Question of trust

Krugman observes:

You could rely on a health maintenance organization to make the hard choices and do the cost management, and to some extent we do. But HMOs have been highly limited in their ability to achieve cost-effectiveness because people don’t trust them — they’re profit-making institutions, and your treatment is their cost. [Emphasis in the original.]

This gets Mankiw thinking:

Perhaps a lot of the disagreement over healthcare reform, and maybe other policy issues as well, stems from the fundamental question of what kind of institutions a person trusts. Some people are naturally skeptical of profit-seeking firms; others are naturally skeptical of government. (There is, of course, the issue that an HMO can be run as a nonprofit organization. The one I use through Harvard is an example. But let's put that issue aside for another day.)

I tend to distrust power unchecked by competition. This makes me particularly suspect of federal policies that take a strong role in directing private decisions. I am much more willing to have state and local governments exercise power in a variety of ways than for the federal government to undertake similar actions. I can more easily move to another state or town than to another nation. (I am not good with languages.)

Most private organizations have some competitors, and this fact makes me more comfortable interacting with them. If Harvard is a bad employer, I can move to Princeton or Yale, and this knowledge keeps Harvard in line. To be sure, we need a government-run court system to enforce contracts, prevent fraud, and preserve honest competition. But it is fundamentally competition among private organizations that I trust.

This philosophical inclination most likely influences my views of the healthcare debate. The more power a centralized government authority asserts, the more worried I am that the power will be misused either purposefully or, more likely, because of some well-intentioned but mistaken social theory. I prefer reforms that set up rules of the game but end up with power over key decisions as decentralized as possible.

What puzzles me is that Paul seems so ready to trust solutions that give a large role to the federal government. (In the past, for instance, he has advocated a single payer for healthcare.) I understand that trust of centralized authority is common among liberals. But here is the part of puzzles me: Over the past eight years, Paul has tried to convince his readers that Republicans are stupid and venal. History suggests that Republicans will run the government about half the time. Does he really want to turn control of healthcare half the time to a group of policymakers that he considers stupid and venal?

These thoughts, I appreciate, are broad generalizations. They don't immediately lead to a specific set of reform proposals. But I wanted to give Paul credit for a key insight: A central question in this and perhaps other debates is, Whom do you trust?

Naturally, I'm totally on Mankiw's side here.  And it seems to me that a large part of the distrust of private health-care in particular (as compared to non-health-care sectors) originates from a lack of choice.  Health insurance and management organizations may not be selling a commodity like bread, as Krugman argues, but they are selling something you could potentially have healthy market-based competition on.  The problem is right now we don't have good competition.

The market has been distorted by employers offering single or a limited selection of plans--a relic of World War II price controls that prohibited wage competition, leading employers to compete by offering more lavish benefits instead.  (This is a fine example of the unintended consequences of government regulation.)  To make matters worse, not only is there a limited selection, but those plans are tied to employment and not portable once you leave a job.  The status quo is perverse.

The lack of healthy competition causes problems.  If the insurance company you have refuses to cover a procedure that most health care consumers would expect to be covered (a situation that isn't specific to healthcare and can occur in other areas like insurance and finance) you don't have an effective recourse.  You probably can't switch to a provider that covers the procedure, because a) your employer may not offer that plan, and b) you might be denied based on the pre-existing condition.  You also couldn't start a backlash against the company that causes other customers to switch, the threat of which serves to keep companies honest (e.g., retention-attitudes like "the customer is always right").  Thus, health insurance and management organizations have a perverse incentive: denying coverage, particularly of more obscure and expensive procedures, offers them a much higher upside than the potential downside, because maintaining a good reputation with customers is less important to them than a healthy level of competition would dictate.

So how do we fix the market's competition?  Set up health insurance exchanges where anyone can choose any plan and not be denied on the basis of pre-existing conditions.  Require every employer that offers health benefits to contribute the same portion to these premiums if chosen.

For example, suppose that an employer offers to cover 70% of a $10,000/yr. BlueCross plan.  That's $7,000.  The employee should be able to take this very $7,000 and apply it toward any of the plans in the health insurance exchange.  Suppose there are several plans on offer there:

MoreBasicThanBlue -- $7,000/yr., with higher deductibles and such.
GoldPlated --- $15,000/yr., better coverage
MoreTrusted -- $10,000/yr., very similar to BlueCross but higher customer satisfaction

Presently, this employee would pay $3,000/yr. for their portion of the employer's BlueCross offer.  They might opt for the more basic plan, and pocket the difference as savings.  Or they might want want to shell out that extra $8,000/yr. for the Gold.   Or, maybe they heard from a friend or read at Consumer Reports that "MoreTrusted" offers better care then BlueCross (e.g. better customer service, fewer spuriously denied claims, etc).  They could select the most trusted provider.

This concludes my illustration of a functional, for-profit market-based system.  A government-run plan and greater bureaucracy does not seem helpful to me--and if you have a healthy distrust of government intervention and price controls, you should be concerned about direct public involvement making things worse.

Meanwhile, Tyler Cowen looks at examples of free market health care, which Krugman thinks there are no successful examples of.