Yesterday, the Wall Street Journal (“…Model For U.S. Health-Care System“) investigated recent reforms in the health care system in the Netherlands.
New System in Town
The new system has the following major characteristics:
- All individuals must be insured
- All individuals purchase health insurance on the private market
- Individuals can choose to get their health insurance through their employer–if the option is available–but the employer does not have to offer health insurance. If the employer does not offer health insurance or if an individual is unemployed, then they must purchase health insurance on the private market.
- Health insurers are free to charge each individual any price they please for health insurance. Of course, market forces limit the price that the insurers can charge the consumers before they switch to another plan. After the reform was implemented, however, there was significant consolidation in the health insurance market and now there are only four or five large plans. This may reduce the amount of price competition in the market.
- The cost of health care is more transparent to consumers since they see the price they are charged for health care. In most national social health insurance programs, individuals do not know the value of health care they receive since the amount of money they pay into the system is proportional to their income and thus unrelated to actuarially fair value of health insurance.
- Health insurance is subsidized by the state. “Insurers get risk-equalization payments for patients with about 30 major diseases.” Thus, people who are sicker receive a larger state subsidy than healthy individuals.
The old system was described as follows:
“The country had four different coverage schemes. The wealthiest third of the population was required to get health insurance without government assistance. Some in this group received help from employers in paying premiums, while others paid the whole bill themselves. The bulk of the Dutch population was covered under a compulsory state-run health-insurance scheme financed by deductions from wages. Civil servants and older people were insured under two separate plans within this state-run scheme. The government closely regulated hospital budgets and doctors’ fees, but provided few incentives to cut costs. When hospitals lost money on a particular kind of care, they rationed it. Many patients ended up on waiting lists. People in line for heart transplants were particularly affected. In the mid-1990s, fewer than three Dutch people per million received such transplants. By comparison, a study of 12 European countries showed that only Greece had a lower rate of such operations. In the U.S., there were about nine heart transplants per million people.”
The Healthcare Economist’s Take
Overall, I think this is a good compromise between equality/social justice and allowing the free market to make health care more efficient. Sicker people get more money from the government–which may anger individuals such as Megan McArdle–but there is not centralized pricing or rationing of the health care system. Also, the risk equalization payment does not have to be perfect. If the actuarially fair additional insurance premium for someone with diabetes is $600/year, and the government pays only $500, the extra $100 will have to be covered by the individual. When a centralized government pays a risk equalization premium directly to an insurer, a lower risk equalization amount will lead insurers to try to drop patient with some conditions and with a higher risk equalization premium will lead insurers to do their best to attract these patients. This problem will not occur when the consumer pays the insurance company directly.
The libertarian in me worries about compelling people to buy insurance. Maybe individuals would prefer to spend this money on food for their kids or electricity for their home. Mandating coverage does make some sense if everyone can in essence get free health care at the emergency room, and taxpayers or consumers would have to foot this bill anyway. More of a problem is what type of health insurance is mandated. Can individuals buy bare bones plans to spend more money on other goods? If so, then mandated health insurance has no teeth. If there is a high minimum level of health insurance, who decides this? Will this level be too high for some people? This is always an issue when you restrict individual sovereignty.
Another problem stated in the article is that “insurers can currently negotiate prices for only 10% of the services hospitals offer.” This figure is set to rise in the future, but the free market is not really free yet. Also, I wonder what will happen when an insurer decides not cover a certain illness that either may not be included in the risk equalization payment or is deemed to be not cost-effective. Can the patient pay out-of-pocket? Another issue is how the insurance companies will influence the doctor-patient relationship. Will doctors make medical recommendations based on what is best for the patient or what will save the insurance company the most money? Still, the proposals seems like a step in the right direction, but deserves more thorough investigation.