The Logic of DeLong Care

My brief post from Thursday trying to explicate some of Brad DeLong’s synthesis of the best ideas in health care economics detached from political reality prompted some interesting discussion in comments. And I thought I might elaborate on the idea, because some people’s objections seemed to be grounded in misunderstanding.

For one thing, it’s crucial to recognize the role that the clinics are playing in this system. There’s considerable evidence that there’s a lot of waste in our health care system, and there’s also considerable evidence that making people bear the cost of care utilization directly is, in fact, effective at reducing that waste. But one obvious problem with that is that there’s also a lot of kinds of care on which we don’t want people to economize, especially when you consider that taxpayers generally are going to wind up picking up the tab for health problems that are catastrophic or that manifest themselves in old age. Hence the idea for a UK-style, taxpayer funded system of government-salaried medical professionals doing routine preventive care.

To figure out exactly what this would look like you would need, of course, to consult with doctors and public health experts. But the general idea is that you’d have a menu of services that we really think people ought to get, and those services would not only be made available for free, people would to some extent be nagged to get them. That’s your vaccinations, your demographically appropriate cancer screenings, your doctorly advice about healthy behavior, your basic dental hygiene, your regular checkups, etc. The idea is that for people who aren’t sick, this public health system dedicated to doing its best to ensure that you don’t become sick would be your main source of medical care.

Then note that the 15 percent health withholding is not a 15 percent tax. Most people will spend less than 15 percent of their income on health care in most years. If so, your money will be returned to you. Because there’s reason to believe that Americans save too little for retirement and also reason to believe that default rules matter a lot, the default rule would be for the money to be returned to your and placed in a retirement account. But if you need or want the money, you’d fill out form 1346-FGH or whatever and get the cash.

In addition, note that people’s cash income would be a lot higher in a universe without health insurance plans and Medicare taxes. That’s a hefty chunk of your compensation.

Last, this plan is a lot more progressive in its distributive implications than the flat tax rates involved imply. Consider two guys who both contract the same illness. It winds up requiring $20,000 in treatment. A person who only earns $30,000 a year is going to find himself paying $4,500 out of pocket whereas someone who makes $100,000 will pay $15,000 out of pocket. The taxpayers will cover his last $5,000 in expenses, but he’ll also be paying $5,000 in taxes. Conversely, the $30,000/year guy is getting $15,500 in government benefits and paying only $1,500 in taxes. In other words, the tax structure is pretty flat but the benefit structure is highly progressive so the net impact is very progressive.

There’d be nothing wrong with implementing a more progressive tax structure, but in practice progressive universal benefit systems (Social Security in the US, health care and pensions in Europe) are usually funded through flat (or, like FICA, even regressive) tax structures.