Paul Krugman: Death by Insurance

Paul Krugman returns to an important topic, health insurance. As I've stated many times, I'm in full agreement with his call for a single-payer system:

Death By Insurance, by Paul Krugman, Health Crisis Commentary, NY Times: For lower-income working Americans, lack of health insurance is quickly becoming the new normal. That's the implication of survey results just released ... The survey found that 41 percent of nonelderly American adults with incomes between $20,000 and $40,000 a year were without health insurance for all or part of 2005. That's up from 28 percent as recently as 2001.

Many of the uninsured reported spending their entire savings on health care and/or that they were having difficulty paying for basic necessities. And most uninsured adults reported cutting corners on medical care to save money — failing to fill prescriptions, skipping medications, going without preventive care.

Here's the other side of the same coin: health insurers' business is lagging ... And some investors are feeling the pain. Aetna's stock price fell sharply last week, on news that its "medical cost ratio" — a term I'll explain in a minute — rose from 77.9 to 79.4.

Taken together, these stories tell the tale of a health care system that's driving a growing number of Americans into financial ruin, and in many cases kills them through lack of basic care. (The Institute of Medicine ... estimates that lack of health insurance leads to 18,000 unnecessary American deaths — the equivalent of six 9/11's — each year.) Yet this system actually costs more to run than we would spend if we guaranteed health insurance to everyone.

How do we know this? The medical cost ratio is the percentage of insurance premiums paid out to doctors, hospitals and other health care providers. Investors are upset about Aetna's rising ratio, because it leaves less room for profit. But even after the rise..., Aetna spends less than 80 cents of each dollar in health insurance premiums on actually providing medical care. The other 20 cents go into profits, marketing and administrative expenses.

Other private insurers have similar ratios. ... Older Americans are covered by Medicare, which doesn't spend large sums on marketing and doesn't devote a lot of resources to screening out people likely to have high medical bills. As a result, Medicare manages to spend about 98 percent of its funds on actual medical care.

What would happen if Medicare was expanded to cover everyone? ... [T]his would mean covering 46 million Americans who are currently uninsured. But the uninsured already receive some medical care at public expense ... And Medicare manages to spend much more of its funds on medicine ... than private insurers. If you do the math, it becomes clear that covering everyone under Medicare would actually be significantly cheaper than our current system. And this calculation doesn't even take into account the costs our ... system imposes on doctors and hospitals. ...

Many pundits see red at the words "single-payer system." They think it means low-quality socialized medicine; they start telling horror stories — almost all of them false — about the problems of other countries' health care. Yet there's nothing foreign or exotic about the concept: Medicare is a single-payer system. It's not perfect, it could certainly be improved, but it works.

So here we are. Our current health care system is unraveling. Older Americans are already covered by a national health insurance system; extending that system to cover everyone would save money, reduce financial anxiety and save thousands of American lives every year. Why don't we just do it?

Previous (4/28) column: Paul Krugman: The Crony Fairy.
Next (5/5) column: Paul Krugman: Our Sick Society

Update: From Krugman's Money Talks:

Jim McEvoy, Brussels, Belgium: I believe your readers need to know how well socialized medicine works outside the United States. As an expatriate American, I have resided and worked in Belgium for the past 17 years.  

First of all, as a self-employed Belgian, I pay social security contributions that are capped at 12,000 Euros per year. That contribution includes my family's medical coverage except for an additional 165 Euros per quarter for hospitalization coverage.

Everyone can choose a family house doctor who manages their health file and basic care. If your child is too sick to get out of bed, that doctor makes a house call. Instead of paying 20 Euros for an office visit, you then pay 30 Euros. I have never seen a house doctor who had any staff. If you need to see a specialist, you simply find one and seek their advice, no restrictions in doing so. Belgium has some of the leading specialist in the world in various fields of medicine.

The results of this system are impressive. When my wife delivered both our children, the out of pocket expense was approximately 35 Euros each time. For normal deliveries they keep the mother in the hospital for one week to recover and rest. I know for a fact that in the United States, you are lucky to get 24 hours in the hospital for normal childbirth.

