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A matrix of options

There's no shortage of ideas for health care problems. Each solution has its pros and cons.

July 1, 2002


Douglas Clement Senior Writer

Problem: Moral Hazard - Excess consumption of medical care because insurance shields consumer from actual costs.

Solution Pros Cons
Higher co-pays.
Higher deductibles.
Better price signals. Reduced risk sharing.
Defined contribution plans, which incorporate employer contributions, consumer payments up to a specified level and catastrophic insurance above that level. Better price signals.
Employer still contributes.
Some plans allow
carry-overs of yearly contributions.
Reduced risk sharing.
Confusing to potential customers, has resulted in low uptake.
May discourage preventive visits to care providers.

Problem: Adverse Selection - High-risk and low-risk consumers tend to segregate by insurance plan generosity and cost, thus reducing risk pooling.

Solution Pros Cons
Universal coverage, government sponsored. Broadest possible risk pool. Prevents "creaming" by insurers.
Insures coverage to
high-risk consumers.
Politically unattractive in U.S.
Large deadweight loss due to taxation.
Large redistribution impact.
Risk adjustment—adjust insurance payments according to actual health risk. Better price signals.
Employer still contributes.
Some plans allow carry-overs of yearly contributions.
Current systems are inaccurate, don't predict actual risk well.

Problem: Market Power - Markets with restricted entry and too few players give providers and insurers undue influence over prices.

Solution Pros Cons
Antitrust enforcement at federal and state level. Establishes more competition and better markets. Politically difficult, though Federal Trade Commission has taken some steps recently.
Allows for-profit HMOs in states that prohibit them. Establishes more competition. Politically unlikely.
For-profits may be less financially transparent than non-profits.

Problem: Information Asymmetry - Unequal information regarding disease and treatment distorts transactions between patients, doctors and insurers;may result in poor decisions, fraud and waste.

Solution Pros Cons
"Report cards" on providers. Better information for consumers. May skew doctor behavior, pushing them not to treat high-risk patients in order to raise ratings.
Provides information about disease, treatments, costs and doctor/hospital quality via Internet. Better-informed consumers.
Improves communication with providers.
Improves price signals.
Puts onus on consumers.
Better information sharing between insurers and providers to prevent fraud. Increases likelihood that fraud can be detected. Concerns over patient confidentiality.
Increases fraud enforcement efforts. Raises prosecution levels and improves deterrence. High cost.
Government has other security priorities.
Improves technology to monitor and share information about current best practices and "evidence-based medicine." Can reduce waste by ensuring that most cost-effective methods are used. Expensive technology.
Might discourage innovation.

Problem: Unequal Access - The poor don't have access to health care because they lack insurance, and prices for drugs and health care services are beyond their means.

Solution Pros Cons
Single-payer, universal insurance. Basic health care made widely available. Politically unattractive in U.S.
Large deadweight loss due to taxation.
Large redistribution impact.
May increase moral hazard.
Tax credits for small employers to encourage them to provide insurance for employers. Extends tax subsidies for health insurance to
self-employed and broadens coverage through small employers.
Some research indicates credits may not induce insurance purchases.
Buyer pools for insurance. Larger risk sharing pools and greater leverage with insurers. Research suggests they do provide more choice, but don't lower prices.
Subsidizes education for nurses and other health care workers. Increases number of workers and lower pressure on wages. Expensive.
State negotiates discount prices with pharmaceutical companies.
Companies not offering discounts may face price caps.
Less expensive drugs. Legal challenges by manufacturers (though federal courts have recently rejected several challenges).
Price caps may discourage research.
Restricts drug advertising. Less artificial demand creation for drugs. Inhibits information flow.
Open to First Amendment challenges.
Reduces patent protection for drugs. Introduces more competition in drug manufacturing.
Lower prices.
May reduce research and development for new drugs.

Return to: Cures for health care ills

Douglas Clement
Senior Writer

Douglas Clement was a managing editor at the Minneapolis Fed, where he wrote about research conducted by economists and other scholars associated with the Minneapolis Fed and interviewed prominent economists.