Wednesday, June 24, 2009

Nate Silver on the health care debate

One of our very bright former students posted a link on Facebook to this piece by Nate Silver on the "government option".

I have a few thoughts:

1. In what sense is aggregating risk easier than running a restaurant or an airline, as is suggested in the article? This is not obvious to me, and also seems to conflict a bit with the later claim of high barriers to entry.

2. I agree that employees do not spend much time worrying about the price of their benefits, but surely employers do. Indeed, because employers have much more at stake than any single employee would if he or she were buying her own insurance, the firm will optimally make a much more informed choice. Competition should be working on this dimension, and Silver provides no evidence that it does not.

3. In Silver's simple model, insurers aggregate risk, taking the outcomes and their probabilities as given. Of course, in the real world, insurers attempt to keep costs down (because of, e.g., moral hazard issues around physician behavior) but it seems odd to blame them for something that is mainly driven by technology (and occasionally by government coverage mandates resulting from interest group pressure).

4. I am not convinced about the high barriers to entry. Any company large enough to self-insure its employees on health care can easily start a company (using its employees as the initial customer base) and then enter the broader market. There are many such companies.

5. I think that everyone (other than the broad uninformed public) can agree that not taxing health insurance benefits is bad policy. However, while the tax subsidy increases the demand for health care, it is not clear that it increases the demand for risk aggregation very much. It mainly just changes what is being aggregated.

6. The political economy is missing. One might worry, for example, that the government option would be more susceptible to interest groups adding additional types of coverage or additional types of providers than is private insurance.

In sum, I am less impressed with this bit than our student.