore the better off we will be.

Posted by Lawrence Auster at February 25, 2010 03:21 PM | Send