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

July 26, 2011

Vermont’s Bold Experiment

Filed under: Budget,Health insurance,Health Reform,Health spending,Integration — David Dranove and Craig Garthwaite (from Oct 11, 2013) @ 9:02 am

I was delighted to see the lead article in Health Affairs describing Vermont’s new single payer health care financing system. Harvard Professor William Hsiao and his coauthors describe this as a “Bold Experiment” and I couldn’t agree more. It is also a very welcome experiment. For over thirty years I have heard the rhetoric that a single payer system would never work in the United States. For that matter, I have heard that a true market-based system (with vouchers) would never work either. Why not let the states experiment and find out what will and won’t work? Thankfully, the Vermont legislators and Governor Shumlin had the courage to take this leap of faith.

The biggest obstacle to implementation appears to be ERISA, which limits the extent to which states can regulate self-funded plans. Apparently, self-insured employers could object to having their tax payments used to support the plan. But Vermont can apply for an ERISA waiver under terms in the Affordable Care Act and the state hopes to begin its bold experiment in 2015.

As bold as the plan might be, Hsiao et al. might be even bolder in projecting the potential cost savings, which they peg at 25.3 percent. Academics rarely go out on a limb with projections like this that can easily be assessed in a few years time. And academics are rarely so optimistic. I wish I could share that optimism.

Let’s take a close look at the projections. Hsiao et al. expect a 2 percent reduction in expenditures from malpractice reform. This is plausible, but malpractice reform is easily severed from health financing reform – many states have already done so – and I do not see why we should attribute any resulting savings to the implementation of a single payer system.

Hsiao et al. also projecta reduction in administrative expenses of 7.3 percent, stemming from “the consolidation of insurance functions” and “reduced administrative costs for providers stemming from uniform claims administration.” This also seems plausible and the actual savings could be even higher, inasmuch as the state will be doing away with all of the marketing and medical underwriting functions of private health insurance.

From here, things get dicier. Hsiao et al project another 5 percent savings from reduced fraud and abuse. How so? The “comprehensive claims database” is supposed to make detection easier. The authors cite a 2007 FBI report as the basis for their 5 percent estimate. That report states that fraud and abuse amount to as much as 3-10 percent of total U.S. health spending, but it makes no mention of the potential cost savings from creating a comprehensive claims database. Hsiao et al. also cite a study of fraud and abuse in Taiwan but do discuss its relevance to Vermont. Will consolidating claims help stop fraud and abuse? Medicare is not a comprehensive claims database but it is awfully big, yet Medicare fraud and abuse is rampant. Large private insurers also fall victim to fraud and abuse. If Hsiao et al believe that Vermont’s state employees will do a better job fighting fraud and abuse than private insurers, good luck to them!

Hsiao et al project the biggest cost savings, 10 percent, will come from payment reform and integration of delivery systems – essentially, moving everyone into an Accountable Care Organization. (Hsiao and colleagues acknowledge that the shift to ACOs is not mandated yet include the projected cost savings as if it was a fait accompli.) As I have previously blogged, any cost savings projected from ACOs are truly speculative. And in a small state like Vermont, the shift to ACOs may backfire. To understand why, consider that single payer systems in Canada and Europe largely hold down costs by bullying the medical community into accepting low wages and restrictions on access to medical technology. The bullying works – the proof is in the cost savings. But Vermont is not large enough to support more than a handful of ACOs, each with a local monopoly. If anyone does the bullying, it will be the monopoly ACOs demanding higher rates and funding for more technology. Dominant ACOs may have even more bargaining power than the state; legislators can always be fired. (I realize that Vermont is perhaps the most liberal state in the nation and I suppose that goes for their physicians. But let’s see how liberal they are when the state decides to slash their fees by 10 percent.)

Lastly, Hsiao et al. project a savings of 1 percent in governance and administration, apparently due to “insulating major spending decisions from the political process.” They expect to keep politics out of the single payer system?

Let me reiterate. The new Vermont law is terrific. I hope they implement it as soon as possible and that it succeeds beyond my wildest expectations. But I doubt it will succeed beyond Hsaio et al’s expectations, as those truly are wild. If Vermont can reduce administrative costs and expand coverage without sacrificing quality or creating shortages, the experiment will be a success. If and when that happens, I hope more states will follow suit.

Now which state will be bold enough to experiment with a fully market-based system?

December 14, 2010

The Grinch that Stole Obamacare

Filed under: Health insurance,Health Reform,Uninsured — David Dranove and Craig Garthwaite (from Oct 11, 2013) @ 3:38 pm

Article 1, Section 8, Clause 3 of the Constitution, better known as the Commerce Clause, states that Congress has the power to “regulate Commerce…among the several States.” To supporters of health reform, the Commerce Clause is the Grinch that stole Obamacare. To opponents, the Commerce Clause might seem like a Sanity Clause (apologies to the Marx Brothers.) One thing now seems certain. Obamacare is on the fast track to the Supreme Court, where a ruling on the Commerce Clause could have far reaching implications for health reform and, frankly, for many other federal interventions into economic activity.

