We are again in a debate about health insurance for those not covered by their employer, Medicare, Medicaid or another group.
The health-care debate has many elements, among them politics and power. I’m not deriding those elements – they are part of the process. But they sometimes obscure some fundamental factors that play a part in insurance. Among these fundamentals are the economics of health care and health insurance. Some key “economic facts of life” are often overlooked in the health-insurance debate because they require us to consider tradeoffs that are sometimes unpleasant.
A basic economic tenet of insurance, including health insurance, is the relationship of the price of the insurance – the premium paid by an individual – to the likelihood of the individual filing a claim. For example, if Jerry is a lousy driver with a track record of many accidents, he will certainly pay higher auto-insurance premiums than Tiffany, who has a perfect driving record with no accidents.
In health insurance, a key factor determining the odds of filing a claim is age. On average, younger people are healthier than older people. For example, average annual health-care spending for a 65-year-old is seven times higher than for a 20-year old and times higher for an 85-year-old. So on this basis alone, we would expect health-insurance premiums to be higher for older folks than younger folks.
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Private health-insurance plans handle this reality by making health insurance a benefit of employment and including workers of all ages. So it is also important for any publicly-supported health-insurance system to have a mix of ages paying into the system. This can be done by requiring everyone to have health insurance – such as most states do for auto insurance.
Obamacare mandates that everyone not insured through their employer or other private or public plan purchase health insurance, but the penalty for not doing so is relatively minor. Hence, many younger people have opted not to participate. One study estimated that for Obamacare to work, 40 percent of enrollees needed to be young people ages18-34. But the actual share has only been about 25 percent. The lack of sufficient numbers of younger enrollees is one reason why Obamacare premiums have risen more than expected.
Therefore, any publicly-supported health-insurance system has to address the issue of balancing younger and older enrollees.
Another equally important fundamental issue is the generosity of the provisions of the health-insurance plan. Less-generous policies – covering fewer procedures or care and paying less of the total bill – cost less in terms of the premium, deductible and co-pay. More-generous policies cost more.
Therefore, any government-sponsored health-insurance plan will have to confront this tradeoff between the level of guaranteed coverage and costs. If government requires more-generous plans, then the higher costs must be paid by the individual, the individual’s employer or government. There is no free lunch.
Finally, most of the discussion of health care and health insurance has focused on expanding coverage to more people. But perhaps equally important is looking at the providers – the suppliers – of health care. If we want to moderate the costs of both health care and health insurance, one way is to expand the supply of health-care services.
So what can be done to increase the supply of health care services? The government can work to increase the number of students entering medical school. The government could look at easing the ability of foreign-trained doctors to practice in the country. Another option is to expand the care and treatments performed by medical professionals who are not doctors, such as physician assistants.
In terms of other parts of the medical supply, many states – including North Carolina – have legal restrictions on expanding medical facilities and equipment. Some recommend adjusting or eliminating these restrictions. At the federal level, there have been calls to speed Federal Drug Administration approval of new pharmaceuticals while shortening the time that new drugs can be offered in lower-priced generic form.
However, at the heart of the debate about expanding supply are concerns about maintaining both the quality and safety of health care. It’s a difficult balance.
Many issues – with no easy answers – shape the debate over health insurance. Maybe this is why, collectively, we are having a hard time deciding.
Walden is a professor and Extension economist in the Department of Agricultural and Resource Economics at N.C. State University. He teaches and writes on personal finance, economic outlook and public policy.