Category Archives: Economics of Health Care

Save the Death Panels!

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Thomas A. Firey writes,

imagine how quickly and dramatically the iPAB provisions will be altered when the news media begin reporting on how some telegenic children or senior citizens will be deprived of vital medical treatment because of the pencil-pushing decision of some isolated group of bureaucratic eggheads…I submit that no legislative language or one-time “repeal window” will prove an impediment to presidential directives and congressional action to countermand IPAB recommendations or terminate the board altogether.

He cites previous attempts by government agencies to highlight cost-ineffective medical treatments. When the firestorm hits, the politicians cave.

Too bad. When people ask me what I think of Obamacare, I always say that the aspect that its best feature is the death panels.

The Gift of Health Insurance

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Megan McArdle writes,

There may be something seriously wrong with our understanding of who the uninsured are, and what they are willing and able to buy in the way of insurance. I don’t know exactly what the fault may be in our understanding. But if the numbers [of previously uninsured signing up for Obamacare] stay this low, I’d say we need to reassess the state of our knowledge about the uninsured — and the vast program we created to cover them.

This reminds me of an essay that I wrote over 10 years ago, called Health insurance do-nots.

In America is Crazy, I wrote that our health care policy reflects mental illness. The fundamental problem is that we believe that health insurance is something that only should be received as a gift — never obtained for oneself. Thus, we immediately assume that when a family does not have health insurance, they are to be pitied for not having received the gift, rather than being blamed for not having taken responsibility.

After the Census report was announced, the evening News Hour on PBS featured a young man (he appeared to be about 30) without health insurance who had been diagnosed with melanoma. The focus of the feature was the financial hardship that the man was going to have to undergo, including putting his family deeply into debt.

While I truly feel sorry for this man, I have so say that the worst of the financial burden of his illness was avoidable. When he was healthy, he could have obtained health insurance. Instead, he chose to spend his income on other things. He was a health insurance “do-not.”

However, the thrust of the story was not, “Let this be a lesson to you. Buy health insurance, because you never know when you may need it.” Instead, as in the Times editorial, the PBS story treated the man as a victim because he did not have employer-provided or government-provided health insurance.

To deal with the problem of health insurance do-nots, I wrote that

some form of catastrophic health care coverage ought to be mandatory

I was naive at that time, thinking that the government could mandate basic catastrophic coverage. The political process instead works in the direction of mandating gold-plated coverage. It works in the direction of rewarding politicians who make the most outlandish promises (“it will lower cost, you can keep your doctor,” etc.), rather than in the direction of rewarding politicians who tell people the truth about the cost of health care or who dare to raise the issue of individual responsibility.

Romneycare Update

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Philip Klein writes,

As Modern Healthcare reports:

Massachusetts, whose health care reform program was used as a template for the Patient Protection and Affordable Care Act, had the highest per capita health spending in the U.S. in 2009. According to the commission’s report, the state spent $9,278 per person on health care in 2009, which was 36 percent higher than the national average of $6,815, and 11.2 percent more than the next-highest state, New York, which spent $8,341.

When Romneycare was enacted, I wrote,

If more Massachusetts consumers enjoy coverage without any deductible, then the average per-person expenditure on health care of $6,000 seems likely to go up.

Indeed, it seems that per capita health spending went up over 50 percent in just the first three years under Romneycare. At the time, many of its proponents were saying that Romneycare would hold down health care spending.

When people are insulated from having to pay for health care, health care spending goes up. You might want to insulate them, anyway. But the theoretical ways that you reduce spending–by cutting down on emergency room visits, or through better prevention–do not pan out in practice.

Placebo vs. Knee Surgery

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From the WSJ:

But researchers in Finland who studied two sets of patients—one that received the surgery, and another that was led to believe that it had—observed no significant differences in improvement between the groups after one year.

This is for torn meniscus. It interests me because a lot of people I know have had such surgery. Of course, it also illustrates Hansonian medicine–giving placebos is a less effective way of showing that you care.

Two Views of Obamacare

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1. The Washington Post editorial page:

Republicans, many of whom claim to favor market approaches to expanding health-care coverage but oppose excluding patients with preexisting conditions, can’t credibly balk at the natural results of competition organized under those very principles. No one can expect low premiums and near-unlimited service, particularly in a system designed to spread costs around so that the sick and the old can finally obtain decent health coverage from private insurers. That’s not a mistake. It’s economics.

Pointer from Mark Thoma. I wish that he had also linked to John Cochrane’s piece, below.

Of course, I do not think this is very good economics. Spreading costs around is best done through subsidies and taxes, not through mandating that some people buy inappropriate coverage so that others can enjoy subsidized coverage. Also, I am getting really tired of folks referring to government-designed health insurance sold through an exchange as a “market approach.” This approach eliminates what I see as the main benefit of markets, which is the process of innovation and creative destruction.

2. John Cochrane:

Only deregulation can unleash competition. And only disruptive competition, where new businesses drive out old ones, will bring efficiency, lower costs and innovation.

Now that’s economics. As to health insurance, Cochrane writes

Health insurance should be individual, portable across jobs, states and providers; lifelong and guaranteed-renewable, meaning you have the right to continue with no unexpected increase in premiums if you get sick. Insurance should protect wealth against large, unforeseen, necessary expenses, rather than be a wildly inefficient payment plan for routine expenses.

