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

July 18, 2010

Donald Berwick and Rationing

Filed under: Efficiency,Health insurance,Health Reform,International Comparisons — David Dranove and Craig Garthwaite (from Oct 11, 2013) @ 8:02 am

Let me take time out from book writing to comment on the recent appointment of Dr. Donald Berwick to run Medicare. This was a recess appointment made by President Obama apparently to prevent Republicans in Congress from reviving the debate about health reform. Dr. Berwick seems vulnerable because he has frequently commented about rationing of medical services, even admiring programs for rationing that have been instituted in England and elsewhere. Dr. Berwick’s critics want to argue that rationing is un-American, even evil. But rationing simply means that individuals do not receives all the services they would like regardless of cost. All goods and services are rationed, even in market economies. Health care services are no exception. There is no way around it – America rations health care services.

Unfortunately, U.S. market-based rationing of health services is highly problematic, for reasons that I have described in previous blogs. One problem is moral hazard due to health insurance. The only way to fix this problem is to completely eliminate health insurance (high deductibles slightly mitigate the problem), but this exposes individuals to unwanted financial risk, a solution that may be worse than the cure. This is the Catch-22 of health care. The other problem is inadequate and asymmetric information about medical need and outcomes, which leads to demand inducement and practice variations. Health insurers could intervene to correct these problems but they might have incentive to encourage under treatment. In any event, last decade’s backlash against managed care has tied insurers’ hands. For these reasons, U.S. market-based rationing is woefully inefficient. Health services researchers are in near unanimous agreement on these points and Dr. Berwick stands on solid ground.

Dr. Berwick looks to other models for rationing. England’s National Institute for Clinical Excellence offers perhaps the most sophisticated model. NICE rations by relying on cost-effectiveness data and restricts access to medical treatments that cost “too much” – generally more than $60,000 per “quality adjusted life year”. Interestingly, if we had true market-based rationing without insurance, many of the technologies rationed by NICE would be unaffordable to the average American so there might not be much difference. English-style is not without its faults. It is a one size fits all solution to medical decision making. It does not adequately account for the learning curve associated with many new, costly technologies and does not account for innovation spillovers (when using a technology for one purpose sparks other innovative uses.) It also begs the question of how to choose the cutoff – is a year of life worth only $60,000? Who gets to decide?

We should all agree that market-based rationing with health insurance is problematic. Doing without health insurance may be even worse. We can also agree that English-style rationing has its own faults. Who is to say which form of health care rationing is the lesser evil? The Republicans think they know the answer without really understanding the question. The President wants to avoid the question altogether.

Isn’t that a debate worth having?


  1. Dr. Dranove – Thoughtful post, as usual. I agree with your conclusion on the qualifications of Dr. Berwick and the need to have a frank debate about how we want to ration, given the failures of the current system. However, I would argue a point of distinction with you. I would assert that markets do not ration; they allocate resources to those who most value those resources. One can think of this as “rationing on price” in the short-run, but in the long-run, I think the price signals and profit functions caused by this short-term “rationing” would lead to providers and new entrants expanding supply, as profits invite more capacity (healthcare professionals in this case), which drives down costs and prices and thus serves more people at cheaper rates. In contrast when bureaucracies ration resources — either based on time/wait lists (usually a function of price controls) or based on some other measure like QUALYs — there is no market signal to current (or potential) suppliers to expand capacity in the market. In the long-run, I would argue “price rationing” leads to a much better result (more capacity and lower prices) than does “bureaucratic rationing” which does nothing to expand supply or lower costs. Note that I’m not arguing the “market works” – there are clearly a number of market failures in our current system that need to be addressed; I’m only arguing that “price rationing” can lead to a more desirable result than can “bureaucratic rationing.”

    Comment by Chris Dupre — July 27, 2010 @ 10:31 pm

  2. I think we are on the same page here. The relevant question is whether we ration by markets or by fiat. (Even in the long run, markets ration.) Focusing on short-run inefficiencies in the market is, indeed, short sighted.

