Health care reform and costs

I found an interesting article on BusinessWeek's site today that relates to costs, specifically sunk costs, in terms of health care. Top economists are discussing implementing an "individual mandate" requiring individuals to purchase some form of health insurance, or face a fine. If implemented, it would be something similar to requiring people to have car insurance, something that all law-abiding citizens simply accept and don't put up too much of a fuss about.

I don't know about the rest of you, but I treat my monthly cost of car insurance as a purely sunk cost. In Chapter 4 of the text we learned that sunk costs are costs that are commited and therefore unavoidable. All of us purchase car insurance, even though most of us have probably never been in a serious enough car accident to justify the cost of the insurance. Similarly, I think requiring all individuals to have some basic form of health insurance is a smart idea. Even though a lot of us in school right now are young, in good health, and have probably never ended up in the emergency room, there is always the chance of a "serious accident" occuring, which is the point of having insurance. If all of us simply treated the cost of health insurance as a sunk cost, people wouldn't be getting so worked up about health care reform.

The article discusses the right price point for the fine to incentivize people to just buy health insurance coverage rather than having to pay a significant fine. I think that this situation represents an opportunity cost, in the financial sense. Here is a hypothetical situation to help illustrate my point: Let's say you have the choice of purchasing health insurance for yourself for $1000 per year, or you can not purchase health insurance and pay a yearly fine of $600. The opportunity cost of not purchasing health insurance is the chance to save $400 per year. However, let's say you factor in the chance of having a catastropic accident, one that would leave you with $100,000 worth of medical bills if you were uninsured, or $10,000 worth of medical bills if you were insured. Now your opportunity cost of choosing to remain uninsured is a much larger net loss, versus a much smaller net loss if insured. Which would you choose?

This article helped illustrate to me why the health care crisis our country faces right now is so important, both on a macroeconomic level and a microeconomic level, since it stands to impact the lives of every individual as well as the state of the country as a whole.

What do you all think?

Health-Care Reform: The Mandate Debate


Rebecca said...

Thomas, good post. I think the way you frame the question is good. However, I have to believe that most Americans prefer to have their cake, eat it too and let the government pay for it.

Unless there is some positive incentive in the market system to make folks go forward and buy or pay the price for not buying, nothing will change.

I agree with you that the prospect of a catastrophic illness or injury is enough to justify purchasing insurance. However, many people are not as rational (or good looking) as you and I may be. The logical is rationalized away and we are at square one.

I think the answer lies within the principle of incidence. We know we need to improve the affordability of health care. Government wants health care for the masses. Why not wrap the cost of health care into consumer goods and/or services in the form of taxes. At page 155 Png says the price does not necessarily go up. And Tufte says the one who wants it the most pays for it.

If the transfer of cost applies to all health care premiums including mine, then it works for me.

Dr. Tufte said...

Thomas: you need to add some probabilities onto the catastrophic outcomes to make your example useful.

Rebecca: I don't think your idea will fly with health insurance (for no good reason other than people are used to it being done the way it is). Having said that, this is the approach of the environmental movement to internalizing the external costs of carbon dioxide pollution.

The auto insurance requirement example if popular right now, but it not well chosen or deeply understood. There are two problems worth thinking about it if you choose to use this argument in discussions outside of class.

1) Many states have percentages of uninsured motorists that already exceed their percentages of people without health insurance. All the potential fines for not carrying insurance don't mean that the insured don't have to have uninsured motorist coverage. And yet, what we're mostly complaining about in our current healthcare debate is the costs of the insured being inflated because they have to cover the uninsured.

2) Most car insurance ensures the other party in the crash, not yourself. This eliminates a good chunk of the moral hazard: if you insure yourself and your "victims" get to lump it, you'll drive a lot more unsafely than if you insure your "victims" and you might have to cover the costs of your own negligence. Health insurance is like the former not the latter, so it comes with much bigger moral hazard problem - and moral hazards translate into higher costs.

Paige said...

I think the general idea of the health care reform and requring everyone to have some coverage seems like a good idea, on the outside. Their are so many poor Americans that the goverment continues to help out (including food stamps, medicaid) that requring the every American to have some coverage that they pay themselves probably won't work out. Their will always be the indivduals that can't afford to pay for it, and the goverment will have to step in and help out.
My second opinion is that everyone should look at how they view health care. Is it a "right" for people to be able to buy health care for themselves? Or a "privledge?"
Should the goverment be forcing a right or privledge on Americans that don't want health care coverage because of the costs?