Getting More for Less: A Solution for American Health Care

No post on this blog has gotten so much traffic as my analysis a month ago titled “Less Is More: The Ugly Truth about American Health Care.” In response, readers have offered one important correction and a closely-related question, both of which can guide us to a better system.  What Else We Can Learn from the VHAWhen discussing the VHA, I wrote, “In 1996, President Clinton made the system available to all veterans, regardless of health condition or ability to pay.” While that synthesis was Clinton’s original intent, the final legislation was a compromise that dramatically increased access but did not allow all veterans “regardless of…ability to pay.” In the VHA, though, that phrase means the opposite of what it means in our privatized system. Our system rations care by preventing access to many people who cannot afford private insurance. The VHA rations care by preventing access to veterans who can afford private insurance. It is a system designed for those who need it most, just as financial aid at colleges is usually given more generously to students with less family income.In a way, this feature is another way in which the VHA is the perfect role model for reforming our system, which leads me to the most commonly asked question in response to my original post: “What do you think of the legislation being considered currently in Congress?” Because there are several different versions of “legislation,” I really cannot answer that succinctly. I will outline my ideal reform, and we can see whether it looks like Congress is moving us closer to or further from that utopia.I use the word “utopia” for a specific reason. My ideal reform would be “Brad DeLong’s Unrealistic, Impractical, Utopian Plan,” which has been nicely summarized by Matthew Yglesias:

— 1. Taxes on public health hazards (booze, sweeteners, etc.)— 2. An army of publicly employed doctors and nurses working in clinics and vans and such roaming the country dispensing preventive care and lifestyle advice to all and sundry.— 3. 15 percent of your income is automatically plunked into a Health Savings Account.— 4. When you want health care services that aren’t covered by the clinics, you pay out of your HSA.— 5. If there’s money left in your HSA at the end of the year, it gets plunked into your IRA unless you specifically fill in an opt-out form.— 6. If you run out of money in your HSA and need more health care, the government pays for it.— 7. On top of the 15 percent HSA deduction, there’s a 5 percent tax to pay for 6.

In DeLong’s original post, he also included:

A Lot of Serious Research on Best Public-Health, Chronic-Disease, and Hospital Practices: Made easier, of course, by linking the payment records from the health branch of the IRS to hospital records to the wirelessly-[transferred] logs from the barefoot doctor vans.That’s it. No deduction for employer-paid health expenses. No insurance companies.

As you can see, this is similar to the VHA in that the government pays for what you can’t, and you pay for the rest—give or take some important nuances.Friends Don’t Let Consumers Drive Health CareThe most important difference you’ll note is DeLong’s last sentence: “No insurance companies.” Sounds ominous, but according to both liberal and conservative economists, it’s the key to fixing the system in the long run. Okay, maybe conservative economists wouldn’t advocate eliminating insurance, but they do suggest reducing its influence.Remember the three economic challenges of health care that I explained in my last post: moral hazard, adverse selection, and asymmetric information. Conservatives suggest consumer-driven health care (CDHC) where you pay out of your own pocket with minimal catastrophic insurance, only to cover really big expenses. That reduces costs from moral hazard (because you aren’t insulated from the cost of your care by insurance and therefore have little incentive to overuse health care services) and adverse selection (because insurance companies play a smaller role and therefore suck up less money in administrative costs to monitor consumers’ riskiness). Liberals suggest government-run health care. That reduces costs from adverse selection (because the government doesn’t have to pay high administrative costs to monitor consumers’ riskiness, as insurance companies do), asymmetric information (because the government ensures doctors are following the most effective protocol), and moral hazard (because the government rations the care to prevent overuse).If we had to pick just one, we’d be better off with the latter, if for no other reason than CDHC only deals with two of the three problems—and the one they don’t fix, asymmetric information, is the most important. Ezra Klein summarizes the challenges of CDHC:

The problem is, studies show that we're rather bad at discerning the good or necessary care from the bad or unnecessary, and, when prices go up, we tend to just cut back on everything. That's not only bad for health outcomes, it's bad for costs.A 2006 study in The New England Journal of Medicine, for instance, compared Medicare patients who faced heavy cost-sharing for pharmaceuticals with those who had nearly unlimited benefits. The seniors with cost-sharing cut back on pharmaceutical spending (and thus, use) by about 31 percent. The results? More visits to the emergency room, more hospitalizations, and higher rates of death. And the upshot of all this is that the costs incurred by the deterioration in health completely erased the savings from the cost-sharing. So those with increased financial vulnerability not only had worse health outcomes, they didn't save money.That's what makes cost-sharing so tricky. You don't want to disproportionately penalize the poor, or keep them from seeking necessary care. You don't want to decrease the use of cost-effective treatments. You don't want diabetics to abandon their treatment regimens and require amputations, or for patients to drop their hypertensive medications and suffer heart attacks. Not only is it bad for the patient, it's costly for the system.

