My personal viewpoint tends to be libertarian-leaning. I generally prefer free market solutions with limited government intervention, and I tend to lean that way both due to political philosophy (I’m skeptical of the morality of extracting resources by force from people who earned those resources through their own efforts in consensual, mutually-beneficial transactions with others. Particularly when those resources are then spent on dubious programs of limited benefit to the person from whom they were extracted). Also as a more practical matter, I find libertarian solutions tend to simply work better. Aside from a fairly limited set of scenarios, the free market price mechanism and people’s desire to act in their own best interest tends to work well in allocating the scarce resources of the economy in the way that leads to the best outcomes for the largest number of people.
However, one area which I’ve always struggled with is the topic of health care. I could never quite fit a satisfactory model of healthcare into my libertarian viewpoint.
Firstly, it is worth discussing how health care tends to function in a private market. I think we can start by dividing healthcare into generally 2 buckets. The first is the “day-to-day” care, such as annual check-ups, getting treated for cold/flu/cuts/broken wrist etc. For the most part, the costs associated with this care ought not to be overwhelming, and in general the majority of people have sufficient resources to secure a reasonable level of care in this bucket should they so choose.
The second bucket concerns what might be described as “catastrophic” health care challenges. These would be incidents or illnesses which require significant and very costly care, things like being diagnosed with a serious chronic medical condition, major surgery, cancer, heart attack etc. Depending on the exact circumstances, the cost of care in these scenarios could quite easily climb into the 6 figures or more, and well outside the financial resources of an average person. Given the nature of life, and the fact that everyone will die eventually – it seems inevitable that a relatively large portion of people will at some point find themselves in this bucket.
A natural market solution that arises to address that second bucket is health insurance. An insurance company can gather up a large group of people, and have them all pay a manageable premium. These funds then allow the insurance company to pay the large financial outlays for the relatively small number of insured people who at any given time encounter a catastrophic scenario.
However, this private market scenario encounters at least 2 major challenges:
Pre-Existing Conditions
For various reasons, some of which might be entirely outside of someone’s control (such as a newborn child, or being recently laid off from a job and losing their healthcare coverage) – a person may find themselves without health insurance, and yet diagnosed with an expensive medical condition. Under such a scenario, the private model breaks down. A for profit health insurance company cannot be expected to accept a customer who they know will cause them a financial loss. For such a person, the company now knows that the cost of their care will exceed any premiums they can collect, and they will refuse to cover that person.
Now you might say “well the answer is simple, pass a law that forces the insurance company to accept any customer regardless of any pre-existing condition”. However the risk with this approach is the concept of adverse selection. Because people know that the insurance company will accept them regardless of their circumstances, people will have an incentive to simply wait until they are sick before signing up for coverage – in the meantime saving on their regular premiums. Because the insurance company is relying on the premiums of the relatively healthy people to pay for the occasional catastrophic case that comes up, losing those premiums while getting stuck with only the costly customers may cause them to go bankrupt.
The first question might be: well, is this really so bad? Someone got unlucky and that’s too bad but what does that have to do with me?
While a relatively small portion of the population might feel that way, I think a larger portion (including myself), find it fundamentally unjust to live in a society where someone can do “everything right” so to speak, and yet find themselves being bankrupted, destitute and still unable to pay for their own care or the care of a loved one. I’d hate to find myself or a close family member (or really anyone) in that position – and the situation seems sufficiently unjust that I feel it ought to be acknowledged as a market failure that needs some intervention from the collective community as a whole (ie. the Government).
The “Free-Rider” Problem
Another issue that tends to arise in the private market scenario is the “free-rider” problem. In a modern, wealthy society – the majority of people (myself included), find it unacceptable that someone might show up at a hospital with a serious, dangerous condition and simply be refused care because they can’t pay. The idea of having people pushed out on the street and left to die for lack of care that is in fact readily available is not viewed as an acceptable outcome, and so generally hospitals either by law or by simple morality will treat such people even when those people are unable to pay for their own care.
The result is that a “free-rider” problem can arise, somewhat similar to the adverse selection problem discussed further above. There is a (relatively small) group of people who will simply not purchase any health insurance despite being able to afford to (of course there are those who simply can’t afford to – but I would consider that scenario to be less of a market failure and more of a social-safety-net issue that could be otherwise addressed). These people are still guaranteed a certain degree of care when they show up to the hospital for the reasons above. So the cost of their care is then distributed onto the people who are paying into the system. I would again consider this to be a market failure, where some people are able to impose their own costs on the larger population – although it is somewhat mitigated by the fact that someone who takes this approach does so at their own financial peril, since the cost they are imposing on others is only that which exceeds their total personal resources (if they are forced into personal bankruptcy by the cost of their care).
