A world full of magic health-care ponies by mattsteinglass
August 24, 2009, 1:14 pm
Filed under: Health

Megan McArdle has now provided the Economist with a positive and logically argued program for health insurance reform. That makes her more responsible than any Republican politician in the United States of America. Another way that she’s more responsible than Republican politicians is that she states quite openly that she is opposed to universal health insurance. She’s trying to do something else with her insurance reform proposals, not achieve universal coverage. I’m not 100% sure I understand what it is that she’s trying to do. And a number of things she says on the way to making her case for reform aren’t, if I understand correctly, true. But a lot of other things are true, and it’s interesting to take a look at the argument.

I ought to respond by looking first at what Megan says her positive program is. The fact is, it’s late at night and I don’t have time to think that out. Also, it features a resort to some measures, like reinsurance, that I’m not familiar with. I’ve seen people vaguely make the reinsurance argument before, but I’ve never seen a plan that relied on it as a way to solve the problem of high premiums for people who are at high risk of illness actually getting far enough along in the political process to sustain serious critique. So I’ll have to hold off on that. In the meantime let me just respond to a few of her answers to questions.

First, on the idea that no one has proposed getting rid of private insurance: in fact, a lot of people have proposed getting rid of private insurance (or at least, private insurance that is not essentially a tightly-regulated utility).

Some people have indeed proposed getting rid of private insurance. That is not the bill that is moving through Congress, and it is not relevant. Republicans have manipulated confusion between the actual reform proposal and the British and Canadian systems to deceive the public about the type of reform that is being proposed. Megan is not deliberately misleading the public along those lines. But she is being misleading: she tries to blur the distinction by saying that private insurance under regulated private universal health insurance systems, like Switzerland, the Netherlands, and France, inevitably becomes “a tightly-regulated utility”. She doesn’t explain what she means by this (insurance companies are pretty tightly regulated already), and she doesn’t explain why she feels there is no difference between a government system and a tightly-regulated private utility. Phone and electric companies are tightly-regulated utilities, but surely if the government proposed nationalizing them, Megan would consider that more than a semantic change. What Megan is doing here is assuming the consequent. If she wants to make a case that these reforms eliminate the essential functions provided by private insurance, whatever those are, she has to make that case.

In fact, to a first approximation nearly everyone who is pushing these changes wants the government to guarantee universal coverage. When they are talking to each other, they sell these bills, which none of them much likes, as being another step on the slippery slope to single payer. So it’s not unreasonable to fear that that’s where we’re headed.

It’s not unreasonable to fear that that’s where we’re headed, but the rest of this claim is just wrong. The overwhelming majority of advocates of single-payer support the continued existence of a private industry for supplemental insurance. And a lot of people don’t even want single-payer; at this stage most people on the liberal, pro-reform side support a French or Dutch-style system rather than a Canadian one. Even people who want a public plan because they believe it will evolve into a universal program for basic coverage still want to preserve the option for private supplemental insurance. Megan considers such a supplemental private insurance sector to be a neutered joke, but that is her belief. If she wants to argue that case, again, she has to argue it.

Second, the changes will not eliminate perverse incentives. The dominant strategy of an individual in a world with the “strong” public option is to pay the tax surcharge, refuse to buy insurance, and then go on the public plan if you get sick. The weakest bills, on the other hand, simply command people who feel that they cannot buy insurance to buy it anyway, and subsidise some of them.

A universal health insurance plan based on private insurance has to include an individual mandate. That’s the way it is. If you want universal health insurance that doesn’t have a mandate, you need to go with a single-payer system for basic insurance. If you don’t support one of these two options, you are against universal health insurance. And Megan is if I understand it correctly quite openly opposed to universal health insurance. But it’s true that the right way to design these systems is to force anyone who doesn’t buy private insurance to buy into the public plan, rather than pay some kind of “penalty”, so Megan is right that a system implemented the latter way (like Massachusetts’) would be flawed.

Third, I’m looking at what happens in countries with these systems. What happens is that they quickly resort to price controls on inputs, because otherwise the costs start marching upward. I think it’s reasonable to assume we will follow the price control strategy, which is not, historically, a good way to build a functioning market.

