Catastrophic Care – Part Two

The previous post reviewed some of the problems about healthcare in America as iden-tified by David Goldhill in his recent book “Catastrophic Care.” So how does Goldhill pro-pose to fix healthcare and contain costs? First, he would require everyone to purchase health insurance, but limit coverage to truly catastrophic medical illnesses. In practice, this would mean a policy with an extremely high deductible, which would sell for a relatively low price.

Second, Goldhill would create a health account for everyone. These accounts would be the “foundation” of the system and everyone would contribute some fixed percentage of their income to their account. The contributions would replace the premiums that employers and employees currently pay for health insurance (as well as what the government pays for healthcare), so the total amount of money spent under Goldhill’s system initially would equal what is spent today.

We would pay for our non-catastrophic expenses and catastrophic insurance premiums out of these health accounts. Any individual whose account balance failed to cover his expenses or his insurance premium would be entitled to a loan to cover the deficit. But don’t worry about the prospect of borrowing for healthcare:  loans would be repaid out of future contributions to health accounts and no one would ever be required to repay more than their total lifetime contributions.

Individuals would deal directly with providers for their medical care. Goldhill believes that such direct dealing would eliminate the moral hazard of insurance and make us all better consumers, meaning we would purchase less healthcare. And because individuals who die with a positive balance in their health accounts could leave the balance to their survivors, to be used for any purpose, moral hazard would be further lessened.

Most likely Goldhill is correct when he claims that individuals would not easily part with their health dollars if they directly handled the spending. But his proposal contains a major flaw:  the health accounts would provide an unending supply of money to con-sumers through the loans that would be available. And because individuals need not repay any loan amount that would exceed their lifetime contributions, the excess would be free money.

So a moral hazard would taint Goldhill’s health accounts in precisely the same way that Goldhill claims it taints our current system. After all, how many individuals with access to unlimited funds would scrutinize costs better or refuse additional care suggested by their doctors? With unlimited funds, it would be as if a third-party were paying the bills. So, Goldhill’s health accounts very much look like our current insurance except that we would speak of “contributions” rather than “premiums.”

The concept of diminishing marginal utility would also undercut the claimed benefits of health accounts. As their balances in the health accounts increased over time, individuals would come to value the marginal dollars less and less, which means they would become more and more willing to give up those marginal dollars in exchange for healthcare. So at some point, diminishing marginal utility would weaken any tendency of individuals to reduce their purchases when they deal directly with providers.

If Goldhill’s health accounts generate system-wide savings (not to be confused with the positive and negative balances in the accounts), there would be constant political pressure for the government to reduce the required contributions so that they more closely matched lifetime medical expenses. This means that the average person would have little or nothing to leave to a survivor upon death. As consumers would certainly understand this, the incentive to reduce their purchases would be further eroded.

Goldhill’s criticism of our current system implies a false consciousness on the part of Americans. But his solution calls for a false consciousness of its own, by tricking us into forgetting about the free money that would be available through the health accounts. He also needs us to pretend that if we reduce our healthcare purchases, a pot of gold will be there at the end of our lives for our survivors (if any). Most likely, this pot of gold would be as illusory as the one that lies at the end of the rainbow.

In reality, Goldhill is calling for the creation of two insurance systems, one for catas-trophic care and the other for non-catastrophic care (called health accounts). And both systems would be based on a single-payer concept, so say hello to central planning and control for one-sixth of the largest economy in the world. The inevitable result of this would be low quality, stagnation, and decline. But maybe Goldhill is correct when he calls his proposal radical in so far as no developed country has ever placed 315 million people under the thumb of a central authority.

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One Response to Catastrophic Care – Part Two

  1. Bob Hertz says:

    Good analysis, but let me add the following:

    all proposals that replace employer contributions have the blithe assumption that this will be easy to do, since the total dollars are about even.

    Assume that Joe Smith works for the ABC company, earns $50K a year, and the ABC company pays $12K into a family policy for the Smiths.

    If employers are let off the hook, we have to get $12K from Joe. This will make him poorer unless the employer gives him a $12,000 pay increase.

    Who is going to supervice that switch? Especially wnen so many employers are having trouble meeting payroll as it is. Most employers will just keep the $12K that they save, and that includes school districts and city governments by the thousands.

    Bob Hertz , The Health Care Crusade

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