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HEADLINE: Health Economics 101

BYLINE: By Paul Krugman; Bob Herbert is on vacation.

BODY:

Several readers have asked me a good question: we rely on free markets to deliver most goods
and services, so why shouldn't we do the same thing for health care? Some correspondents were
belligerent, others honestly curious. Either way, they deserve an answer.

It comes down to three things: risk, selection and social justice.

First, about risk: in any given year, a small fraction of the population accounts for the bulk of
medical expenses. In 2002 a mere 5 percent of Americans incurred almost half of U.S. medical
costs. If you find yourself one of the unlucky 5 percent, your medical expenses will be crushing,
unless you're very wealthy -- or you have good insurance.

But good insurance is hard to come by, because private markets for health insurance suffer from
a severe case of the economic problem known as ''adverse selection,'' in which bad risks drive
out good.

To understand adverse selection, imagine what would happen if there were only one health
insurance company, and everyone was required to buy the same insurance policy. In that case,
the insurance company could charge a price reflecting the medical costs of the average
American, plus a small extra charge for administrative expenses.

But in the real insurance market, a company that offered such a policy to anyone who wanted it
would lose money hand over fist. Healthy people, who don't expect to face high medical bills,
would go elsewhere, or go without insurance. Meanwhile, those who bought the policy would be
a self-selected group of people likely to have high medical costs. And if the company responded
to this selection bias by charging a higher price for insurance, it would drive away even more
healthy people.

That's why insurance companies don't offer a standard health insurance policy, available to
anyone willing to buy it. Instead, they devote a lot of effort and money to screening applicants,
selling insurance only to those considered unlikely to have high costs, while rejecting those with
pre-existing conditions or other indicators of high future expenses.

This screening process is the main reason private health insurers spend a much higher share of
their revenue on administrative costs than do government insurance programs like Medicare,
which doesn't try to screen anyone out. That is, private insurance companies spend large sums
not on providing medical care, but on denying insurance to those who need it most.

What happens to those denied coverage? Citizens of advanced countries -- the United States
included -- don't believe that their fellow citizens should be denied essential health care because
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they can't afford it. And this belief in social justice gets translated into action, however
imperfectly. Some of those unable to get private health insurance are covered by Medicaid.
Others receive ''uncompensated'' treatment, which ends up being paid for either by the
government or by higher medical bills for the insured. So we have a huge private health care
bureaucracy whose main purpose is, in effect, to pass the buck to taxpayers.

At this point some readers may object that I'm painting too dark a picture. After all, most
Americans too young to receive Medicare do have private health insurance. So does the free
market work better than I've suggested? No: to the extent that we do have a working system of
private health insurance, it's the result of huge though hidden subsidies.

Private health insurance in America comes almost entirely in the form of employment-based
coverage: insurance provided by corporations as part of their pay packages. The key to this
coverage is the fact that compensation in the form of health benefits, as opposed to wages, isn't
taxed. One recent study suggests that this tax subsidy may be as large as $190 billion per year.
And even with this subsidy, employment-based coverage is in rapid decline.

I'm not an opponent of markets. On the contrary, I've spent a lot of my career defending their
virtues. But the fact is that the free market doesn't work for health insurance, and never did. All
we ever had was a patchwork, semiprivate system supported by large government subsidies.

That system is now failing. And a rigid belief that markets are always superior to government
programs -- a belief that ignores basic economics as well as experience -- stands in the way of
rational thinking about what should replace it.

URL: http://www.nytimes.com

LOAD-DATE: November 14, 2005

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HEADLINE: Health Care Confidential

BYLINE: By PAUL KRUGMAN

BODY:

American health care is desperately in need of reform. But what form should change take? Are
there any useful examples we can turn to for guidance?

Well, I know about a health care system that has been highly successful in containing costs, yet
provides excellent care. And the story of this system's success provides a helpful corrective to
anti-government ideology. For the government doesn't just pay the bills in this system -- it runs
the hospitals and clinics.

No, I'm not talking about some faraway country. The system in question is our very own
Veterans Health Administration, whose success story is one of the best-kept secrets in the
American policy debate.

In the 1980's and early 1990's, says an article in The American Journal of Managed Care, the
V.H.A. ''had a tarnished reputation of bureaucracy, inefficiency and mediocre care.'' But reforms
beginning in the mid-1990's transformed the system, and ''the V.A.'s success in improving
quality, safety and value,'' the article says, ''have allowed it to emerge as an increasingly
recognized leader in health care.''

Last year customer satisfaction with the veterans' health system, as measured by an annual
survey conducted by the National Quality Research Center, exceeded that for private health care
for the sixth year in a row. This high level of quality (which is also verified by objective
measures of performance) was achieved without big budget increases. In fact, the veterans'
system has managed to avoid much of the huge cost surge that has plagued the rest of U.S.
medicine.

How does the V.H.A. do it?

