Direct Subsidy More Efficient Than Universal Insurance

Gov. Matt Blunt’s new low-income health care plan, “Insure Missouri,” may cover more than 100,000 people by the middle of 2008 by subsidizing insurance policies for working families. The plan includes some worrisome details that warrant careful study, but if the government is going to subsidize health care, the best way to do it is through direct subsidies to low-income recipients. Here’s why.

In any society, scarce resources will be allocated by a system of rationing. In ordinary retail markets, rationing is determined by price, ensuring that whomever most values a good will be the one who receives it. However, if government policy mandates that everybody is supposed to receive a share of some scarce resource, rationing will usually take a form that we don’t measure directly in dollars and cents. This might include waiting in a queue, bribing officials, nepotism, or some other form of competing for political favors.

If the scarce resource in question is health care, rationing is a matter of life and death. In a consumer-based market, people who can’t afford health care may succumb to untreated illness. Under universally mandated health coverage, which tends to bring lengthy waits for treatment, those who get stuck on the wrong side of a queue may be treated with insufficient haste. There’s a reason that cancer patients have a much higher survival rate if they happen to live in the United States: Treatments may be expensive, but they’re timely.

The United States has the highest quality of care available to those who can afford it because we have at least some semblance of a market pricing mechanism at work. Greater incentives exist for the health care industry to innovate and perform well, because more cash is at stake. It’s true, though, that this system doesn’t serve everyone.

Calls for universal health coverage are growing ever-louder. While reasonable people can debate the role of government, and the scope of its powers, it may well reach the point when society demands that government ensure a basic level of health coverage. Then the question becomes: How do we maintain health care quality and innovation when the government intervenes to make sure fewer people suffer from price-based rationing?

Universal health care subsidizes everybody, but also destroys the price-based system of incentives that both encourages greater quality and innovation, and discourages frivolous doctor visits. If the government instead offered direct subsidies to those who can’t afford service, the feedback loops that prices and markets provide would remain relatively intact.

Although such a subsidy — akin to a health care “voucher” — would raise all health-care prices, it would be more efficient than universal insurance. It’s easier to tell who needs the subsidy, and provide it, than it is to figure out who’s at the wrong place in a queue, desperately waiting for critical care. The system would have to be continually adjusted to give special favors to the right people at the right time, without a consistent method of figuring out who the right people are. This isn’t something bureaucracies do well.

Some argue that queues would disappear under universal care with adequate funding. But there will always be funding shortages. Even the oft-touted Canadian system is limited to a relatively small percentage of Canada’s GDP. The most generous taxpayers in the world will insist that universalized expenditures be balanced with other priorities.

One primary problem with “Insure Missouri” is that it treats routine medical care as an insurance matter. But insurance is designed to be a hedge against unforeseen problems, not a mechanism for paying ordinary health care costs. This is why the health insurance law passed this summer, HB 818, is so important. It makes pretax health savings accounts widely available to Missourians — especially those working for small businesses. The eventual goal of any health care entitlement program should be to move people from government-funded care to an HSA that can be used both to pay for routine care out of pocket, and to purchase a portable insurance policy.

Health care will always be subject to scarcity, and when government is involved there’s no avoiding some effects of the tragedy of the commons — people at the margin have a greater incentive to free-ride, commit fraud, and use resources capriciously. But, ultimately, direct subsidies that facilitate low-income participation in a market-based health care system would keep more people alive and well than universal insurance would. The devil is in the details, but if the goal is to cover more low-income citizens while staving off calls for a disastrous universal care system, “Insure Missouri” may be a successful — though fundamentally flawed — strategy.

Eric D. Dixon is the editor for the Show-Me Institute, a Missouri-based think tank.