An Improbable (Semi) Victory for Obamacare
Against all odds, President Obama signed US healthcare reform into law this week, ending a year-long struggle to pass the legislation. The magnitude of this achievement should not be undermined. The US was just about the only developed nation without universal healthcare (one of the scars left behind by slavery), its system of private health insurance resulted in the US spending vast sums of money yet achieving inferior standards of care compared to other advanced nations. See BBC pic.
Sadly, there has been little change in the healthcare system since President Johnson created Medicare and Medicaid in the 1960s. Medicare is government provided insurance for the over 65s and Medicaid provides support for low-income families. Apart from some help for children and veterans, the majority of the population had to rely on the private sector for insurance.
Econ 101 teaches that the invisible hand of the market will lead blind self-interest to attain the optimal allocation of resources (under some assumptions ☺). However, if we stop to think for a moment, it becomes obvious why private insurance has perverse incentives. How do insurers maximise profits? By charging as high premiums as they could whilst avoiding paying for health care by any means possible. This translates to not insuring those who are already ill, charging astronomical premiums for those at risk of becoming ill and fighting with doctors over whether the required treatment is covered or not (indeed, an industry has developed to help doctors argue with insurers). Private insurers also lack incentives to invest in preventative care, treatments that cost money now and save in the future, since Medicare covers over 65s.
The result is 45 million uninsured Americans. Life for them must have been pretty scary.
So what does the reform look like? Well, those not covered by Medicaid or Medicare must obtain insurance, insurers are no longer permitted to discriminate against those with pre-existing conditions, and low-income families will get higher subsidies. Together, the legislation aims to cover 95% of the population. Simply by letting the tax cuts President Bush passed expire (essentially increasing the tax rate on the wealthy) can fund part of this.
Whilst this legislation is a step in the right direction in my opinion, it doesn’t go far enough to tackle the different level of premiums. Ideally, to ensure fairness, premiums should not depend on medical history. This is already the reality in some states but not all. Moreover, I am not convinced that competitions solely between private insurers are sufficient to offer people the best value for money, as more people are required to buy insurance, the profit temptation may be too strong. Some kind of public-private competition would be more effective to keep costs down.
Watching Obama’s “victory speech” reminded me of a line from President Franklin Roosevelt’s Madison Square Garden speech in 1936:
“They do not tell him that the insurance policy that is bought for him is far more favorable to him than any policy that any private insurance company could afford to issue.”
FDR was talking about unemployment insurance, but it applies with equal force to healthcare.
*I do apologise for the lengths of my posts, it’s supposed to be three paragraphs long!
Sadly, there has been little change in the healthcare system since President Johnson created Medicare and Medicaid in the 1960s. Medicare is government provided insurance for the over 65s and Medicaid provides support for low-income families. Apart from some help for children and veterans, the majority of the population had to rely on the private sector for insurance.
Econ 101 teaches that the invisible hand of the market will lead blind self-interest to attain the optimal allocation of resources (under some assumptions ☺). However, if we stop to think for a moment, it becomes obvious why private insurance has perverse incentives. How do insurers maximise profits? By charging as high premiums as they could whilst avoiding paying for health care by any means possible. This translates to not insuring those who are already ill, charging astronomical premiums for those at risk of becoming ill and fighting with doctors over whether the required treatment is covered or not (indeed, an industry has developed to help doctors argue with insurers). Private insurers also lack incentives to invest in preventative care, treatments that cost money now and save in the future, since Medicare covers over 65s.
The result is 45 million uninsured Americans. Life for them must have been pretty scary.
So what does the reform look like? Well, those not covered by Medicaid or Medicare must obtain insurance, insurers are no longer permitted to discriminate against those with pre-existing conditions, and low-income families will get higher subsidies. Together, the legislation aims to cover 95% of the population. Simply by letting the tax cuts President Bush passed expire (essentially increasing the tax rate on the wealthy) can fund part of this.
Whilst this legislation is a step in the right direction in my opinion, it doesn’t go far enough to tackle the different level of premiums. Ideally, to ensure fairness, premiums should not depend on medical history. This is already the reality in some states but not all. Moreover, I am not convinced that competitions solely between private insurers are sufficient to offer people the best value for money, as more people are required to buy insurance, the profit temptation may be too strong. Some kind of public-private competition would be more effective to keep costs down.
Watching Obama’s “victory speech” reminded me of a line from President Franklin Roosevelt’s Madison Square Garden speech in 1936:
“They do not tell him that the insurance policy that is bought for him is far more favorable to him than any policy that any private insurance company could afford to issue.”
FDR was talking about unemployment insurance, but it applies with equal force to healthcare.
*I do apologise for the lengths of my posts, it’s supposed to be three paragraphs long!