Question

why is the marginal cost structure of health insurance so problematic?

Answer 1

Now that we understand the main economic forces at work, let’s look at some data that describe the U.S. healthcare system. We first examine what we get from it, as measured by how long people live. We then see how much healthcare costs us, how much other nations pay, and how we pay the bill. 2a People Are Living Longer We start with some good news: People are living longer than ever before. shows life expectancy over time in the United States. Life expectancy measures how long people born today would live, on average, if they faced current mortality rates at every age. You can see that it has increased substantially over time. Life expectancy, A large part of the increase in life expectancy is due to a decline in infant mortality. At the beginning of the twentieth century, about 10 percent of children died before the age of one. Today, the infant mortality rate is less than 0.6 percent. Much of the credit for the increase in life expectancy goes to advances in medical technology. Physicians now know more about how to prevent disease and how to treat medical problems when they arise. But other developments play a role as well. For example, improvements in sanitation—specifically, the availability of clean water and the adequate disposal of sewage—has reduced the spread of disease. In addition, the rate of fatalities from car accidents is now half what it was in 1950. Credit for this change goes to advances in automotive safety, such as seat belts and airbags.

Most of these ideas are widely accepted by economists who study healthcare.b Despite this consensus, there is an ongoing debate among U.S. policymakers about what role the government should play in the healthcare system. Those on the political left would like to see an expanded government role. They often believe that private insurance companies are particularly inefficient and too often put profit ahead of people. Some on the left would like the government to offer people a public option in the healthcare system—that is, a government-run insurance program that any person can buy into instead of purchasing private insurance. Others would like to move toward a single-payer system in which the government pays for healthcare for everyone out of tax revenue, as Medicare now does for the elderly. They point to Canada as a successful model. A centralized system run by intelli- gent administrators, they argue, is best able to reduce administrative inefficiency, eliminate wasteful treatment, bargain with providers for lower costs, and allocate healthcare resources most equitably to where they are most needed.

In the context of health insurance, the term “moral hazard” is widely used (and slightly abused) to capture the notion that insurance coverage, by lowering the marginal cost of care to the individual (often referred to as the out-of-pocket price of care), may increase healthcare use.

The reduced form of evidence tells us unambiguously that health insurance increases health care utilization and spending. Moral hazard, in other words, irrefutably exists. The overwhelming, compelling evidence on this point—from several randomized evaluations as well as countless, well-crafted quasi-experimental studies—should give any informed reader considerable pause when they hear claims to the contrary. Consider the rhetorical debate we started with over whether a moral hazard exists and if so whether it might be of the opposite sign. These qualitative hypotheses are powerfully rejected by the reduced form evidence. This is a particular illustration of a broader point: when the debate is about sharp nulls or qualitative signs, credible reduced form studies, which often rely on fewer modeling assumptions, are very powerful in convincingly distinguishing between competing hypotheses. Reduced form evidence can also be valuable for retrospective analysis when an existing policy of interest is captured by the reduced form variation. If one is interested in the question: what happened when Oregon expanded Medicaid coverage in 2008, there is no better way to answer that than with the results of the lottery expansion. Likewise, historical interest in the impact of the original introduction of Medicare can be well-served by reduced form analyses of the impact of that introduction.