    Comment by dranove — July 28, 2010 @ 8:14 am

  3. I think the really relevant question is whether you need a specific service. I am a multiple cancer survivor and am very glad the necessary services exist at a price my insurance has been willing to pay. I have no such confidence in any bureaucratic rationing system, particularly one that will be run by someone who a) thinks rationing is great and b) was appointed by a socialist under cover of darkness. Its nice I guess to get paid to spend time thinking about these issues. One learns the real substance of them by doing, not by thinking. We were looking – I thought – for solutions to the problems of our medical care delivery system in America. Doesnt look like that’s what we are going to get with Obamacare, however. But when I sell my house and retire in a few years, it will be gratifying to pay the 3.8% hidden real estate tax to help pay for this political disaster.

    Comment by Dick Hough — July 28, 2010 @ 1:08 pm

  4. Dick’s comment is the only one here that makes any sense to me. If you NEED a specific service to get well, you virtually always get it in the USA. People are not being denied CAT scans for cancer detection (which is partly why our cure rate is much higher than socialized medicine’s for cencer). There are no 2 year waits for cancer treatments or hip replacements.

    To glibly state “markets ration” is misleading at best. The rationing being proposed by Obama is pure budget cut rationing…cutting $500 billion from Medicare for example. Services will be rationed to fit a budget, irrepective of need. This is cutting services (reducing supply), not the operation of the price mechanism.

    If you need a hip replacement, you buy one hip replacement. You do not buy 4 of them because the surgeon is having a sale at 60% off. Under the present system of insurance, you get one hip replacement. Under Obamacare, a bureaucrat will decide whether you get either one or zero, depending on whether the state has the money or desire to pay for it.

    So the statement that we can either have the market ration or the state ration is misleading. We are not talking about rationing the existing services, we are talking about reducing available medical care significantly to save the government money. The reason Dr. Berwick was recess appointed is because the American people reject what he stands for, and he could not be confirmed if his views were given public hearing. But of course, that is the essence of Obamacare, using deceit to ram the program through Congress against the will of the American people.

    Comment by RJ — July 28, 2010 @ 5:57 pm

    • There is overwhelming evidence that in the U.S., (1) what care you receive, how much you receive, and where you receive it all depend on your wealth and insurance status and (2) price matters. Yur comment about hip replacements is odd. Isn’t the same true for houses (at least for 98% of Americans). But houses are rationed. You can get a big one in a nice neighborhood or an apartment somewhere else. And you can get a hip or you can get screws.

      Berwick’s comments about rationing have nothing to do with the Obama cuts in fees to physicians. (See my earlier posts about what I think about those.)

      In layman’s terms, we ration less in the U.S. than elsewhere, at least if you are middle class. But the point is that rationing is not, by itself, a bad thing!!!! It is not a dirty word. All goods and services are scarce. All of them. They have to be allocated. Allocation is, by definition, rationing. That is why economists say that all goods and services are rationed. (My goodness, even Milton Friedman would agree.) Whyat is wrong with debating the best way to ration? It is at least plausible to suggest that we are getting too much stuff to the wrong people at the wrong times. I haven’t told you what I think the answer is but apparently, by merely mentioning the term “rationing”, you are making me out to be a socialist, communist, or worse.

      Comment by dranove — July 28, 2010 @ 6:06 pm

  5. I agree that all goods and services are rationed. I can’t really argue against that. I also agree with Chris Dupre’s sentiment that “bureaucratic rationing” will not lead to the most desirable result. I can’t believe that a set of elected officials (many of whom are voted into office over and over due to their gerrymandered districts) or appointed officials truly have motivation to put the country first before themselves. All people are selfish and when put into positions of power, they will eventually abuse those positions. In the case of health care, they may put in place rules to ration the number of cancer treatments that any one person can receive. Of course, if an official comes down with cancer enough times, I seriously doubt they won’t use their position to secure them more treatments than their fair share.

    On a more personal level, I am seeing this play out with Small Business Innovation Research grants. The SBIR process has effectively been hijacked by people in the House who are more concerned with keeping their donors happy (venture capitalists and BIO) than passing the extension of a program that has clearly paid dividends to the country through the small business community. Our small business lobby is apparently not as big as the VC and BIO lobbies.

    Comment by Todd Melby — July 29, 2010 @ 12:12 pm

    • I completely agree. Government technology review is politicized enough in other countries; I can only imagine what would happen here with our free flow of political money.

