Paul Krugman on Health Care in the United States

In the coming decades, getting the economics of health care right will be central to the public health of the entire economy. Below, Krugman outlines the three central issues with America’s health care system and why the private health care market doesn’t work.

1. 1. Potential collapse. Private health insurance markets are inherently vulnerable to collapse. In any given year, roughly 5% of people are responsible for roughly 50% of all health care costs. When a private insurer decides how much to charge for premiums, it has to figure out what its average customer is going to spend on health care that year. If the insurance company charges too low of a premium, it will not be able to cover the costs. If it charges too much, however, healthy people will decide to cancel their policies. When that happens, the percentage of insurance company’s customers who are sickly will go up and so will the average cost per patient. If that happens, the insurance company may still not take in enough in premiums to cover costs. This can create a death spiral. If the insurance company again raises their premiums to cover their increased average costs, even more patients will cancel their policies, driving average costs even higher. This process continues until only the sickest patients are willing to pay for insurance. To cover the cost, the premiums on that insurance will be at least equal to the cost of treating those patients, making it virtually unaffordable.
2. 2. Asymmetric information. Consumers know more about their health than insurance companies do. This gives people an incentive to lie to insurance companies and tell them that they are more healthy than they actually are. In response, insurance companies employ investigators to not only research potential customers before they sign up, but to question the validity of an insurance claim once it’s filed. This arms race between customers and insurance companies over the disclosure of pre-existing conditions leads to enormous frustration and losses on both sides.
3. 3. Moral hazard. Once people have insurance it is in both their interest and their doctor’s interest to buy any procedure even if it only has the slightest chance of working. These two factors are one reason why health care costs in the United States are higher than they are in most of the developed world.

Krugman posits there are three ways to provide universal health care. These health insurance plans aim to provide a sustained quality of care across income brackets, so that all Americans, whether low-income or not, have access to acceptable medical care.

1. 1. Socialized medicine. The first system is for the government to provide health care directly under “socialized medicine.” In this case, all hospitals would be owned by the government and all doctors and nurses would be government employees. The United Kingdom’s National Health Service, or NHS, is an example of this type of system. Over time, it has proven to be one of the most cost effective systems. However, both doctors and patients have less choice in the range of treatments and procedures that are available to them.
2. 2. Single-payer system. The second system is to have a single-payer system, like Canada. Under a single-payer system, the federal government provides health insurance for everyone, but doctor’s offices and hospitals are still private businesses or nonprofits. This type of system allows people more choice between doctors (for example, primary care physicians) and hospitals with different approaches to care, but it also costs more than socialized medicine.
3. 3. Private insurance. The third system is to allow private insurance companies but regulate them and mandate that everyone purchase some type of health insurance. Switzerland has regulated health insurance and the recently-passed Affordable Care Act is an attempt to build a mandated health insurance system in the United States. Regulated health insurance systems allow for the most consumer choice, but they are also the most expensive. Every country, including the United States, with a regulated health insurance system uses subsidies to help lower income people afford to pay for insurance. Perhaps surprisingly, moving the United States towards a regulated health insurance system added relatively little to the country’s overall health expenditures. Even though around 20 million people gained coverage. Insuring those people was relatively inexpensive because most of them were young people, who are much cheaper to cover than the elderly covered by Medicare.

According to Krugman, the real challenge in reforming the U.S. health care system was overcoming our fear of change.

The majority of Americans had health care even before the Affordable Care Act. Most retired people had insurance through Medicare. Most working, middle, and upper-class Americans had insurance through their employer. Those Americans at or below the poverty line were eligible for insurance through Medicaid. Those with insurance through their employers were worried that the new system would not be as good as the old system. This concern meant that Congress was unlikely to do anything that would get rid of the current employer-based health care system.

Making major changes to any public program, like health insurance, is a difficult undertaking. The existing system will only tolerate so much change at one time. Trying to do too much at once can be counterproductive.

Nonetheless, health care reform is one area in which many economists, like Krugman, feel that the most important work is yet to be done. The Affordable Care Act took the United States closer to universal coverage but still left millions uninsured.

Krugman points to two lessons in trying to advocate for better health care.

1. 1. Don’t let the best be the enemy of the good. Even small improvements can change the lives of millions of people.
2. 2. Have hope. The fact that there are better health care systems out there means that the U.S. health care system can be improved.

Learning to think like an economist takes time and practice. For Nobel Prize-winner Paul Krugman, economics is not a set of answers—it’s a way of understanding the world. In Paul Krugman’s MasterClass on economics and society, he talks about the principles that shape political and social issues, including access to health care, the tax debate, globalization, and political polarization.

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