The secret of its success is the fact that it's a universal, integrated system. Because it covers all
veterans, the system doesn't need to employ legions of administrative staff to check patients'
coverage and demand payment from their insurance companies. Because it covers all aspects of
medical care, it has been able to take the lead in electronic record-keeping and other innovations
that reduce costs, ensure effective treatment and help prevent medical errors.

Moreover, the V.H.A., as Phillip Longman put it in The Washington Monthly, ''has nearly a
lifetime relationship with its patients.'' As a result, it ''actually has an incentive to invest in
prevention and more effective disease management. When it does so, it isn't just saving money
for somebody else. It's maximizing its own resources. In short, it can do what the rest of the
health care sector can't seem to, which is to pursue quality systematically without threatening its
own financial viability.''
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Oh, and one more thing: the veterans' health system bargains hard with medical suppliers, and
pays far less for drugs than most private insurers.

I don't want to idealize the veterans' system. In fact, there's reason to be concerned about its
future: will it be given the resources it needs to cope with the flood of wounded and traumatized
veterans from Iraq? But the transformation of the V.H.A. is clearly the most encouraging health
policy story of the past decade. So why haven't you heard about it?

The answer, I believe, is that pundits and policy makers don't talk about the veterans' system
because they can't handle the cognitive dissonance. (One prominent commentator started yelling
at me when I tried to describe the system's successes in a private conversation.) For the lesson of
the V.H.A.'s success story -- that a government agency can deliver better care at lower cost than
the private sector -- runs completely counter to the pro-privatization, anti-government
conventional wisdom that dominates today's Washington.

The dissonance between the dominant ideology and the realities of health care is one reason the
Medicare drug legislation looks as if someone went down a checklist of things that the veterans'
system does right, and in each case did the opposite. For example, the V.H.A. avoids dealing
with insurance companies; the drug bill shoehorns insurance companies into the program even
though they serve no real function. The V.H.A. bargains effectively on drug prices; the drug bill
forbids Medicare from doing the same.

Still, ideology can't hold out against reality forever. Cries of ''socialized medicine'' didn't, in the
end, succeed in blocking the creation of Medicare. And farsighted thinkers are already
suggesting that the Veterans Health Administration, not President Bush's unrealistic vision of a
system in which people go ''comparative shopping'' for medical care the way they do when
buying tile (his example, not mine), represents the true future of American health care.

URL: http://www.nytimes.com

LOAD-DATE: January 26, 2006

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HEADLINE: Pride, Prejudice, Insurance

BYLINE: By Paul Krugman

BODY:

General Motors is reducing retirees' medical benefits. Delphi has declared bankruptcy, and will
probably reduce workers' benefits as well as their wages. An internal Wal-Mart memo describes
plans to cut health costs by hiring temporary workers, who aren't entitled to health insurance, and
screening out employees likely to have high medical bills.

These aren't isolated anecdotes. Employment-based health insurance is the only serious source of
coverage for Americans too young to receive Medicare and insufficiently destitute to receive
Medicaid, but it's an institution in decline. Between 2000 and 2004 the number of Americans
under 65 rose by 10 million. Yet the number of nonelderly Americans covered by employment-
based insurance fell by 4.9 million.

The funny thing is that the solution -- national health insurance, available to everyone -- is
obvious. But to see the obvious we'll have to overcome pride -- the unwarranted belief that
America has nothing to learn from other countries -- and prejudice -- the equally unwarranted
belief, driven by ideology, that private insurance is more efficient than public insurance.

Let's start with the fact that America's health care system spends more, for worse results, than
that of any other advanced country.

In 2002 the United States spent $5,267 per person on health care. Canada spent $2,931; Germany
spent $2,817; Britain spent only $2,160. Yet the United States has lower life expectancy and
higher infant mortality than any of these countries.

But don't people in other countries sometimes find it hard to get medical treatment? Yes,
sometimes -- but so do Americans. No, Virginia, many Americans can't count on ready access to
high-quality medical care.

The journal Health Affairs recently published the results of a survey of the medical experience of
''sicker adults'' in six countries, including Canada, Britain, Germany and the United States. The
responses don't support claims about superior service from the U.S. system. It's true that
Americans generally have shorter waits for elective surgery than Canadians or Britons, although
German waits are even shorter. But Americans do worse by some important measures: we find it
harder than citizens of other advanced countries to see a doctor when we need one, and our
system is more, not less, rife with medical errors.

Above all, Americans are far more likely than others to forgo treatment because they can't afford
it. Forty percent of the Americans surveyed failed to fill a prescription because of cost. A third
were deterred by cost from seeing a doctor when sick or from getting recommended tests or
follow-up.
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Why does American medicine cost so much yet achieve so little? Unlike other advanced
countries, we treat access to health care as a privilege rather than a right. And this attitude turns
out to be inefficient as well as cruel.

The U.S. system is much more bureaucratic, with much higher administrative costs, than those of
other countries, because private insurers and other players work hard at trying not to pay for
medical care. And our fragmented system is unable to bargain with drug companies and other
suppliers for lower prices.