Given that health care in other OECD countries is superior to health care in the US on as many measures as not, and costs between 40% and 65% of what it costs in the US, and that everyone in those countries gets insurance, it would seem that whatever systems they are implementing are in fact good ways to build functioning markets in health care. The health care market is inevitably distorted from the get-go. This is hardly an original observation. It’s distorted because most care is paid for by insurers, not patients, and because society implicitly guarantees health care for everyone because society believes in some measure of basic equality. As in other economic spheres, such guarantees drive up prices. Various other measures may be taken, such as price controls, to counteract that distortion. But it’s not the regulations that create the distortion. It’s the nature of the market.

I actually think that the other thing most people are worried about, rationing, is less likely. America seems to lack the political will for it. But of course that means that costs are going to hit 30% of GDP pretty soon, with a good chance that this will trigger a major political crisis if the government is covering 60% or more of the spending. Those high-end claims driving costs are not for abusive knee surgeries; they’re for organ transplants, cardiac care, cancer treatment, and preemies. There are no magic ponies we can ride to painless cost savings.

If there weren’t a lot of ineffective care going on in the US, nobody would be opposed to comparative effectiveness research. In fact we know that the counties with the highest medical costs in the country have basically no difference in treatment outcomes from the counties with the lowest medical costs. They’re doing more procedures and buying more care, but it doesn’t seem to be doing anyone much good in most cases. And we know that the most effective integrated health care organizations, like the Mayo Clinic and the VA, deliver better care at much lower cost than the broader fee-for-procedure private-insured system. If some organizations are doing it better and cheaper than others, that means that there are in fact magic ponies we can ride to painless cost savings. Or rather: there are magic ponies we can ride to cost savings that will be painless for patients. They may involve some financial pain for people who are currently charging too much for useless services.

You know, if I owned a really crappy fast-food restaurant down the street from a McDonald’s, and I was providing worse food at higher prices in less attractive surroundings, I might find that my revenues were in trouble. And the question might arise, what should I change? The logical answer would be, let’s look at what McDonald’s is doing and figure out how to do that. Lately I get the feeling that if I were an American conservative, my answer would be: it’s hopeless; either we need to spend more for better ingredients and tastier food, which will drive up prices, or we need to cut expenditures and make our food even worse. There are always trade-offs! American liberals are arguing, you know, not only are there a few other wealthy countries doing health care better and cheaper than we are; every other wealthy country seems to be doing it better and cheaper than we are. If those are magic ponies, the world seems to be full of magic ponies.


3 Comments so far
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As Rep. Anthony Weiner so effectively argued, libertarian “free market” ideologues must justify why we should maintain a private insurance system for health care. (At least Bill Kristol was honest enough to admit that his opposition to universal, affordable care is based on his premise that Americans do not deserve first-class health care.)

Our health care system is certainly a complex, multi-headed beast. But insurance is simply a mechanism which collects our premiums and pays health care providers. For-profit private insurance companies do not add any value whatsoever to the system. So why should we hand over billions of dollars a year to enable private insurers to pay for their administrative costs and to enrich their shareholders when those billions can be put towards actual health care services? Is there a single reason why anyone — besides private insurers, their shareholders, or the batshit-crazy crowd — should “fear” a “slippery slope” to a single-payer system?

Comment by jasong

If health insurers were regulated like utilities they could not get away with denying claims until the patient dies to save money for the stockholders on Wall Street. We already have rationing by health insurers not covering anyone with pre-existing conditions, dropping people after they use their insurance or carving out types of disease or body areas where patients might need coverage later. Insurers have a 34% overhead vs about 4% for Medicare and they are only able to operate with state charters so you do not get any national competition. Most states are dominated by 2 or 3 insurers who can use their monoply like power to skim healthy people and dictate coverage and conditions to employers, patients and hospitals. We need “insurance reform” more than we need healthcare reform. Think of how many uninsured we could cover if we cut the 34% overhead even in half and then we would not spend the vast amounts of money treating people in emergency rooms.

Comment by fleetlee

Mr. Steinglass,

Private insurance companies do not insure millions of Americans at all. Even if one accepts the dubious proposition that private health insurance is inherently more efficient that a publicly funded one, how are the uninsured to put that to their advantage? The simple fact of the matter is that it is not possible for private insurance companies to profitably insure a great many Americans. Government needs to provide services that the private sector cannot. For example, there is no way a private company can deliver mail to every address in the United States, six days a week, for less than four bits so the USPS has to do it. The same is true for health insurance.

Comment by davidlosangeles

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