Part 5 (2/2)

As a result, the process of unraveling stops, but not before many people have been excluded frolitz, we should also expect insur-ance coet around this leh the solutions e bureaucratic burden of the US systele to monitor the risks, behavior, and expenses of their custoe of health insurance with jobs is another re-sult: at first sight, there is no reason why a job should come with health insurance, any more than it should come with a house or free food Employees are frequently forced to buy the health in-surance that is packaged with their job This packaging compels the healthiest es and so helps prevent the unraveling of the market But this so-lution doesn't come cheap: health-care plans are not chosen by their beneficiaries, ould aiht price, but by hu their own lives easy with a ”one-size-fits-all” bulk purchase The result is likely to be further waste-ful spending

Not every drawback of the US health-care system should be blamed on Akerlof 's lemons problem Even without the difficulty of inside information, the system of insurance is problematic, because patients are not always able to choose their treat the appropriate treatotiation When you ask somebody else to pay for your health care, don't be surprised if you don't get exactly what you would have chosen yourself

Nevertheless, it is striking that partial coverage, inefficiency, and high costs are not only the defining characteristics of private health insurance, they are also exactly ould have pre-dicted armed only with the theoretical litz

Imperfect information- the whole story The leon), when inside infor to pay for quality they cannot observe, is one example of the broader probleon) Inside information also pro-duces an obstacle called ”moral hazard” The concept is sis happen to theainst theft, I will park wherever I find a space, even on a deserted street that doesn't seem entirely safe If my insurance doesn't cover theft I may choose to pay a little ex-tra to park in a lot with an attendant If I lose overnment pays unemployment benefit, I may not hurry to find a new job quite as quickly as I would if I had no inco account is insured against a bank failure, why bother to check that the bank is financially sound?

Moral hazard is an inevitable problem in the real economy While it is impossible for insurance coether, they can take steps to reduce it For exa fired or becoreat to have that kind of insurance The reason is easy to see: it is easy to arrange to be fired or to get pregnant There are many people ould like to leave their jobs and many others ould like to have children, and such people would be particularly ea-ger to buy an insurance policy that would pay the their plans into action As a result, moral hazard de-stroys the market for private unemployment insurance

On the other hand, public unemployment insurance still exists, in spite of moral hazard It is not polite to say so, but it is obvious that paying people to be uneovernment scrapped unemployment benefit, there would still be jobless people, and supporting the jobless is so that every civilized society should do The truth is that we have a trade-off: it is bad to encourage uneood to support those without incoovernainst moral hazard One of thethe insurance policy to provide incomplete insurance, in the form of a deductible Ifthat ant safety precautions, but it should be enough to make me check that my car is locked

Another way insurance co access to the inside information Health insurers ant to knohether I am a smoker before they set my premiums Of course, I could lie, but it wouldn't be too hard for insurers to expose my lie; a simple overnments pay unemployment benefits, they do so on the condition that recipients are actively looking for work Because the government cannot er uneovern for jobs, then it would be possible to payrecipients

The problems of imperfect information include adverse selection (leuer issues For example, ood job, but because he has only a vague idea how hard I a, my performance bonus is only a small part of my salary If my boss could observe my skill and effort perfectly, he could make my entire salary performance-related Another example: let's say I would like to eat at the best-value restaurant in town; I don't knohat it is, so I look for a fa that custo to find the cheapest place around, established restaurants are able to charge more than they should

Do these information problems destroy markets co to exaggerate the problems In spite of asymmetric inforenious solutions to ie caused by imperfect information

When I buy complicated equipment like a caazines, which I hope will giveto choose between Expert reviews providing ”inside in-fornorant about e're buying I rely on them all the time in another market, which suffers from severe information problems: the market for vacations I'm the kind of person who likes to visit new places, but often I have no idea where to go or ill be fun, where is tacky and who offers a good deal, where is beautiful and where is dangerous If the problem were insoluble ouldn't bother to take vacations at all (Or we overnes of being on a waiting list for years before enjoying organized teaames and artificial cheer in an overcast concrete resort) Instead, we siuidebooks and try to learn ain, provides a particularly acute exauidebook to find out what to do on vacation It's quite another to consult a guidebook to find a heart surgeon Yet the basic information prob-leery patients try to learn ood repu-tations, which procedures have the highest success rate, and which hospitals provide the best recovery care Still, most patients would adood their doctor really is

