Maybe the Best Thing I’ve Read on Health Care Reform
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The other day a commenter recommended David Goldhill’s article on health care reform from the forthcoming Atlantic, and let me now do the same. It’s a long piece, and not easily excerpted, but absolutely worth reading carefully and in its entirety. Here’s a quick summary of what I take to be its most important points:
1. We spend too much money on health care. 18% of GDP, a quarter of our total economic growth from 2000-2008, 20% of total government spending … you know the drill. And like the housing bubble, this is largely the result of misguided government policies that distort the market in the name of combating undersupply, on which more shortly.
2. We treat “health insurance” and “health care” as synonymous, but they shouldn’t be. Understanding the purpose of health insurance as that of paying for all of our health care expenses is a quite recent phenomenon, and it has a lot to do with the post-WWII policy of subsidizing employer-provided health benefits, which quickly became the norm (and was mimicked by Medicare and Medicaid) and crowded out alternative methods of payment. Among others, one consequence of this is the vast amount of money we spend – $500 per person, as of 2006 – just to staff the insurance bureaucracy.
3. There is a massive moral hazard problem. Patients have little direct financial incentive not to request whatever expensive treatments they see on TV, and doctors have clear financial incentives to provide them. Combine this with a massive informational asymmetry, and costs spiral perpetually upward; individuals with health insurance (or “insurance”; see #2 above) spend nearly four times as much of other people’s money on health care than do individuals without it, and in many instances the attendant benefits are marginal at best.
4. We’re the only ones who can pay. Not the health insurance or drug companies, whose profits would fund our appetite for health care for less than half a year. Not our employers, who just take it out of our salaries (and the would-be salaries of our would-be coworkers). And wouldn’t some of that money be better spent doing something else?
5. Governments can’t do enough reduce costs. Concerns about innovation aside, state bureaucracies aren’t actually very good at cost control; even the costs of Medicare have risen consistently (and their relatively low costs are largely the product of shifting costs onto non-beneficiaries anyway), while single-payer systems like those in France, Canada, and the U.K. have lately seen increases in per-capita spending comparable to our own.
6. Regulation limits competitiveness. State laws make interstate competition an impossibility. Licensing requirements form huge barriers to entry. Safety regulations are reshaped by powerful interests as a way to disadvantage their would-be competitors. Government laws and payment policies have encouraged a situation where large and powerful hospitals, rather than smaller specialty clinics, have a near monopoly on many forms of care. None of this is the result of a free market, and little if any of it works to our benefit.
7. Medical providers work to serve the people who pay them, not the people in their care. With the exception of billing, hospitals and other health providers have little incentive to make IT improvements. Costs are hidden from potential patients, which of course is a perfect way to inflate prices and discourage real competition. And very little is done to encourage greater transparency with respect to cost or quality of care.
8. The costs of medical technologies are vastly inflated. In contrast to the open, competitive, and relatively transparent market for ordinary consumer goods and, say, services like LASIK surgery (with insurance seldom covers), much new medical technology is used in a way that involves little incentive to lower prices. And as per the above, this can’t be fixed through supply-side remedies; the only solution is to alter the way we make our demands.
9. The present push for “comprehensive” reform will do nothing to solve the underlying problems. Rather, it will only perpetuate many of the present system’s worst excesses, thus further solidifying the sorts of tendencies that have given rise to the present mess. (This is an important point to be made in response to those who argue, not unreasonably, that the present situation demands that we move quickly and not sacrifice the better for the perfect; as I’ve suggested before, the flip side of this is the risk that self-styled “reforms” are passed with much fanfare, and then the demand for truly necessary changes comes to an end with a whimper. Short-term gains can easily become long-term losses.)
10. The proper response is a shift toward consumer-driven care, with subsidies for the poor and a single program of truly catastrophic insurance available to all. In other words, pretty much what I’ve been saying.
Please note that Goldhill is a Democrat, and that he comes at this issue as a businessman who recently lost his father to poor hospital care, rather than an industry wonk with a line to toe. If anyone knows of any especially forceful criticisms that have been made of his argument, please do link to them in the comments and I’ll take them up in a future post. In the meantime, you should read the whole thing.
P.S. Here are the transcript and audio from an interview with Goldhill on NPR’s Morning Edition.
Filed under: economics, government/law, health care
I’m not quite sure I understand what the difference is between us paying for it, a la number 4, and employers paying for it, when in fact they just take our insurance contributions out of our pay.
9. The present push for “comprehensive” reform will do nothing to solve the underlying problems.
Unless you think that the fundamental problem with our system is that too many people lack essential health care access, and that, if nothing else, comprehensive reform can get many more people access. That’s not a refutation of any of your points, which are well taken, and it’s not even a disagreement with you. I think that in the larger conversation we have masked a basic disagreement about what the exact paramount aims of reform are. And reasonable people disagree! My personal, depressing view is that in our discussion– and this is true maybe even more of Democrats than Republicans– you’re only really speaking seriously when you talk about those who are not worst off. That’s why it was so important for so many wonks to write predominately about efficiency and waste when the reform conversation got started in earnest. It’s not that they’re wrong in what they’re saying or wrong to bring it up. But I think that they were operating in an intellectual space that is narrow in part because they let it be narrowed.
You’re right that demand-side price adjustments are simply going to have to happen for improvement. One thing that I think is currently hampering the debate is that those who propose public plans are prevented (due to talk of “death panels” and similar) from talking about demand-side price controls, whereas those who advocate for the status quo are allowed to. This gets back to the fact that the government (who in this case would be demand side) rationing care is not materially different from an insurance company or HMO rationing care, but for some reason people find the former much worse than the latter. Great post.
I’m not sure your 10 points are entirely accurate representations of Goldhill’s argument… I’m just going to address them directly though:
Let’s go point by point.
