Why do we have health insurance?

One of the comments I sometimes get in class about healthcare reform is that it's not fair to have a system where the healthy pay for the sick and the wealthy pay for the poor. Setting aside the second half of this comment, the healthy paying for the sick is the essential idea behind health insurance. Borrowing from Karen Pollitz, I present the swoop. (Please note that this is a very informal graph and would not be acceptable to include in an academic paper)

When it comes to healthcare, at any point in time most people cost very little, but there is a small group of very sick people who cost a lot. Pretty much everyone will fall into this small group of costly healthcare consumers at some point in their lifetime, and they have almost no control or ability to anticipate when that will be. Heart attack, pregnancy, cancer etc. can all shift someone into the high cost group. Sure, there will be some unlucky people who spend more time in the costly group and some very lucky people who remain relatively low cost throughout their lives, but we have no way of knowing who that will be. This is what we call "an information problem", using applied economic speak. Because we don't know how much we would need to save to pay for our healthcare needs or when we may need it and because we can all anticipate being high cost healthcare consumers at some point, it makes sense to enter an insurance pool.

When you have a large insurance pool where there are lots of people who do select in based on some reason: (employment, residence, citizenship etc.) aside from health status, you create a system where the healthy transfer money to the sick (because remember, most people are relatively healthy most of the time) with the knowledge that when they are sick, the healthy will in turn transfer money to them. The bigger the insurance pool, the more healthy people there will be to transfer money to cover the very sick, and the less costly one major illness will be for everyone. This is why the individual insurance market is so inefficient. It creates a system where more of the sick select into the insurance pool, and the relatively healthy stay out. This is also why the individual mandate is an important component of healthcare reform from the perspective of the insurance companies. They need healthy people in their pool to keep premiums low and ensure a profit.

In terms of the wealthy paying for the poor, the evidence is more mixed on this case. You can argue from a public health perspective the wealthy benefit from the poor having healthcare coverage. When people are able to get treatment for infectious diseases more quickly, it reduces the likelihood that the diseases will spread. Also, immunizations are an important aspect of preventive care. Children with certain diseases are unable to tolerate vaccines and have to rely on herd immunity to keep them well, if access to immunizations is reduced, herd immunity becomes less likely, and these children are more likely to get sick. This becomes especially true with the current cultural movement against immunizations that some more well off families are participating in. Preventive care also reduces the strain on our emergency systems, freeing up medical personnel for true emergencies. Finally, a healthy workforce is a productive workforce so greater healthcare coverage of low-income families is good for business' bottom line.

A recent ground-breaking study from the National Bureau of Economic Research  evaluated the impact of Medicaid coverage on low-income Americans and found that despite the issues with lower acceptance of Medicaid by doctors and healthcare providers, individuals on Medicaid had better outcomes than those without insurance. They got better health coverage, had better mental and physical health status, and were financially more stable. The study used a randomized design to avoid selection bias, and is a very strong study methodologically. This paper illustrates the importance of health insurance, especially for individuals and families who are already struggling.

My Thoughts on Healthcare Policy

I hope by now you have all seen one of the assigned documentaries for this week, "Sick Around America" or "Sick Around the World". The first discusses many of the problems individuals face in the US healthcare system and the second discusses the ways, in which, different countries have structured their healthcare systems. Both of these documentaries were made prior to the passage of the healthcare reform bill. I posted a good overview of the new bill on the blackboard site.

I chose healthcare policy as our first substantive area because I hope you all have some familiarity with the political debate over the healthcare reform bill that was passed last year. Healthcare policy is also one of the issue areas where I have some expertise. For those of you who watched "Sick Around America", Karen Pollitz was one of my professors in my MPP program at Georgetown.

I think the first important point that Peters brings up is that government intervention in healthcare is not new in the United States. The U.S. government has provided healthcare services to certain populations through Medicare, Medicaid, and the VA for much of the 20th century. The U.S. government also invests substantially in research and development and regulates the pharmaceutical, insurance, and healthcare markets. At the same time, the United States has historically done very little to address access and cost issues compared to other developed nations.

As Peters points out, we are usually addressing three issues when we discuss healthcare policy: access, cost, and quality. Sometimes these issues can be in conflict. Increasing access to healthcare for the sick and elderly risks sacrificing cost containment. A market system may provide incentives to increase quality for those who can afford to pay for cutting edge services and pharmaceuticals, but it limits access to the highest quality care to only those who can afford to pay. The United States does better on quality, at least for those who can afford the best services, and does poorly on access and cost containment. Of course, the lack of access shows how some aspects of quality, access, and costs are related. At the population level, our healthcare system does not perform well in terms of healthcare quality measures because so many individuals are priced out of the healthcare system.

The healthcare reform bill passed by Obama in March, 2010 is mainly concerned with reducing costs and increasing access to healthcare. While it will fall short of universal coverage, CQ Researcher estimates that it will cover 32 million of the 45 million uninsured individuals in America. The bill also provides funding for pilot studies to determine how best to restructure our healthcare system to incentivize preventive care and efficient and effective medical treatment. The current controversy over the bill concerns the constitutionality of the individual mandate, which requires everyone who can afford it to purchase health insurance or face a monetary fine. The issue will almost certainly be decided by the Supreme Court in the next few years. Without the individual mandate, it is unclear what will happen to the healthcare reform law.

I hope that by reading through the history of attempts to pass universal health care in America, you also got a sense of what a big deal the passage of the reform bill really was. As Peters states, Presidents since Truman have been trying to pass some form of universal healthcare in America and we are the last developed country without comprehensive access to healthcare. While there is plenty to dislike about the bill from both sides of the aisle and the standpoint of policy effectiveness, sometimes good politics has to be good policy for anything to change. For those of you who watched "Sick Around the World", I hope you saw that relative to the healthcare systems of other countries, the system created by the healthcare reform bill is still quite ideologically conservative and market-based.