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Beware of Romneycare
http://www.newyorker.com/talk/financial/2012/10/29/121029ta_talk_surowieckiMitt Romney can be a hard man to pin down. But there is one thing that he’s been clear about: if he becomes President, he will repeal Obamacare. That simple promise, more than any other that Romney has made, illuminates what is most at stake in this year’s election. The campaigns may spend most of their time talking about taxes and jobs. But health care is where the election’s outcome will have the most immediate and powerful impact on how Americans live.
Abolishing Obamacare would eliminate subsidies for people buying insurance and rescind regulations requiring insurance companies to guarantee coverage and benefits (for instance, to people with preëxisting conditions). Romney’s proposed alternative is to give individuals a tax break when they buy insurance and to push them toward high-deductible insurance plans, which he believes will make them more rigorous and price-conscious in choosing doctors and treatments. Romney also wants to reform Medicare by encouraging more competition among private insurers. The details are skimpy, but the core principle is that unleashing the power of the free market will bring down costs and raise quality.
This is an appealing vision. In most areas of the economy, free-market principles insure that products and services keep improving, and that consumers get better and better deals. But the free market, though it may be the best way of allocating new TVs and cars, falters when it comes to paying for bypass surgery or chemotherapy. The reasons for this were established nearly fifty years ago, by the economist Kenneth Arrow, in a classic article entitled “Uncertainty and the Welfare Economics of Medical Care.” Arrow showed that health care is distinctive in ways that limit the power of the market. Because people don’t have the expertise to evaluate doctors, hospitals, or treatments, it’s hard for them to comparison-shop. Because they can’t pay for major care out of pocket, they must rely on insurance, thereby often losing the final say in what to buy or how much to spend. More fundamentally, markets work only when consumers have the power to say no if the price isn’t right. Yet it’s very hard for people to say no in the case of things like end-of-life care or brain surgery.
Abolishing Obamacare would eliminate subsidies for people buying insurance and rescind regulations requiring insurance companies to guarantee coverage and benefits (for instance, to people with preëxisting conditions). Romney’s proposed alternative is to give individuals a tax break when they buy insurance and to push them toward high-deductible insurance plans, which he believes will make them more rigorous and price-conscious in choosing doctors and treatments. Romney also wants to reform Medicare by encouraging more competition among private insurers. The details are skimpy, but the core principle is that unleashing the power of the free market will bring down costs and raise quality.
This is an appealing vision. In most areas of the economy, free-market principles insure that products and services keep improving, and that consumers get better and better deals. But the free market, though it may be the best way of allocating new TVs and cars, falters when it comes to paying for bypass surgery or chemotherapy. The reasons for this were established nearly fifty years ago, by the economist Kenneth Arrow, in a classic article entitled “Uncertainty and the Welfare Economics of Medical Care.” Arrow showed that health care is distinctive in ways that limit the power of the market. Because people don’t have the expertise to evaluate doctors, hospitals, or treatments, it’s hard for them to comparison-shop. Because they can’t pay for major care out of pocket, they must rely on insurance, thereby often losing the final say in what to buy or how much to spend. More fundamentally, markets work only when consumers have the power to say no if the price isn’t right. Yet it’s very hard for people to say no in the case of things like end-of-life care or brain surgery.