1. Not going to argue. Anyone who does argue that one is an insane person.
2. Entirely correct. People’s inability to distinguish between “health care” and “health insurance” is driving a lot of the ignorant ranting and raving surrounding the reform discussions.
3. Actually, a great many people most certainly DO have direct financial incentive not to request expensive medical treatments all willy nilly. It’s called a “co-pay”. OR… it’s called “being uninsured”. I have what many would consider to be rather decent insurance by US standards provided through the rather large engineering company I am employed at. It’s no gold plated Cadillac of a plan or anything but it’s above average. For regular old standard routine care and examinations I tend not to see bills, but if I start spontaneously requesting high end extras just because I saw a commercial for them I liked then you can bet your backside I’m suddenly going to be facing off with some accountant at my insurance provider who is going to be telling me there’s no way they’re picking up 100% of the bill for it.
But my gripe here is middling… I suppose we probably have a different definition of “little” financial incentive.
4. And back on track… yes, we need to pay for what we get.
5. And… train-wreck.
Nitpicking about what exactly constitutes “enough” cost reduction aside, the bottom line is that we have this thing called the real world to look at to tell us if higher public sector involvement successfully reduces health care costs. Namely, half a century of observational data from the rest of the industrialized world where a vast array of universal coverage schemes ALL of which are utilizing significantly higher public sector involvement in their funding. And EVERY SINGLE ONE has dramatically lower costs.
Yes, France, Canada and the UK have seen rising costs… it may surprise people to learn that aging baby boomers aren’t limited only to the United States… but COMPARABLY rising costs? That’s a purely lunatic statement.
http://graphics8.nytimes.com/images/2009/07/09/business/econgraphic2.jpg
http://graphics8.nytimes.com/images/2009/07/09/business/econgraphic3.jpg
Sorry, NO. The US is *way* off ALL by itself on that particular graph. Clearly breaking from the pack in a bad way.
Being either ignorant of or stunningly dishonest about this fact is going to rather destroy any ability to reach any reasonable conclusions about solutions to the issue.
6. Arguably true, but irrelevant to the provision of insurance when dealing with non profit public sector entities providing it. It always stuns me how many people don’t understand that selling insurance is not like selling clothes, or cars, or fruit. Market competition is a very good thing for the consumer in all of the latter. Not so much in the former.
The problem is that insurance works best when it can do two things in particular:
A) Pool risk as efficiently and predictably as possible in the largest population it can manage.
B) Wield the greatest possible negotiating leverage for cost of services… again, totally reliant on the size of it’s customer population.
If you try to cover a population of 1million people with a single non profit insurer they can do very, very well. They have an extremely strong negotiating position resulting from their lock on the customer base. Dealing with a population of a million people they can rely fairly well on statistical models to provide accurate projections of future service requirements and set premium levels appropriately without unreasonable amounts of risk that the cost of servicing the group will suddenly massively overshoot their available revenues. And a non profit entity has little incentive to indulge in the kind of nasty abuses a profit seeking entity would if given monopolistic control of a sector.
If you try to service that same population with 100 competing providers they can try all they want to try to streamline their services to outdo each other, they will NEVER match the performance potential the single non profit payer had covering the whole group. Competition between that many different providers means you are, by definition, carving the population into far smaller piecemeal segments to be individually serviced by different insurers. That compromises the ability of each insurer to reliably model service needs as their number of customers shrinks so they *need* to raise premiums or risk bankruptcy on a random statistical fluke in ending up with patients as customers who just happen to be disproportionately expensive to provide services to. Their negotiating leverage is absolutely slashed so their costs are going to end up being higher and THAT will force their premium levels to be higher as well. They can’t get around the math. And that’s before you even add in the administrative inefficiencies of private competing insurance providers relative to a universal non profit public sector provider who can simply co-opt existing bureaucratic structures inherent in government to cover things like fee collection (we already have tax collectors) and the reduced need for massive teams of fraud monitors (everyone is on your plan, how many people are going to be trying to fake access to it?), the lack of advertising costs, the lack of need for profit margin built into prices…
So.. who cares if government regulation reduces competition in an insurance marketplace? Just let the government do something it’s actually good at and run the whole system.
7 & 8: No argument….
9: Debatable. Everything I’ve seen about the proposals being given serious consideration in congress is certainly underwhelming but I wouldn’t say it will do *nothing*. It just won’t do anywhere near enough until congress stops pandering to the insurance lobby, take a serious look at how other nations all control costs far more successfully than the US does, and do more than this ridiculous half assed tinkering they keep trying to pass of as “reform”.
10. And here’s where the train wreck in point 5 comes back to bite us. The solution is rather obviously dramatically increased public sector involvement in and regulation of the health insurance market… not turning everything over to free market forces. I love the free market for almost anything society needs to be provided with… but it absolutely SUCKS at providing insurance. It’s very good at creating very very profitable insurance entities, but they don’t generate those profits by focusing on getting insurance products to the people who **actually need them** since those people represent financial losses as customers. And that’s a fatal flaw from society’s viewpoint and drives cost to actually get those services provided to where they’re needed through the roof.
“The proper response is a shift toward consumer-driven care, with subsidies for the poor and a single program of truly catastrophic insurance available to all. In other words, pretty much what I’ve been saying.” This makes much too much sense. Congress and the President could never support such a thing.
Nothing – which was really my point. The problem is that when we subsidize employer-provided coverage we encourage people to think that health care is “free” to them, when in fact it isn’t.
As to your second point, Freddie, I am entirely in favor of expanding access; I just think we shouldn’t apply the “comprehensive” label to something that isn’t that at all; and I think that government-provided coverage should move in a consumer-driven direction rather than mimicking the employer-based system. I’ll have more on this later this afternoon, I hope.