Market failure versus govern A health-care system based on pri-vate insurance will be, as we have discovered, patchy, costly, and bureaucratic What's more, it will offer patients choices, such as the choice of heart surgeon, that they are not very well qualified to overnment do better? After all, every chapter of this book so far-with the exception of chapter 3-has la to look to the governs out

Unfortunately, while overnments can fail too Politicians and bureaucrats have their own motivations Scar-city power, externalities, and ii-cally disappear when the econoovernovernment failure are both present, the choice is often between the lesser of two evils

An intriguing case in point is Britain's National Health Service (NHS), which offers health care to all citizens It is alh people with jobs need to pay a token ae: if you walk into any doctor's surgery or any hospital in the country, you will be treated free of charge

As you would expect, the systeets overcrowded, people of-ten have to wait, and patient choice is not a major feature of the system: you accept whatever treat Overall, thelines for treatment have been a major bone of contention for many years The same survey, which found 17 percent of American citizens approved of the US health-care sys-tem, reports that only 25 percent of the British are happy with their own syste endorse blind in Britain, you would be well aware of a recent example of the difficulties faced by such a syste with other organiza-tions representing people with vision proble by the National Institute for Clinical Excellence (NICE), an agency that evaluates treat-ments and decides whether the National Health Service should pay for theery is on the approved list; nose jobs are not

The controversy stems from NICE's half-hearted endorsement of a new treat called ”Visudyne” or verteporfin, combined with a low-intensity laser treatment, to destroy lesions under the sur-face of the eye's retina, usually without da the retina it-self If the lesions are not treated they can irreversibly dae the center of the retina, called the eneration (ARMD), destroys cen-tral vision so that the victi cause of blindness in the United Kingdo photodynamic therapy only in more extreme cases, only when both eyes are affected, and only in the eye that is less seriously daed The iht in one eye, while others whose sight ether

It is easy to conde its e confronting the National Health Service is that it has a limited amount ofit It is no good asking patients, who pay little or nothing for treat So NICE et what type of health care, and ill be left to fend for hi be decided under such conditions? What would you do if you were in charge of NICE? It's a near-impossible task, but you would probably work out the costs and the effects of each treatment, and then you'd compare them to each other Sometimes this is quite si another heart attack is better than a treat another heart attack Under pressure to o farther and say the first treatood, and should be used if it is less than twice as expensive Even to go that far would be a stretch How, then, would you coain after an accident, with a treat blind? I NICE you would have to try

The way NICE does it is to calculate the impact of each treat-ment in ”Quality-Adjusted Life Years,” or QUALYs A treat-ment that saves ten years of life is better than a treatives somebody ten years of able-bodied life is better than a treatives some-body ten years alive but in a coments involved are extraordinarily difficult Yet they must be e

As an exa the QUALY impact of photodynamic therapy, which reduces the chance of blindness The best way for the Royal National Insti-tute of the Blind to get a higher priority for photodynaue that a year alive but blind is worth hted If NICE accepts this view, treat blindness will become very valuable on the QUALY h above years alive but blind

But hang on The strict logic of the view that ”it's bad to be blind” would suggest that while that claih priority on vision treat people for other illnesses if they are already blind If two people, one blind and one sighted, simultaneously turn up in a hospital in coronary arrest and there is tiy offers a truly unpalatable conclusion; that it is more hile to help the person who can see rather than the blind patient

We could backtrack and argue that in fact there is no differ-ence in the value of life for the blind cohted That is certainly more comfortable Unfortunately, in conjunc-tion with the QUALY y, this produces the conclu-sion that there is no point in spending anything at all on photodynalasses If treat-ments do not improve the value of people's lives then they are not worth spending money on, particularly when there are many causes, such as treatment for cancer which certainly do improve the value of people's lives

It is no wonder that the Royal National Institute of the Blind steers well clear of even ues that photodynamic therapy is proven to improve vision and so should be coiven the proble an unlie of medical treatments-it is easy to understand the position NICE takes: in particular the apparently heartless ruling that treato blind The dispassionate perspective of QUALY analysis argues that the difference be-tween having two good eyes and one good eye is less significant than the difference between having one good eye and none at all Small wonder that the calculations tend to churn out e recommendations But a free service will always be in de- it

Fixing health care with keyhole econoeons to operate withoutthe risk of complications and side effects Econo to fix a policy probleet the proble a little more drastic

How, then, can we fix health care? The insurance-basedbadly in the United States, in large part because of the problem identified by Akerlof 's lemons model The result: expensive, bureaucratic careand even that, only for some

The British approach has been to sweep away the overned by the decisions of bureaucrats like NICE rather than directed by h part of the old Soviet Union had been transplanted into the hospitals and surgeries of the English shi+res Fortunately, political and bureaucratic decisions are dom than in the USSR, so the syste response to the serious but rather specific problem of inside information We owe it to ourselves to ask: is there a ”keyhole” solution, which could fix health care without sacrificing the ability of patients to decide how much they value their own eyes?

