Free PIE for Everyone!

Readers of my blog are aware that I am not a big fan of Obamacare and Medicare For All (MFA). I have proposed an alternative to these two programs, Medicare Prime (MP). But the term “alternative” implies that this new proposal is opposed to Obamacare and MFA. The fact is that MP is a generalized version of MFA that borrows many features from Obamacare. MP bridges the gap between the current program, Obamacare, and its proposed replacement, MFA. If we understand this, we better understand the trade-offs we are proposing and the relative strengths and weaknesses of these programs.

The Lone Economist likes to elucidate through historical perspective. So, let me explain what I mean by “generalized version” using this technique. In 1905, a little known 26-year old clerk in the Swiss patent office published a peer-reviewed article, “On the Electrodynamics of Moving Bodies“, in the German-language Annals of Physics. It was only later that the author, Albert Einstein, realized his theory of moving bodies was a special case of a more general explanation of gravity. The original paper was then dubbed the special theory of relativity when a subsequent paper published in 1916 publicized his general theory of relativity. Neither paper was known outside the German-speaking scientific community until after the end of the First World War. The international fame these two papers eventually received publicized the concept that debates over opposing ideas were sometimes about special cases of the same general theory.

It was 1936 when economists, not of the Marxian persuasion, found themselves in existential crisis. Since the beginning of the Great Depression in 1929, large market-directed western economies had been in continuous recession. The prevailing theory for nearly a century predicted that such extended periods of high unemployment were not possible in such economies. Therefore, this theory was useless when formulating a policy that would end the slump.

In that year, a British economist, John M. Keynes, published a book that claimed the prevailing theory of how market-directed economies worked was only a special case of how they worked in general. According to Keynes, market-directed economies quickly regained full employment under certain conditions but not under others. In effect, there were times when an economy could get stuck in neutral and only a push by the national government could get it moving again. It was only after the publication of this book that the prevailing special case theory was even given a name, Classical. With a nod toward Einstein’s contribution to scientific discourse, Keynes titled his book, The General Theory of Employment, Interest and Money.

The General Theory of Public Insurance Expansion

So, standing on the shoulders of giants, the Lone Economist identified his own general theory. Public insurance expansion (PIE) is a policy of extending Medicare and Medicaid coverage to more people than currently qualify, i.e. people over age 65, the disabled, and the poor. Although Medicare currently charges a premium and shares some costs with its beneficiaries, its proposed expansion would do away with these features. So, we’re talking about expanding the breadth of coverage as well as the number of covered persons.

MFA is the special case of PIE where coverage is extended to everybody. But is that the optimal amount? Is there a point at which the benefits of additional PIE are outweighed by its costs?

To answer this question, we must acknowledge that PIE affects more than just patients. It also affects healthcare providers and taxpayers. By outlawing private insurance, we would be effectively nationalizing the healthcare industry. All doctors and hospitals would involuntarily and exclusively become government vendors. The Lone Economist is no lawyer, but I can’t imagine a set of circumstances where our federal judiciary would find that constitutional.

In my previous posts, I’ve described the general conditions necessary that would allow a less extreme version of PIE that just might survive judicial review. Individuals would be free to purchase private insurance or not. Private insurers would be free to sell insurance of whatever quantity and quality to whomever they wish or not. Providers would be free to join a public network with limitations on payments and quality or not.

For adverse selection to be eliminated and moral hazard contained while allowing these freedoms to exist, public insurance would need to be primary regardless of provider and non-exclusive for out-of-network providers. Most importantly, the degree of coverage would need to be dependent on household income and preexisting medical conditions, including age.

To see why MFA and MP are separate special cases of PIE, consider my suggestions for the parameter values that would determine the cost of MP. Using a simple model, I estimated that the combination of parameter values a = .5, b = 1.38, c = 4, and d = .35 would result in government expenditures approximately the same as they are currently. This would also result in more families qualifying for 100% coverage than currently qualify for Medicaid. Families that now qualify for a premium subsidy would benefit from lower premiums under MP.

If we consider the parameter value combination of a = 0, b = 0, c = ∞, and d = 1, we get MFA. Everyone would be included in the middle-income group and everyone’s MP deductible would be zero. There would be no distinction between an in-network provider and an out-of-network provider. All providers would be paid the full Medicare rate. Thus, all healthcare expenditures would be paid by the government.

This is how the Lone Economist summarizes these health insurance proposals. MFA is free PIE for everyone, while MP is free PIE for the poor and sick, no PIE for the rich and half-priced PIE for everyone in between. The latter is just not as catchy as the former, but a lot more realistic.

Published by TheLoneEconomist

I am a PhD economist who studies just about anything and proudly specializes in nothing.

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