My older sister in Minneapolis and I in Belgium each had a procedure called a catheter ablation of the heart to eliminate an irregular heart beat. She spent $2,400 American for the procedure with full employee medical coverage, which was performed as an outpatient procedure under a mild sedative. My same procedure cost 70 Euros and I was fully sedated and hospitalized for two nights.

Prescription drug costs are also a huge difference. A common medicine I now need to take cost me 3 Euros for a three-week supply. I checked in the United States and that same medicine would cost $19. That's nearly four times the cost !

As far as I can see, the private sector control of health care in America has been a total failure. It's time to look for something that works — and works for everyone.

Paul Krugman: I didn't know about the Belgian system, but there's abundant evidence that European systems work far better than the U.S. non-system. We subject ourselves to enormous risks and poor care, and end up spending more money to do so.

Comments

[cm]

I work in a supposedly well-to-do company that offers a supposedly good healthcare plan, and while I can so far not complain about the quality, I have issues with getting "in-network" referrals, and I have to deal with far more bureaucratic issues than I think I should, half of them billing screw-ups.

[ilsm]

If the US devotes 16% of GDP to medical care, and the private part spends 21% of it stake in that 16% of GDP then what part of that 16% of GDP goes to "overhead" and profit?

[anne]

An important question, but profit is far less the issue than needless administrative cost in health care, even though health care is increasingly monopolistic in delivery.

[Anonymous]

We'll have universal health care the moment corporate America decides such action is in its best interest and funds a lobby that is stronger than the current health-industry lobby.

We seem to be getting closer to this outcome every day.

[Alejandro]

From the economic point of view universal coverage has one attractive: It reduces the adverse selection problem.

See http://en.wikipedia.org/wiki/Adverse_selection for a discussion of the topic.

Since everybody is covered health premiums are adjusted to the average individual and not to the high risk population.

Still this does not mean that we should have only one provider. I'm not sure but a system of vouchers might have the same effect on premiums with the advantage of competition among providers.

[save_the_rustbelt]

Instead of repeatedly suggesting a system many Americans don't want, and which is not politically doable at this time, why doesn't Krugman propose a real solution?

That would require hard work, trust me I've tried.

Easier to write quick newspaper columns.

[anne]

Low cost health insurance is, of course, something that any American beyond the health care industry should want and almost all would be overjoyed with, but the idea in any form has been methodically resisted by the health care industry and especially in a time of a Republican Administration and Congress we are not heading this way.

[Barry]

Rusty, because many good causes take decades to reach their goals. In the mean time, you gotta keep picking away at it.

[Carter]

Good analysis. Another significant insurance overhead expense left out by Krugman is the financial cost to providers of the insurance billing system. What is the main staffing source in hospitals - its all the people they have that go through the insurance plans of their patients, deciphering health coverage, deductibles, copayments etc. This easily comes to 10s of billions of dollars.

[Mark Thoma]

Thanks Carter. I cut this part, maybe shouldn't have:And this calculation doesn't even take into account the costs our fragmented system imposes on doctors and hospitals. Benjamin Brewer, a doctor who writes an online column for The Wall Street Journal, recently commented on the excess expenses he incurs trying to deal with 301 different private insurance plans. According to Dr. Brewer, he currently employs two full-time staff members for billing, and his two secretaries spend half their time collecting insurance information. "I suspect," he wrote, "I could go from four people in the paper chase to one with a single-payer system."

[Bruce Webb]

Barry, this may not take decades. Medicare "crisis" has been piggybacked on Social Security "crisis" to create Entitlement crisis. But what happens to that narrative if you just remove Social Security from that narrative? What if every economist from sea to shining sea was forced to concede that Social Security was fully funded going forward?

Is this blue sky, pie in the sky talk? S-T-R will contemptuously snort and say that it is. All I know is that a certain economist known as Duncan Black seems to know that the Social Security Report will be released today.