Taiwan, which moved 10 years ago from a U.S.-style system to a Canadian-style single-payer
system, offers an object lesson in the economic advantages of universal coverage. In 1995 less
than 60 percent of Taiwan's residents had health insurance; by 2001 the number was 97 percent.
Yet according to a careful study published in Health Affairs two years ago, this huge expansion
in coverage came virtually free: it led to little if any increase in overall health care spending
beyond normal growth due to rising population and incomes.

Before you dismiss Taiwan as a faraway place of which we know nothing, remember Chile-
mania: just a few months ago, during the Bush administration's failed attempt to privatize Social
Security, commentators across the country -- independent thinkers all, I'm sure -- joined in a
chorus of ill-informed praise for Chile's private retirement accounts. (It turns out that Chile's
system has a lot of problems.) Taiwan has more people and a much bigger economy than Chile,
and its experience is a lot more relevant to America's real problems.

The economic and moral case for health care reform in America, reform that would make us less
different from other advanced countries, is overwhelming. One of these days we'll realize that
our semiprivatized system isn't just unfair, it's far less efficient than a straightforward system of
guaranteed health insurance.

URL: http://www.nytimes.com

LOAD-DATE: November 7, 2005

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HEADLINE: A Private Obsession

BYLINE: By PAUL KRUGMAN

BODY:

''Lots of things in life are complicated.'' So declared Michael Leavitt, the secretary of health and
human services, in response to the mass confusion as registration for the new Medicare drug
benefit began. But the complexity of the program -- which has reduced some retirees to tears as
they try to make what may be life-or-death decisions -- is far greater than necessary.

One reason the drug benefit is so confusing is that older Americans can't simply sign up with
Medicare as they can for other benefits. They must, instead, choose from a baffling array of
plans offered by private middlemen. Why?

Here's a parallel. Earlier this year Senator Rick Santorum introduced a bill that would have
forced the National Weather Service to limit the weather information directly available to the
public. Although he didn't say so explicitly, he wanted the service to funnel that information
through private forecasters instead.

Mr. Santorum's bill didn't go anywhere. But it was a classic attempt to force gratuitous
privatization: involving private corporations in the delivery of public services even when those
corporations have no useful role to play.

The Medicare drug benefit is an example of gratuitous privatization on a grand scale.

Here's some background: the elderly have long been offered a choice between standard
Medicare, in which the government pays medical bills directly, and plans in which the
government pays a middleman, like an H.M.O., to deliver health care. The theory was that the
private sector would find innovative ways to lower costs while providing better care.

The theory was wrong. A number of studies have found that managed-care plans, which have
much higher administrative costs than government-managed Medicare, end up costing the
system money, not saving it.

But privatization, once promoted as a way to save money, has become a goal in itself. The 2003
bill that established the prescription drug benefit also locked in large subsidies for managed care.

And on drug coverage, the 2003 bill went even further: rather than merely subsidizing private
plans, it made them mandatory. To receive the drug benefit, one must sign up with a plan offered
by a private company. As people are discovering, the result is a deeply confusing system because
the competing private plans differ in ways that are very hard to assess.

The peculiar structure of the drug benefit, with its huge gap in coverage -- the famous ''doughnut
hole'' I wrote about last week -- adds to the confusion. Many better-off retirees have relied on
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Medigap policies to cover gaps in traditional Medicare, including prescription drugs. But that
straightforward approach, which would make it relatively easy to compare drug plans, can't be
used to fill the doughnut hole because Medigap policies are no longer allowed to cover drugs.

The only way to get some coverage in the gap is as part of a package in which you pay extra -- a
lot extra -- to one of the private drug plans delivering the basic benefit. And because this
coverage is bundled with other aspects of the plans, it's very difficult to figure out which plans
offer the best deal.

But confusion isn't the only, or even the main, reason why the privatization of drug benefits is
bad for America. The real problem is that we'll end up spending too much and getting too little.

Everything we know about health economics indicates that private drug plans will have much
higher administrative costs than would have been incurred if Medicare had administered the
benefit directly.

It's also clear that the private plans will spend large sums on marketing rather than on medicine. I
have nothing against Don Shula, the former head coach of the Miami Dolphins, who is
promoting a drug plan offered by Humana. But do we really want people choosing drug plans
based on which one hires the most persuasive celebrity?

Last but not least, competing private drug plans will have less clout in negotiating lower drug
prices than Medicare as a whole would have. And the law explicitly forbids Medicare from
intervening to help the private plans negotiate better deals.

Last week I explained that the Medicare drug bill was devised by people who don't believe in a
positive role for government. An insistence on gratuitous privatization is a byproduct of the same
ideology. And the result of that ideology is a piece of legislation so bad it's almost surreal.

URL: http://www.nytimes.com

LOAD-DATE: November 18, 2005