Giuliani’s free market cure for health care

Light posting, lately – I’m working on other things. Things related to this story, actually.

Giuliani recently discussed his planned reform for health care in which he proposed, amongst other things, a $15,000 tax deduction for families ($7,500 for indviduals) to buy private health insurance instead of getting insurance through employers.

He also stated, erroneously, that American medical care was the best in the world. I’m very tired hearing that one. He also got away with saying the socialised medicine would bankrupt America. It’s done wonders for the rest of us: why would America be the only country in the OECD to cock it up? Is Giuliani promising thoroughly incompetent government? Sounds like it.

Here is what Americans pay for health care:

OECD Expenditure

And here is what Americans get:

OECD health indicators

That something needs to be done should be a given: American health care financing is just not cost-effective.

On, then, to Giuliani’s plan. It has been criticised already, as has the coverage. However, that was because the New York Times has neglected to mention cost – which they’ve done for Democratic proposals. It isn’t hard.

To conduct a brief intellectual exercise: using data from the US National Bureau of Labor Statistic, the number of people employed in the United States is approximately 126.8 million. Using the average of $7,500 per worker, Rudy Giuliani’s plan will cost just over $951bn.

Here’s something else: The pharmaceutical industry is among the most profitable in the United States. In 2005 they had an average profit margin of 15.7%, according to the Fortune 500. Private hospitals had a 5.2% profit margin in 2004. In 2005, Life and Health insurance had profit margin of 10.3% and Insurance and Managed Care 7.1%, also according to Fortune 500.

Using only the Insurance and Managed Care average, 7.1% or $67.5bn of the Giuliani plan’s money will be profit for private insurers, rather than health care for Americans. Add to that figure analysis that shows private overhead expensese are around one third of total, compared to less than 4% for Medicare (this is commonly criticised by people who say Medicare does not need to advertise, for example – nor does a single payer, making the criticism redundant).

This means that using a single payer in a public system, rather than retaining private financing in a market system, could save around $275bn. Using Giuliani’s figures – already significantly higher than per capita expenditures in 2004.

So here’s what I want people to be asking:

  • Why does Giuliani think the solution belongs in the free market, when it will mean up to USD300bn will go to shareholders, as cash, instead of to Americans, as health care?
  • Why does Giuliani think the solution belongs in the free market, when removing insurance from an employer basis will most likely worsen risk pooling of health insurance, thereby increasing costs?
  • Why does Giuliani insist that ‘choice’ is best, when Americans currently enjoy less choice than most of their OECD counterparts? Even the current system has generated escalating out-of-pocket expenses: having the choice of insurance plans whose premia you cannot afford does not count.

The short answer is that free-market conservatism does not suit health care financing. To libertarians, not being forced to hold health insurance you don’t want is worth any degree of inefficiency, but that’s about it. American health care has fewer beds, physicians, nurses, than public systems, and delivers less health, in less equal distribution, than public systems. The jury is, by and large, in on this one.

Of these, I prefer the risk pooling question. Giuliani’s plan will have quite a large impact on risk pooling in American health insurance, and I’d like to see someone ask him if he even knows what risk pooling means. Does he have a plan to shore the private market up with changes to risk-rating laws, or re-insurance? Inquiring minds, etc.

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4 comments so far

  1. jonolan on

    All of your objections to Giuliani’s proposal are completely valid; the idea is horrendously flawed and will be costly. On the other hand, it’s the most plausible plan for the US. By keeping healthcare in the “free market” – quoted because in the US that market is controlled a very few corporations – the plan has a chance of actually being enacted.

    Between the health insurance giants and the pharma giants, we’re talking about multi-billion dollar per annum lobby groups. Add to that the US’ fundemental love of the free market and any more socialist model would be doomed to stillbirth.

    Yeah it sucks, but I’m used to voting for the lesser of evils.

  2. zooeygoethe on

    My costing was quick and dirty though, and ignores other things such as the continued complication of the tax system.

    If we’re to use taxation to redistribute wealth as health to Americans, why not do it directly? Health care would be more efficient and taxation would be more efficient. Public insurance is as plausible for the US as anywhere else, providing the electorate are properly informed about the issue.

    Free-market conservatism annoys me for exactly this reason, and I hold the media mostly to blame. If Americans want poor and less efficient health in order to maintain a bastardised libertarian philosophy, that’s fine (it’s strange, but it’s their prerogative). Only so long as they make that choice with all the information required.

    It’s my economist’s sensitivity. Our theories always assume individuals are fully informed and rational – which is why so few of them work as planned in reality.

    Giuliani’s plan will appear the best so long as ‘the media’ go along with this idea that, somehow, the context of employer-provided insurance is at fault. His plan will, without common-carrier restrictions, increase the choice of insurers (as to whom they insure) much more than individuals, and likely worsen access to health care.

    Funnily enough, none of it would affect me. I have non-University insurance that I can easily afford, I’m only here temporarily and in my own country care is pretty much free. If I was a father of 3 (earning less than median wages), I’d be worried. Forget not – this is also the man on record saying he wouldn’t even try for the African-American vote.

  3. jonolan on

    I don’t believe its based on libertarian philosophy. I believe its chance for implementation is based on allowing the health insurance industry to still make a profit, probably a larger one than they do now.

    You can’t just uproot multibillion dollar private industries. US Health, the largest carrier has earnings over $50 Billion per annum. Threatening to remove that is not feasible.

    LOL! In America always always always follow the money.

  4. zooeygoethe on

    I think the retention of the status quo is ideological, more or less (with differences of opinion over more or less. It sure as hell isn’t due to the health or the economics, though). Of course one cannot ‘just’ uproot the industry – which is why any reform would be slow, and possibly incomplete.

    But it should at least begin (“should” meaning “according to my idea of social welfarism”, which is not in accord with most of my current surrounds). Those industries feed off teat that they should not have, and they need to be weaned off it, for our benefit (“our” not including me).

    As you’ve said, though, the point is probably moot. Competition with K-street, Senate incumbency rates and the electoral college is itself a non-starter. Moreover, much of the advocacy is itself too absolutist, and possibly too shrill, to help their cause. Some asymmetries will need to be retained, purely as a pragmatic concession to the markets that exist.

    As a social-welfarist health economist, though, I will never be sanguine about it.


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