Grant:
Umm, no it’s not. Here’s Goldhill:
The graphs you show from the NYT both illustrate the data in a way that obscures this point.
As to the rest of your argument re: #6, it is the very same sort of reasoning that has led people to conclude that government central planners should set wage and price controls. I understand that it is an article of faith among the Left that “health care is different”, but aside from repeating it like a mantra I’ve never seen someone actually show that it’s true.
First: The only thing Goldhill could be looking at to get values like that for any of those nations is growth in spending as an absolute dollar value, and I’m still not sure exactly where he’s getting his numbers from since the data have says that looking at those numbers gives values of:
Canada: +37.7%
France: +30.1%
UK: +39.7%
US: +38.8%
Which is a little different than what he has but ok… ballpark.
But it is rather more appropriate to look at growth in spending as a percentage of GDP so that you don’t get thrown off by things like the effect of changing rates of exchange in the different nations, and those numbers put the US as the worst performer:
Canada: +12.5%
France: +9.9%
UK: +13.9%
US: +15.2%
According to available OECD statistics. And when we’re dealing with expenditures in the trillions of dollars making up large fractions of total national GDP a difference in the rate of cost growth of 1.3% over a 5 year period (the difference between the US and the UK, the next worst performer) is worrying. A difference in the rate of growth of 5.3% (the difference between the US and France) could be referred to as “catastrophic” by the less charitably minded.
And that’s only if we look at 2000 to 2005 in isolation, which there’s no particular reason to do. As the considerably longer ranged charts I linked with data for significantly more countries showed, the problem with controlling cost growth is persistently considerably worse in the US than anywhere else. It’s not some fluke blip in the data, it’s systemic.
Moving on… you’ve seriously never had anyone show you how it’s true that insurance markets operate differently than the markets for almost any other commodity? It’s remarkably easy to do. In fact, I already did a great deal of it in my first post where I explained in moderate detail why market competition isn’t the wonderful thing for the consumer in an insurance marketplace that it is markets for almost anything else. Did you miss it? For another aspect of how it’s different, consider what the profit motives in insurance define their ideal customer to look like. The consequences are mind numbingly obvious:
Let’s say I am in the business of selling… food.
Who do I like most as customers? People who consume LOTS of food, or people who consume very little food?
LOTS. I like people as customers who consume lots of food. Because the amount of money I make is DIRECTLY PROPORTIONAL to the amount of product I sell, which is itself DIRECTLY PROPORTIONAL to the amount of product my customers consume.
Now, let’s say I’m in the business of selling health insurance. Who do I want as my customer? Someone who consumes LOTS of health insurance, or someone who never uses the stuff? You know the answer as well as I do. you want to sell policies to people who will walk away and never, EVER use them. that would be great for you. Barring that ideal situation, people who use them as little as possible are people you like to see writing you premium checks.
The profit motive is BACKWARDS in the insurance industry. Other businesses in the free market (like, food sellers) are motivated to direct significant effort towards serving the elements of society with the greatest need for their product because that’s where the greatest profit is. so they make their profit, society gets it’s needs met, and everything works relatively well.
Insurance providers however want to do the OPPOSITE. They don’t want to sell insurance to the people in society who need it most, those people COST them money as customers. So they spend significant time and energy *avoiding* meeting the greatest needs of society in their business sector by throwing up every barrier they can think of to keep from having to give insurance to people they think will actually use it heavily. If they think you fall in that category they jack the prices up to prohibitive levels, cut the level of coverage you’re able to secure as far as they can manage citing “pre-existing conditions” or other nebulous risk factors they identify, etc… and why wouldn’t they? They’re just doing what makes obvious business sense.
And that’s the problem. Because what makes obvious business sense for the insurance industry is *bad news* for the society it operates in.
So to repeat, the free market SUCKS at providing insurance, because the market doesn’t act on insurance like it acts on other things.
You will never find someone who sells, say, steel… employing an entire department of lawyers whose sole function is to be put to work trying to figure out how to avoid delivering steel shipments to people who actually need to use it for something. That would be insane. But that makes perfect sense if you change the word “steel” to the word “health insurance” because YOU have to pay for the customer actually using the product when you sell health insurance.
Clearing up any yet?
Regarding #6, we should focus on excess spending, i.e. spending that is not coming from economic growth or due to an aging population, rather than simply growth of all spending for a better comparison, especially if you are trying to draw a conclusion on effectiveness of price control. In excess spending, the US leads – CBO report,”US Health Care Spending: Comparison with Other OECD Countries”, at http://opencrs.com/rpts/RL34175_20070917.pdf
My own experiences show that Grant is exactly right: ask anyone from the Hurricane Katrina area what happened inside the homeowner’s insurance industry after the storm. Rates skyrocketed and many of the major insurers won’t even write policies along the Gulf Coast any longer. The premium inflation, higher deductibles and new policy freezes occurred even though the insurance industry showed profits in 2005 after both Katrina and Rita and there was considerable instance of insurance companies trying to wriggle out of payment for various reasons. Just think what would happen given the same situation if you had a more fragmented customer base spread among smaller competing insurance companies– bankruptcies. You saw tendencies towards this with the smallish highly esteemed company, USAA, in 1992, insuring only military officers at the time, when Hurricane Andrew hit south Florida. The payouts mauled them badly and my rates in Mississippi doubled. This doubling of my premiums prompted me to switch to a much larger insurer, Nationwide, and here again four years after Katrina my rates have increased 300%. Grant is absolutely correct– the profit motive for insurance providers is inverted.
