February 11, 2003

The Increasingly-Strong Case for National Health Insurance

Daniel Davies points out that the rapid approach of genetic screening makes national health insurance inevitable--at least if we don't want to have a *huge* problem as those whose genes are bad for expensive-to-treat diseases find themselves very, very poor indeed.

D-squared Digest -- A fat young man without a good word for anyone: ...Solutions? Sorry, don't really have one, unless one seriously thinks that the genie of genetic screening can be pushed back in the bottle. I'd note, however, that the engine of most of these "problems of asymmetric information" (in this case, the adverse selection problem which makes the pooled equilibrium solution with private information untenable) is usually an embedded option. In this case, it's the option of the insured party to choose whether or not to buy insurance. Since you can't force them to buy the product, they will only do so when it's to their advantage, and this turns out to be enough to knock down the existence of the market. I speak as a member of a health insurance scheme (the National Health Service) which doesn't have the property that you can refuse to buy it if you don't want it, and would humbly suggest that something along these lines might help the insurance industry out of what might turn out to be a nasty hole...

Posted by DeLong at February 11, 2003 06:24 PM | TrackBack

Personally I would like to see the eradication of the insurance industry but that is just the radical in me. Our insurance potion of my wife's health insurance plan with the University of Colorado went up over 60% this past fall. Why was that? It was because Cigna lost a ton of money on a complicated derivative transaction. Not lawyers terrible malpractice cases but bad market logic. I don't just pay this insurance for family, I also pay health liability insurance in order to drive a car and own a home. On top of that there is the portion of Worker Comp that goes to medical costs and the payroll tax for Medicare. Just for fun you can also add the taxes I pay that go to Medicaid and the Taxes that support the VA.
So why exactly am I supporting a University Bureaucracy, an Insurance Bureaucracy and a government Bureaucracy just in order to go to the Doctor? Jobs? Well maybe. But most likely I think it is because the Republican party thinks 3 Bureaucracies are better than one.
Look into Mr Snows family business sometime HCA and their double and triple billing of Medicare and ask yourself why the Bush Admin wants to increase Medicare.

Ps My Wife who is up for Tenure was told today that even if she gets it she will receive no raise but will be given a voucher that is not retroactive for the raise some time in the future.


Posted by: Bruce Ferguson on February 11, 2003 08:14 PM

Ah, another Boulderite. Wanna buy a downtown condo ;)

It is getting near the point where insurance will disappear, or be extended nationally. As I stated in the (often out-of-order) comments on D^2, we don't need to wait for the genetic revolution--Covering the elderly carries with it the same problems.

Posted by: Brennan on February 11, 2003 09:30 PM

There is a a surprisingly simple solution to the genetic testing problem. Sell genetic insurance. Before taking a genetic test insurance would be bought. If the test indicated a bad gene the policyholder would be paid a lump sum amount that would be large enough to fund the now higher health insurance premiums. In this way, insurance companies would want to serve individuals with bad genes because tehse individuals would have the funds to pay them the actuarially sound rates.

More details can be found in:

Tabarrok, A. 1994. Genetic Testing: An Economic and Contractarian Analysis. Journal of Health Economics 13:75-91.

available from my web page (go to published papers)


and also in a shorter version in a book I edited called Entrepreneurial Economics: Bright Ideas from the Dismal Science. The shorter version points out that this idea is a variant of John Cochrane's Time Consistent Insurance (originally in JPE reprinted in Entrepreneurial Econ.), see


for more on the book.

Alex Tabarrok
Department of Economics
George Mason University

Posted by: Alex Tabarrok on February 12, 2003 07:07 AM

A comment from a Canadian friend of mine yesterday: "They tell us our health care is free, but you get what you pay for".

Said comment made while he is in Rochester, Minn. trying to come up with the $50,000 to pay for the surgery his father just underwent to arrest stomach cancer. $50K he can't deduct from his income on his tax return, he tells me.

At least his father will survive. But only because of the safety valve that is American health care. The man would have been put on a waiting list just to get the tests done, and then another waiting list for the surgery, in Canada. All the while his cancer getting worse.

Posted by: Patrick R. Sullivan on February 12, 2003 08:32 AM

why wouldn't this problem be fixed very simply by lowering lifetime caps on medical insurance?

All the insurance company needs to solve that problem is a distribution of historical payouts, based on which they can develop tiers of lifetime caps and price them accordingly.

so, from the insurer's pov, you can do your genetic tests and you don't have to share it with me, but i am limiting you to $100k lifetime for this premium.

Posted by: Suresh Krishnamoorthy on February 12, 2003 09:43 AM

It is suggested:
"There is a a surprisingly simple solution to the genetic testing problem. Sell genetic insurance. Before taking a genetic test insurance would be bought."

