Levitt and Becker on health care

Lynne Kiesling

I noticed recently that Steve Levitt opined briefly on the health care bill in ways that are consistent with my earlier argument that unless Congress tackled the third-party payer problem head on they would be wasting our time and money. In his Freakonomics post, Levitt recommends Gary Becker’s analysis to us:

In Becker’s opinion, the health care bill that passed recently is a disaster for at least two reasons.  First, it seems to do little or nothing to deal with the single most important shortcoming of our current system: the fact that people pay very little on the margin for the medical care that they receive.  Imagine that you could show up at a car dealership and have any car you wanted, and as many cars as you wanted, for no marginal cost.  The market for cars would be in complete chaos, and people would have too many cars, and the ones they had would be too nice.

That is more or less the situation we now have with health care.

I second Levitt’s recommendation; Becker’s post provides a thoughtful and careful analysis of the likely unintended consequences of the health care bill, most of them reducing economic welfare. Becker also focuses on the third-party payer problem:

For the most part, however, the bill increases our dependence on employer-based health care by imposing sizable penalties on companies that do not provide their employees with sufficient health insurance. Many companies are already beginning to add to their projected future costs the anticipated increase in the cost to them of insuring their employees. These changes will particularly affect the costs of smaller companies since they are the main ones that do not provide health insurance for their employees. Since smaller companies are responsible for a disproportionate share of additions to employment during recent years, this provision of the bill will tend to reduce the demand for workers and hourly wages.

The US health care market is over-regulated rather than under-regulated. One example is that families in one state are generally not allowed to buy their health insurance from companies located in other states. Another example is the mandates that states impose on insurance companies, such as coverage of the costs of normal birth deliveries. Such coverage has little to do with insurance against unexpected health costs, whereas coverage of extraordinary delivery costs is a desirable protection against unexpected health care risks. The bill generally pushes in the direct of greater regulation, such as the limitations imposed on how much health insurance companies can spend on administrative costs relative to their other costs, the mandated reviews of the premiums charged by health insurance companies, and the mandated provision of health insurance by small companies.

My conclusion matches Levitt’s too: “Ultimately, it is hard to believe that this bill will be a net positive.  It remains to be seen whether it will be a wash, or far worse.”