Keyhole economics would first identify the specific ories: scarcity power, externali-ties, and imperfect information, plus the issue of fairness Scarcity power is a potential proble-nificant one In the United Kingdohly fifteen hundred patients per general practitioner (the doctor who is the first port of call forthe National Health Service) So, a small town of nine thousand people can support six doctors, probably e real competition, in a country where 90 percent of people live in urban areas Soreater scarcity power-people fly from Australia and New Zealand to Hawaii for treat brain tumors So there are some situations, but fehere scarcity power is a concern

Externalities, too, are important only in select cases: for in-stance, for public health projects to restrict co condoms to protect themselves from HIV/AIDS, I would not have needed to bother) Yet neither externalities nor scarcity power are so severe or wide-spread that government provision becomes an attractive alterna-tive The keyhole solution would be soht to prevent the exploitation of scarcity power, coupled with focused subsidies to boost inoculation progra, athat even perfect markets do not necessarily provide But we care deeply about fairness when it comes to medical care, both because we do not want the poor to be deprived, and because the cost of health care can vary dra on the luck of each individual In a civilized society ant to make sure that everyone can afford some standard of eneral problem of poverty (think back to the ”head start theore redistributive taxes After all, why spend so noring the fact that they cannot afford healthy food or a safe house to live in?

That leaves inside infor health-care systeovern is out of patients' hands, and resources are ra-tioned by political processes Meanwhile, the overwhel prob-lem for the market provision of medical care is inside information, and more specifically its tendency to destroy insurance ests a two-part keyhole treatmentThe first part is to ensure the widespread availability of inforet a second opinion, easy to call a help-line, and easy to get information from libraries, clinics, the Internet, even superdom, people do not pay much attention to this information because doctors make the decisions If ere asked to take responsibility for our own medical care ould pay much closer attention, and many more resources (public and private) would respond to our deive patients an opportunity to use this information In a privatized, insurance-based system the insur-ance coovernovernment makes the choices In a market-based system without insurance, the patient makes the choices Much better But the patient also has to pay for unpre-dictable and potentially catastrophic health-care costs

How to give patients choice and responsibility without put-ting an unbearable burden on them? The best system would be one that co an incentive to inform themselves and to make choices that are both in their interests and reasonably cost-effective but which leaves the ht work, because most medical bills are not cata-strophic and so do not need insurance

How ht such a systeive maximu theovernments or insurers, but to make sure that nobody faced catastrophic h est: people should pay for all est bills; and that every-one should have a savings account dedicated to overnment would contribute in the case of the poor or the chronically ill

Catastrophe insurance, which pays out only when a particular course of treats are no problem either: simply reduce each person's tax bill by, say 1,500 a year-this is very roughly the cost, in taxes, of both the UK and the US public health systes account For people who pay less than 1,500 in tax a year, the government would contribute money to make up the shortfall Since the system is compulsory, no adverse selection takes place

If you participated in such a progras would autoh-interest bank account They would build up gradually throughout your life For er years So you could expect to have thirty thousand dollars in your account when you turn forty;low and watched the money earn interest Thirty thousand dollars buys a lot of le expensive procedure, except that catastrophe insurance restricts your expenses

If you reach retires account beyond some minimum, you can put the excess toward your pension When you die, you can pass the savings to other people's savings accounts (usually your spouse or children) So at every point in your life, you would have an incentive to spend money only on health care that you feel is absolutely nec-essary If you felt that the right treatment for you was a bit of preventive maintenance-a course of shi+atsu, say-then that would be your choice You iven how much it would cost you in medical bills over the years The catastrophe insurance would still pay for your lung transplant, of course, but no humane system can avoid moral hazard completely

If one day your optician told you that you were suffering froeneration, but that a treatment with pho-todyna your sight for a few more yearswell, the choice would be yours The photodyna, Visudyne, costs 1,500 a treatht fro about QUALYs: it's your money, and your choice

The exception would be if you had a catastrophic expense, in which case the insurance company would prefer to pay for the cheapest treatment while you would want the best-a difficult problem, but no different frole treatment in our medical systems today The new system simply means that that inherent conflict of interest happens far more rarely