How should US policy-makers choose a replacement for the Affordable Care Act? Dan Hausman looks at the values and economic complications guiding health care reform.

With Republicans in control of Congress and the Presidency, presumably Obamacare will eventually be repealed, although deciding on a replacement has not proven to be easy. What will replace it? The choice should depend on both the values of Americans and an understanding of the economic complexities of health-care provision. The values that should guide health insurance reform (and which in fact guide the NHS) are compassion, choice, efficiency, fairness and solidarity. These may conflict. Americans need to ask of any plan: Is it compassionate? Is it fair? Does it protect individual choice? Does it control costs? Does it recognize our common vulnerability to suffering and death?

To design health policy, one must also understand the reasons why health-care markets work badly without regulations, such as Obamacare’s unpopular mandate that requires individuals to purchase health insurance that meets minimum standards. The first reason is asymmetric information: Physicians often know more about how to treat your health problems than you do. The relations between patients and doctors are unlike those between shoe sellers and customers; people know when they need new shoes, but not whether they need an MRI.

Health insurance, which is necessary because many health-care needs are unpredictable and extremely expensive, creates further problems. The first is adverse selection. Health insurance is a better bargain for those who believe they are more likely to be ill. If the less sick opt out, average claims and hence insurance premiums skyrocket, and the high premiums further discourage healthier people from purchasing insurance. Markets for individual health insurance break down unless insurance companies can charge risk-adjusted rates, which effectively deny insurance to those with pre-existing conditions. To escape this adverse selection in a fair and compassionate way requires universal insurance like the NHS here in England or heavily subsidized high-risk pools.

Moral hazard is a second serious problem with health insurance: People seek more treatment and take more risks if their insurance pays than if they pay. More discriminating diagnostic tests, new drugs, or other more efficacious treatments are often extremely expensive, and those with comprehensive insurance have no incentive to economize.

The cures for moral hazard are co-pays and deductibles or limits on what insurance policies will pay for like those that the findings of the English National Institute for Health and Care Excellence imply. Low co-pays don’t solve the problem, while, as Obamacare has shown, high co-pays and deductibles undermine the value of insurance. If insurance policies address moral hazard instead by specifying what they will and will not cover, then they limit choice. There are tradeoffs between efficiency (which requires limiting reimbursements), fairness (which speaks against high co-pays), and choice (which cautions against reimbursement limits).

Many critics of Obamacare favor a greater role for markets. After all, markets are typically both efficient and responsive to individual choice. But the economic complexities, coupled with the moral concerns, are incompatible with leaving health insurance to the market. Unregulated health insurance markets leave millions uninsured. Moreover, compassionate concern for one another gets in the way: Americans will save the life of the individual who arrives at the emergency room with a massive heart attack, even if, overly confident of his health, he did not purchase insurance. That means that there is in the US a second implicit insurance system of charity care and legally-required emergency care, which greatly increases costs and undermines the discipline that the market would otherwise impose. (Why purchase insurance, if you will be treated for the most serious problems without it?) Trusting to markets, while at the same time interfering with them for ethical reasons, Americans would be back to the hodgepodge that preceded Obamacare: tens of millions uninsured, lives stunted and shortened, a large and growing gap between the health and life expectancy of rich and poor, and far greater costs than any other nation. Going back is not an attractive option.

What alternatives are there? The health-insurance systems of other affluent countries, including the UK, present many models. These provide universal coverage at a lower cost than the US health care system, with or without Obamacare. Though none is without its problems, they can guide us in modifying Obamacare. Most severely limit the role of markets, although Switzerland, Singapore, and the Netherlands show that, with very heavy regulation, private health insurance markets can implement universal coverage.

Obamacare attempts to navigate between the concerns discussed above, but the strength of its regulations, which were essential to cope with informational asymmetries, adverse selection, and moral hazard, offended many Americans, while the weakness of its regulations has undermined insurance markets in some areas. The challenge is to find a policy that copes with the market failures while conforming to moral commitments. I personally place a great weight on compassion and fairness and favor moving toward comprehensive universal health care. Whether others agree or not, whatever comes after Obamacare must be both economically sound and morally defensible.

By Daniel M Hausman

 

Daniel M. Hausman is a Professor of Philosophy at the University of Wisconsin-Madison and a Ludwig M. Lachmann Research Fellow with the Centre for Philosophy of Natural and Social Science at LSE. His research focuses on methodological, metaphysical, and ethical issues at the boundaries between economics and philosophy. His most recent book is Valuing Health: Well-Being, Freedom, and Suffering (2015).

 

Further Reading

  • The Incidental Economist Blog
  • Daniels, N. (2007). Just Health: Meeting Health Needs Fairly. Cambridge University Press.
  • Menzel, P. T. (2012).“Justice and Fairness: a Critical Element in U.S. Health System Reform” The Journal of Law, Medicine and Ethics, 40(3): 582-97.

 

Featured image by Daan Stevens on Unsplash