Grant and Eric: I don’t disagree that an absolutely unregulated market in health insurance will result in unjustly high premiums for high-risk individuals and other abuses and morally problematic practices (like recission, say), but that obviously doesn’t entail that market competition in health care isn’t a good thing at all; for one thing there’s the issue of medical innovation, and for another there’s the question of whether government rationing can do a better job than the market of providing health care in ways that are cost-effective and suited to individual needs. And by my lights it would be possible to deal with most of the problems you mention by some combination of, say, outlawing recission and/or discrimination on the basis of preexisting conditions, mandating (along Goldhill’s lines) or having the government provide universal catastrophic insurance coverage, or simply offering means-tested vouchers to help high-risk individuals afford the level of insurance they need; all of which reforms can be made around the margins of what remains an essentially free-market system, they don’t require anything like single-payer or the public option.
Oh, I’m certainly not arguing that it isn’t good *at all*. If we’re only looking at a private insurance market then given the choice between a competing network of multiple private for profit insurers or a single for profit entity with a total monopoly on the provision of insurance I’m definitely going with the system that throws a few insurers against each other to keep each other at least minimally “honest”. Maybe the monopoly has the *potential* to operate better but I don’t want ANY profit seeking corporation getting their hands on a monopoly of something whose demand is as inelastic to pricing as health care. That would be a nightmare waiting to happen.
I’m just saying that this idea that’s floating around among free market advocates that all you have to do is turn over the provision of health insurance to the market while getting government out of the way and then market competition and the profit motive will just automatically drive the industry to an equilibrium point where efficiencies are maximized and costs are minimized and the bulk of society’s needs are being met the way it would if we were dealing with the provision of any other commodity is purely wrongheaded. The market simply isn’t geared to do that when you’re dealing with insurance.
And yes, innovation incentives are one thing to keep an eye on, I know McCardle at the Atlantic never stops pounding away on that angle… but from where I’m standing right now the cost of running health care policy the way the US currently does carries costs of:
1. About 800 billion dollars a year in EXTRA spending above and beyond what would be getting spent if the US ran a system with the costs of even the average OECD nation.
2. Tens of millions of Americans priced out of the insurance market.
3. Tens of millions more only able to get insurance that is wholly inadequate to prevent severe financial distress or bankruptcy in the event of serious illness or injury.
4. Decreased mobility in the labor force. People don’t want to change jobs because it puts their insurance status up in the air… if they have any existing medical condition then that goes double, the idea of trying to get new insurance while possessing the dreaded “pre-existing condition” will nail them to their cubicle even if they hate their job. And even thinking about striking out to start your own business invites all kinds of nightmare headaches trying to deal with the provision of insurance for not just yourself but employees…
Etc…
So, if we want to use the “but, innovation suffers” argument against the idea of ramping up public sector involvement in the nation’s health insurance and controlling costs by using, among other things, the very large leverage a universal public sector insurer could wield in price negotiations… I would want to see some substantive argument that the amount of innovation the current system is driving *that would no longer exist* once the system was reformed is giving us at least equal value for the current incredibly massive cost. And it’s not like suddenly giving millions of extra people access to medical care isn’t going to have some positive counterbalancing effect on demand for medical services/equipment/medicine… not to mention all the rest of the nation still needs those things even if they are getting them cheaper. Innovation incentives aren’t just going to up and vanish on us because we reign in some profit margins, at most they’re curtailed a bit. Which I’m fine with as a trade-off considering what we’re trading for.
Frankly, I think it would be extremely hard to argue the amount of *extra* innovation the current system is driving that would go away if the system was reformed to something closer to what the average OECD nation runs even covers anywhere near the extra 800 billion cash before we even get to the millions of people being denied adequate access to medical care and the effects on the labor force.
However, on the question of whether government rationing can do a better job on this particular subject… I thought we’d already established that isn’t a question. A half century of observational data from the rest of the industrialized world tells us the public sector does better at this. The steps you mention (outlawing rescission and discrimination based on health condition, mandating coverage for everyone, etc… ) are really just imposing sufficient levels of public sector regulation that you’re forcing the private sector to act according to public sector rules instead of according to where market forces would naturally push them to go, with some small margin for profit allowed. Basically, turning the private sector into subcontractors providing insurance packages for the public sector according to the public sector’s rules. Which would work if it was done properly, a lot of European nations use systems along those lines… but it isn’t exactly the market in action making it work well, it’s the government regulation *blocking* the natural actions of the market that makes it work.
Oh, and on “single payer or the public option”… you’re not talking to a fan of “the public option”. If you’re going to do it with the public sector do it right or don’t do it at all. As I mentioned in my first post, competition in an insurance marketplace isn’t the great thing it is in other markets… so just throwing one more competing plan into the middle of the private insurer mob and thinking it will make things better because it happens to be a public plan and it will “keep the private insurers honest” by competing with them is dreaming. First of all, as I understand it this new public option isn’t going to have a pre-existing ready to go customer base like Medicare did when it was enacted. So you start this thing up, nobody is enrolled in it yet, it thus has NO negotiating leverage so the only way it can offer competitive pricing is to almost certainly run way in the red.. then people squeel that the program is bleeding money…
Yeah, that’s going to work great.
And how are medical service providers supposed to see any administrative savings by just making them deal with ONE MORE insurer? (Oh, I forgot to mention this is yet ANOTHER way “competition” screws up the ability of insurance markets to operate at peak efficiency.) Canadian providers realize HUGE administrative overhead savings because they only have to deal with ONE very simple billing structure from one single source running a single, common benefits package for the vast majority of their business… instead of having to deal with hundreds of insurers with seperate claims departments and billing procedures and authorization contacts and paperwork and coverage plans that they need to hire entire administrative staffs just to deal with…
Not having to deal with all that lets Canadian doctors and hospitals significantly lower their prices and still stay profitable. Which means the government can charge lower premiums and still keep the system solvent. You get none of that benefit with this “public option” plan they keep talking about but they’re too terrified of being called communists or something to ever even think about doing single payer the right way so you’re never going to see those savings happen in the US.
