Tuesday, October 23, 2007

Doesn't Money Fix Everything?

Over the last few months, I have explained some problems with our current health care set up. My chief complaint about the plans that Hillary, Obama, and Edwards have put up is that they fail to address the bad incentives HMO and PPO style insurance creates. Even though I supported Bush’s veto of S-Chip, I knew that he and other free-market supporters would get bad press. When it boils down to a moral argument, it is hard to win against “Helping the Children” by complaining about cost over runs. Having said that, something remarkable struck me over the weekend that dramatically changed my thinking on Universal Health Care.

It Will NOT Work. We will be no healthier with Universal Health Care than without it. In fact, I think there are reasons to believe that our health will be worse under Universal Health Care.

The reason? Moral Hazard. Moral Hazard, is an insurance term, and happens when one party is insulated from risk and therefore behaves more risky than before they were insured. It can pop up in many forms. A person with a large life insurance policy might be more likely to commit suicide because family members won’t suffer financially. A company with fire insurance may choose to spend less time on fire prevention. Sometimes Moral Hazard is a conscious choice, but many times our behavior changes without even thinking about it. We feel safe, so we act a little more recklessly.

The following is from Tim Harford, a member of the Financial Times editorial board, in his column The Undercover Economist. This effect described by Mr. Harford is known as the “Peltzman Effect”. It is akin to Moral Hazard in the insurance world.

“The idea that seatbelts cause accidents is so ridiculous it could only have come from an economist. That economist is Sam Peltzman, who in 1975 published a paper demonstrating that drivers did indeed drive more dangerously after mandatory seatbelt laws were passed in the US. He argued that despite technological evidence showing that seatbelts save lives in a given accident, there was no evidence that the seatbelt laws had reduced driver fatalities. In other words, drivers take advantage of seatbelts to drive more dangerously rather than to live longer. More compellingly, Peltzman detected a rise in pedestrian and cyclist fatalities when seatbelt laws were passed.”

One might think it is a stretch to compare a seatbelt law with health care coverage. So let’s compare the outcome of a much larger government run insurance program. Welfare can be considered poverty insurance. It pays out money in the event that someone slips into poverty. I have argued before that Welfare distorted behaviors in many negative ways, but how well did it actually reduce poverty?

In 1959, the poverty rate in the U.S. was measured at around 23%. The “War on Poverty” passed under Lyndon Johnson in August of 1964, going into effect in 1965. In 1965, the poverty rate was about 16%, meaning that before welfare became a nationwide program the poverty rate had fallen by 7 percentage points in 6 years. While the poverty rate fell to an all time low of 11% in 1973, by 1983 the poverty rate increased up to 15%, wiping out previous gains. It dipped afterwards, but again rose to 15% in 1993.

If welfare had much of a positive benefit, it is hard to tell. Maybe it worked for a few years, but if it did work, shouldn’t the poverty rate start to climb in 1995 after Bill Clinton and the Republican Congress reformed welfare and the number of recipients declined by over 50%? In 1995, the poverty rate was about 14%, declining to around 11.5% in 2000. Today, it is at 12.6%. Poverty rates improved after we radically cut back Welfare benefits.

The answer is then clear. If the poverty rate failed to decline permanently after Welfare passed in 1965, and getting rid of the program led to lower poverty rates the program never worked. If the poverty rate was declining rapidly before Welfare was passed, and then came to a halt afterwards, the conclusion can be drawn that not only did it not work, it made things worse. The power of Moral Hazard outweighed the no-strings-attached checks we handed to the poor.

How does Moral Hazard affect health insurance? In three ways: First, as I’ve talked about before, we tend to use more health services than we need under an HMO or PPO style plan. Second, we have less personal incentive to shop for the least expensive doctor, hospital, medicine, or service provider because the insurance dramatically reduces our out of pocket costs. Third, those with generous insurance are likely to feel safer and act more reckless with their health.

Some may scoff at the third one, but let me relate a story to you of a gentleman I met a couple years ago. He was in his early 30’s, college educated, with a professional job (and generous health insurance). He happened to order a big chicken fried steak so we started talking about heartburn. He related to me that he was on name brand high blood pressure medicine, heartburn medicine, and cholesterol medicine. He said, “It’s great! Now I can eat whatever I want and not have to worry about it.” Do you really think he would have the same reckless attitude if he had to pay full price out of pocket for all of those medicines? Not a chance.

Universal Health Care, under the schemes that our Democratic candidates for President are proposing will not just cost too much, they will not improve our health. If mandatory seat belts don’t save lives, if Welfare didn’t cure poverty, universal health care will not make us healthier.

As always, let me know what you think.


michael samuels said...

Check out the new HIPPA laws because more than just Moral Hazard can now effect people with health insurance. A new internet show called 'The Raymond Report' focuses on intrusive trends taking place now because of the new HIPPA laws that most people don't even know about. Some states already let companies fire employees for smoking or not hire smokers. Now, employers can raise insurance rates on employees who don't want to participatein new corporate 'Wellness Programs' . So while the SCHIP program is a necessity, what happends to people who have access to medical insurance but may get priced out because of smoking or even diets and personal habits. Check out http://mnr.onthescene.com/raymond-report/episode2.html

The host is set up as a watchdog and has a team of investigators for people with healthcare problems

Brian Shelley said...


The problem of employer meddling is all due to the fact that your employer owns your healthcare. The solution to this is simple: 1) Get rid of the tax incentives for companies to offer you HMO or PPO style insurance. 2) Have every American set up a Health Savings Account. 3) Give employers an incentive to make direct deposits into your HSA.

The employer can not dictate what you do with your HSA, and until you reach your deductible an insurance company can't say anything either.