Health Care Costs
When most of the attention is fixated on the government’s balance sheet (medicare and medicaid), the far bigger problem is private health care. Ultimately, this way of thinking is myopic – you might not be paying for it through higher taxes, but you are paying for it by lower wages (and some people are paying for it by being denied health care altogether – about 2 million each year fall into the ranks of the uninsured). See below:
As to what is behind these costs (remember, the US spends twice as much per patient on health care as other countries, with nothing to show for it), there is a lot of buzz surrounding the article by Atul Gawande. He wanted to know why health care costs were so much higher in some areas than others. He looked at Medicare expenditures, because the data were readily available. So what was the reason? It’s not overall healthiness. It’s when doctors stop being doctors and become free market capitalists. It’s the classic problem of asymmetric information, a cause of market failure. Doctors know a lot more than patients, and if the doctors says you need x, y, and z, then you are in no position to complain. But if the doctor benefits financially from these treatments, then he will run up costs. Gawande even found some sleazy examples of doctors taking kickbacks to send patients to certain hospitals.
And outcomes are no better. In contrast, the best and cheapest health care is where doctors are not free market capitalists. He points to the Mayo clinic, which puts patients first. Crucially, it pooled the money and started paying doctors a salary, breaking the link between treatment and individual compensation.
Health care reform must begin with controlling these costs. It must change the incentive structure facing doctors. Another issue is the paucity of primary-care physicians, because it is not lucrative. Gone are the days of the home visits, and the close doctor-patient relationship, the ultimate embodiment of subsidiarity in health care (it has little to do with whether a government or a gigantic profit-making insurance company pays the bills).
These trends are common to all forms of health care, but private insurance is even more inefficient, as it makes money by denying people coverage, and spends a huge amount of money in the process. The solution here is a mixture of mandated coverage (to broaden the risk pool and lower overall costs, as the healthy are more likely to opt out) and community rating (stopping insurance companies from discrimination based on “pre-existing” conditions. I personally think single payer is the best system, as it lowers premia from the broadest possible coverage, does not waste money on rent-seeking activity, uses its bargaining power to get better deals from suppliers (including drug companies), and reduces the administrative inefficiencies of multiple systems. But there are other ways to do it.
Single payer is clearly not on the table, but the current debate centers around the idea of a public plan. Many oppose it on grounds of cost (again, in myopic manner, looking narrowly at the government balance sheet). Others say it would have a subsidy advantage. But they even oppose a public plan with no extra subsidies or legislative advantages — one that would deal with the private insurers on a level playing field. This seems like a win-win– if private insurance is as great as its defenders say, the public option will get no takers. And yet, the debate has always been about protecting vested interests and their rent-seeking activities (it’s an economic problem very common in developing countries).
Here’s a perfect example: They even oppose a private coop system, which would take out the government ownership but still compete with the profit-makers. As Ezra Klein muses: “It’s that the current insurance providers would face unexpectedly aggressive competition in the marketplace. Which raises an interesting, and potentially clarifying, question: Are Republicans in this to preserve the healthy functioning of a competitive private market or preserve the profits of the currently dominant insurance companies?” I think the answer is clear.
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Um, there’s already a nonprofit health insurance company. It’s called Kaiser Permanente. I don’t recall any Republican trying to shut Kaiser down or disadvantage it over Cigna, Aetna, WellPoint, or UNH.
All a co-op really is, is a corporation that substitutes a common commodity for money, anyway.
There’s something kind of ironic about using an analysis of Medicare to show the evils of private health care.
Profit seeking can lead to socially beneficial results, but only under certain circumstances. In the case of medicine, doctors have an incentive to overtreat, and patients do not have a strong incentive to stop them. Is the problem asymmetric information? I don’t think so. Asymmetric information exists in lots of areas without leading to such massive increases in cost. My car mechanic knows a lot about what’s wrong with my car than I do, but the asymmetrical information here can be largely overcome by relying on reputation or by seeking a second opinion. The problem is that with health care I have no incentive to do that because the marginal cost to me of whatever treatment he is recommending is close to zero.
Well, there’s only one way to reduce the incentive to overtreat: raise its price. Which means either higher out-of-pocket costs, or government/corporate rationing through limitations, exclusions, and wait times.
I think the answer is clear.
Very clear.
The GOP rhetoric is (to summarize George Will from the other day) “You certainly don’t want government run health care as it will be terrible, and if we allow for a public option, it will become the only choice because everyone will choose it.”
There’s something kind of ironic about using an analysis of Medicare to show the evils of private health care.
Ironic? That’s exactly why I provided the chart. the focus on medicare is because it’s really easy to obtain and compare data. This argument is like the nonsensical “rationing” arguments you hear from single payer systems — just because the US does not keep records on rationing does not mean it does not exist (it does).