And what’s the comparison point? The trainwreck of a system we’ve got in the US, which no one in his right mind could view as a free market? I’m not at all one of those wide-eyed “free market advocates” you talk about, and I’m perfectly happy with your classifying the sorts of regulations I’d support as “forcing the private sector to act according to public sector rules instead of according to where market forces would naturally push them to go”, but as I said that’s true only around the margins and in a specific range of special cases. Health care for the vast majority of Americans, including many of those who require government assistance, can and should be made available in a consumer-driven fashion through a basically free market, not by asking centralized bureaucrats to decide what health care is worth and who deserves it.
As a Canadian physician, I really enjoyed the article, and found Mr. Goldhill’s insights quite interesting. Right now, I do prefer the current universal Canadian system (warts and all) to the current patchwork US system (and yes, I have worked on both sides of the border). However, I am not closed-minded to the possibility that a new American model like Mr. Goldhill is proposing could make our Canadian single payer system look backwards by comparison.
Americans need to look at more radical reform of their system, and quite frankly, care could not get any worse than it is under the status quo. As a result, rather than looking to other nations for inspiration, Americans should look to more radical home grown solutions like Mr. Goldhill’s. Because it is driven by consumers, but with appropriate safe guards, it should appeal to both parties. While I applaud Mr. Obama’s efforts to address health care reform, the current bills being floated are simply too tepid and timid, and fail to address the dysfunctional underlying structure of the system.
Bullshit!!!!
Fred Jack,
Just what specifically are you commenting on? It might help to spur debate.
If it was about my comment, I do have a somewhat of a stake in this debate, as my spouse is a US citizen, and sometimes she does want to leave Canada for home. And if I’m in the US, I’ll be working in and using whatever system evolves there…
as a small ‘l’ libertarian, the only thing I don’t like about Goldhill’s idea are the mandates, understanding it wouldn’t work without them. But considering his point about how we would still socialize the costs of care under virtually every proposed reform of the current system– radically changing the way those costs are distributed, and who they’re accountable to, makes a large difference.
To all the people who say ordinary people aren’t “equipped” to act like consumers with health care– stop condescending to people like their infants and they might accept the responsibility, as a free people should.
*they’re*
Jord: I don’t much like the mandates, either, and while I do understand the purpose it seems to me that something similar could be accomplished simply by having the federal government guarantee payment of catastrophic expenses above a certain percentage of household income. Obviously such a policy would have to be funded by the taxpayers and so would, in a sense, just be an implicit mandate, but it seems to me that it would be considerably more consumer-driven and so would involve less of the sorts of abuses that often accompany insurance mandates.
It’s a very good article, and Goldhill makes some very good points.
However, he does a much better effort diagnosing some of the absurdities and distortions in the current system than he does analyzing why his proposed solution ends up being more effective.
In fact, he mentions one of the key weaknesses in his proposal – the idea that consumers are the best deciders of what their own healthcare needs are. That is why we have doctors, internet hypochrondriacs notwithstanding. Given that his proposal doesn’t address the problems of overtreatment and its attendant cost issues, its not clear how his proposal deals with what he suggests is the core problem in American healthcare – costs. That is, its one thing to shop around for something elective like LASIK. It’s quite another when your cardiologist says you need a triple-bypass in the next week. It’s simply not feasible for most people.
That said, Goldhill admits these and some other weaknesses in his proposal. But like many other “market-based” solutions, there is an enormous gap in the appeal of the theory and any even theoretical implementation of it. Put another way, its very easy to propose that an ideological solution would work (e.g., “competition” as a panacea), but quite another to elaborate as to how the rubber meets the road. And this lack of specificity and vagueness is at best unsettling and at worst another piecemeal idea with great intellectual appeal but little pragmatic value.
I don’t see why proponents of consumer-driven care need to assume any such thing; rather, the idea is that having patients who are interested in spending less rather than more will create an incentive doctors to provide care in the most cost-effective way possible. In most cases, patients will be more likely to ask around (and, e.g., check the internet) about which doctors are the best on this score than to pretend they know better than their doctors when it comes to the question of what sorts of care they need.
Mr. Schwenkler,
This is the best thing you’ve read on health care reform? I suggest you keep reading. From the predictable, attention-getting hyperbolic title “How American Health Care Killed my Father” to the rambling, tangential thesis, this is hardly new or enlightening material. There is too much to rebut in one comment, but let me address his initial point, that Health Care killed his dad. Really? His father was 83, and apparently had some medical problems. He was admitted with presumptive pneumonia and then “within 36 hours” was septic. Sepsis is not an uncommon complication with pneumonia. Sounds like they kept his father ALIVE for the next five weeks. What would have happened to him if he had stayed home? Blaming the System (notice the walk back on blaming the docs or nurses) is a cop out. As a doctor myself, I don’t want to see anyone die. But a hospital is a big building full of sick people, and those with weak immune systems (elderly, chronically ill, very young) are at risk the second they walk in the door. Hospitals SAVE people’s lives, please remember that.
Here is my own anecdote: My father, also a physician, lost his father at the VA during a routine knee replacement surgery at age 65. There was some type of anesthetic complication and Grandpa went into liver failure and slowly died. Years later, as I became a doctor, I questioned if the VA had “killed grandpa”. My father did not like me asking this because he knew that there are no guarantees, and that nothing is risk free.
I suggest Mr. Goldhill eat his apple a day.
That would be fine except for the fact that we just went through a long discussion as to why doctors in fact don’t have an incentive to minimize costs, despite serious Medicare pressure to do so. Instead they simply increase treatments, as they have a clear economic incentive to do so. Once again, its not clear how this system pressures them to be more efficient. Instead, as profit-maximizers, doctors will continue to try and increase income, and while patients may wish to resist in opposition, they are simply not in the best position to do so, with a significant informational disadvantage. Otherwise, they’d be doctors. And there is obviously significant incentive to maintain this informational asymmetry as much as possible. Once again, it seems to me to be a clear gap between theory and actual behavior.
