You can’t get it for free!

There is nothing wrong with profits, right?
If for example your hair dresser rescued you from whatever had developed on your head during the Corona crisis, why shouldn’t that person earn a livelihood with it?

How do you feel about profits in the healthcare sector? Is it OK, that the nurses in a hospital get an extra bonus for their work during the crisis? Is it still OK, if the managers of a company researching on Corona antibodies get a big bonus?

How do you feel about profits in the education sector? Is it OK that your kid’s material for homeschooling was provided by somebody making a profit?

It feels different thinking about this, then it did pre-Corona, doesn’t it?

Welcome to the eighth installment of our series about justice! I got a great streak of bothering you with ideas that challenge some of your most deeply held believes about ethics, entertainment (=politics) and the economy. We can’t stop now, can’t we?

It’s time to combine not two, no, but three things that are hotly debated: universal healthcare, education and private profits. The Corona crisis has revealed a few things about a few cherished assumptions are just plain wrong.

I already teased it: it seems like there is a place for profits in the health and education sector. The government has a role in the large scale production and distribution or medical necessities. The private sector really did a lot for medical research and the education sector!

(My) Justice demands healthcare

My deliberately chosen system of justice demands that the vagaries of the natural and social lottery do not impact the chances of people of like abilities. Getting medical attention, when you need it, is a huge part of this: losing decades of otherwise productive lives of children and adults, because they happen to be slightly poorer than average, seems just cruel and senseless. To put it differently: letting children die, because their parents can’t pay, registers as crime with me.
Imagine yourself behind the veil of ignorance: Would you ever let that happen, if if could be your son that is dying of entirely preventable causes, like some parasite in his stomach? Would you let your daughter’s brain development be stifled forever, because you can’t afford the pennies it costs to give her vitamins? Would you consider it being worth it to remove the moral hazard? Well, I don’t.

I get the counter arguments: Wouldn’t it be too expensive? Wouldn’t it kill innovation? Isn’t it socialism? I’d like to show you a plan, devised by Laurence Kotlikoff. It is called “The Purple Health Plan” and devised to answer exactly these questions.

But let me first make sure we are on the same page here:

1. You should be free to chose what type of healthcare you want.

2. All who are able to pay for their healthcare themselves, should do so.

3. Spending has to be controlled. We can’t afford overuse.

4. You should be able to get healthcare, even when you have preexisting conditions

5. Healthcare should not keep you from getting a job. Or a better one.

Can we agree on that? Good!

The system in the USA costs a total of 5.2% of GDP for Medicare, Medicaid, CHIP and Obamacare. There is also about $1 trillion of private spending on healthcare.
The government’s share is projected to rise to 9.1% by mid-century and 13.3% by the end of the century. Total federal revenue is projected to be 18.1% of GDP in 2100. That’s almost three quarters of all federal revenue. Schools, the militarty, roads… all of them will have to be paid with the remaining quarter.
The fiscal gap, which is the difference between all future spending, projected from the currently existing obligations created by the laws and all projected income, measured as present value, was $211 trillion. In 2011. [KOTLIKOFF]
60% of this comes from the governments projected future healthcare expenditures. Does that sound like a stable system to you? Is that what you would call “fiscally prudent”? Do you think that system is affordable? Not in my book!

So let’s say there is a difference between what the healthcare system should look like and what it is now.

Let me walk you through Kotlikoff’s plan to fix this.

A public-private hybrid: Healthcare

Every citizen gets a voucher. It is redeemable for a basic health coverage plan and good for a whole year’s services. Everybody would get a voucher that is good for the same basic services, but the price tag on the voucher varies from person to person and depends on the individual’s health status: those in a bad shape would get a voucher with a higher number written on it, but it buys the same basic coverage. It’s financed by taxes. As long as we have a progressive or at least neutral tax scheme, this means that people chime in according to their income. Those that don’t have an income, don’t pay, those that have super-high incomes, subsidize those of low or even no means.