And fundamentally, healthcare should not be a marketable commodity. Right now, doctors will overtreat, because they paid for it. If we went your way, and had people shop around for different treatments, do you think that would work? No, it would be an utter disaster. For a start, you are in no position to assess the information provided, and again, the provider will take advantage of this to gain business. Plus, you increase rationing by income, which is endemic in the US system. No, the answer is to stop treating health care like a business. Stop doctors acting like profit-maximizing capitalists, and stop insurance companies denying treatment or coverage to “high-risk” individuals. As John Paul said, the free market is appropriate for some things and not others. I can’t imagine anything that is more inappropriate for the free market than health care.
Let’s keep this simple: Is the private practice of medicine morally wrong?
And fundamentally, healthcare should not be a marketable commodity.
Why not?
If we went your way, and had people shop around for different treatments, do you think that would work?
Not only do I think it would work, I think it does work. Singapore has better health outcomes than the U.S. and spends a quarter of what we do on health care (as a percentage of GDP). That’s less than what the European countries whose systems you tout spend.
But as the Reading Rainbow guy used to say, you don’t have to take my word for it. Here’s Brad DeLong:
Blackadder, if you want to quote Brad on healthcare reform, I would not focus on a bizaare “utopian” scheme for abolishing insurance companies. No, I would focus on the essay he wrote with David Cutler, a leading health care economist:
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Every other North Atlantic country spends less than half what we spend on medicine. Every other North Atlantic country is healthier than America…the inefficiency of our health system is the biggest threat to economic growth over the next two decades–bigger, even, than the current financial crisis. The doubling of health insurance premiums since 2000 has forced employers to choose between cutting wages, cutting benefits and hiring fewer workers. The result is lost profits and lost wages, in addition to pointless risk, insecurity and a flood of personal bankruptcies.
One element of reform is information: Doctors, patients and administrators simply do not know enough about which treatments work and which are ineffective or harmful. An estimated one-third of medical costs go toward care with no value. Obama proposes to jump-start the long-overdue information revolution in health care with $50 billion to computerize the medical system and spread the word about best practice.
A second element is to fix perverse incentives in medical care. Doctors and hospitals today are paid for performing procedures, not for helping patients. Insurers make money by dumping sick patients, not by keeping people healthy. Obama proposes to base Medicare and Medicaid reimbursements on patient outcomes in a coordinated effort to drive the entire payment system toward paying for improved health rather than just more care.
A third element is to help the small players–individuals and small firms–get the same deals as large buyers. Obama proposes purchasing pools where individuals and small firms get the same low rates as large firms and sick people get coverage the same way as the healthy. Our current system of excluding the sick from coverage does not make their costs disappear but rather assume other, less efficient guises.
A fourth element is prevention. In today’s health-care market, less than one dollar in 25 goes for prevention–despite the fact that three-quarters of medical care is for conditions that could be prevented. Guaranteeing access to preventive services will improve health and, in many cases, save money.
By contrast, Republican presidential nominee John McCain believes that the central problem in health care is that people have too much insurance and, because of it, consume too much medical care. McCain seeks to reform the health care system by taxing and punishing businesses that offer employer-sponsored insurance. Once they are forced to drop coverage, he holds, their workers will find themselves in the non-group health insurance market, where they will buy less generous plans and go to the doctor less often. Modest tax credits would help some, but nowhere near all, of the uninsured afford coverage.
We are skeptical of the value of McCain’s plan for three reasons. First, the tax increase McCain proposes and the resulting dislocations it creates are the last thing American business needs now, when it’s in the midst of a severe economic crisis. Second, the non-group market is nowhere near as rosy as McCain makes it out to be. People who buy insurance in that market now are risk rated, see their pre-existing conditions excluded from coverage or priced higher and are never secure in their coverage. The McCain plan would amplify, not fix, these problems. Third, the McCain health plan has a huge financing hole–between $1 and $2 trillion over the next decade.
if you want to quote Brad on healthcare reform, I would not focus on a bizaare “utopian” scheme for abolishing insurance companies. No, I would focus on the essay he wrote with David Cutler, a leading health care economist
I would think that if you want someone’s honest opinion, an op-ed written as part of a political campaign would not be the place to look for it.
If you called or e-mailed Brad and asked for his views on healthcare reform today, what do you think he would say?
Just to interject, I think that the best way to expand the guaranteed-issue insurance market is to open it up to fraternal societies and professional orgs, like KofC and the NAR. That kinda fits with the co-op idea.
If you called or e-mailed Brad and asked for his views on healthcare reform today, what do you think he would say?
I imagine he’d say he still thought his proposal from two years ago was ideal, but that he preferred the Obama plan to the status quo or to any Republican alternative.