What is the solution?
Based on the above market failures, I’ve come to believe that a government intervention makes sense. The question then becomes, what would that solution look like? Of course, one option is the one adopted by many Western countries, a universal government funded health program that provides coverage to all citizens.
Pros and Cons: Single-Payer Universal Health Coverage
The solution taken by countries such as Canada and the United Kingdom is to charge their citizens additional taxes, and then use those funds to provide health care coverage to everyone. The advantage of such a program is that it addresses the two issues above, nobody is forced into bankruptcy or destitution because of an unfortunate health care scenario. Some such programs (such as Canada’s) also allow for a certain amount of ‘competition’, in that many health care providers are in fact private companies that then receive reimbursement from the government for services they provide. So generally citizens have some degree of choice in which providers they can go to, if they aren’t happy with their particular doctor they have some options to find a new one.
However there are challenges with such an approach:
- Because the health care, from the perspective of the customer, is “free” – there is a natural tendency that people will use more care than they otherwise would if they were forced to pay for the cost of care themselves. This is one of the reasons why one hears about longer wait times and generally strained resources in countries which operate under these systems, it is the natural result of these warped incentives. That being said, speaking as someone who lives in a country with single-payer care, my own anecdotal experience is that people can still get a fairly good quality of care and although wait times are probably longer than they’d be in somewhere like the U.S.A., that is a trade-off many are willing to make in exchange for not losing sleep wondering what might happen if they ever get seriously sick.
- The “free” care also removes the market incentives that exist in other industries when consumers search out lower cost or better solutions and providers. The single-payer program by its nature requires a fair amount of government price controls and regulations that necessarily stifle some of these market factors that drive improvement and innovation in other sectors of the economy.
How much does single-payer care cost?
I was curious about how much, at the end of the day, a single payer program might cost on a per-person basis. So I pulled up the most recently available (at the time of this writing) financial statement for the Province of Ontario (in Canada, the Provinces are responsible for administering and running the single-payer health program). Here we can see that for the year ended March 31, 2020 the Province of Ontario spent $63.7 billion CAD to provide health-care for a population of about 14.6 million people. That works out to a per-person annual cost of $4,363 CAD (about $3,310 USD at the time of this writing).
To look for another example, I looked at the National Health Service in the United Kingdom. Although this information is a little older (from 2018), it shows that the public cost of healthcare in the UK was £2,517 ($3,253 USD) that year.
It’s important to note that the above figures are just the public portion of funds spend by these citizens on healthcare, and that public spending in these systems accounts for only about 70-80% of the total, with the remaining being private spending (often for basic prescription drugs, some dental and vision care among others, that are not covered by the public plan).
Private Insurance – Obamacare
In contrast to the single-payer option, there is the option of private insurance coverage, such as that found in the United States. However this private insurance system suffers from the pre-existing condition and free-rider problems outlined further above.
In 2010, the Affordable Care Act (ie. Obamacare) was passed into law, marking one of the largest and most comprehensive healthcare reforms in decades. Among other things, the law was meant to restrict insurance companies from refusing people with pre-existing conditions, as well as introducing various rules and subsidies to help more people afford coverage.
In some respects, the Obamacare approach seemed like an approach I might have expected from the conservative side of the aisle, since it aimed to keep the existing market-based health insurance largely intact, instead of implementing a wholesale single-payer or universal plan of some kind. I suspect this was part of a political calculation to make the plan more politically tenable, although as we know the plan nonetheless became very controversial and did not pick up much (any?) conservative support when it was passed. But that’s another story.
Why is Obamacare so expensive?
One of the biggest challenges with Obamacare is that for those who don’t qualify for its subsidies, the insurance coverage can be brutally expensive – very high premiums and deductibles, with out of pocket costs well into the 5 figures for many families on moderate incomes. I’ve wondered why healthcare remains so expensive in the USA and the cost of coverage remains largely unaffordable under this program and can only guess at some of the reasons:
- The ACA aimed to avoid the adverse selection risks discussed further above (ie. the risk that healthy people wouldn’t sign up for insurance, only waiting until they were sick) by charging a penalty to people who didn’t sign up. However I suspect the penalties were insufficient to fully encourage people to sign up for insurance, and in any event these penalties were subsequently removed.