The economic Right has been using Social Security as shorthand for big government program failure for decades. I don't know about you but I've got Lennon's "Imagine" going through my head. "Imagine all those people ... reading table V.B1". (Well I won't quit my day job.) What would be the effect of turning that narrative 180 degrees? I don't know, but I hope to find out, maybe starting later today.

[Fred Hapgood]

I would like to see Krugman or any other advocate of Single Payer think a bit about the transition issues of moving to his system. I'm not sure how many jobs would be lost in moving to SP but it would be a lot, certainly in the tens of thousands. Leaving aside the politics involved in putting that many people on the street and erasing a few hundred billions in investment, which is of course a huge caveat, how would it work, exactly? Would there some government involvement or not? I'm not arguing for or against; I'm just pointing out there are consequences here that will need to be dealt with.

Another big uncertainty in my mind is what kind of private insurance would remain and how the government program would co-exist with it. Presumably the private insurance would represent and therefore define the high end of health care, which mean that the government program would represent and define the low end. That might be a real problem. SP might end up not so much ameliorating inquality as aggrevating it.

[save_the_rustbelt]

Bruce, assuming you are correct and SS is fully funded going forward (and I'm dubious), I;m not certain how that will solve any Medicare problems.

Many snort fire at the mention of an incremental approach, but taking action on indigent care and catastrophic coverage could be a good start.

[Fred Hapgood]

assuming you are correct and SS is fully funded going forward

This social security debate taught me to notice that economists routinely pick lookahead horizons that to noneconomists like me seem preposterously distant. This inclination is not linked to any one issue -- once reading up on social security had educated me about the habit I started seeing it everywhere, especially in the new enthusiasm for sustainable accounting. I wonder where it comes from. Surely the world does look that much more predictable to an economist than it does to, say, an engineer. Or maybe it does.

[Fred Hapgood]

Surely the world does look that much more predictable to an economist than it does to, say, an engineer. Or maybe it does.

... does NOT look that much more ...

[DJM]

from ; Careless Industry: How Corporate America Perpetuates the Health Care Crisis By David Sirota
http://www.truthout.org/docs_2006/050106M.shtml
The Institute of Medicine (stated in 2004) "Lack of health insurance causes roughly 18,000 unnecessary deaths every year in the United States...."

So how is it that government and media have settled into complacency when the system is so bad for so many? The status quo pays big dividends.

In 2003, HMOs nearly doubled their profits from just a year before, adding $10 billion to their bottom line. That year, top executives at the 11 largest health insurers made a combined $85 million in one year. In the first three quarters of 2004, HMO profits increased by another 33 percent. The sheer numbers behind these profits are staggering: In 2004 alone, the four biggest health insurance companies reported $100 billion in revenues. That's $273 million a day, every day, 365 days of the year.

That's the kind of cash that allowed the health industry to spend more than $300 million on lobbying in 2003, and another $300 million on campaign contributions to politicians since 2000. Their agenda is pretty simple: stop any proposals to curb health care profiteering by private insurance companies.

[DJM]

from Doug Thompson Capitol Hill Blue's

Real change cannot come without real reform and real reform means stepping back and admitting that our system has evolved into an unbearable mess driven by too much money, too much greed, too much lust for power and tool little regard for the people the system is supposed to serve.

The system cannot be changed as long as those who must approve the change benefit most from the current corruption.

[DJM]

David Sirota wrote;
In 2004, the nonpartisan group Families USA was asked to testify before a House committee on the issue of health care.

But of course, the hearing was only a formality, really. Congress had no intention of listening too much to anyone who didn't come bearing a very large check. Still, the political goons in the employ of the big insurance companies understand that in even the most mundane situations in Washington, the truth must be squelched at all costs. So it was no surprise when amidst the boring proceedings, fireworks started.

Rep. Mike Rogers (R-Mich.) apparently had heard enough about the health care crisis. So in the middle of the testimony by Ron Pollack, Families USA's executive director, Rogers snapped. "Just so I understand your organization," he said, "you support rationing, limited drug use, pharmaceutical use?"