You take that voucher and go to a private health insurance company. Such an insurance company can’t deny coverage. All of them have to offer the same basic coverage plan.
You don’t have to use your voucher. But you can’t use it on anything else and you can’t sell it.

What’s in the basic coverage plan? That’s set by a panel of medical experts.
I would highly recommend to sample them by lot from a pool of experts that all political parties can nominate candidates to. This panel makes sure that the projected cost of the basic coverage does not exceed 7% GDP in any given year. That’s what Medicare, Medicaid, CHIP, Obamacare and the tax subsidy of employer-based healthcare cost in 2015. So this scheme would freeze the current, relative level of spending. Which is the opposite of the exploding costs we got in place now.

The insurance companies contract with private health care providers to actually provide healthcare services to the people. The patients can of course choose from the doctors and hospitals in the network of their selected insurance company’s plan.

Insurers are free to offer supplemental plans to all participants. But they can’t price it based on preexisting conditions.

Another important point is to reform malpractice laws to limit so called defensive medicine. This is a term when patients get unnecessary procedures, because this let’s doctors off the hook, if unexpected complications should occur. As far as I could determine, defensive medicine’s costs outweigh the benefits by huge factors. Except for lawyers’ fees, of course. This might also expand patients’ right to try new treatments.

These reforms get employers out of the business of simultaneously being a healthcare insurance broker. I don’t entirely get why they were in that business anyway, but people should not get stuck with a job with “great health insurance” and hate everyday of working there. Increased employee mobility should be a boost to the economy.

The free-market case for government interference

Why would you want to have the government in the loop? Well, the healthcare market has unfortunately the economics of a “lemon market“. This peculiar situation occurs, when one side of a transaction has a huge information advantage: people know a lot more about their “real” health than does their insurer.
This is similar to – wait for it – the used car market. On it, the seller typically knows how many miles that red light was blinking. And how often the oil was changed. Or not. But the buyer doesn’t.

So people that have pristine cars typically don’t want to put them on the open used car market, because they can’t persuade buyers that their car has really been treated like a family member. Buyers will assume of almost all cars that they are the worst kind of used cars, so called lemons. That’s where the name comes from.
And they will make low offers in return. The consequence? The market is only attractive for people who really want to sell a lemon!
Like the used car owner, who can’t get a “reasonable” price for her well-maintained mechanical pet, the healthy people don’t want to pay “outrageous” premiums.
It’s just a problem of information asymmetry. Standard economic theory predicts that markets can’t perform efficiently in such situations and governmental intervention is necessary to (re)establish the conditions of a functioning market.
In this scheme, the government creates pools of possible insurees and makes the insurers choose between turning all away or turning none away. It is the same function employers fulfill in the USA today. As a result, the average “quality” of the pool rises and thus the price gets better. Government “interference” in a situation like that can make everyone better off: the bad risks get insured at a lower cost and the good risks get coverage, they want, but not for the price the lemon market produces.

So much for the “collective” part of the plan. How does it differ from “socialism” or a single-provider approach?

The free-market case for the private provision of healthcare

The plan would keep the private provision of healthcare services. Why? Because the market is great at innovating! By having competing providers trying to make a profit, you will on average get better services for lower prices. It let’s the patients chose which services they like best. I’d also stipulate that there has to be price transparency. The vouchers’ nominal value creates transparency about the healthcare costs. All citizens pay for it, why not show them how much exactly?

The plan would also keep private insurance companies. The idea, again, is to have competition between the insurers. They might try to pay you money to lose weight. Or get you to do your blood work regularly, because it’s cheaper to do prevention by changing your habits than providing medication for an acute illness. Another way to save: share the profit with the customers!
Let’s say you need an MRI. You can get it a 30min drive away for $2.5k or 45min away for $2k. How much would the insurance company need to offer you to make the longer drive? How about an equal split? Would you be willing to add 30min of driving (and gas) for $250? I think a lot of people would. That would be an easy 10% reduction in the cost of that procedure from the insurance company’s perspective.
Let the insurance companies do the hard A/B testing to get the price of healthcare right.
They might also act as a buffer between the healthcare panel, politicians and voters, who want more than the system can afford.