Dosen't this assume that there is a way to prevent me from getting testing done secretly before buying genetic testing insurance? How? And if not, don't you have the same asymetrical information problem in the genetic insurance market?

Posted by: Jonathan Goldberg on February 12, 2003 09:55 AM

It is clear that insurance makes sense when you want to cover unexpected expenses and much less so when you cover predictable expenses that very a lot between individuals. Consider type 1 diabetic. Do we want to priece the person out of the work market? Or from the health care market? Would it be economically efficient to get rid of the 5% of population that has highest medical costs? Would we like to live in such an efficient society?

By the way, if Canadian medical schemes are such a mess, can one tell it by some statistical measure of health, say comparing Minnesota with Manitoba?

Posted by: Piotr Berman on February 12, 2003 10:31 AM

"Comment made while he is in Rochester, Minn. trying to come up with the $50,000 to pay for the surgery his father just underwent to arrest stomach cancer."

My wife, the doctor, tell me she does not believe this for a moment. She consults with Canadian doctors regularly and believes there is no difficulty for a cancer patient gaining access to world class surgery in Canada. Has Canada begun to simply let it people die for want of health care? My wife says, no way!

Posted by: dahl on February 12, 2003 11:32 AM

dahl missed this part of my earlier post:

"The man would have been put on a waiting list just to get the tests done, and then another waiting list for the surgery, in Canada. All the while his cancer getting worse."

Speed of treatment is crucial in dealing with cancer, I would think your wife, the doctor, would agree. My friend specifically told me that he took his father to the Mayo Clinic because it would happen right away, and that wasn't the case in Ontario. And he's not the first Canadian I've heard say such.

Posted by: Patrick R. Sullivan on February 12, 2003 03:37 PM

Being a Canadian, I also find Mr. Sullivan's post curious. I've heard of lengthy waits for procedures such as organ transplants, but never for routine tests and treatment. If there are statistics suggesting otherwise, I would actually like to see them.

In Toronto where I'm from, most of the controversy over health care is related to relative cuts in spending since the mid-1990s by the neoconservative provincial government, and the reduction of "transfer payments" from the federal government to Ontario as part of its efforts to eliminate the deficit and work-off the national debt. This resulted in several ER closings in the greater Toronto Area, and occasionally long wait times for non life-threatening emergencies.

Still, I'm suspicious of unsubstantiated claims that the Canadian system is "broken", especially when the direct experiences of friends and family members speaks otherwise. Canadian health care may hardly be a bargain when considered in international perspective, but I don't think many in Canada would trade it for that south of the border.

Posted by: david l on February 12, 2003 04:26 PM

The truth is that many people in the U.S. who suffer from serious chronic conditions that are expensive to treat are already accessing care through our quasi-socialized programs, Medicare, Medicaid, or the VA.

Unfortunately some of such people had to "spend-down" their wealth before being qualified. However, many others have managed to hide their assets so as to qualify.

Regardless, I don't see where genic testing changes the picture regarding access to coverage that much for the majority of those destined to come down with serious and expensive long term conditions.

As an aside, Americans being subjected to genetic tests for healthcare insurance purposes would probably provide a boon to the estate planning industry.

Regarding coverage for those who demonstrate a predisposition to less chronic moderately expensive acute conditions, say heart attacks (for any of a variety of common reasons) genetic testing might not change the cost of coverage that much.

Actuarily speaking, it may be that it is at least as cost effective to identify genetic predispositon and administer preventative medicine and encourage healthy lifestyles (to a now highly motivated covered life) than it is to deal with high levels of risk due to uncertainty while simultaneously providing expensive acute care to an estimated percentage of covered lives (as now) whose illness suddenly hits them in a full force crisis form.

And I hate to buy into topic drift, but......the socialized medicine that we do have in this country, particularly the VA system, does a very good job at effectively delivering high quality health care in an efficient manner. I don't see why a more encompassing national plan couldn't be modeled after the VA program.

Posted by: E. Avedisian on February 12, 2003 05:14 PM

To illustrate the above...

An insurance company has a risk pool containing 10,000 covered lives. They know that, on average, 1% (100) of those in that pool will suffer from a serious cardiac crisis that will cost, on avg., $50,000.

So that's $5,000,000 a year that they have to spend. They do not know who those 100 covered lives will be and there's no way to eliminate their coverage before they will have to pay out for the acute cardiac crisis.

The cost of paying out for the crisis is simply spread across all members of the risk pool.