Or, as Jonathan Cohn explains in response to GMU economist Arnold Kling’s CDHC proposal:

We have precious little evidence to believe that people can distinguish good care from bad care. (Kling quotes Harvard economist David Cutler making this point, and I couldn’t agree more.) And particularly in the case of the people who are most price-sensitive — that is, the poor — there’s every reason to think they will do precisely the opposite and make the worst possible kinds of choices. Suddenly sensitized to higher medical costs, they’ll cut back on the kinds of routine, preventative measures that would ward off future medical calamities, thereby inviting not just bigger health problems but, over the long run, higher costs. (By the way, the Rand experiments suggested this, too.)Citing this objection, Kling asserts, as the defenders of his approach often do, that people can become more intelligent shoppers in time, with more information. It’s a lovely idea, but one that seems highly dubious — particularly if you’ve ever had the experience of trying to read up on a condition via WebMD or wade your way through hospital quality ratings. The available information is useful, certainly, and someday it could be a great tool for consumer decision-making. But it’s hard to imagine we’ll reach that point anytime in the next few years. Even the experts themselves disagree on exactly what measures are the most useful, or how to interpret them.

The evidence bears Cohn out on this one. My dear friend Arnold J. Rosoff, who has spent a lifetime studying the American health care system, backs him up in his January 2007 article in the Journal of Legal Medicine:

Although proponents of CDHC like to list improvement of quality as one of the benefits that can flow from consumers taking ownership of their health care, there is scant evidence that those enrolled in CDHPs actually make much use of the provider-specific information available. One study, for example, reported that only 34% of a CDHP’s participants at the University of Minnesota visited the plan’s informational Web site in the year under study.

While we know from experience that a government-run system can be implemented in steps over many years without much adverse health or distributional effects, Rosoff shows that the same cannot be said of CDHC:

As Sara Collins points out, evidence indicates that the people who opt for [high deductible health plans (HDHPs)] tend to be those with higher incomes and better health status. People of lesser means cannot comfortably accommodate out-of-pocket health expenditures in their regular household budgets, so they prefer to purchase insurance with low deductibles, even if they have trouble affording the higher premiums this coverage entails. People of greater means can afford to self-insure against routine costs and, so, are more comfortable with HDHPs. Furthermore, as Collins also points out, the tax-shelter for HSAs is more beneficial to people in higher tax brackets, helping to explain why wealthier people are more attracted to HSAs.If the CDHC movement tends to take the wealthier and healthier people out of the general risk pool and leave that pool populated with poorer and sicker people, that will change the dynamics of the health insurance market. Premiums for people in the general pool will go up, driving more people at the margins out of that pool and into the CDHP pool, creating and accelerating a downward-inward spiral. At the end of this spiral, arguably, the general pool will be left in a state where health care is not affordable for a substantial portion of the society without some sort of restructuring or subsidization. If this happens, the CDHC movement that in the short run may seem to offer a solution to our health care cost woes will, in the longer run, prove to be no solution at all. Moreover, by further eroding solidarity, it may make attainment of a real solution much more difficult and distant.

Still, CDHC has its benefits, and Americans are rightly suspicious of any policy that will take away their economic freedom. We are a people born of the notion that “life, liberty, and the pursuit of happiness” ought not to be abridged. Of course, these three values conflict frequently, and the challenge of economics is often to find the best balance.A recent article in The Atlantic by business executive David Goldhill, “How American Health Care Killed My Father,” has infused new life into the fight for CDHC, especially from libertarian thought leaders Tyler Cowen and Arnold Kling. Goldhill’s proposal has been positively compared to DeLong’s, and in that comparison lies the critical distinction that makes DeLong’s proposal ideal and the ultimate political solution to health care reform.“No insurance companies.”Three words can make a world of difference. The key difference between most CDHC proposals—including the recent op-ed by Whole Foods CEO John Mackey in the Wall Street Journal that had a similar effect on CDHC advocates as Goldhill’s article—and DeLong’s is how health care outside of HSAs is financed. (Goldhill doesn’t make it clear which side of this fence he’s on, but I read him as leaning toward DeLong’s version.) If the ideal reform—one that fixed all the problems with the current system—is as I described it last month…

Doctors would be salaried; care would be coordinated; doctors would be encouraged to follow evidence-based medicine (which means we need more evidence through comparative effectiveness research and the like); hospitals would not have a financial incentive to invest in unnecessary equipment; doctors would not have a financial incentive to order unnecessary tests or conduct unnecessary procedures; all health professionals would use electronic medical records compatible with VistA; pharmaceutical companies would not market directly to consumers or bribe doctors; clinical research would be funded by the government and other unbiased sources; the employer tax deduction would be eliminated; and all American citizens would have health insurance, regardless of health condition or ability to pay—which, if it didn’t affect their premiums, would remove the cost of outsmarting adverse selection.