I don’t know about you, but that doesn’t look like a single-payer from the perspective of the service providers to me, because they have to deal with multiple insurance companies. There is no socialism in private, for profit healthcare providers. I also have trouble spotting socialism in having private insurance companies competing on a market.
It looks an awful lot like a well-regulated market to me, though.

The whole program would be a big change to the current system. Maybe we could start small by mandating price transparency? I’d bet that alone should drive prices down significantly, if insurance companies are allowed to “bribe” people to lower the costs of procedures. That’s seems like it could easily be mandated, doesn’t it?

What about block-grants? Let the federal government set a budget for healthcare and distribute this by health status adjusted citizen numbers to the states. Let them experiment! If California wants to quadruple this amount and institute more public hospitals, great! If Kentucky wants to pay this money directly to all its citizens and let them select private doctors, okay. Let them experiment and innovate! Maybe we can learn something from that.

So much for healthcare. I think the same principle can easily be applied to schools. So does – of all places! – Sweden.

A public-priave hybrid: Education

Sweden has been running a school voucher system since 1992. It enables the free choice among publicly and privately run schools. The vouchers are paid by public funds from the local municipality directly to the schools. Their income is based on the number of students a school can attract.

Public and private schools are are funded exactly the same way. The private schools can be run by non-profit or for-profit organizations.
No school can charge more payments and must serve students on a first-come, first-serve basis. I’d probably replace that by randomly drawn lots.

The effects? Hotly debated, as you might imagine. There are a lot of vested emotions in the current system and there are different opinions to all politically charged topics.
But this seems like a fair assessment to me:
“We do not find positive effects on school expenditures. [i.e. the prices didn’t increase]. Hence, the educational performance effects are interpretable as positive effects on school productivity. We further find that the average effects primarily are due to external effects (e.g., school competition), and not that independent-school students gain significantly more than public-school students.” [BÖHLMARK]

What I take from that is that getting educational institutions to compete, even in this tightly controlled setting, where all participants get the same amount of money and can’t cherry-pick their students, is beneficial. For all students, be they in public or be they in private schools.

I think the Corona crisis has shown us that a large part of schooling is not education, but daycare. The idea, that there is great educational material on the internet is not contested anymore. It ceased to be blasphemy to wonder, whether there might be better resources for education somewhere out there in the whole wide world, than in whatever happens to be your local school.

It’s my deep conviction that we owe it to children, especially poor children, to get them the educational resources they need to reach their full potential.

Vouchers and the internet seem like the most obvious path to getting there. And it seems completely possible to test it. Technically, not necessarily politically. Are there volunteers for a RCT on this? Or why not start with higher-education? I think the Corona crisis has already shown that even traditional universities are capable of becoming “online education centers” virtually overnight. What would stop us from cutting all the administrative and physical slack and go full Udacity with MIT, Harvard, etc.? The dormitory and dating experience?

There are already performance based learning services, like coding schools, that will put you through a few weeks of an intensive boot camp and take a fixed percentage of your first year’s salary after that.

How much of a problem would “student debt” be, if society decided skills are more important than the name on a diploma?

Summary

We have to test a lot of different concepts to get to a good healthcare and education system. I think a market of competing private entities is the best place for finding out what works and government is the best institution to make sure “everybody” gets it.

Let us leverage the strength of both systems. Vouchers are a tool to do this.

Let’s get going!

Source:

[BÖHLMARK] BÖHLMARK, Anders; LINDAHL, Mikael. Independent schools and long‐run educational outcomes: Evidence from Sweden’s large‐scale voucher reform. Economica, 2015, 82. Jg., Nr. 327, S. 508-551.

[KOTLIKOFF] from:

https://health.purpleplans.org/

. Accesses 2020-05-16

[KOTLIKOFF2] KOTLIKOFF, Laurence J.; BURNS, Scott. The clash of generations: saving ourselves, our kids, and our economy. MIT press, 2012.