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Consumer choice: A brief response

Posted in observations, thoughts by rumin8r on September 6, 2009

In his excellent blog, James Kwak hits on a problem he has with a particular framing in the health care debate that has become much more common after the Atlantic article by David Goldhill and subsequent reverberations in the blogosphere. Specifically, he has a bone to pick with recent NPR coverage on the thought experiment of providing the expected lifetime health care costs of $1.77 million as an alternative for employees to exert their pressure as a consumer on the health care industry. From his post:

No, the missing element in this story – not only on Planet Money, but almost every time it is told – is distribution. Any health care system in any advanced democracy plays a redistributive function. [Emphasis mine]

While health care might seem like it has a redistributive function, in fact it does not. Only in a universal coverage scenario and at the extremes of poverty and high cost care would a health care program need to be redistributive.

The principle of insurance is that a large enough group of like people participate so that any one person’s misfortune can be accommodated at a small cost to those more fortunate. With this in mind, it is obvious that the ‘other side of this framing’ is meaningless. Of course the principles of insurance do not apply when everyone is handed $1.7mm as a lifetime health cushion. If anything, the idea resembles a ponzi scheme with the obvious question being ‘who’s gonna foot the bill?’ And my bet is that the additional cost to the average of any redistributive function would be marginal at most if everyone were forced to participate (thus remaining closer to insurance than social welfare).

The framing that originated from David Goldhill’s article is intended to examine an alternative that does not cut the consumer out of the process. I think we should also keep this separate from the question of whether the consumer can contribute meaningful pressure in the face of the information gap, which is a much stronger point from Kwak’s post that bears fleshing out.


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