Politics & Policy

Uncovering the Over-Insured

Why are the candidates ignoring the real health-care problem?

The conventional wisdom is that the number-one goal of health policy should be “universal” coverage: everybody should have health insurance. Few dare to challenge this trope, for two reasons.

First is the supposed disgrace that the U.S. is the only developed country that does not have universal coverage — the emotion-driven stock-in-trade of the Michael Moore crowd. Second is a prevailing narrative that portrays the uninsured delaying primary care until their illnesses worsen and they show up at emergency rooms for wildly expensive — but unpaid — treatment. This sticks hospitals with unpaid debts that they cover by shifting the costs to private insurers who then raise premiums.

On the left, Dennis Kucinich (and company) advocate a single-payer government monopoly as in Canada. They conveniently ignore that about three million Canadians have no access to a primary care physician, as well as the 2005 Canadian Supreme court decision that government monopoly health care violates human rights. From the right, former Governor Mitt Romney of Massachusetts, Governor Arnold Schwarzenegger of California, and others advocate a more Swiss model of compulsory private insurance. Senator Hillary Clinton of New York has a hybrid approach: compulsory private insurance with the option of government benefits if one prefers!

The route to bipartisan, political success in health policy now consists of basically ordering the uninsured to become uninsured. The political appeal is obvious because employed people who have health insurance are probably not excited about paying higher premiums or taxes to provide their uninsured neighbors with health care. If you can convince them that they are already paying for it, proposing mandatory health insurance is a winner. There’s just one problem.

The uninsured are relatively insignificant to health costs, especially in emergency rooms. Of the 15-percent of the U.S. population generally considered uninsured, only seven percent of them used an ER at all in 2000, whereas 10-percent of the privately insured did, and a whopping 18 percent of those on government benefits — which pay hospitals far less than private insurers do. The real cost shift, therefore, is from government programs, not the uninsured.

Further, most uncompensated care is covered by a confusing array of government programs that fund hospitals for unpaid bills. A scholarly effort to measure all truly uncompensated health costs figured them at $35 billion in 2001 — less than 3-percent of health spending that year, of which a significant fraction was bad debts from insured patients!

On the other hand, many uninsured Americans voluntarily pay extra income taxes, because they forgo a non-taxable health benefit. The Census Bureau reports that many of the uninsured are within taxable income brackets. A full 15-percent earn more than $75,000 annually. Even if we shrink the Census Bureau’s estimate by half, a rough calculation shows that the uninsured likely pay at least $60 billion extra in federal income taxes alone, by forgoing the tax savings associated with private health insurance.

If cost shifting from the uninsured to the insured were really the biggest element of our health-care “crisis,” then the government could easily eliminate it by simply transferring $30 billion or so of its windfall tax revenue to the insured, without upsetting the whole applecart by commanding “universal” care. Such a transfer, of course, would do nothing to improve health care because it ignores the perverse incentives caused by traditional health insurance. In fact, the concentration of health expenses is almost identical in both insured and uninsured populations.

About half the people have few or no health expenses, and 5-percent of the people incur half of the group’s health expenses. So, we should not expect compulsory private health insurance to magically transform the health-care incentives of the uninsured, but simply to move them all onto a higher spending baseline. Because the uninsured use health services much less than the insured, they pay the insured a “hidden subsidy” of as much as $66 billion annually.

In some cases, the uninsured face better incentives for wise use of health resources than the insured. One similarity between American and Canadian health care is that patients control very little of the cash flow: only 15 cents on the dollar. The only difference is that because the U.S. and state governments do not monopolize health spending, they cannot ration it as completely as in Canada.

American patients drive up health spending because they think someone else is paying for it. Because of bad incentives, insured Americans use twice as many health services per person than the uninsured. U.S. Senator Tom Coburn of Oklahoma, an obstetrician, agrees with those who estimate that one-quarter to one-third of health care is wasted because almost nobody has the right incentive to use it wisely.

Why, then, does everyone fret about the burden of the uninsured, but not that of the overinsured? Politicians avoid it because asking the 350 million or so insured Americans to take responsibility for escalating health costs is a risky approach. Of the presidential front-runners, only Rudy Giuliani has clearly explained that we need to get health dollars out of the bureaucracies and into the hands of the patients.

The solution to improving health-care lies in uncovering the over-insured, not covering the insured.

— John Graham is the director of health-care studies at the Pacific Research Institute.

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