Do you have any reason to think otherwise? More to the point, do you have any reason to take issue with his judgment (borne out by the Singapore experience)that “consumers are cost conscious and economize when they have financial skin in the game”?
Singapore has better health outcomes than the U.S. and spends a quarter of what we do on health care
Singapore’s system more or less matches what President Obama is proposing.
I think that the best way to expand the guaranteed-issue insurance market is to open it up to fraternal societies and professional orgs, like KofC and the NAR.
Again, the President’s plan has the greatest potential to promote this.
I know very little of Singapore’s system, so send me something if you have it.
If “consumers” (and I object to calling patients consumers, but anyway…) have skin in the game, then, yes, they will economize. They do so already. 47 million have no insurance. Another 25 million are underinsured. Surveys suggest that 40 percent of Ameicans delay medical treatment each year on cost reason. Now, you can play semantics games all you like, but that’s how the American system rations care.
As Ezra Klein puts it: “Canada might have waiting times for non-essential treatments, but we have cost barriers to all manner of treatments. Some can’t afford the care, and so they go into debt, or have to sell their home. Others can’t afford the care, and so they never get it. We count that waiting time as zero rather than infinity, but that’s just a bad faith numbers trick meant to make us feel better.”
So, “skin in the game”? As Gawande’s piece shows, the wrong incentive are on the doctor’s side, not the patients. Let’s start pooling doctors incomes, paying them a salary– linking remumeration to the quality rather than quantity of care.
I know very little of Singapore’s system, so send me something if you have it.
See here.
If “consumers” (and I object to calling patients consumers, but anyway…) have skin in the game, then, yes, they will economize. They do so already. 47 million have no insurance.
The percentage of health care spending that is out of pocket is around 10%. Forty years ago it was around 50%.
The 47 million number is a bit misleading, as most of that number is people a) who lack insurance temporarily, b) who are already eligible for government or employer health care but just aren’t enrolled, and c) who could afford insurance but choose not to pay for it.
I’m still gobsmacked by Ezra Klein saying, “Okay, Canada MIGHT have waiting lists for NON-ESSENTIAL services…” Yeah, Ezra. I’m sure the critics in Canada and elsewhere could just be making it all up.
When a resource is scarce, it will be allocated by some combination of price, and queueing. If you lower the cash price, the queue will increase, because the supply of the resource will go down. If you raise the price of the resource, the queue decreases. In places where less money goes to health care (Canada, England), the queues are higher. In places where more money goes to health care (USA, France), the queues are lower.
Incidentally, France is a good example of a hybrid, non-single payer, but rather egalitarian system. It works kinda okay, but costs are exploding.
The graph displayed is not very informative. Assuming it is correct, it lumps all health care into one category. But “Health Care” is not some monolithic entity, like a blob of jelly that is uniform throughout. To cry for panic and rationing and nationalization doesn’t help the problem at all, rather it makes it worse
To really know what to do about health care, one must know what specific sectors are driving the increase in costs.
As someone who works in insurance, the costliest cases I’ve seen are those that require ever increasing doses of the latest patented narcotics, and those involving alternative therapies that provide expensive momentary relief of symptoms. There are a lot of people out there who will consume a half a million dollars worth of narcotics. Ironically, their pain complaints never change. There are people out there who will consume a hundred thousand dollars of alternative therapies, yet be back to baseline the day after treatment.
I’m not trying to be callous, but it is a well documented medical fact that sometimes the best therapy is to tell someone to buck up and get on with their life. Ah, but then the legal profession gets involved when someone doesn’t want to buck up… and so it goes.
A small percentage of patients drives up costs for the rest. Sometimes it’s just bad luck, but often it is bad expectations on the part of the patient. Nationalizing health care will not fix this.
My sister was at a Shriner’s Hospital for treatment of multiple orthopedic birth defects. Her room mate there was a Canadian medical refugee who could not get treatment in under six months for a simple femur fracture in her home country, a condition that is easily fixed. So much for nationalized health care.
If you lower the cash price, the queue will increase, because the supply of the resource will go down. If you raise the price of the resource, the queue decreases.
Yeah, last time they had a sale on proctology exams, the lines were around the block to get one (in fact, with the price so low, why stop at one?).
Nice try. I’m talking about resources that are of actual value.
Doug, stick to the statitics instead of personal anecdotes. Rationing of healthcare in the US is far more severe than in Canada (in the US it’s largely by cost).
Having looked a little into the Singapore model, I think its applicability is questionable. Basically, it is a system of forced savings combined with regulation of prices, incomes, and services. The former works well in the Asian culture, while the latter is the best part. The big weakness of the system is it does a poor job in insuring against tail risks — expensive chronic illness.
So, you’re saying that Americans can’t be trusted to spend more out of pocket on health care… but Asians can?
Oh, and are you familiar with the term “Erastianism?”