Health Care Incentives

One of my main worries about the health care proposals is that I don't see them doing anything significant to reduce costs -- and even that the whole mindset is misguided on the cost issue. (On this latter point, the correct measure of welfare is clearly not cost, but overall surplus. Even more spending on health care may well be welfare enhancing.)

But if we want to assume that there is spending beyond the point where marginal cost equals marginal benefit, and we want to reduce the total spending, the question is how to do it.

To that end, I would present the case of Dartmouth College. Like many reasonably sized institutions and businesses, the College self-insures in regard to the health expenses of its employees. So while we all think we have Blue Cross Blue Shield insurance, in fact that organization simply manages the administration of the College's health benefits to its employees. The College actually ends up paying all the bills. Of course this would be true even if we did buy true insurance, as over time the premium we would pay would have to equal costs.

My point here is simply that the College, since it bears all of its employees' health costs, has tremendous incentive to reduce those costs through whatever means it can. It can find the most efficient administrative entity to handle all the paperwork -- and it can find this administrator through a competitive process. I have to assume that Anthem BC/BS must offer the best overall package of service and cost. The College can also tell this administrator how to structure the different policies offered to employees, including deductibles, coninsurance, incentives for good behavior, etc. In fact we have a relatively active committee consisting of faculty, staff and administrators who work together to determine the policy options that will be offered each year. I think the overall incentives and ability to manage health care costs are quite high.

Even with these incentives and ability for an institution like Dartmouth to manage health care costs, we still see cost increases very similar to those of the rest of the nation. And I think our overall costs, in an absolute sense, are close to average as well. As a very rough calculation, the cost for a single person to buy health insurance from the College is around $6500. If I take that and multiply by the 300 million population of the US, and divide by US GDP of about 13.8 trillion dollars, I get around 14%, roughly our national expenditures on health care.

So I don't think that the College does any better in reducing costs than the rest of the country.

And this is even with the incentives and ability noted above -- and even with the Dartmouth Institute on campus, the folks who the Obama administration seem to think have the magic wand to show where waste is and how to eliminate it!

So here is the question: to the extent that the health care proposals shift the center of cost controls and incentives away from institutions like Dartmouth and towards the US government, why should we assume there will be better management of health care spending?