National health care as a private consumption good

In their spirited point-counterpoint on "boutique medicine" (Feb. 11, 2002), Natalya Efros '05 and Eric Harkleroad '03 framed the debate on our nation's health policy, honestly, as only young people would. With few exceptions, the seasoned adults who conduct that debate in the political forum camouflage their ethical predilections in the seemingly value-free jargon of actuaries and economists. The pretense is that all Americans share a common ethical vision for their health system and merely quibble over some technicalities of implementing that vision.

In fact, the actuarial and economic issues surrounding health policy are trivial and easily solved. At the core of our debate is and always has been what President Bush the Elder had called "the vision thing," namely, the question what distributive ethic should govern America's health system. For decades now, two extreme visions have competed for the policy maker's favor — the egalitarian and the libertarian vision — with many blends in between.

Egalitarians perceive of health care as a social good, as part of the social cement that makes a genuine nation out of a group of people sharing a geography. On that vision, health care may be produced by private entities — even for-profit entities — but it should be collectively financed, on the basis of the individual's ability to pay, so that it is available to all members of society on equal terms. The health system of neighboring Canada is built upon this vision, as are the health systems of most nations in the industrialized world, including Continental Europe, Japan and Taiwan. All Canadians have the same comprehensive, provincial health insurance, with first-dollar coverage that gives them access to the country's mixed public-private health system on equal terms. (By contrast, over 40 million mainly low-income Americans, millions of children among them, do not have any health insurance whatsoever and must rely on whatever health care they can afford with their own budgets or procure on a charitable basis. Recent research has shown that medical bills now constitute the second most frequently cited cause of family bankruptcy in America).

To be sure, some Canadians of means do travel to the United States for speedier access to certain diagnostic and surgical procedures that are in shorter supply in Canada, just as some low-income Americans travel to Canada for lower-cost health care. In return for the price of occasionally queuing up for their health care, however, Canadians do reap an economic dividend. According to the most recent data published by the Organization for Economic Development and Cooperation (OECD), total per-capita health spending in Canada in 1999 from all sources, and expressed in U.S. dollars equivalents (based on purchasing-power parity) was only about 57 percent as high as the comparable American figure. Remarkably, on population-based, measurable health-status indicators such as life expectancy at birth and at age 60, infant mortality, or preventable years of life lost, Canada actually ranks significantly better than the United States.

In view of these Canadian benchmarks, some Americans — albeit not a politically dominant number — would like to see such a health system introduced in the United States as well. Alas, egalitarian health-insurance systems are explicitly designed to redistribute the financial burden of health care from low-income to high-income families and from the chronically sick to the chronically healthy. That redistribution conflicts with America's more libertarian vision of a social order.

On libertarian vision, most clearly articulated by Nobel Laureate economist Milton Friedman and favored by many of his disciples inside and outside the economics profession, health care is perceived as a private consumption good whose financing is its consumer's own responsibility. Most libertarians probably would guarantee the poorest in society a basic, minimally adequate level of care for life-threatening illness, but they would otherwise ration access to health care by the individual's income and ability to pay, just as Americans now countenance such rationing for food, clothing, shelter, education and justice. During the debate over health reform in the early 1990s, for example, Milton Friedman proposed the complete abolition of the federal Medicare program for the elderly and the state-federal Medicaid program for the poor. A more efficient approach, he argued, would be for families to have only catastrophic health insurance, with an up-front, out-of-pocket deduct-ible of $20,000 per year or 30 percent of the family's income during the last two years, whichever is lower (The Wall Street Journal November 12, 1991). At the time of his writing, the median pretax family income in the United States was $35,000, which means that he had in mind a $10,500 deductible for such a family.

For better or for worse, the American health system now slouches ever more heavily towards the libertarian vision for health care. As national health spending rises once again annually at double-digit rates, the insurance industry is poised to segment its clientele more and more by actuarial risk class, that is, by health status. It is achieved through the process of computer-based "mass customization" that allows insurers to tailor a family's health insurance policy ever more closely to its own "needs" — code for "actuarial risk" or "health status."

Under currently proposed reforms, the Medicare program for the elderly would inexorably move in this direction as well. Even now elderly at or near the federal poverty level spend over one third of their own meager budgets on health care, because Medicare does not cover many types of health services, including prescription drugs. Between 12 and 15 million of the elderly lack any insurance coverage for prescription drugs, which therefore are rationed to them on the basis of their own ability to pay. Furthermore, to help contain the federal deficit that followed in the wake of the massive tax cut granted last spring, the recession that started then and Sept. 11, President Bush now proposes to impose a $1,500 annual deductible on certain groups of veterans who had not hitherto faced that level of cost sharing for their health care.

The net economic effect of these developments will be to allocate less of the financial burden of health care to the chronically healthy who "consume" relatively little health care and more to the chronically sick who "consume" relatively more. In tomorrow's sequel to this commentary, I shall explore the ethical foundation for this redistribution. Uwe Reinhardt is the James Madison professor of Political Economy. He can be reached at reinhard@princeton.edu.