Keeping Costs Down (And Going Out On A Few Limbs)

The President says of a public option:

Why would it drive private insurance out of business? If private insurers say that the marketplace provides the best quality health care; if they tell us that they’re offering a good deal, then why is it that the government, which they say can’t run anything, suddenly is going to drive them out of business? That’s not logical.

And Nate Silver agrees. Robert Reich has his own explanation of why that's bunk.

It strikes me as silly circular argument. Michael Steele says that if the problem is prices, lets just "do the deal" and cut prices. Then George Will says that you can't have competition from a public insurer, because insurance companies will be forced to cut profits and lower prices!

Incidentally, in Nate Silver's post, as well as Greg Mankiw's, a lot of other ideas for keeping health care costs down are discussed. For example, does subsidizing health insurance (sort of a back door subsidy through making it income-tax-free (see Nate's)) benefit the wallet of the consumer/patient or the insurance company? Given that the market for health care is one with low elasticity of demand (people perceive it as a necessity, required whatever the cost), it may be mostly to the benefit of the insurance company. Or as David Brooks comments:

The exemption is a giant subsidy to the affluent. It drives up health care costs by encouraging luxurious plans and by separating people from the consequences of their decisions. Furthermore, repealing the exemption could raise hundreds of billions of dollars, which could be used to expand coverage to the uninsured.

Professor Mankiw writes about the disparity between American doctors' income and those of other countries with universal health coverage. The typical argument that tends to follow here might be that the doctors in the US are far more talented, and if we were to do something that could effect their incomes, we might not be able to attract such talented doctors.

I'm not quite sure I can sympathize with this sentiment. Does this higher income indicate a greater degree of talent or education? Typically, licensure in the US requires education at a medical establishment in the US, and though the US educational establishment is well-sought internationally, it is likely to be because of the income one is able to earn with a practice in the US. International comparisons on tests of hard knowledge have been of late tending to favor the products of a European education.

So what else could produce such a higher income? As Mankiw discusses, education of doctors in the U.S. is usually something that is built into the price of an insurance premium, because a Doctor will usually take a loan to fund medical school and repay it while in practice (thus, this educational cost is actually education + interest), while in some European nations, medical education might be publicly funded (still coming from the same people, taxpayer/patients, but in this case under a different heading). This will make reported incomes higher in the U.S. while a lot of that price is actually repaying for education.

Another easy explanation: too few doctors. This is something that is regulated by the admission departments of American centers of medical education. These organizations have the incentive to appease the AMA to stay accredited, which has the incentive to keep class sizes small to keep their incomes up. Part of a solution could be to offer schools an incentive to increase their class sizes (aside from merely the additional tuition).

The issue Mankiw brings up regarding doctor training is an important distinction to consider in discussing healthcare costs, but it could also provide a solution. The difference here is timing (which may not be an issue: the government will also have to pay interest if they need to go into debt to fund any of these proposals) and incentives. A person considering medical school might be more swayed by the idea of a free education followed by a lower income later. At least I would be.