Those seeking to redesign a health system can make a good argument for revising or replacing the
prevailing system of employer-provided insurance with either a single-payer system or an individual
mandate. The advantages of employer provision stem from long-term practices that cause economic
distortions. During World War II, the U.S. government froze prices and wages. Competing
for workers, firms expanded their fringe benefits, which were not subject to the freeze. After World
War II, employer contributions to health insurance were, and continue to be, tax-exempt, providing
workers with a substantial discount and inviting inefficiencies of over-insurance and moral hazard.
Meanwhile, many of the unemployed, as well as many low-wage employed, have gone without
health insurance.
Health insurance problems also occur when workers change jobs. When leaving their previous
employer’s health coverage behind them, workers have little choice but to buy an individual policy, a
“continuation of benefits” or COBRA, from the previous employer, or do without insurance entirely.
Individual policies are often more expensive, sometimes pose administrative problems, and sometimes
comprise a lower financial priority for people out of work. Workers often find pre-existing
conditions such as heart disease to be uninsurable.
Single Payer versus Multiple Insurers
A move in the United States toward universal coverage also entails the option of a single insurer,
presumably the federal government. In the United States, multiple private companies insure a majority
of the population. The most prominent single-payer proposal discussed in the U.S. debates
has been the Canadian Medicare system.
Economic theory suggests that consumers value variety. Numerous restaurants serve different
foods, prepared in different ways. American auto manufacturer Henry Ford said (at least apocryphally)
that one could have any color of his pioneering Model T, so long as it was black—his
company lost its market prominence to General Motors who provided a wider variety of cars (and
colors). In principle, a variety of insurers may provide different types of coverage, pool different
groups of people, and provide products that more closely match the variety of consumers.
However, the multiple-insurer system, as it has evolved, has led to multiple forms and policy
rules that face hospitals, clinics, and nursing homes. Patients, as insurance clients, must often
provide the same information numerous times, with commensurate possibilities of error. With hundreds
of different health insurers, the difficulty of coordinating different policies falls on hospitals
and physicians. It is external to the insurance companies and as a result, they do not see the need to
reduce it. Nevertheless, it is a real economic cost both to patients and to providers, and the government
as single payer could reduce it with fewer and standardized forms.
In principle, a consolidation of insurers could reduce such administrative costs if there are
economies of scale in administration, or if gains could obtain from pooling those insured. Many
economists have tried to estimate the excess administrative costs. Cutler and Ly (2011) partition
the $1,589 difference in per capita health care spending between the United States and Canada in
2002. Higher administrative costs accounted for $616, or 39 percent, of the difference. The authors
argue that this figure probably underestimates the amount and share, because nurses also spend
substantial time on administrative tasks, but accounts typically consider nursing time as clinical
care rather than administration.
One must be cautious in assuming that a government single-payer system would solve all of the
administrative cost problems. The same administrative technology is available to the private sector,
and if further economies were possible, and there is appropriate non-monopoly competition, private
firms would merge to take advantage of the economies. In addition, the profits that private insurers
gain are not a waste to the economy, but rather payments for capital that government also must incur.
Moreover, a switch to a single-payer system would greatly diminish, if not eliminate, the very
large private health insurance industry. To put the issue in perspective, Cogan, Hubbard, and Kessler
(2010) note that of the approximately $2.4 trillion in 2008 U.S. national health expenditures, $830
billion were private insurance premiums. Over one in three dollars of health care expenditures went
through private insurance! Private insurers would almost certainly oppose a single payer plan, and
they have actively promoted their own cause in the formulation of PPACA.
Do health care system problems warrant a change to a single payer? Other reforms may address
specific problems. For example, we insure the uninsured through mandated coverage including
subsidies for the poor, and provide coverage for people with pre-existing conditions through the individual
mandates. Before PPACA passed, beneficiaries used COBRA legislation to address this issue.
A potential benefit of the single-payer system lies with the possibility of common coverage.
We may worry now that some insured people have inadequate policies in terms of the depth and
breadth of coverage. The single payer could offer one policy or a small number of variations, each
variation determined to be adequate by policy makers representing the public. In contrast, the availability
of many policies from many companies offers variety, tailoring policies to the individual
preferences for cost-sharing features and coverage.
COMPETITIVE STRATEGIES
Regardless of any changes in the direction of U.S. health care policy, governments will remain
heavily involved in the financing and delivery of health care. The ideological battle is over the superiority
of (1) increased government involvement through both expanded regulation and additional
government programs to provide or finance health care or (2) an increased emphasis on market
mechanisms and market forces with corresponding decreases in the use of regulatory instruments.
This controversy between competition and regulation is not new to the academic and policymaking
communities. Those who deny the applicability of the competitive framework will most
likely favor regulatory strategies. Proponents of further regulation tend to argue that attempts to promote
partial forms of competition will not readily correct information imperfections, flawed agency
relationships, and other distortions. Regulation proponents also react to the rapid growth in overall
health spending and in spending on Medicare, Medicaid, and other public programs. The spending
record in the United States, as compared to other more highly regulated systems, has reinforced beliefs
among many that health care markets do not work like most other markets. Many believe that
increases in supplies of hospital beds and physicians increase utilization of marginally necessary or
even unnecessary services. There are widespread views that physicians can and do create demand
and that empty beds in hospitals will be filled through physicians’ discretionary decisions to admit
patients.
Those who share these views advocate controls limiting hospital capacity and physician supplies,
and increasing the monitoring of services provided. We have outlined the general forms of
these controls. What is competition in health care? Pauly (1988a) defines competition through the
conditions of “free entry and potential entrants willing[ness] to offer goods and services to consumers,
with no one firm large enough to have an important influence on levels and quality” (p. 35).
From this definition, in a competitive health care industry we would expect (1) price-elastic demands
facing providers; (2) a tendency toward marginal cost pricing; (3) efficiency in production—
allocative as well as technical efficiency; and (4) the availability of alternatives in terms of price,
quality, and form of delivery.
Others see competition in a more limited way, largely through the form of government policy
rather than the structure or performance of health care markets. A competitive health care policy is
one that relies primarily on financial incentives rather than controls to achieve goals. Those supporting
this approach believe that market participants respond to changes in prices in a predictable and
substantial way. Supporters of competitive approaches also argue that even imperfections in their
strategies are preferable to the distortions caused by imperfect regulation.
Under either view of competition, certain forms of government intervention such as CON
laws, utilization review, and mandated benefits, are anticompetitive because they compel. To be
more specific in the distinction between competition and regulation, consider the uninsured. From
the competitive point of view, many of the uninsured have insufficient income to purchase insurance.
Mandated benefits and other requirements that drive up insurance prices aggravate their
dilemma. A competitive solution is to subsidize purchases of insurance for the lower-income uninsured
through tax credits, and to deregulate insurers so that lower-priced options become available.
In contrast, they view programs that would provide insurance for the uninsured as lacking in incentives
for efficient consumer search. Bearing in mind these distinctions, we turn to several broad
competitive strategies for reforming the U.S. health care system.
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