Now with genetic testing those 100 can be identified before the acute cardiac crisis occurs. Say there is a drug available (perhaps one that lowers bad colesterol and/or placque build up in arteries) that costs the insurance company $500 a year per covered life and that lowers the chance of heart attack - even for those with the predisposition - to only 20%. Furthermore, assume that the avg. age for having the heart attack is 48 years of age. Finally, assume those who test positive for the predisposition have close to a 100% chance of developing an acute condition (heart attack).

Now a thirty year old works for a firm that purchases insurance from the company and is part of the above mentioned risk pool. She has proved to have the genetic predisposition for heart attack. The insurance company agrees to cover her contigent on her following the preventative regime.

Her actuarial cost to the insurance company will be $19,000 if she works until age 48. That's 18 years of pharmaceuticals ($9,000) plus a 20% chance of a $50,000 acute care bill ($10,000).

The insurance company has saved $31,000.

Of course, you say, the insurance company could have saved the whole $50,000 by not covering her at all.

True. However, there is no reason that the federal government could not legislate coverage where the actuarily determined benefits of providing coverage with preventative medicine regimes provides a savings over the actuarily determined costs of providing coverage *if the genetic predisposition were not known*.

This is a win/win scenario. The insurance company saves money, premiums can be lowered to that extent, and the person with the bad genes can act to prevent an illness that she would have been otherwise unaware of until it was to late.

As medicine continues its exponential increases in the list of conditions it can preventatively treat, such a scenario becomes increasingly more feasible.

A caveat: insurance companies are relutant to engage in preventative medicine because they feel that people switch plans often enough that, by preventing, they are merely creating a positive externality for another company. But that is another issue altogether.

Posted by: E. Avedisian on February 12, 2003 07:59 PM

What nonsense Patrick Sullivan sprouted! If his friend can come up with $50k for the Mayo clinic then surely he could pay a Canadian surgeon the lesser amount needed to get treatment outside the national health scheme - or better yet have had private insurance in addition to his national scheme membership. He's in any case no worse off than if he lived in the US.

Nationalised health schemes consistently outperform, on a health outcomes (infant mortality, life expectancy, morbidity, etc) per dollar spent basis, private ones. It's one of the rare industries where socialism delivers superior efficiency, as well as equity. Those who won't, on ideological grounds, look at the international evidence on this remind me of the Florentine astronomers who refused to look through Galileo's telescope.

Posted by: derrida derider on February 12, 2003 09:23 PM

What nonsense Patrick Sullivan sprouted! If his friend can come up with $50k for the Mayo clinic then surely he could pay a Canadian surgeon the lesser amount needed to get treatment outside the national health scheme - or better yet have had private insurance in addition to his national scheme membership. He's in any case no worse off than if he lived in the US.

Quite. I hope that the person in question recovers, but going to the Mayo Clinic is just an example of the way in which US health care, rather like hotels and restaurants, has its 'boutique' level, whereby one pays for the brand as much as the treatment. Except that in the US, one has to 'go boutique' in order to get a decent standard of care.

Posted by: nick sweeney on February 13, 2003 08:27 AM

Patrick Sullivan - Surely, your points must be considered anew - We thank you....


February 13, 2003

Long Lines Mar Canada's Low-Cost Health Care

TORONTO During a routine self-examination last May, Shirley Magee found a lump on her breast. Within weeks she had it and some lymph nodes removed. So far so good, until it came to the follow-up therapy.

Mrs. Magee, a 55-year-old public school secretary, researched her condition on the Internet, and read that optimally, radiation treatment should begin two weeks after surgery. But the local provincial government clearinghouse that manages the waiting time for radiation therapy told her she had to wait until the end of September nearly three months after her surgery to begin treatment.

"I was supposed to feel lucky I got in so quickly," said Mrs. Magee, still viscerally annoyed though she has since successfully completed her radiation regime. "It's a horrible feeling that something in your body is ticking that you have no control over. If I were a politician's wife I wouldn't have had to wait."

Posted by: dahl on February 13, 2003 10:02 AM

That New York Times story was garbage. All it had were numbers from the Fraser Institute, which are worthless, and anecdotal quotes from people like Mrs. Magee. Who are more likely to survive breast cancer, Americans or Canadians? How do Canadian waits compare with the waits of Americans without $50,000 to burn? Who have longer life expectancies, or are more likely to survive most diseases? Who is getting more for their money? The Times article doesn't say these things, or anything else useful, because if it did, Canada's system would start looking much better. The story was a hatchet job by a reporter who knew what he wanted his story to say before he did any research. For real statistics, try the OECD website.

