Code Red: Two Economists Examine the U.S. Healthcare System

September 28, 2009

Make No Little Plans or, How Republicans Can Be Meaningful Players in the Health Reform Debate

Filed under: Competition,Efficiency,Health insurance,Health IT,Health Reform,Tax deduction — David Dranove and Craig Garthwaite (from Oct 11, 2013) @ 2:44 pm

In a virtual carbon copy of their previous Wall Street Journal op-ed pieces, John Kogan, Glenn Hubbard, and Dan Kessler recently (9/25/2009) offered the standard Republican critique of Democratic health reform proposals before laying out their own agenda.  They are long on anti-government ideology and often fall short on economic principles.  But mainly, their ideas lack the power to bring about real change.  Daniel Burnham once said, “Make no little plans. They have no magic to stir men’s blood.”  Republicans have become the anti-Burnhams.

They start by trashing mandates to purchase insurance.  I would agree with them if the uninsured, upon falling gravely ill, had the good graces to forego charity care and die cheaply.  Thankfully, that isn’t how the system works.  Many, perhaps most, providers are willing to treat the uninsured and worry about payment later.  The uninsured are free riders waiting to happen.  We all ought to pay our fair share without forcing providers to go to court to press for payment.

Kogan et al. also trash the idea of uniform coverage, instead arguing that everyone should be allowed to buy the coverage that is best for them.  This type of argument almost always makes sense.  I like the taste of Ghirardelli chocolate, and when I purchase their candy bars this creates value for me and Ghirardelli alike.  And I don’t have to buy vanilla.  But if I feel prone to heart disease and load up on cardiovascular insurance, I am merely engineering a transfer of wealth from my insurer to me.  There is no value creation to speak of.  And what if I skimp on cancer coverage and my prostate goes bad?  Will the hospital turn me away?  Some benefit mandates are silly: acupuncture Los Angeles, podiatry, and so forth. Well, I heard good things from podiatry Los Angeles but these are a sideshow to the main event.

I agree with some of their concerns about the Democratic proposals.  It is foolish to predicate cost savings on future Medicare cuts.  And it is dangerous to predicate funding of insurance expansion on tax increases.  Add the Congressional Democratic tax proposals to proposed increases in state taxes and marginal tax rates will quickly exceed 50 percent.  Maybe this is a clever way to cut health care spending.  What surgeon would want to operate on a Medicare patient when fees are 25 percent lower and taxes eat up more than half of what is left?

All of this is window dressing to Kogan et al.’s own three-pronged proposal: allow insurers to compete across state lines, give a bigger push to high deductible health plans, and fix malpractice. None of these ideas are silly, but none will have much of an impact.  Most local healthcare markets already have 4-6 major carriers, including a Blue plan, United, Aetna, Cigna, and Humana, not to mention some local plans.  A few markets are down to 2-3 choices, but I don’t see how letting someone purchase insurance from Aetna in Massachusetts will improve competition for consumers in Connecticut, who already have a local Aetna option.   Besides, successful insurers must manage local provider networks.  Out-of-town plans won’t make a dent in most markets.

There is nothing wrong with high deductible health plans and the Democrats are committing economic malpractice by trying to limit out of pocket spending.  But unless we are willing to expose individuals to extremely high deductibles, these plans will not influence the marginal purchases of the most severely ill Americans.  And malpractice reform?  We already have it in many states and the best research suggests that if reform goes national, spending could drop by as much as 3 percent, giving us a four month respite from a decades-long cost spiral. This is hardly revolutionary.

It is time for Republicans to abandon their little plans.  Capping or eliminating tax deductibility of insurance is a good start.  But our best chance to make markets work is to reinvigorate managed care, which the Wall Street Journal and many Republicans once equated to socialized medicine.  Fueled by a revolution in health information technology, managed care in the 2010s would be a far cry from the much reviled HMOs of the past.  There have been many proposals to harness competition among managed care plans, from Alain Enthoven’s managed competition, to Stephen Shortell’s vision of competing integrated delivery systems.  These are big plans, worthy of those who truly believe in market-based healthcare.

1 Comment

  1. I much prefer your book to theirs, for what that’s worth. But there’s a glitch at the bottom of your page 41:

    “The Kennedy-Mills proposal . . . suggested . . . a deductible of $1,000.”

    Talk about a high-deductible plan! That would be nearly $6,000 in today’s dollars. I would be delighted to buy such a plan without a dime of subsidy, if only the government would allow it. But Kennedy-Mills did not really have a $1,000 deductible. Instead, it capped maximum (not minimum) outlays at $1,000.

    Politically-designed health insurance reflects politics, not economics or actuarial common sense.

    Comment by Alan Reynolds — October 29, 2009 @ 10:57 am

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