…then relying on private insurance instead of the government is a recipe for, well, not much reform. The other crucial distinction is where we draw the line between government/insurance and HSAs. The trick is to admit what the evidence tells us: CDHC is good at optimizing health outcomes for some health conditions—as you might imagine, the ones where asymmetric information plays a weaker role—and terrible for others. The ideal system, then, would let put consumers in charge of the former and the government in charge of the latter. In Goldhill’s proposal, catastrophic insurance (i.e. the government’s role) kicks in for expenses above $50,000. Sorry, but even with an HSA accumulating interest, that is a lot of money for most consumers to pay out of their own pockets. What’s more, an arbitrary cap doesn’t apportion financing to optimize health outcomes. Ezra Klein has pointed out that a good role model for this allocation is the French system:

The trick would be exempting certain conditions and treatments from the cost-sharing. For instance, it’s cost-effective and medically important to encourage adherence to statin regimens (cholesterol-lowering drugs), and the evidence shows that co-pays compel some to stop taking the medication. So statins shouldn’t be subject to cost-sharing. Indeed, the French system provides a useful model here, as it erases cost-sharing for various chronic conditions (like diabetes) and cost-effective medications (like hypertension treatments) where it’s cheaper and more healthful to encourage health care use.

The added bonus of DeLong’s plan is that it appeals to both sides of the ideological spectrum. Just look at how quickly libertarians jumped at the chance to praise a liberal who supports HSAs like their favored health care system, Singapore. In a political system without the reign of special interests, it isn’t far-fetched to speculate that this kind of reform might pass into law as a bipartisan compromise—government care for Democrats, HSAs for Republicans. Good economics, I always say, knows no ideological boundaries, and bipartisanship is always possible, if only both sides were amenable to fact-based reason. Alas, it should come as no surprise to any student of public choice economics that such progress is not to be.What We Will Get InsteadIf you want to understand the legislation Congress is considering, the most efficient use of both my and your time is for me to direct you to Alec MacGillis, who manages to summarize it all into 1,000 words brilliantly in The Washington Post. You will notice that most of their proposals don’t look anything like DeLong’s or Goldhill’s or Klein’s, and they certainly don’t solve most, if any, of the problems I explained last month. At its heart, the current reform is more a social issue than an economic one. It is a question of how to extend insurance to the millions of Americans who suffer adverse health because the only time they can get care is in a crowded emergency room when some catastrophic illness has befallen them (which probably could have been prevented with insurance), as well as how to protect the millions more who worry everyday whether they will lose insurance for their entire family because, in an employer-based system like ours, economic insecurity is a growing, fickle beast.The one proposal that could save us significant costs—the nonpartisan Congressional Budget Office estimates $150 billion—is the public option, which is on its last breath. The other proposal that most of the country’s top health economists expect to save us money and improve our health outcomes, the Independent Medical Advisory Council (IMAC), would begin to address the misaligned incentives in the way we pay physicians and hospitals, as I explained last month—and that too is considered controversial enough to have legislators on the fence.Where we are headed, says Nobel Prize-winning economist Paul Krugman, is the Swiss model:

[Everyone] is required to buy insurance, insurers can’t discriminate based on medical history or pre-existing conditions, and lower-income citizens get government help in paying for their policies.In this country, the Massachusetts health reform more or less follows the Swiss model; costs are running higher than expected, but the reform has greatly reduced the number of uninsured. And the most common form of health insurance in America, employment-based coverage, actually has some “Swiss” aspects: to avoid making benefits taxable, employers have to follow rules that effectively rule out discrimination based on medical history and subsidize care for lower-wage workers.

As Krugman hints in the last sentence, the Swiss model is a bit closer to CDHC than the legislation being considered in Congress, but the fact remains that it is probably the best form of universal coverage we’re going to get without transforming the entire system. If you think we have a moral obligation to make sure no American dies unnecessarily, then that’s a bill worth grudgingly supporting.Ezra Klein has looked back at history and calculated that this sort of opportunity only comes around once every 19.5 years. The good news is that no legislation is perfect, even the ones we idolize today. Paul Begala pointed out recently that, if Social Security were proposed today in its original reform, we’d probably rebel against it for being “cramped, parsimonious, mean-spirited and even racist.” But we took a step forward and vowed to make it better over time. That, in fact, is what Massachusetts is doing. Now that they have achieved near-universal coverage, they will take the next step and fix rising costs. Let us hope that we continue to move forward, and our children and grandchildren can look back on what we did much as we look back on the imperfect reforms in American history—as the foundation for a better world.