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August 04, 2005

Pricing the Uninsured

Yesterday, Brad Plumer brought up the question of whether or not it's cheaper to leave the uninsured outside the system.  From one perspective, it obviously is: the insured use $2,484 of health care each year, while the uninsured get only $1,253.  But it's trickier than that.

Kaiser estimates that covering the uninsured would boost their annual earnings by 10%-30%, lift their educational attainment, and prolong their lives by 5%-15%.   There's money to be had there, in higher purchasing power, in better productivity, and in longer work years (though there's also money to be lost, as longer lives may mean more costs), all of which may translate into larger government tax revenues and increased ability to pay for their own health insurance. 

But the more interesting argument is who pays.  Covering the uninsured is, in some ways, a cost-shifting device.  That's because the uninsured, for the most part, aren't poor.  The poor have Medicaid. The uninsured are (generally) low-income folks above the poverty line with full-time workers in the immediate family.  Many of them are young men.  Most of them are white.  And a significant portion could, if they wanted, pay for insurance themselves.

To some degree, uninsurance is often a question of priorities.  Sometimes the priorities beating out health insurance are food and school clothes for the kids.  Sometimes, they're nights at the bar.  Sometimes, laziness. Sometimes, an aversion to doctors.  Under a basic universal coverage scheme, though, there'd be a mandate to buy baseline coverage, those who genuinely couldn't afford it would come in for subsidies, and those who could afford it would now be forced to buy in.  That means they'd be paying for much of their own insurance. That means, you'd be paying for less of it.

Right now, the federal government, which is to say the taxpayer, foots the bill, to the tune of $30 billion a year.  Assume that, under this system, the average uninsured person ended up paying about $400 a year for health care (which is conservative, many would be higher, some lower).  That puts $17 billion in government coffers, a total which'll countenance a fair increase in care for the uninsured.  If they were to start using health care at normal rates, Kaiser estimates it'd cost $34 billion in addition to the $30 billion going out now.  Putting aside the fact that we don't know if they'd use at the same rates as insured folk (the uninsured prioritize health care lower, some may not like doctors, young men don't schedule many appointments, etc), that $17 billion plus the earnings and education increase should make it a wash as far as the taxpayer is concerned.  With the uninsured paying more of their own way and their better earnings creating more tax revenue, the whole thing should end up fairly close to revenue neutral.

So will covering the uninsured cost more?  Yes, if you're talking about expenditures.  But if the question is whether covering the uninsured will cost you more, well, the answer may very well be no.   

August 4, 2005 in Health Care | Permalink

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Kaiser estimates that covering the uninsured would boost their annual earnings by 10%-30%, lift their educational attainment, and prolong their lives by 5%-15%. There's money to be had there

Really good point. Although do note that there's also money to be lost there. When people start living longer, they start developing old-age diseases that can cost a lot to treat. Okay, I have no idea how this shakes out, or what the numbers are, but it might happen!

Posted by: Brad Plumer | Aug 4, 2005 3:00:28 PM

More seriously, though, Kaiser's estimate of how much money covering the uninsured would cost taxpayers is badly mistaken. You also need to factor in the number of people who would switch from their privately-purchased insurance to the new subsidy system. That's not inconsiderable.

Many economists have run these numbers. See, e.g., here. The consensus seems to be: If all currently uninsured Americans were covered by the government, whether it be by expanding Medicaid or creating the mandates you prefer, then total spending on health care would go up some $34 billion. But government spending on health care would rise some $100 billion, because of the cost-shifting. I don't mean to pimp links all over the place, but I went into this in a bit more detail here. In the grand scheme of things, $100 billion isn't much money -- an additional percentage point of GDP -- and well worth doing, but those seem to be the numbers. "Revenue-neutral" seems like a pipe dream. Hopefully the $100 billion would be offset by the productivity effects you're talking about, although those, in turn, might be offset by the "old-age disease" effects I mentioned above. Heh, who knows?

On the other hand, completely revamping the health-care system and switching to, say, single-payer would change these numbers around in all sorts of ways. That's much harder to estimate.

Posted by: Brad Plumer | Aug 4, 2005 3:24:59 PM

As a side note, Uwe Reinhardt's Health Care Primer for Journalists is a handy resource. He also argues that covering the uninsured in this country, while keeping the current system more or less intact, will almost certainly increase public outlays by some $80-$100 billion per year, no matter how you slice it. Perhaps he's wrong, but that seems doubtful.

Posted by: Brad Plumer | Aug 4, 2005 3:31:30 PM

I'm not so sure (because I haven't seen any good data) that the truly uninsured (those not covered by Medicaid) are mostly younger men. Any data for this? My guess is that there are a lot of lower middle class families who are uninsured, and actually use substantial health services - mostly for serious or emergency problems.

One somewhat bewildering situation bothers me: in both the case of a private, unaffiliated MD (and private labs they use), or a major public University Medical Center health clinic (Oregon Health and Sciences University - which is taxpayer funded only at about 5% of total costs), there is a major difference between what an uninsured person pays and what is paid by insurance companies plus the individual. So, a round of lab tests might be billed at $1,200., but if the person is insured, the insurance company plus insured person pays only about $500. The service provider (under contract to the insurance company) shows on their final bills the difference (in this case $700) as a discount - but they don't call it a discount.

This suggests that the uninsured pay more than twice as much for the care they need than an insured person does.

How does this affect the actual paid costs per person over a year for health care? Is this example of reality saying that insurance for the uninsured would be substantially less cost for the insured than current estimates?

Posted by: JimPortlandOR | Aug 4, 2005 3:39:46 PM

"You also need to factor in the number of people who would switch from their privately-purchased insurance to the new subsidy system. That's not inconsiderable."

No, it's not. But then, it also doesn't matter. The problem here isn't that the government spends too much, but that the country does. Which is to say, if we're talking about folks switching from private to public, doesn't this not much matter at all, as money that would be spent privately is now being spent, hopefully more efficiently, in the public sector? You mention they'd move into the subsidy system, which is potentially true. But the costs of that depend on the types of subsidies, the size of subsidies, who qualifies, etc. Also, you could make this very basic floor insurance, in which case it wouldn't cost much at all.

So color me unconvinced. It's not that government outlays will stay the same, but what each individual is paying shouldn't rise too much, particularly as individuals who didn't use to be contributing to their health care now are.

Posted by: Ezra Klein | Aug 4, 2005 4:35:53 PM

$400 a YEAR? Damn, where do I sign up for that? What's the deductible, $100k? Last time I looked, the only policies available to individuals were more like $400 a MONTH. And that's IF they'd even let you sign up...

Posted by: tatere | Aug 4, 2005 6:35:44 PM

tatere, thats what I was thinking. I pay roughly 1400 on my own for the year, my employer pays the other half. I'm a young, single, white male. Small company.

Posted by: Adrock | Aug 5, 2005 12:32:47 PM

I think everyone deserves health insurance and should be covered. Health insurance can be crucial to many families.

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