The Big Question: Is there an alternative to Obamacare?

Credit: Josh Stunkel

Feb 12, 2014

Sections Economics Public Policy Video

Collections Health Care

Every month, The Big Question video series brings together Chicago Booth faculty for an in-depth discussion. This is an edited excerpt from January’s episode, in which John H. Cochrane, AQR Capital Management Distinguished Service Professor of Finance; Matthew Gentzkow, Richard O. Ryan Professor of Economics and Neubauer Family Faculty Fellow; and Matthew J. Notowidigdo, Neubauer Family Assistant Professor of Economics, examine health-care provision and reform. The discussion was hosted by Hal Weitzman, Booth’s executive director for intellectual capital.

Is there a role for the state in providing health care?

Gentzkow: In my view, unquestionably. Health care is a fundamentally different market from airlines, books, or other privately provided goods. We as a society have made a moral decision that we will not let people go without health care. In this country, we mandate that if you are sick or are having a baby, if you turn up at a hospital, the hospital is required to treat you. So we have already decided to provide health care to all citizens. Letting people who have serious health conditions not get treatment is not an option. That means fundamentally the state is involved in this market because they’re mandating that firms provide care to people if they turn up at the door. That’s where the fundamental difference arises relative to lots of other markets. We’re providing health insurance to all people in this country implicitly. There’s a strong argument for moving toward an explicit system of providing insurance for all Americans.

Cochrane: The completely free market in health care is a red herring. We had an enormous amount of government regulation before Obamacare and even more afterward. Poor people dying in the street is a red herring. We’re going to take care of the bottom 10%. This is about the other 90%. Does the government have to have a big role in structuring the health insurance that you and I buy? To help poor people falling on the street with heart attacks, we don’t have to do that. There is a fundamental disagreement here. Health care is not a different good. Poor people have trouble paying for it, but for the average, middle-class person who buys a house, a cell phone, or a car, health care is an economic transaction, it’s a personal service, and we don’t need huge state involvement.

Gentzkow: The consensus goes beyond a homeless person in the street having a heart attack or what you describe as the bottom 10%. Can a middle-class, healthy 25-year-old make the decision, “I’m going to choose not to buy health insurance and take the risk that if I subsequently get cancer, I just won’t get treatment for that?” That is a decision that people would be free to make in a free market. But if they get some serious, chronic condition, we’re going to provide treatment. So I don’t think it’s a red herring or only about the bottom 10%. It’s a moral decision that we have made as a society. Given that we’ve made it, we should try and implement it in the most efficient way possible.

Cochrane: I agree with you. But do we need 10,000 pages of regulations to solve that problem? No. We need a much freer market of supply, driving down costs. We need catastrophic insurance. Once we have a completely free market on the supply end and catastrophic coverage insurance, I’m fine with a mandate that 25-year-olds have to buy it.

There are systems that have socialized medicine where the outcomes are actually very good, costs are lower, and life expectancy is longer.

Cochrane: There are three systems. There is the free-market system, which nobody has; the crony capitalist, highly regulated system, which is what we had before and now have even more; and the government provision system, which is really a two-tier system. The masses get government provision, everybody with connections goes off into the private hospitals. We could go that way in a lot of markets. Let’s have one government-run airline, or a government-regulated telephone monopoly. Everyone needs food. What do we allow all these grocery stores for? Do you think things would be better with a federally provided, single-payer food program that takes over groceries stores that aren’t serving poorer areas—do you actually think that would wind up being a better system? It’s not about the wonderful imaginary system; it’s about how those things work in practice.

Gentzkow: When you say the system you’re advocating is something that no country in the world has ever tried, that’s really important. In terms of practical policy, we have to begin with where we are. We spend far more on health care than any other developed country. We have slightly better outcomes on certain things like cancer, but worse outcomes for many things, like life expectancy and infant mortality. We have to take that seriously. When we look at the systems that have been implemented, the private provision of health care has not succeeded in this country, and a lot of other countries are doing things far short of socialized medicine that are producing better outcomes at lower costs. 

Notowidigdo: I did hear some agreement on one thing, this issue of providing catastrophic health insurance. There’s an emerging consensus among health economists that that is something we should experiment with. We have tens of millions of people in the US without health insurance. What kinds of health insurance do they want to have? The answer could look very different than the insurance offered on the health-insurance exchanges.

We should have insurance for catastrophes, not everyday checkups?

Cochrane: Right. Your car insurance doesn’t pay for oil changes. Your home insurance doesn’t pay to clean the gutters. What the typical person needs is catastrophic coverage that pays for cancer treatment, and that gives you the right to always stay in health insurance so that you’re buying the right not to have a “preexisting conditions” problem. That could be very cheap. I think a lot of people would buy that on their own if it were offered. I’m not sure we even have to regulate it or mandate it. But if people weren’t buying it, I’d be happy to regulate it or mandate it.

Gentzkow: I agree totally. When I’m a healthy 25-year-old, I would like to sign up for something that says, “I am insured against the lifetime risk of having terrible health outcomes, terrible chronic conditions.” That is a policy that I currently cannot buy.  

What would you do about checkups, the regular low-level health care?

Cochrane: You pay for stuff. But the deep problem of why this can’t happen is the cash market is so dysfunctional. There is no market so regulated as health care. You can’t walk into a hospital and say, “I want to pay cash.” So you need a functional system of health-care delivery that works before you can implement a lot of this stuff.

Gentzkow: Where we started was: What is the rationale for having health insurance that not only covers catastrophic events, but also a bunch of other things that you might imagine could be provided on a cash basis? If you started from the view that people are likely to underinvest in those things, a system that has a price of zero on the margin for getting them is going to lead to more consumption. It’s perfectly coherent to argue that in the kind of insurance we’re going to provide to people, we want that to give them low, marginal prices for things that have those kinds of benefits. 

Cochrane: We don’t need Obamacare for that. If you think people aren’t getting enough stuff and you want to subsidize it, send them a voucher. 

Gentzkow: I think we’re getting closer and closer. You agree we need to subsidize these parts of health care. You agree we need to have a mandate that covers a broad part of the population. You agree we want to have health care portable and not tied to employment. The goals are very close to the goals of Obamacare. How do we implement those goals? That’s the difficult question. I agree that if we can start from scratch, there are a lot of things we would do differently. If we agree on those goals and we’re constrained by the political process, you shouldn’t disagree that this is a step in the right direction—an imperfect step, but largely due to the constraints we face. 

Cochrane: It’s a step in exactly the wrong direction. It gets rid of competition, innovation, free entry, and it just turns it into this crony capitalist, highly regulated, highly controlled, barriers-to-entry system. 

Has the Affordable Care Act at least provoked an important debate?

Notowidigdo: For sure. It’s going to be interesting to see in the next couple of years what happens when you have tens of millions of new people coming into the health-care system who haven’t used it before, what happens to their health and their financial well-being.