Pyrrhic Victories on Health Care

Mom always said to be careful what we wished for, lest we actually get it. The warning is apt now that the health care reform debate in Congress seems headed into the home stretch, or maybe just the back stretch.

Several big players in this extended national drama should look over their shoulders. Health insurance companies are one. You might be another.

The insurance companies won a major skirmish last week when two attempts to add a so-called public option to the Senate health care reform bill were defeated.

A trio of House committees has approved reform bills that contain public option plans; it's too early to say whether insurance companies can hold on to what they won last week.

But if health care reform were enacted without a public option, insurance companies could be setting themselves up for what the noted Princeton University health economist Uwe E. Reinhardt describes as a "winner's curse."

Many of us think about economics as only dollars and cents. But economics — particularly a branch called game theory — provide interesting insights into the health care reform debate, starting with the winner's curse. It describes the tendency of a winning bidder at an auction to overpay for an item. That usually occurs when competing bidders vie for the same prize, escalating the price.

Mr. Reinhardt applies it in a slightly different way to the health care debate in referring to the generally weak cost controls in the reform bills and the so-called individual mandate that requires everyone to buy health insurance.

The public option is designed to help control health care spending by serving as a competitive counterweight to higher health insurance premiums.

Without it, there may not be enough in the reform bills to constrain spending — or premiums.

A few years from now, consumers who faced a mandate to buy coverage and then pay soaring premiums could decide that their insurance companies are to blame. That could lead to even more radical reforms that target for-profit insurance companies.

The companies would have won the battle, but they would end up losing the war. That defines Mr. Reinhardt's winner's curse.

Two other economic principles help to explain parts of the current debate. James Surowiecki describes them in a recent New Yorker article. The first is called the endowment effect. That's the tendency of people to overvalue assets they already own.

The second is what economists call the status-quo bias, the tendency in financial matters to leave things the way they are. That happens because people feel the loss of something they own more acutely than rewards that they enjoy from disposing of it.

In the case of health care reform, that means many Americans overvalue their current coverage and underestimate benefits they could accrue from reform. Special interests have played on those fears with ads warning that some people could "lose the coverage they have now."

But the ads fail to mention that if reforms aren't enacted, many people could lose coverage as premiums continue their stratospheric climb.

Some of the loudest voices in the opposition to health care reform actually have the most to gain from it — and the most to lose if it fails.

Be careful what you wish for.

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