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Kotlikoff Fun Two

Via Reihan Salam I see Kotlikoff has a plan for Medicare (PDF) that suffers from a similar problem as his Social Security plan -- it's the illusion of markets. Here's how it works:

We should eliminate fee-for-service and introduce a voucher system. In the fall of each year the government would provide all Medicare and Medicaid participants with vouchers to purchase health insurance for the following calendar year. But unlike other voucher schemes, these vouchers would be individual-specific, with the amount based on the participant's medical condition.

A perfectly healthy 85-year-old might get $8,000, whereas an 85-year-old with pancreatic cancer might get $75,000. These vouchers would be used to pay the insurance premiums for a year of coverage. If the cancer patient needed more than $75,000 in care, the insurance company would make up the difference. If he needed less, the insurance company would pocket the difference. Because those in the worst medical shape would have the largest vouchers, insurance carriers would be as happy to sign them up as they would their healthy contemporaries.

Now note that this plan is premised on the notion that God-like bureacrats inside the Department of Health and Human Services can make these highly individualized calculations in a reliable manner. In other words, assume a can opener. This is precisely the function that federal regulators are ill-suited to performing, and it's avoiding these efforts at centralized allocative decision-making that are the primary virtue of market-based systems. If you allow Medicare reformers to assume the can opener, however, there's no reason to involve the private sector at all. Medicare could simply set caps for how much health care it will reimburde people for according to the mysterious Kotlikoff formula. That only thing bringing insurance companies into the mix does is force some of the money to be skimmed off the top in the form of profit.

February 20, 2005 | Permalink


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A few thoughts.

1. I think the voucher idea has some merit here. I'm not totally opposed to school vouchers, even if I think the notion of them being close to the magic bandaid for all of the problems in schools is ridiculous, but in medical care, where a big part of the solution is to hold down costs, it makes more sense. It represents the government being involved, which it clearly has to be in some way for everyone to be covered, but doesn't make us lose the advantages of the free market.

Still, upon first glance, I am not sure how this would work. If we go by what appears to be Kotlikoff's suggestion, we give out vouchers of different amounts for different treatments. Then the insurance company (or perhaps the consumer, in some cases) could make up the difference. But if the procedures kept rising in price, even if it wasn't by a lot, would that really make a difference? If the government is covering 75% of medical costs under this proposal, as opposed to, say, 100% right now, have we really solved the problem? I guess it's fair to say that the costs would come down because of the pro-market conditions, but still, I am not sure they would drop so drastically. (If I am missing something here, please don't hestitate to point it out.)

2. Who's to say that these vouchers won't be easier to cut? They can come up with any reason under the sun to do something, and if they are in power for at least a few years under this time, the Grover Norquist types, who likely won't vanish any time soon, probably won't like the idea of vouchers in this form.

3. This is a little off topic, but why is it okay for rationing to happen at the local level and not the federal level? Bush's proposals for community health centers would, in many ways, bring some form of rationining to health care, yet it's never mentioned. How come?

Posted by: Brian | Feb 20, 2005 2:30:51 PM

Kotlikoff's plan could be optimized by merely paying the medical bills as you go. That way we wouldn't need the amazingly predictive government bureaucracy nor the private insurer's bureaucracy. I think that is called a single payer system...

Posted by: Nat | Feb 20, 2005 2:34:25 PM

Well, sort of, Nat. Medicare right now is like a single payer system, and it doesn't replace the private system now, and in Kotlikoff's plan, it doesn't seem to do that, either.

You raise another interesting point, though: paying the bills as you go. That's sort of what we do now. The idea is that vouchers would create market conditions, which would drive down costs. I suspect, although this is an entirely not-expert opinion, that the savings wouldn't be that great. We shouldn't dismiss any idea that could help us save some money and not have that much pain, but it seems like the message is pretty clear: either we have to be prepared to pay, or a lot of people are going to suffer. Of course, like I said, this is a non-expert opinion, and if I am wrong, I have no problem being told so.

Posted by: Brian | Feb 20, 2005 9:40:29 PM

First, disclaimer: I'm a physicist damnit, not a health-care economist! Or more precisely, all I know about Kotlikoff's plans comes from somewhat thoroughly reading his popular book _The Coming Generational Storm_, from Paul Krugman's very recent review of it in the New York Review of Books, and from that PDF that Matthew and Reihan linked to.

With that said, let me say I think Kotlikoff would respond to Matthew and the commenters so far:

First, to Brian, Kotlikoff believes that the most good for people can be done by avoiding the massive economic downturn that he thinks will result at some near-future point if the world markets can't be convinced that the US government is going to get its finances on some sort of sustainable track. Hence, the explicit goal of his plan is *NOT* to reduce health care costs, it's to make sure government expenditures on health care grow no faster than real wages. And he ensures his goal is met in ruthless and direct fashion: his plan explicitly mandates that the government's expenditures on health-care will not grow any faster than real wages. Thus his whole plan is premised on the fact that whatever the government does, it's going to have to take the drastic step of mandating that it will not allow its health care expenditures to grow faster than real wages else it will inevitably throw the economy into a tailspin that'll cause a lot more hardship than this explicit, drastic restriction of government medical speding growth would.

Now why might Kotlikoff believe that his plan, among all possible plans that explicitly limit government health care spending growth, minimizes hardship? This gets to what I imagine Kotlikoff's response to Matthew would be:

Matthew, realize that government bureacurats are currently deciding what's a fair price for *specific medical procedures* That's a type of central planning that no mainstream American economist thinks the government could do well, at least not for any type of care that doesn't have a long, long history... and indeed a major complication faced by anyone trying to control health care costs is the steady infusion of new methods to treat both currently treatable and formerly untreatable ailments. In constrast, Kotlikoff holds that it's plausible to think government bureaucrats having full knowledge of an individual's medical condition could figure out how much an insurance policy should cost for that individual in such a way that they break even on average. I'd agree that this task is in fact plausible because, it seems to me (and again I'm not an expert), even without full knowledge of individual medical conditions, government and private actuaries do a relatively decent job of figuring out what insurance prices would have to be to allow the insurer to break even on average. And that's with them facing the quintessential example of an incomplete information problem. With full knowledge, actuaries could do better. So the question is, which actuaries do you want holding all your medical data (and allow me to repeat: ALL YOUR MEDICAL DATA), government ones that are statutorily mandated to keep it confidential like the IRS is statutorily mandated to keep your tax returns confidential, or private sector ones? Kotlikoff opts for the former. I would too.

(However, I'm not sure yet if there are or are not sizeable inefficiencies in the health care system other than the incomplete information / adverse selection in insurance problem that one could plausibly imagine fixing in the next few years such that the government can restrain health care costs and simultaneously give people significantly more care than they have currently. Heck, I'm not even sure that medical innovation does critically depend on having a free market component to health care under the standard argument "All things that today are affordable enough to be ubiquitious began as expensive enough to be available only to the rich" which seems to me to be the most salient argument for keeping a free market component to health care... which of course, wouldn't disallow universal government-funded basic coverage, but would disallow true single-payer plans)

Posted by: Bill Kaminsky | Feb 21, 2005 12:36:20 AM

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