Tuesday, April 3, 2012

Fixing Health Insurance: Cochrane

Professor John Cochrane joins a theme Global Review has been singing for a while, the Obamacare isn't a solution to the problems of today's healthcare system - it's an enshrinement. The high cost of insurance, Cochrane argues, is due to heavy government regulation, cronyism, and (of course) the moral hazard problem.
The number of new doctors is still restricted, thanks to Congress and the American Medical Association. Congress caps the number of residencies, the AMA has fought the expansion of medical schools, state tests make it difficult for foreign doctors to work here, and on and on... New hospitals? In my home state of Illinois, every new hospital, expansion of an existing facility or major equipment purchase must obtain a "certificate of need" from the Illinois Health Facilities Planning Board. The board does a great job of insulating existing hospitals from competition if they are well connected politically. Imagine the joy United Airlines would feel if Southwest had to get a "certificate of need" before moving in to a new city—or the pleasure Sears would have if Wal-Mart had to do so - and all it took was a small contribution to a well-connected official.
Some might argue that moral hazard is a necessary downside of providing healthcare to a large proportion of the population. But that's not true: a major flaw in our system is that it covers regular, predictable expenses with insurance. People should pay for regular health care out of their pocket - the same way they pay for food.
The [government's] main argument for a mandate before the Supreme Court was that people of modest means can fail to buy insurance, and then rely on charity care in emergency rooms, shifting the cost to the rest of us. But the expenses of emergency room treatment for indigent uninsured people are not health-care's central cost problem. Costs are rising because people who do have insurance, and their doctors, overuse health services and don't shop on price, and because regulations have salted insurance with ever more coverage for them to overuse.

If we had a deregulated, competitive market in individual catastrophic insurance, that market would be so much cheaper than what's offered today that we would likely not even need the mandate.
Why are so many Americans uninsured? Proponents of Obamacare like to point out the pre-existing condition problem and adverse selection. Cochrane proposes a market mechanism to deal with pre-existing conditions, but also points out why even healthy people don't often buy insurance in the private market: it's too expensive. They often can't buy catastrophic-cost insurance, which is their main need, without also buying a host of expensive services they don't want and won't use - but must pay for.

It bears repeating: Obamacare does not solve the current problems; it enshrines them. It doesn't represent a popular victory over the insurance companies, it represents perpetual empowerment of the insurance company over the citizen. In what world is that liberal?

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