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

August 28, 2010

The Accidental Socialists

Filed under: Health insurance,Health Reform,Medicare — David Dranove and Craig Garthwaite (from Oct 11, 2013) @ 4:59 pm

Over the next few years, the U.S. healthcare system will be in the hands of academics from Cambridge, Massachusetts. New CMS Czar Donald Berwick was a member of the Harvard Medical School faculty. Joe Newhouse, who has been the senior adviser to Medicare for as long as I can remember, holds appointments in three different schools at Harvard. David Cutler, Dean of Harvard’s Undergraduate College, seems a good bet to lead the Independent Medicare Advisory Board. Countless of their colleagues and former students have taken key policy making positions in Washington.

I know most of these scholars. They are brilliant as a rule and are acting in the truest sense of public service. None of them are socialists in the usual sense of the word; they do not believe that the government is an efficient provider of most goods and services. I don’t think they want the government to provide health care either. They have never called for government ownership of hospitals or suggested that physicians join the civil service. But whether they realize it or not, they are the vanguard of a movement bringing socialized medicine to America.

My Cambridge colleagues are mostly economists and know a lot about how markets do and do not work. They have learned from economic theory and practical observation that free market health insurance is imperfect. Fearing adverse selection, unregulated insurers take steps that leave some individuals uninsured, while other individuals choose not to buy insurance and free ride off of taxpayer subsidized charity. Most economists (myself included) agree with this diagnosis of the problem with insurance markets.

Academics have proposed many fixes to these market failures. Conservatives like Stanford’s Alain Enthoven and Wharton’s Mark Pauly favor some sort of voucher or direct subsidy with which individuals can buy their own private insurance. Unfortunately, Wharton is hundreds of miles from Cambridge and Stanford is on the wrong coast. The preferred Cambridge solution is a combination of greatly expanded government insurance and a tightly regulated private insurance market. This is the essence of Obamacare.

But this solution does not end with a government takeover of health insurance. There isn’t a public or private health insurer anywhere in the world that doesn’t directly intervene in the delivery of medical care. Socialized insurance necessarily leads to socialized medicine, and if the government controls well over half of the insurance sector through Medicare and Medicaid, and tightly regulates the rest, it is only inevitable that it will also seek to control how health care is bought and sold. And I don’t think it will make much difference whether it is Democrats or Republicans in control. The temptation to set the rules for 17 percent of the GDP is too great.

Let me give you one example. Nearly 20 years ago, academics (from Harvard, naturally) devised a new way to pay physicians under Medicare. They anticipated that improvements in productivity would allow physicians to bill ever increasing amounts that would threaten Medicare’s long term solvency, so they crafted some rather clever rules to calibrate fees, while keeping both physicians and Medicare on an even keel. Those rules are still in place, but they have never been implemented. Every year, doctors protest and Congress overrides the rules. So the best laid plans of academics are cast asunder, doctor enjoy ever higher revenues, and Medicare faces insolvency. (Fees per “unit” of service actually fall, but the number of billed units increases at a faster rate.) This same issue is going to plague Obamacare. To take another example, I helped redesign a physician payment scheme in Alberta with the goal of increasing competition. The provincial government adopted part of the scheme and omitted key details. Now I fear that competition is going to be stifled.

The Obama administration has hired an army of academics to implement the new reforms. They bring with them the finest Cambridge pedigrees and promising ideas. They will write the first draft of the rules and academics everywhere will nod in approval at the cleverness of our colleagues. (Some of us may even enjoy seeing our own pet ideas turn into policy.) But in the fullness of time, the rules and regulations that will govern our health care system will bear the imprint of politicians more than academics. It is the nature of the beast.

My Cambridge colleagues do not favor socialized medicine. But I fear that the regulatory behemoth they have been entrusted to manage is too big for them, despite their talents. Ten years from now, we will look back at these days as the beginning of the end of market-based medicine in America. And my colleagues will only be able to look back, shake their heads, and say “it wasn’t supposed to turn out this way.”


  1. […] This post was mentioned on Twitter by Kellogg School, Charity. Charity said: The Accidental Socialists « Code Red: Over the next few years, the U.S. healthcare system will be in the hands of … […]

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  2. […] Filed under: Health Reform — dranove @ 9:25 pm I wanted to follow up on the previous post on the intellectual contributions of the Cambridge community to healthcare […]

    Pingback by The Best and the Brightest? « Code Red — August 30, 2010 @ 3:12 pm

  3. I have a radical idea. Doctors charge by the hour. A basic unit of both time and cost. Insurance companies reimburse up to a certain amount per hour and a certain number of hours per procedure. The doctor takes the risk that his work on a patient will take more time than he has been alloted- this is always the estimators risk. The patient has a basis for comparison of the cost of their procedure and can do some legitimate price comparison shopping. If they want to choose a doctor who works for above the reimbursed rate per hour then they are free to choose that doctor and pay the difference. Everybody shares the risk and consumers get to make a legitimate choice based on measures they can understand and compare.
    Bob Davee

    Comment by silverdr — September 9, 2010 @ 7:05 pm

    • Wouldn’t it be interesting if primary care physicians earned the same hourly rate as surgeons?

      Comment by dranove — September 9, 2010 @ 7:12 pm

  4. It would be interesting- to them and us. Some would make the same rate. Some primary care Dr’s would make a LOT more.

    Doctors could give themselves a raise when they thought they deserved it. Or cut their price if they had no bedside manor. With real time pricing and real time social media feedback on (perceived)quality of service we just might have a market based solution!
    Bob Davee KGSM 85

    Comment by silverdr — September 9, 2010 @ 7:23 pm

  5. “…beside manor.”????? What a hoot! (whether intentional or not…..or perhaps, I should say, intestinal or not…lol). Needless to say, such “manors” are more likely the purview of surgeons than PCPs…lol

    Dr. Dranove, you are right on target on all counts. Don’t get me wrong, I am a big fan of Berwick. In fact, IHI 100K and 5M Lives put Virginia on the healthcare map. Although outlook of healthcare should be global, delivery is ultimately local. Don’t beleive it……just look at “practice variation(s)” across the country. Thus, what “flies” in the East Coast(whether academics or politics) may be “underground” in the West or Mid-West. And, yes, it not academics…’s politics. It not “Some politics”, but “All politics”…and politicians. This is a scary thought…..and the scary reality….

    Sorry, Dr. Davee, I like your ideas, but I am not a big fan of “social” media. Firstly, I am constantly amazed by what is and is not communicated electronically (sometimes in 140 character sound-bites), which leads to a lot of misinformation and disinformation. Secondly, hiding behind a computer monitor, telephone keypad, or other electronic device, is anything but “social” to me……”electronic”, Yes!……”social”, No! Perhaps, a better term would be “societal” media!!?? Just a thought……
    Mark Dietz, KSM 96

    Comment by Mark Dietz — September 10, 2010 @ 9:08 am

  6. Could you be suggesting that these exceptionally intelligent academics could be suffering from hubris? It’s great that they want to create a great system but if they already know the probable outcome, shouldn’t they pursue a different solution?

    Comment by Todd Melby — September 13, 2010 @ 4:07 pm

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