Unbiased Analysis of Today's Healthcare Issues

One justification for National Health Insurance

Written By: Jason Shafrin - Feb• 06•06

In general, I am not in favor of health care which is controlled by the federal or state government.  I do not believe that the Canadian or British systems are the best methods to administer medical care to a nation’s citizens.  Below I will argue that equity concerns do not justify centralized health care, but a health insurance externalities argument may be persuasive.  I explain below.

Many politicians claim that providing free, government administered health care is beneficial to society on equity grounds.  While this is true, economists claim that if one hopes to equalize incomes (or welfare) across society, there are more efficient manners of accomplishing this.  People have different preferences for health insurance.  Some people are more or less risk averse; some have a higher probability of illness than others; and people vary in the type of insurance they would desire (HMOs, PPOs or conventional).  Giving the poor a lump sum payment equal to their share of Medicaid expenditures would allow them to best choose how to spend this money in order to maximize their welfare.  Assuming health insurance is a normal good, some of this money would be spent on health insurance and overall welfare would increase.

Would this happen in reality?

In the United States, hospitals will not deny care to any patients.  This is a generalization, but it is true that hospitals will not refuse to admit emergency care cases to the hospital.  Poor patients who know that they will receive treatment even if they do not have insurance; thus their incentives to purchase insurance will be small.  Since, society will not refuse care to the ill, the consumers (in the form of higher prices) or the taxpayers (in the form of taxes to cover these expenses) will have be left to pay their bill.  Also, those without insurance will be less likely to seek preventative care and thus the eventual cost of medical care for the indigent to taxpayers will be higher than if the impoverished were granted insurance in the first place.

Vouchers may be a solution to this problem. This is the solution advocated by Ezekial Emanuel of the NIH and economist Victor Fuchs in their June 2005 Washington Monthly article (“Solved: …Why Universal Health Care Vouchers is the next big idea€?). With vouchers, every US resident must purchase health insurance, but each receives a voucher towards the cost.  This would maintain competition among insurance companies, keep the provision of medical care out of the government’s hands, yet still ensure that all Americans were enrolled.  If one did not enroll in health insurance, they would lose the value of the voucher, and be in violation of the law. The vouchers should be set at a minimal level so that those who desire more comprehensive insurance could pay an amount above the voucher. 

One problem with the vouchers is that the price of individual insurance is much higher than that of group insurance.  Another is that of adverse selection.  Individuals with pre-existing conditions may not be able to afford health insurance even with the voucher.  Overall, vouchers remain an intriguing idea.

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  1. […] Florida plans to privatize all of Medicaid, allowing patients to choose between a variety of private health plans.  According to the NY Times (”U.S. gives Florida…“) Medicaid would shift from a defined benefit to a defined contribution entitlement where those eligible would receive a fixed risk-adjusted dollar amount to be used towards purchase of health insurance.  Also, “Medicaid recipients can ‘opt out’ of Medicaid altogether and receive subsidies to help pay the employee’s share of the premium for employer-sponsored health insurance.”  This is similar to the idea of vouchers proposed by Victor Fuchs (see my February 6th post). […]