Amy Finkelstein: The Costs and Benefits of Universal Health Insurance

This WSJ commentary from Amy Finkelstein of MIT discusses the costs and benefits of adopting universal health insurance:

The Cost of Coverage, by Amy Finkelstein, Commentary, WSJ: Thanks to widespread concern about the millions of Americans without health insurance, several states have recently mandated universal coverage... Massachusetts enacted legislation...; other proposals are brewing in California, Pennsylvania and elsewhere. Such reforms are likely to affect health-care spending...

For evidence of how such programs can lead to increased spending, just look at the effects of the introduction of Medicare in 1966. Medicare provides health-insurance coverage to virtually all Americans aged 65 and over. Prior to its enactment, only about one-quarter of these individuals had any meaningful health insurance. As a result of Medicare's introduction, about three-quarters of the elderly ... gained health-insurance coverage. (For perspective, this is a similar increase in the share .. as ... will happen in Massachusetts under its new universal coverage program.)

Research I conducted shows that Medicare had a substantial effect on the health-care sector. By 1970, the program caused a 37% increase in hospital spending. This is an enormous number. If I extrapolate from the Medicare ... to ... the ... overall spread of insurance -- both public and private -- between 1950 and 1990, it suggests that it is responsible for about half of the sixfold growth in real per capita health-care spending during this period.

Why does increased health insurance lead to increased health spending? One factor is that when individuals have insurance, they tend to consume more health care. ...

Another reason is that hospitals and doctors respond to the increased demand for health care by changing some of the ways in which they practice medicine. For example, hospitals were more likely to adopt new medical technologies after Medicare... because ..., with greater insurance coverage, there were more people who could afford these new technologies. ... All of this contributes to higher health-care spending.

Of course, the effect of health insurance on health spending tells us only of the costs of expanding health insurance coverage. We can also ask, what are the benefits? And once again, we can learn something from the Medicare experience. Robin McKnight of the University of Oregon and I have examined the data, and as best we can tell, Medicare did not have any effect at reducing elderly mortality in its first 10 years of existence. Of course, mortality is only one measure of health, and it is possible that other aspects of health improved. It is also possible that in the long run, the new technologies adopted ... because of Medicare had important health benefits that our 10-year analysis would not capture.

While the health benefits from Medicare therefore remain uncertain, we found clear evidence of a different type of benefit: It provided substantial financial protection to the elderly. Prior to Medicare, they faced the risk of large out-of-pocket medical expenditures. About one in 10 of elderly individuals spent one-fifth of their annual income on medical expenses... By 1970, we estimate that Medicare had reduced this risk of extremely large out-of-pocket medical expenditures by half.

What all this means is that, as best we can tell, the elderly were not foregoing life-saving treatments prior to Medicare. Rather, they were getting these treatments, albeit at large or even enormous personal financial cost. But overall Medicare did not so much save lives as it did provide financial security. This is the goal of insurance -- not to prevent an awful event from occurring, but to make sure that if it does occur you are not devastated financially.

The Medicare experience offers valuable lessons for today. Recent state efforts to create universal health-insurance coverage would reduce the fraction of the population in a state without insurance by similar amounts as did the introduction of Medicare... And if that program is any guide, we may perhaps see changes in the structure of the health-care system, such as the development and adoption of new medical technologies. We are likely to witness an improvement in the financial security of the currently uninsured. There are also likely to be increases in health-care spending -- quite possibly substantial ones.

The paper she co-authored with Robin is noted and briefly discussed here. The paper itself is here. Here's a non-technical summary.

Here are some statistics related to the paper Robin has used in presentations. This table shows that medical spending is very skewed: If you order people according to their spending on health care, the top 10% of spenders account for 72% of all spending and the top 1% of spenders account for 30% of all spending. 

Share of health care spenders	Cumulative share of US medical spending
Top 1%	30%
Top 5%	58%
Top 10%	72%
Top 30%	90%
Total population	100%

Source: Berk & Monheit (1992)

It's the people in the tails, of course, that use most of the resources and receive most of the benefits from adopting universal insurance coverage.