Health spending as a percentage of GDP: http://www.oecd.org/xls/M00031000/M00031380.xls
Life expectancy:
Infant mortality:
Acute care beds per 1000 people:
Time spent in hospitals for acute care:

Derrida, while I agree with your sentiment, you were wrong about purchasing insurance. In Canada it's illegal to buy insurance for any care publicly covered, and doctors can't take private payment if they take the public insurance, so almost no doctors do. This is necessary to keep wealthy people dependent on the system, so that it doesn't end up like the British health care system. One of the reasons that Canadian health care is underfunded is because wealthy people sometimes go to America for care. If this wasn't an option, there would be more lobbying for increased health spending.

Posted by: Mitch on February 13, 2003 11:27 AM

Thanks to dahl for the NY Times story. Which ends by telling us just what I said:

" With the system cracking at the edges and waiting lists growing, people will eventually say `all right, let me pay,' " said Dr. Tom McGowan, president of Canadian Radiation Oncology Services, Canada's first for-profit cancer radiation treatment center, which has treated nearly 2,000 patients since it opened in Toronto two years ago. (Patients still pay nothing at the radiation clinic; Dr. McGowan is paid by the province and receives bonuses if he surpasses productivity targets.)

" The Ontario provincial government allowed Dr. McGowan to open his night clinic after it was forced to send 1,650 cancer patients to the United States for radiation treatments during a 25-month period in 2000 and 2001 because of waiting lists that were up to 16 weeks long.

" Dr. McGowan said the emergency, which cost the province $20 million in travel costs, was not rooted in a shortage of equipment nor staff but inefficient public management. Whatever the reasons, his patients are quick to tell horror stories about their waits for diagnostic tests and treatment.

" 'Your worst fear is it is going to grow while you are waiting,' said Pat McMeekin, a 53-year-old hospital clerical worker, recalling the two months she had to wait between a mammogram and the first of two biopsies confirming she had breast cancer last summer. 'When you have something, you want to take care of it and be done with it.' "

As for Nick and derrida, the nonsense is all on your claim: "surely he could pay a Canadian surgeon the lesser amount needed to get treatment outside the national health scheme". While the different provinces have different schemes, your idea is almost certainly illegal in Canada.

Posted by: Patrick R. Sullivan on February 13, 2003 11:30 AM

"Nationalised health schemes consistently outperform, on a health outcomes (infant mortality, life expectancy, morbidity, etc) per dollar spent basis, private ones. It's one of the rare industries where socialism delivers superior efficiency, as well as equity."

This point is irrelevant to the larger question.

1) Do you trust gov't to spend thee right amount of money to optimize the balance between health and other needs? Anyone witnessing the current fiasco over Medicare reimbursement rates can't possibly believe this.

2) National health care schemes (Canada, UK) spend less than the private ones (US). Of course, spending the first dollar of health care delivers more significant results than that second dollar. Like almost all technologically complex services, health care spending delivers diminishing returns. For example, the first $10,000 you spend on your automobile delivers much more than that extra $10,000 on top of it.

Posted by: JT on February 13, 2003 12:15 PM

JT, I think it is relevant. As long as the system is structured properly (no private alternative allowed- rich people must use it), enough will be spent. Canada actually spends enough now. Its problems are fairly minimal. France spends about the same amount, and has an even better performing system, because it pays doctors less. These countries get better results than the US, even though the US spends far more. The UK, which has the worst national health system of rich countries (because private care is legal), gets results comparable to the US, even though it spends about a third as much in dollars, and half as much as a percentage of GDP.

They also have the ability to choose democratically how much is spent on health care. The US doesn't. Here, costs inflate even though nobody wants them to, yet health quality is not improving at the rate of cost inflation. Extra money just goes to enlarge the insurance bureacracy. There is no way of stopping the cost inflation that is causing so much damage here. Everybody justs tries to push costs onto someone else, increasing total costs. If people in Canada feel that not enough is being spent on healthcare, they can elect politicians who will spend more, and that money will be used efficiently. Or, they can elect politicians to hold health spending down. Health care quality will adjust accordingly, because the system is efficient.

Posted by: Mitch on February 14, 2003 01:23 PM

Most of the rise in the cost of healthcare insurance is do to the fact that consumption is increasing on both the intensive and extensive margins. We can treat more people and for a greater number of conditions. Therefore, utilization increases and subsequently, premiums go up.

This is different than saying that the cost of providing services is increasing; though it is due pertly to technology that enhances the existing product and partly due to cost increases in labor.

You have to be careful as to what you are referring when you talk about inflation in the sector.

I do think some of the socialized systems control costs better by rationing healthcare through various means that create more bang for the buck.

Rationing being the operative concept here.

Posted by: E. Avedisian on February 14, 2003 05:53 PM
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