Thursday, October 04, 2007

Crowding out and Low-Income Health Insurance

by Ken Houghton

The argument that government-provided health insurance "crowds out" the private sector actually has two components: (1) is this happening and (2) if so, is it worse than the alternatives?

The second part is often seriously overlooked by some economists, who only use Pareto-optimal in one direction. Jonathan Gruber is one of those who has argued most vehemently that there is crowding out. But his recent NBER paper with Kosali Simon*, an update of Gruber's 1996 AER paper with David Cutler*, notes what we have always known about the model of private health insurance, that its preference to insure declines with the need for that insurance**:
We also find that recent anti-crowd-out provisions in public expansions may have had the opposite effect, lowering take-up by the uninsured faster than they lower crowd-out of private insurance.

The graphic of this is left as an exercise to the reader, but the English version is that the Administration argument against S-CHIP will (as Jason Furman notes at Greg Mankiw's blog) help children in poorer families more than it will provide any subsidy to higher-income families. (UPDATE, appropriate quote, which I missed last night, but which was highlight by Brad DeLong, quoting from Mankiw's blog:
The Democrats and a substantial number of Senate Republicans support a proposal whose principal focus is covering low-income children who are currently eligible (3.2 million according to CBO) plus expanding coverage modestly to new children (600,000 according to CBO). In total 85 percent of the coverage expansion is for those who are already eligible but are not getting coverage either because the funding limits assumed in the baseline are projected to be reached leading states to turn away currently eligible children or because families simply do not sign up for the coverage that is available to them. [emphasis mine]

If economists (or Class of 1975 HBS MBAs) really believed in Pareto-optimal solutions, expanding S-CHIP would be acknowledged as a clear winner.

*Anyone know of a free version for either of these papers? Perfectly willing to add a link.
**This is an intuitive corollary of The Market for Lemons argument.

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I wish people would stop mixing up health care with commercial insurance. Health insurance and health care are two separate and very very different industries.

Fire insurance is not forestry, fer instance...

Granted he who pays the piper calls the tune in some abstract sense -- but music promoters, who actually pay pipers, generally try to supply what audiences want. The profits of commercial health insurers, by contrast, are inflated by every chance they take to *not* provide health care.

That is to say, the first and major "product" of American health insurers is the provision of the service of triage, cutting people off from health care at every opportunity.

You can't get any sense into the health care policy discussion until you reach the first step -- and that step is realizing that health care is one set of industries, and paying for health care is a quite different, and very simple process.

The first discussion, how to govern, provide, train people for, etc. etc., is a discussion which has not even started yet in the United States. It's a discussion that goes on and on and on in Canada, for the elementary reason that it's a very difficult set of questions, and the questions keep evolving. Thus it's the nature of the case that the discussion can never end. Not in the county medical associations, not in the medical Colleges (the professional associations of medicine, surgery, osteopathy, etc.), not in the important teaching hospitals, and not in the pres and the public and political realms.

The second question, how to pay for it, is really really simple, and everybody knows the answer. There are four ways: you can make people pay for it individually, you can have people pay for it through taking out insurance companies, you can pay for it out of taxes, or the fourth and uniquely American possibility, agreed to by everybody from George Bush to Hillary Clinton, is you can have the taxpayer subsidize commercial insurance companies to get in at the trough.

Four simple pipes, choose your mix.
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