BPEA | 1994: Microeconomics

Economic Issues in Reform of Health Care Financing

Barry P. Bosworth and
Barry P. Bosworth Nonresident Senior Fellow - Economic Studies

Henry J. Aaron
Henry J. Aaron The Bruce and Virginia MacLaury Chair, Senior Fellow Emeritus - Economic Studies

discussants: David M. Cutler and
(Cambridge, MA.--Monday, July 28, 2003)   David M. Cutler is Professor of Economics, Associate Dean of the Faculty of Arts and Sciences and John L. Loeb Professor of Social Sciences.  Staff Photo by Rose Lincoln/Harvard University News Office
David M. Cutler Otto Eckstein Professor of Applied Economics - Harvard University
Mark V. Pauly

Microeconomics 1994

As THE DEBATE ON HEALTH CARE REFORM shifts from diagnoses of the ills of the current system to debate on a legislative cure, analysts are tempted also to turn their attention from broad analysis of systemic flaws to close examination of the details of individual plans. In so doing, they risk neglecting generic issues that any plan must confront. Rather than focus on specific aspects of President Clinton’s or any other particular plan, we examine a number of issues that most reforms raise. We begin with a brief review of the current system and the various ways to achieve universal coverage. Achieving near universal coverage is technically easy. It will have little effect on aggregate employment or output, inflation, or the balance of trade. Covering the added federal budget costs of universal coverage will prove difficult, however. We then turn to the most disruptive aspect of health reform, the proposed shift from experience rating to community rating. For particular industries this conversion will cause sizable changes in money wages, employment, and prices and may result in transitory international competitive advantages or disadvantages. Finally, we point out that community rating is compatible with competing insurance plans only if methods of payment can be designed that make “cream-skimming” unattractive. Groups at financial risk for providing care practice cream-skimming to avoid high-cost patients. Risk adjustment formulas exist and are intended to remove the profitability of such practices by adjusting payments based on risk. However, existing formulas are not adequate and sufficient improvements may prove impracticable.