It was a nice tribute to McCarthyism-couch an outrageous, unfounded accusation in a seemingly innocent question. The Families USA representative denied the charge. But it didn't stop there. Like a drooling pit bull snarling at a passerby, Rogers barked, "You support rat?oning health care for American citizens and limiting the ability for them to have access to pharmaceutical treatment in order to keep costs down."

Rogers might well have screamed "Communist!" had his time not run out. Why was he so aggressively hurling out deceptive accusations? He was just doing the job he'd been paid to do: Over the previous four years, Rogers found himself in possession of more than a quarter million dollars of campaign contributions from the health care industry. ...........

[DJM]

Sirota ; The only industries universal health care would hurt are the big HMOs and drug companies. In the current everyone-for-themselves system, they can dictate high prices because citizens are not organized into large blocks that can negotiate lower prices. People are divided, and so the health care industry conquers.
( I might not go so far as D.S. did,to say "the only"...)
We are led to believe that because we have a private, for-profit health care system, we don't have health care rationing in America. But the whole point of most health insurance companies is to ration care, limiting the amount of coverage their patients get in order to save cash. Even the Supreme Court admits that. In 2000, the justices issued a unanimous opinion noting that the existence of HMOs means "there must be rationing and inducement to ration" care. The ultraconservative Washington Times admitted that the court made very clear that "it is the point of any HMO to ration care and within its prerogative to delay tests, avert expensive consultations or refuse experimental care."

Remember, this isn't just rationing of non-critical health services. In 2001, for instance, the Sacramento Business Journal uncovered evidence that senior citizens who were receiving cancer treatment were being priced out of their chemotherapy by an HMO that had arbitrarily decided to raise its rates. "For many seniors on fixed incomes the choice is to die or take a shot at physical survival and life in poverty," wrote the magazine. "This is how the free market rations healthcare. ...
Beyond just the sheer corruption and deception of all this is the insulting pretense that these politicians actually care that health care rationing is going on in the first place. They say they oppose a government-funded health care system because it would result in rationing, yet they are the very same people who actually write the policies that force the government to ration.

[reason]

Fred Hapgood,
your comments are good.
I'm a bit like you and see (a) where we are, (b) where we would like to be and (c) how in hell we can from from here to there as all one messy issue. It would make sense to treat (c) as part of (b) more seriously than we do. Academic Economists love to use comparitive static analysis and so treat (c) as just a messy detail. I think we should tax land and resources use much more than we do, but have real problems with how the transition could be managed so I see the issue pretty clearly. All I can think is that we have to agree to the end (b) in principle first and then negotiate (c) with compensation to injured parties.
As regards economists and distant horizons, well I think the world is full of hystoresis curves but economists only see exponentials. Again I think it has to do with comparitive static analysis. Start in equilibrium growth (exponential) and make a marginal adjustment.

[JoshK]

Many other "single payor" systems have been tried in other countries. Russia tried a "single payor system" for food, and we saw how well that worked. I don't mean to be too glib, but there are huge risks in allowing the government a monopoly on anything. In most of these countries, there is a burgeoning private care business booming - clearly, the single payor system there has issues.

Also, you have to consider the role of torts and liability in US healthcare. Liability insurance is needed at the practice, doctor, pharma, etc levels. The US costs dwarf anything in Europe or elsewhere.

There certainly are structural problems with our system. IMHO, the HFA system makes a lot more sense. Maybe that could be paired with a low-income loan program similar to student loans.

At the end of the day, any system that aims to separate people from the essential costs of something they consume seems doomed to fail, or at least be very inefficient.

[Fred Hapgood]

They say they oppose a government-funded health care system because it would result in rationing, yet they are the very same people who actually write the policies that force the government to ration.

It's hard to imagine any hc system that doesn't ration somehow and impossible to imagine one that won't have to, given the scale of the investment in health care R&D around the world. This is another question I have about Single Payer -- by its nature it will have one rationing scheme across the entire country. Is this a good thing? Maybe, maybe not. But what will that rationing scheme be? Here's a sample candidate: you're covered for all conditions that have a 50% or better chance of killing you in a year if untreated. That would handle a lot of the cases that people worry about -- but no means all of them.

