Health and Economics

Krugman and Wells' Analysis of the Health Care Crisis

From obesity to ADD, health care issues often seem to be of serious concern to Americans. However, it seems like barely a day goes by without the media reporting on the declining quality and increasing cost of health care in the US. This crisis has been developing for some time; between 1960 and 2006 the US saw a 33-fold increase in the amount of money spent per capita on health care...SJ's book. According to Krugman and Wells' article "The Health Care Crisis and What to Do About It," a series of factors have prevented health care from becoming one of politicians' primary concerns; these factors include the unwillingness of politicians to confront insurance agencies, a temporary slow in the growth of health care spending by HMOs in particular, and other nation-wide distractions including terrorism.

Krugman and Wells further identify the three problematic outcomes of rising medical costs as "the increasingly rapid unraveling of employer-based health insurance," "the plight of Medicaid," and "the long-term problem of the federal government's solvency." Moreover, the authors say that the failure to implement universal health care has led to the development of more players in the health care system including private insurers and for-profit hospitals who contribute to rising costs but not to overall quality. They suggest that a universal "single-payer" system, like in Canada where the government provides insurance to all citizens, would be both cheaper and more effective than the current system in the US today. Thus, the article begins by analyzing the underlying economic concepts that pertain to health care. Then it describes how these concepts relate to the problems faced by US health care consumers. Finally, it makes predictions and suggestions for future improvements.

According to the CDC's National Center for Health Statistics, in 2006 approximately 43.3 million people, or 16.8 percent of the US population under age 65 was uninsured.

Krugman and Wells

Paul Krugman and his wife Robin Wells are both professors at Princeton University, where they have collaborated on a number of scholarly articles, such as the one we will discuss here, as well as our lovely textbook. Additionally, Krugman's research focuses on international trade and currency crises; he is one of the founders of the "new trade theory." Wells' research is devoted to theories of organizations and incentives.

Is Health care spending a problem?

Since 1960 US spending on health care has risen from 5.2 percent of GDP to 16 percent. The authors note that "health care spending is rising rapidly 'regardless of the source of its funding.'" In other words, government and private health care spending are growing faster the economy is. To back these assertions up with some numbers, from 2000 to 2004 in the US, private health care spending increased from approximately $756 billion to $1,030 billion, while public spending (national, state and local government) increased from approximately $602 billion to $874 billion (National Center for Health Statistics). Furthermore, the US has the highest percentage of per capita spending on health care and the highest percentage of GPD spent on health care when compared to other countries (National Center for Health Statistics). Krugman and Wells point to the development and increasing importance of new, expensive medical technology as a contributor to these high costs. The article states, "so far, this sounds like a happy story. We've found new ways to help people, and are spending more to take advantage of the opportunity."

However, there are two major reasons why rising medical spending is not simply a response to expanded choice. In the first place, Krugman and Wells note that the US health care system is extremely inefficient. And, as health care spending increases as a proportion of GDP, so does the amount of wasted money. This contributes to the problem of irrational choices in the health care system. The best example of this is how the health care system divides people into "insiders," those who have access to good insurance and medical help, and "outsiders," those with poor or no insurance or medical care. Krugman and Wells note that as the health care system spends more money on the technology to help "insiders," they have to compensate for the additional spending by forcing more and more people into "outsider" status.

The "Consumer-Directed" Diversion

One of the two big reasons to be concerned about the rising spending on health care is that as the health care sector grows, its inefficiency becomes increasingly important. It is widely agreed that the US health care system is extremely inefficient, yet there are disagreements about the nature of the inefficiency. The analysts who have the ear of the Bush administration are committed to a view that is clearly wrong. The underlying view behind the Bush administration’s health care proposals is the view that insurance leads people to consume too much health care.

The view that American consume too much health care because insurers pay the bills leads to what is currently being called the “consumer-directed” approach to health care reform. The main idea of this approach is that people should pay more of their medical expenses out of pocket. Right wing reformers believe that the way to reduce public reliance on insurance is to remove tax advantages that currently favor health insurance over out-of-pocket spending. Last year Bush’s tax reform commission proposed taxing some employment-based health benefits, however the administration recognized how politically explosive this move would be and rejected the proposal. Instead, the administration decided to cut taxes on out-of-pocket spending.

In their book Healthy, Wealthy, and Wise, John Cogan, Glenn Hubbard, and Daniel Kessler call for making all out-of-pocket medical spending tax-deductible, although tax experts from both parties say that this would present an enforcement nightmare. So far the administrations proposals are more limited, focusing on an expanded system of tax-advantaged health and savings accounts. This allows for individuals to shelter part of their income from taxes by dipositing it in such accounts, then withdraw money from these accounts to pay medical bills.

Problems with consumer-directed health care: -One immediate disadvantage is that health savings accounts provide yet another tax break for the wealthy. -A deeper disadvantage is the such accounts tend to undermine employment-based health care, because they encourage adverse selection: these health savings accounts are attractive to healthier individual, who will be tempted to opt out of company plans, leaving less healthy individual behind. - Anouther prooblem with consumer-directed care is that evidence says that people don't, in fact, make wise decisions when paying for medical care out of pocket. People tend to cut back on their consumption of health care when they pay the medical expenses themselves.

Single-payer and beyond