I don’t understand your point at all, George. Of course this system doesn’t pressure doctors to be more cost-efficient, simply because there are millions of patients who are encouraged to treat health care as if its effectively free. And Goldhill’s proposal, which is right in line with what I’ve been arguing for quite a while, is that changing the way we think about insurance would give rise to a new set of incentives that would help to drive costs down.
Grant’s point about insurance and the market seems to kind of miss out on one of Goldhill’s main theses: that a large chunk of health care shouldn’t be paid for via insurance at all. His point is that we currently expect certain social goods to be taken care of through insurance, and that this is a bad thing. His point is not that insurance can take care of those very same social goods more effectively if it operates in a free market (at least not without heavy qualification – did you miss the mandates and universal catastrophic insurance part?). That’s why he says that the single most important step for reforming the system is the practice of paying for health care almost exclusively through comprehensive insurance.
I realize Grant was addressing point 6, which was about market forces, etc. But as John formulated it, that wasn’t specifically about insurance, but largely about health care providers. Incidentally, this is relevant to Robert’s point about infections in hospitals. The stuff about hand-washing aside, it is precisely the point that hospitals are large places with lots of sick people in them. Part of Goldhill’s point was that smaller, specialized inpatient clinics are perversely kept out of the market, and this is perpetuated because of the peculiar set of goods we expect a hospital to provide, which is in turn related to the way we pay for health care across the board.
Back to Grant’s point: you (Grant) applaud the explicit distinction between health care and health insurance, but when John asks why health care is magically different from other goods with respect to the market, you immediately start going off about insurance and the market. But let your points about the latter stand: you seem to be holding the role of insurance in the system as a constant, when in this discussion it’s anything but that. I don’t see anything in Goldhill’s article that suggests he thinks a free market in insurance is the key to all our problems. The crucial move, roughly, is to detach payment for lots of health care from insurance altogether, and to mandate universal coverage for the remainder. The stuff he says about pricing, transparency, and incentives mainly applies to health care providers and insurers: none of this implies the belief that a free market in insurance will provide, efficiently or not, the social goods we’re after.
Argh… bad slip. In the last sentence, replace “insurers” with “consumers/patients.” The point is precisely not so much about insurance as about providers and patients.
George,
It seems like Goldhill is not addressing the issue from an ideological angle, but rather a wholly pragmatic, if slightly idealistic one. He’s a business executive and a Democrat, not some heavy-breathing libertarian. More importantly, his analysis appears intellectually honest and devoid of a lot of pre-conceived notions and straw men one might expect in an essay on this subject. He explains the reasoning behind his arguments and observations cogently, which support his conclusions. Very little of his main critique as written can be disputed by an honest observer/participant of our healthcare system. I find that, in this area as in the economy at large…those who are correct in diagnosing the true problem are more likely to offer solutions that actually address the true problem.
Just as I don’t trust any economist who didn’t anticipate the mortgage/derivatives debacle and understand it’s origins, I don’t trust any healthcare reformer who seems oblivious to the main reasons of healthcare cost inflation–an unnatural system birthed from perverted legislation enacted by politicians on retainer to parasitic business interests.
As to his proposal to reform the system, what is your major complaint? The information disparity faced by patients is so severe that people will unquestioningly acquiesce to whatever a man in a white coat says is best? Firstly, a responsible person aka healthcare consumer plans out contingencies in his own mind for how he would react/proceed if x,y,or z happens, God forbid and ect. Second, a doctor is not God. I would not be here today if my mother didn’t get a THIRD opinion from a holistic M.D who recognized that certain elevated hormone levels did not necessarily indicate cervical cancer, and probably had a more benign origin. He was right, the other two well-meaning doctors were wrong, my mother did not get her cervix removed, and I was conceived a few years later.
My mother realized what should be obvious to everyone. YOU are ultimately responsible for your own healthcare–it’s your body…and you cannot delegate this responsibility away simply because you don’t understand what someone is telling you. LEARN. As for decisions made in a panic from dire news? DON’T. Common sense would suggest a state of panic is never a good platform for wise decision making. In cases of emergency…plan ahead, or accept the consequences of a stranger’s default assumption of how you should be treated. Individual liberty and sovereignty over one’s body requires personal responsibility. The alternative is a parent state ruling over a citizenry stuck in perpetual adolescence. No thanks.
As to your last point, it sounds like the familiar trope of “sounds good on paper…” but you make no effort to rebut his proposal other than to say that things don’t usually work as planned and reality is different from theory. Really! Recall, his overriding point was to illustrate how the current reform efforts by the Dems and Obama are long-run counter-productive especially because they do NOT seek to alter the rotten fundamental drivers of perverse incentives, and I think he demonstrated that pretty persuasively. “Obamacare” is not some balanced compromise for progress, but rather a terrible folly that will do little to resolve the problems it seeks to address, while further entrenching the vested interests in the system as-is.
Pragmatism is a means, not an end. The Democrat’s final bill is very unlikely to succeed on it’s own terms in fixing the problems it’s designed to fix; on the contrary, it might actually make worse those very things it’s attempting improve. (see: housing affordability as bipartisan public policy)
To say that a proposal like Goldhills, flaws and all, is some kind of ideological fantasy because it doesn’t comport to “the art of the possible” in our current cesspool of a political climate, is not an indictment of fresh ideas like Goldhill’s, but rather the sorry state of what is “possible” in this decaying political system, which rarely serves the interests of ordinary people and directly harms them more often than not. What this country needs now more than ever is radical thought and radical action, or we will inevitably continue our descent into fiscal and monetary oblivion, and political cannibalism.