There is nothing people would rather spend money on than their health, and the civilization is working overtime to make sure they have as many opportunities as they need to spend every dollar. I wouldn't bet against its chances.

[HADit]

I am tired of all the praise that is heaped upon employers for the selfless policy they have of giving health care to their employees. Employers actually pay very little of the health care bill, as it is mostly passed through to the government (ie, you and me) at tax time.

There might have been a time when we could afford all the inefficiencies of employers choosing an insurance company to manage the delivery of health care to its employees, but that time has long passed.

What a great concept for a profitable line of business. Sell an expensive product that excludes the people who actually NEED it (and would actually USE it).

Whose idea was it that only those people who were employed by these generous companies were deserving of
comprehensive health coverage? The whole elitist concept is morally corrupt and should be discarded without fanfare.

[sanjay veerkar]

Folks,

I thought this was a blog for economists. I think there is a lot of confusion about how such an insurance would work in practice. It is all very simple and straightforward. Let me try to offer clarity. There are two steps needed to understand this so stay with me till the end .. or flip the channel now.

1) How an exchange works:
Any exchange balances buyers and sellers right? So the price is determined by the buyers and sellers themselves and both parties must understand what exactly they are trading: for e.g. 1 share of microsoft, 1 barrel of oil on Jun 27, 2006, (oil future) etc. The exchange merely provides the mechanism and charges a commision on both sides. Kinda simplified but that is the idea.

Here is how the house price insurance scheme would NOT work. Folks, let us say my neighbor Joe wants to buy insurance for his new house. He goes to such an insurer who promptly matches Joe up with me and I then need go to his house and do some assessment, etc and finally we agree on a price level, 3 month term and premium and we all (Joe, insurance agent and me) go our separate ways. Lots of time wasted and what's worse: Joe won't do the home maintenance he would have done which assures that the price drops. I would anticipate all this and so clearly such a system would not work.

So here is how the system WOULD work: instead of insuring his own particular house, Joe would insure against a fall in a standard industry statistic periodically released by the National Association of Realtors (e.g. next one is to be released on May 11, 2006). I, as a speculator who is a housing believer but not a homeowner, can sit in the comfort of my own home and decide to invest $5,000 for the next 3 months in the hopes that house prices rise so that I can double my money as down payment towards my new home. The insurer would act as an exchange and take my money and provide the opposite service to Joe who will also put down $5,000 betting that the house price will fall. If house prices fall, Joe will make $9,500 and if they rise he will lose all of his $5,000 investment but gain on the value of his home. On the other hand, I will either lose my money or make a profit of $4,500. The insurer will make $1,000 in either case. Of course when other insurers realize how juicy the commissions are they will compete and it will reduce say to a healthy $100 or so.

2) The price is always right:
In this deal everyone wins: Joe reduces his risk, I can speculate without buying a house and the insurer makes a bundle no matter what. However, the price of the premium is decided by Joe and myself. If I decide that the housing market is indeed soft, I will refuse to put down $5,000 and if Joe also agrees that the market is soft, the price of this insurance may change: I may need to put down $2,000 to make $9,900. Joe will put down $8,000. Thus how much to pay is not decided by the insurer but by market conditions as percieved by Joe and myself and of course also by the number of Joes and the total amount they want to hedge, etc. Thus price and hence premium is decided by the market and govt or insurer or anyone has no hand in it.

End of lecture. Bottomline is that insurance will be linked to a standard number and that as a homeowner and hedger you will follow the numbers on a website or newspaper. Just like the inflation and GDP growth numbers.

I trade housing options on hedgestreet and it is quite easy to follow. But trading volumes are really very low.

[ProspectZone Insurance]

The problem with all of this is that insurance has stopped being the betting game that sanjay describes, but has instead become a prepayment. And if that's what it is, ok, but we can't deceive ourselves into thinking it's something it's not. The good news for insurance agents is that because it's not just a bet, it's pretty much required of everybody, so everyone needs insurance. By definition, then, everyone is a potential lead. Theoretically, that should be good business, right?