      Comment by dranove — July 29, 2010 @ 12:14 pm

    • Todd you are right on. I can’t believe the House is putting country before themselves on the SBIR issue. The re-authorization of the SBIR bill has been postponed 8 times now (currently set to expire 10/1/10) based solely on the issue with the Venture Capital issue. The SBIR program has been instrumental since it’s inception in 1982 in providing not only innovation in American technology (thru R&D funding) but also instrumental in creating new jobs. I would think in today’s environment that the House should be very concerned about creating new jobs, especially thru small business initiatives. It is critical to the survival of our free-enterprise economy.

      Comment by Mike Anderson — July 29, 2010 @ 3:57 pm

      • I would like play a little devil’s advocate in order to tie this comment back to the discussion of rationing. Any government subsidy, whether on the supply or demand side, causes markets to grow larger than they would be if truly unfettered. Shouldn’t taxpayers have the right to step in and limit the size of the markets that have been artificially enlarged through taxpayer largesse, in order to create a counter balance? And if you don’t trust the government to sensibly ration demand, why should you trust the government to sensibly dole out subsidies?

        Comment by dranove — July 30, 2010 @ 7:54 am

      • I almost brought up that very point in my first post. I’ve struggled with that very idea from the time I started with my company. Shouldn’t all companies have to make it on their own merit? I’m more inclined to share in the thinking that the government should not be taking taxpayer money and then deciding what potential innovations/”benefits to society” should receive funding. I’m also of the opinion that if our government is dumb enough to throw around “free money” then I’m going to make the most of it.

        One of the biggest differences I see between having the NIH doling out funds via grants to technology companies and people like Berwick being in charge of Medicare and Medicaid is the decision process that the organizations go through. Grants from the NIH are reviewed by scientific committees who are deciding to fund companies’ grant proposals based on scientific merit (it has it’s flaws though). Experts in the field are making the decisions. The case can also be made that it is imperative for our country to continue to innovate as quickly as possible and the NIH provides opportunities for innovation that would not materialize as quickly otherwise (could be an entirely separate discussion).

        Medicare and Medicaid have bureaucrats deciding “funding” not necessarily based on opinions of experts in the field. They are concerned about the solvency of their programs. They are also concerned with the perceived equality or fairness of some being able to afford health care and others not. Interestingly enough, the worst reimbursement rate of all insurance companies is Medicare. An organization with such heft should be able to capitalize on its size to gain efficiencies. Of course, Medicare’s incentives aren’t the same as private insurers’.

        On a personal note, I have a friend who recently received a lung transplant. The decision process was very involved but boiled down to doctors deciding if she would benefit from a new lung. (Contrast that with a guy who died in England because the government-run program there wouldn’t approve a liver transplant. He was an alcoholic so that adds more complexity.) The decision did not come down to her value to society or whether she was rich or poor and therefore needed “fair treatment”. I think this is what terrifies people when they think about rationing of health care. People don’t want to be forced into a situation where their only insurance comes from the government (which has the worst reimbursement rate), they are just a statistic to a bureaucrat and the decision to be treated will come down to an arbitrary measure of fairness. They want doctors to make their treatment decisions.

        Of course there is the issue of cost and if people do not want to go down the path of the government making their health care decisions for them they need to do a better job of caring for themselves and saving money to cover the eventual costs of treatments. People need to not treat health care as a right and treat it as a service…in my humble opinion.

        Comment by Todd Melby — July 30, 2010 @ 11:00 am

  6. At the risk of turning this into a political free-for-all, comments 3 and 4 have the distinction of being the most hostile to Obama (socialist? please), and at the same time the most divorced from the reality of how America’s current health system really runs. To deny that rationing is already a part of of it? To claim that “If you need a hip replacement, you buy one hip replacement,” when the truth is that many people who don’t need them get them anyway because someone else is paying for it.

    Obamacare is a significant disappointment. The blame lies with left wing politicians with too little grasp of how markets work. The blame also lies with conservative politicians who could have made it a lot better by trading votes for changes, but saw more political advantage in stonewalling to appeal to people like commenters 3 and 4.

    Comment by Dave B — August 6, 2010 @ 12:27 am

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