People want to buy this insurance, and companies want to sell it. It would be far cheaper, and would solve the pre-existing conditions problem. We do not have such health insurance only because it was regulated out of existence. Businesses cannot establish or contribute to portable individual policies, or employees would have to pay taxes. So businesses only offer group plans. Knowing they will abandon individual insurance when they get a job, and without cross-state portability, there is little reason for young people to invest in lifelong, portable health insurance. Mandated coverage, pressure against full risk rating, and a dysfunctional cash market did the rest.

Another Obamacare Glitch

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Stella Paul reports,

Millions are losing their health insurance policies and being forced onto the ObamaCare exchanges, where most plans only provide local medical coverage. As Americans realize they must pay for all non-emergency medical care when they leave their home county

With your old, “bad” health insurance, you were covered if you took a vacation. With your new, “better” health insurance, you are not.

I wish that the web site had been working well from day one. That way, these glitches would have shown up sooner, and Obamacare would have failed quickly and cleanly. Instead, it will fail slowly, and its supporters will forever be saying, “If only the technical issues had been handled correctly…”

Health Insurance Corporatism

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James A. Morone, of Brown University and Brookings, writes,

The ACA itself has two large programmatic components. One is a classical Republican idea: health insurance marketplaces. The other expands a program from the Democrats’ halcyon days: Medicaid. The red half of the law tries to tap the magic of market capitalism; the blue half grows the kind of Great Society government program much loved by liberals. The compromise –which might point to the future of American health care—puts the red and the blue together in an unanticipated way.

I object to characterizing health exchanges as “the magic of market capitalism.” To me, health insurance marketplaces run by the government are no such thing. As we are seeing, health insurance exchanges turn the insurance companies into government-run utilities.

If you want market-oriented health insurance, then leave health insurance to the market. Do not put it on a government exchange.

Professor Morone may ve correct about where health insurance in this country is headed. However, such a “compromise” will be an unmitigated defeat for market principles. Corporatism is not capitalism.

Medicaid = Nursing Homes

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Harold Pollack writes,

If we want to provide more cost-effective care to poor people, we should proceed in the same way that we should proceed in other parts of the medical economy. We must do the hard work of improving the quality and economy of care provided to the concentrated group of extremely costly patients. There is no short cut. Under any financing system, this requires the hard work of clinical-care coordination, quality improvement and social services to address life circumstances that undermine health.

Pointer from Tyler Cowen. His main statistical argument is that a small percentage of Medicaid patients account for much of the spending. It is likely that these are patients in nursing homes.

However, this does not answer the question of where there are opportunities to save money in medical care. Some possibilities.

1. Death panels. To the extent that late-stage treatments are wasteful, you have to change the decision-making process. Families and would-be heroic doctors need to have less influence.

2. Reducing procedures, such as back surgery, with high costs and low benefits. In Crisis of Abundance, I argued that there is in fact a large “gray area” of medicine, in which procedures are neither absolutely necessary nor absolutely unnecessary. This is counterintuitive, and if you do not believe it, then you end up siding with Pollack. If you do believe it, then having patients pay more of the cost of treatment could be a big deal.

3. Improving management in health care, particularly of patients with complex illnesses. My guess is that if there are big savings to be had here, they come from reducing the status of doctors relative to managers, social workers, and care-givers with lesser credentials. See Does the Doctor Need a Boss? I would not bet that government will be successful at re-engineering the system, and in fact regulation of medical practice is probably a major inhibitor.

4. Innovation in treatment. My concern would be with the Food and Drug Administration. They want to err on the side of keeping treatments off the market. We might be better off if their task was shifted to funding and publicizing research, not actually regulating.

Doc Shock

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The Washington Post reports,

The Obama administration made it a priority to keep down the cost of insurance on the exchanges, the online marketplaces that are central to the Affordable Care Act. But one way that insurers have been able to offer lower rates is by creating networks that are far smaller than what most Americans are accustomed to.

In our discussion of Obamacare implementation the earlier this week, Megan McArdle warned of this. She called it “doc shock,” as people find that the most reputable health care providers are not in their plans. She said that the out-of-network co-payments are often 100 percent, meaning that the insurance company pays zero and the consumer has to pay everything. This will probably not go over well.

Judging the Health Care Olympics

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Avik Roy writes,

What’s just as interesting is that Japan, the country that tops the overall life expectancy tables, finished in the middle of the pack on cancer survival.

He finds, as have others (John Goodman comes to mind), that the five-year cancer survival rates tend to be higher in the U.S. than in other countries. The one issue I would raise with this is that survival is measured from the point of diagnosis, so that if we diagnose cancer sooner (or diagnose more non-lethal cancers), then we would come out ahead on that measure.

Roy continues,

A few years back, Robert Ohsfeldt of Texas A&M and John Schneider of the University of Iowa asked the obvious question: what happens if you remove deaths from fatal injuries from the life expectancy tables? Among the 29 members of the OECD, the U.S. vaults from 19th place to…you guessed it…first. Japan, on the same adjustment, drops from first to ninth.

I think this study offers more reason to believe that the U.S. is really number 1 when it comes to health care outcomes. Still, it may not show that the U.S. is number 1 in terms of cost-effectiveness of health care. My guess is that comparing the additional amount that we spend on health care to the additional longevity we obtain would yield a very large cost per year of life saved.

I have long argued against using longevity statistics to judge what I once called the international health care Olympics. As I pointed out in that essay, it would lead policymakers to make some really perverse choices. But even if we are number 1 in terms of medically-treatable life expectancy, that is no reason to be complacent that our system is cost effective.