Thursday, November 06, 2008

Some thoughts on health insurance

Even before the new democratic era of the 80s, many Latin American states - Guatemala included - assumed a degree of responsibility for welfare and pensions, considered one of the necessary burdens of modern nation-building.

Yet social spending in Guatemala has been inevitably compromised because the state has only been able to raise around 10% of GDP in annual taxation. (The average in developed nations is 29%. "Where the tax take is less than a fifth of GDP it is hard for the state to command sufficient resources to provide basic public goods," notes Michael Reid at The Economist.)

The worst off, especially those living in remote rural communities, have thus tended to fall outside the scope of welfare provision. Nevertheless a pair of EU-funded projects run by Medicus Mundi are now attempting to demonstrate the viability of 'inclusive' healthcare in Guatemala, with vocal support at least from VP Rafael Espada, himself a prominent physician.

I recently read a compelling explanation by 'Undercover Economist' Tim Harford of the innate flaws in the American model for voluntary health insurance, which goes a bit like this:

All insurance policies depend on mutual ignorance. If either buyers or sellers knows more than the other, then the market simply won't function properly, no matter how much one maintains a knuckleheaded insistence that the alternatives violate liberal economic principles and represent a major step on the road to socialism.

With many kinds of insurance all parties are more or less equally ignorant of future events, but with health insurance it is often the case that the patient has a better idea than the insurer about his or her propensity to make use of a policy. And when the system is voluntary, the young poor who have more urgent budgetary issues, and anyone else who suspects they might not need the cover in the forseeable future, tend to drop out of the system - which raises the premiums for everyone else. Gradually more and more drop out...

Of course the insurers can take steps to reduce these asymmetries of information, but monitoring patient behaviours adds to the levels of bureaucracy and cost. And the more actuarially accurate the information about the risks underlying the transaction, the more likely the cost of insurance will end up approximating the actual cost of treatment, which kind of defeats the object.

Around 15% of the US population is not covered by any health insurance. The US government still manages to spend on its Medicare and Medicaid programmes (which cover the old and marginal groups) more per person that the UK government spends on the NHS which covers everyone.

So it appears that in a 'market-based' system the insurers sell only to people who think they might need it, which means costlier claims and higher premiums, extensive bureaucracy and a large number of people left uninsured.

Harford deems as hardly much better both the NHS in the UK and the kind of 'social insurance' common elsewhere in Europe. If only 17% of Americans approve of their creaky system, just 25% of Brits are happy with the NHS with its long waiting lists and diminished patient choice.

Instead Harford points to the system rolled out in Singapore where the government gives citizens a tax break but insists that the resulting windfall is invested in a high-interest savings account.

This is in effect the money that the state would anyway have paid on a per-person basis. The government can make up any shortfalls and provide catastrophe insurance for the very major medical bills, but will otherwise leave it to the patients to responsibly manage their own costs, effectively incentivising them to spend only what is necessary. At retirement age, any funds remaining can be transfered to a pension fund, and they can also be willed to surviving relatives at death.

Such a system is of course a distant dream for Guatemalans. Standards of living and levels of education would need to improve substantially here, before a private health-care system fuelled by responsible, self-informing patients could bring widespread benefits.


gillberk said...

Businesses make money off of providing us the service of insurance.Another problem is that consumers who purchase health insurance are charged both for those who do not have insurance and for their own care. If you do not purchase health insurance and you do get really sick, somebody else will pick up most of the tab.Increasing market pressure gets you the gain of reduced unnecessary and inappropriate care but also big losses: powerful incentives for HMOs and insurance companies not to cover the really sick and for individuals not to buy insurance.


private health insurance said...

Your article is absolutely correct. 15% of US citizens have no health insurance and Texas holds the greatest number of citizens with out health insurance. Second is Florida.