- Older customers may still be charged up to 3x more than younger people (and this makes some sense given the higher health risk as people get older). So I suspect that some of the very high rates one hears about are also for relatively older people (although we know costs are also quite high even for the younger age bracket). With a single-payer program, costs are spread evenly over all age groups – while private insurance still allows for cost increases to be visible at the individual level as people get older and therefore riskier.
- Not a problem with the ACA but with private insurance more generally is the fact that insured people, once covered, have little incentive to reduce costs. Hospitals and health care providers, motivated by a profit incentive, are encouraged to offer healthcare to the maximum of someone’s coverage. Some people can relate to going to the dentist with a work plan that provides dental coverage. The dentist often will encourage a patient to schedule as many visits as their health coverage provides. The patient sees little harm in doing that, since it costs them nothing and they get a lot of “free” dental care, but it is probably more care than they would have asked for if they were paying the cost directly. Instead the cost goes to an insurance company – whose incentive to manage costs is also reduced since they are, to a certain extent, just passing the cost onto their final customer who is for example the patient’s employer. At that point the final cost burden is 2 steps removed from the care decisions that were being made by the patient. This problem is exacerbated since employer sponsored benefit plans are non-taxable in the United States, providing tax incentives for people to organize their employment affairs to receive much more generous health plans than they otherwise would if there were no such differences in tax treatment.
Could the ACA be re-worked or improved to make it more affordable? Possibly. I myself am inclined to view the ACA as a bit of a ‘Frankenstein’ regulation which tries to be a blend between a universal government solution and a market-based regulation and ends up not doing a particularly good job at either, just introducing a lot of additional rules, overhead and subsidies to an already imperfect system.
A Solution – Universal Catastrophic Coverage
If it were possible to start from scratch, with a blank drawing board, what would a great health solution be? From a more libertarian and free market viewpoint, the best solution I have come across has been a Universal Catastrophic Coverage (UCC) program. I think such a program would provide a good trade-off by providing universal coverage that avoids catastrophic costs bankrupting people who “did everything right” so to speak, while still keeping to the principle that people who can afford to do so should assume responsibility for their non-catastrophic healthcare expenses.
UCC would mean that the government effectively enrolls every legal resident in the UCC plan. The plan would include a relatively high deductible (scaled to income) but would otherwise provide coverage to everyone regardless of pre-existing conditions. There are different options for funding it, but I think the most plausible approach would be to fund it through general government funds and perhaps the introduction of an additional tax (anecdotally called a “premium”) via the personal income tax. There is an excellent write-up of what a UCC plan could look like here.
Compared to a single-payer plan that provides “first-dollar” coverage such as those in Canada and the UK, a UCC means the majority of people are still retaining a meaningful portion of their healthcare costs to the extent they can afford it. That in turn keeps the cost to the government relatively lower than it would be under a first-dollar plan, and helps ensure people still have incentives to avoid excessive or unnecessary care.
Estimating the exact cost of such a program is challenging. Jodi L. Liu has published an interesting simulation model that attempts to analyze the potential costs of a UCC program. If I’m reading the analysis correctly, the model estimates an incremental cost to the government of $679 Billion across 203 million people covered (this model assumes Medicare and Medicate remains intact), which works out to a cost of $3,345 USD per person. That cost seems a little on the high side since it is roughly equivalent to the public spending by Canada and the UK on their “first dollar” programs, but considering the USA is already significantly more expensive than those countries, a higher cost of providing the UCC should perhaps be expected. In any event, it seems to be in the right general ballpark. Liu’s model also envisions significant savings in excess of $500 Billion due to lower administrative costs, drug prices and other costs due to moving to a single-payer approach for such a large portion of the country’s healthcare spend. While such projected savings may need to be treated with a grain of salt since they are ultimately estimates, the experience of other countries (spending significantly less per capita on health care while achieving better health outcomes) suggests that it is at least plausible to expect that moving to a more centralized plan can result in savings.
The conclusion I’ve drawn is that a Universal Catastrophic Coverage plan provides the best blend of universal coverage while maintaining a reasonable degree of personal responsibility and market incentives. Although not strictly a purely libertarian solution, I don’t think there really can be a purely libertarian solution to public health policy considering the known market failures that arise in private health insurance.