First of all, I never suggested that Goldhill is being ideological – far from it. From his background it would seem unlikely. Rather, I was suggesting in the abstract, given how much the right loves to trumpet “market-based” solutions that one might want to look beyond how this particular solution fits dogma to actually visualizing how it would work on a purely pragmatic level. I don’t consider his proposal a “fantasy”. Rather, it addresses in specific terms an action, but is extremely vague as to the reaction by existing participants.
Put another way, I have no problem with his particular solution. But he himself admits that he’s not sure how it would play out in reality, albeit it can’t be worse than a failing system. That is, its one thing to sketch out a program where consumers hold catastrophic insurance policies and pay out of pocket for other costs. It’s quite another to describe in detail how this produces cost pressure on doctors who overtreat and overprescribe, pharma, hospitals, and insurance companies. Just saying it creates a competitive market is too vague for my dense skull, especially when analysis of any “competitive” market ultimately reveals inefficiencies, natural monopolies, oligopolies, etc. My point is that such an explanation of how existing incentives are modified and how that impacts existing behavior seems to me to be missing from the article, something even the author appears to suggest. The only way I can put it this – I’ve built hundreds of financial models in my life, using variables and relationships to predict financial results prospectively. To do so, you need to propose very specific, mechanical relationships between many factors. I’m not sure I see any of that here.
As for people being responsible for their own healthcare, that’s a lovely idea in concept, but strikes me as generally unrealistic. It seems to me to much like the healthcare discussion in toto – where persuasion seems to come from anecdotal evidence. Given that we are emerging from a crisis where millions used toxic mortgages to buy houses they couldn’t afford, and a large swath can’t decide where Obama was born, much less understand that as Medicare recipients, they already have government health insurance, I’m not particularly confident in the populace’s ability to make their own judgments, at least with any great accuracy. Being an educated consumer is obviously a good thing, but I think the reality is that medicine is complicated enough that most will defer to their physician. Put another way, if my dermatologist tells me that the formation on my face is melanoma, and that I need to have it excised by Dr. SomeGuy, its very likely that I will go this surgeon and not shop around for a better price. That referral is a large part of what I want from the doctor. You can propose a different model of behavior; in fact, I expect you to. Given that this seems to be how it works now, I would need to be convinced otherwise.
I’m not saying I think Obama’s current proposal is perfect – far from it. But the pragmatic issue is that any sort of reform is going to be imperfect and piecemeal at best. The entrenched interests would tolerate nothing less.
After reading the entire eighteen pages, which allows me to agree that Mr. Goldhill’s article is the finest analysis of the current healthcare systems and problems reforming them that I’ve read; I was a little non-plussed that the end of the article didn’t address the one thing that struck me as a fellow buisness person. The last paragraph evades discussing a reality that my company confronts every day and that is that if we bumble one of our designs or deliver faulty equipment none of our customers would consider paying us a thin dime for the repairs/re-manufacture, and based on certain contracts we’d be subject to charges of liquidated damages. The hospital was no doubt due that certain portion of the bill associated with the good faith effort to save Mr. Goldhill’s father, but that they got paid for the WHOLE thing? Even when they were responsible for the conditions that caused many of the charges to be incurred in the fist place?
Some significant cost reductions might be captured if Medicare were to have an administrative function that was prepared to receive family complaints directly from survivors like Mr. Goldhill; an office that reviewed such cases based on bills over some pre-arranged amount – denying payment for treatment of the errors and omissions that could be directly attributable to the provider, in this case the hospital that treated Mr. Goldhill’s father. If it could be accomplished (any lawyers out there?) once a ruling was made by Medicare denying certain kinds of charges, the providers would not be able to transfer the costs back to the surviving family.
Whoever it is that pays the bills; they must retain the ability to challenge unjust charges and be prepared to verify or dis-prove the same, especially if informed by one of the parties intimately involved in the treatments and transactions.
Grant, your arguments are interesting but they make one critical mistake; i.e., that the government doesn’t have to make a profit. You can see the mistake as soon as you realize when we talk about government we are really talking about politicians who want to get re-elected and that profit consists of getting re-elected. There are endemic issues with presidential, majoritarian political systems such as ours that can, under certain conditions, drive things in a direction that assures relatively small fractions of the population pretty much call the shots in terms of how redistribution is undertaken and accomplished with the result that redistribution schemes concentrate their benefits on a few instead of the larger public good. An academic examination of the phenomenon can be seen at:
http://didattica.unibocconi.it/mypage/upload/48805_20081009_050832_THE_SIZE_AND_SCOPE_OF_GOVERNMENT_COMPARATIVE_POLITICS_WITH_RATIONAL_POLITICIANS.PDF
Health care in the US is, at this point, an oligopoly. It became an oligopoly largely due to two factors. 1) tax preferenced treatment of health care benefits provided by employers and 2) government involvement in the market via medicare and medicaid. While Mr. Goldhill doesn’t use the word oligopoly once, his article is an examination of the ills that oligopoly can and do cause when the entity that should be regulating the oligopoly is instead a participant in the oligopoly. His recommendations would largely have the effect of returning the government to the role of regulator from its current role as oligopolist.
[...] this excellent, but extremely long article (10,974 words!), I recommend John Schwenkler’s superb summary. Excerpt: 2. We treat “health insurance” and “health care” as synonymous, but they [...]
[...] II: Read the summary and more when you have time. Should be a [...]
[...] on the left and on the right, to read it. If you can’t do 10,000 words just now, start with this summary and it will only whet your appetite for the [...]
[...] you just don’t have time to read a 10,000-word article today, check out John Schwenkler’s summary here.) [...]
Joyce – a lawyer here….the main problem with what you suggest is the plain fact that people die, and that their friends and family don’t like it. I think that is the difference between a (non-health care) product that doesn’t deliver as promised and a health-care problem.
Yes, there are inefficiencies and inadequacies that exacerbate the issue. Yes, some physicians are negligent and cause more harm than good. And YES, hospitals, even the cleanest and newest of them, are cesspools of infection, because they are filled with SICK people. However, the vast majority of the time, both doctors and hospitals have a vested interest in seeing their patients get better. But they are hampered in a significant way because they are always trying to cover themselves, in the event of a lawsuit, by using technology and information that is not really helpful, but looks good on paper. And that is just a reaction to massive tort litigation and the regulations that already exist. I cannot imagine what would happen if there were another layer of bureaucracy second-guessing physicians.
Here is a not-so-quick example from my recent pregnancy and birth of my second son:
I had gestational diabetes with my first pregnancy, which was well controlled with diet and exercise. I had very good sugar levels all along. However, I was “labeled” and when my first son was born, in spite of excellent APGAR scores, he was subjected to a blood test immediately upon delivery, to asses his glucose level, and when it was marginally below the “cutoff”, he was given sugar water to drink when he was only minutes old. That caused him to be delayed in getting to me, delays in breastfeeding, etc. etc. etc.
Fast forward two years. I am pregnant with my second son. Because I wanted a more natural birth (and as little time spent in a hospital, thankyouverymuch, given the afore-mentioned problems with hospitals) I told my OB that I was planning on following the diabetic diet, but could I PLEASE skip the test, because I didn’t want to be labeled. I was perfectly willing to test my blood four times a day, etc, to reassure him that my blood sugar was under control. His response was that the glucose test was the standard of care, and if I didn’t have it, the hospital wouldn’t admit me. And then he said something along the lines of: “and besides, I need medical malpractice insurance to practice. And they require me to follow the standard of care, no matter what I think.”
While in the hospital in labor, an external fetal monitor was attached to me, measuring the baby’s heartbeat and the relative strength of my contractions. Whenever the monitor did something odd, the nurses would come rushing in. That happened quite frequently because the baby moved a lot and the monitor would slip from reading his heartbeat of about 150 bpm to mine, about 90. So, the nurses kept worrying. I had someone with me who was able to “chase the baby” with the monitor around my belly, to maintain contact with him. Oddly enough, studies have shown that there is no better result of births when a fetal monitor is used, than without one. But you better believe that, in the event of a bad outcome for baby or mom, that the hospital will whip out the tape of the heartbeats and say, “We did everything in our power, there was nothing that showed the baby was in distress.” So, basically, the monitor, and its attendant expense and annoyance (We had to tell the nurses every time I needed to get up and move, or go to the bathroom, or anything.) was only a CYA for the hospital. But I had to pay for it.
Wow. That was long. And it was only to add a personal anecdote to the simple fact that adding yet another layer of investigation and regulation is not likely to make health care more efficient (nor is it likely to prevent bad outcomes, i.e. death), but it will certainly make it more expensive.
First off, after reading through the article and all of the blog comments I have to say this is by far the most informative debate on health car/insurance I have experienced, period.
Second, with all of the discussion about the value of the free market in health insurance, or for heath care, I am glad that the last blogger finally got to mentioning the legal aspects within the system that drive costs.
It seems that many doctors feel compelled to practice what I have heard referred to as “defensive medicie”, i.e. ordering tests, procedures, and colsutation to ensure that all of the i’s and t’ and dotted and crossed in triplicate to be able to defend themselves in the case of litigation. Further, the litigeous nature of the society we live it is certainly a driving factor in the increasing cost of medical malpractice insurance, which also adds to the cost of care. Granted, there are doctors who are less than competent, and who cause harm to patients through negligence or inexpereince, but the majority of such cases are driven by an individuals or family’s unhappiness with the fact that people do die, whether we want them to or not.
As such, any reform of the health insurance system in the US, certainly also needs to include reform or enhanced regulation of the medical litigation process, otherwise the “lawyer and insurance company-driven” standard of care will continue to cause the upward spiralling of costs with only negligible increases in performance and value.
Doug,
You done broke the code. One major reason our costs are so much higher than other developed countries is that we are the only country in which it pays to sue doctors and hospitals. Tort reform would be a major step toward reducing medical costs.
An anecdote illustrating another area of potential cost savings. 17 years ago I had my gall bladder removed by a fine surgeon who performed laproscopic surgery (minimally invasive) to remove it. I had insurance which required that I pay 20% of any major costs up to $25,000. The surgeon charged $2,000. The anethesiologist charged $850. I was in recovery for 2 hours then placed in a multi-bed ward overnight. The hospital bill was $10,0000. I considered this an outrageous sum and balked at paying my share of $2,000 of this bill. I contacted the hospital office and requested an itemized bill. It was 20 pages long. I went through it item by item and found at least half of it contained charges for things I had not received. I took the bill into the hospital administrator and presented my findings. She agreed that I was right, but balked at reducing my bill. She informed me that the hospital had to treat people nightly with gunshot wounds, knife wounds, and drug overdoses who had no insurance. (This was a city with a big crime problem, which, 17 years later, has not improved much.) She told me the hospital had to overcharge patients with insurance to cover the “pro bono” work for the criminals and thugs. (They also treat people with no insurance who come to them for colds, headaches, and other minor ailments.) I left a check with her for $1000 and never heard from them again so I assume they accepted my offer, however reluctantly. I would offer that this is a big factor in the cost of health insurance and health care both then and today. Congress could pass a law denying medical care in emergency rooms to those without insurance or the abillity to pay. I know it is a cold thing to propose, but it might lead to some positive changes in behavior among criminals and those who refuse to buy insurance.