Virginia officials cited the Commerce Clause in arguing that the individual mandate was beyond the power of Congress. U.S. District Judge Henry Hudson agreed with the centrality of the Commerce Clause:

While this case raises a host of complex constitutional issues, all seem to distill to the single question of whether or not Congress has the power to regulate and tax a citizen’s decision to participate in interstate commerce.

Judge Hudson sided with Virginia, stating that “no specifically articulated constitutional authority exists to mandate the purchase of health insurance.”

Judge Hudson does not reject health reform in its entirety. Although he speculates as to whether the bill would have been enacted without the exchange, he notes that the record in the case is insufficient for a final determination and thus he “severs (the individual mandate) with circumspection,” leaving the rest of the bill intact. In doing so he provides a road map to others attempting to strike down the entire legislation, provided they can find some evidence that votes hinged on the inclusion of the exchange.

Suppose that the Supreme Court ultimately agrees with Judge Hudson’s ruling. Is there anything of substance left in Obamacare? Consider the following:

– The law puts barely a dent in the $300 billion tax subsidy for health insurance, thereby losing the single best opportunity for containing costs and funding increased enrollments. Even the economists on Obama’s health reform team regret this failure. Instead, cost containment relies on cutting payments to providers, cuts that may never materialize.

– The law makes strides towards creating electronic health records, but this effort is physician-centric when it should be equally management-centric. This will limit our ability to transform how health care is delivered. Besides, there is not enough money in the bill to promote nationwide adoption of EHR.

– The law encourages the creation of Accountable Care Organizations, the “lite” version of Health Maintenance Organizations. ACOs have far less potential for cost containment and may even exacerbate costs if providers use ACOs as cover for mergers that enhance market power.

For all of the changes to healthcare that are buried in the 2000+ pages of legislation, the centerpiece of Obamacare has always been the expansion of health insurance coverage through the creation of health insurance exchanges. The individual mandate is an essential element of exchanges, intended to assure a broad risk pool so as to encourage insurers to reduce premiums. Take away the mandate and the exchange becomes an overly regulated version of the private insurance market, with little to attract private insurers.

Without the mandate, the exchanges are likely to be no more successful than state regulated insurance pools. Nearly every state has created an insurance pool for individuals and small business that were shut out of the individual market. Many of these pools welcomed low risk enrollees but few applied. The resulting adverse selection caused costs per enrollee to skyrocket, stretching state budgets to the breaking point and limiting combined enrollments across all the states to about 200,000 individuals. This works out to less than 0.5% of the uninsured! California did see some success with its Health Insurance Purchasing Cooperative, a government sponsored private exchange administered by the Pacific Business Group on Health. In the early 2000s, HIPC had nearly 150,000 enrollees, but by mid-decade the program had fallen prey to adverse selection and HIPC folded in 2006.

Two states have full-fledged exchanges. Maine’s Dirigo Health, has been an unmitigated disaster. Prior to Dirigo, Maine had about 135,000 uninsured. The state imposed a 2.14 percent tax on all private health insurance claims to help subsidize enrollments in Dirigo. Enrollment is voluntary and thus far about 15,000 people have signed up, but the majority was previously insured. It is rare to find such a large, broad-based tax that benefits so few individuals.

The Massachusetts Connector is more successful, with about half of the uninsured now covered through the state exchange. But Massachusetts receives substantial subsidies from the federal government (who can Obama turn to, China?). Of greater note, Massachusetts has an employer pay-or-play mandate that is analogous to the purchase mandate that Judge Hudson struck down.

And therein lies the Constitutional rub. States have powers to regulate commerce within their borders that are not available to Congress, which is restricted by the Commerce Clause to regulating industries with nontrivial interstate commerce. Judge Hudson apparently did not believe that health insurance involved substantial interstate commerce and ruled accordingly. Thanks to Obamacare, the Supreme Court is going to have a chance to revisit the Commerce Clause and perhaps provide guidelines for defining “substantial,” guidelines that may apply well beyond the realm of health insurance.

Ironically, Republicans had been calling for new rules allowing the interstate sale of health insurance. Had they succeeded, Judge Hudson might well have found that health insurance was covered by the Commerce Clause and that Congress did have the power to create exchanges.

October 23, 2010

Dear Mr. Smith

Filed under: Health insurance,Health spending — David Dranove and Craig Garthwaite (from Oct 11, 2013) @ 8:32 am

John Smith of Chicago (not his real name) asked the following question in a recent letter to a local newspaper:

“Over the last several years my annual deductible has increased from $500 to $2000…With higher rates, I have had to limit key diagnostic services that my physician recommended at my physical. Does health reform cap deductibles…?”

The paper’s response mentioned that many preventive services are covered under the new law and mentioned something about risk pools – a decent enough answer I suppose. Here is what I would have written:

Dear Mr. Smith,

I understand that you are upset. No one wants to spend money on something when someone else has been buying it for them. Healthcare is no exception, and over the years we have gotten use to having our health insurance company buy everything our doctors ordered. The upside of generous health insurance coverage is that we are better able to avoid the risk of financial ruin. The downside is that we sometimes agree to receive medical services that we might not need. The latter is really true – the research evidence is overwhelming – and this has contributed mightily to the cost crisis you have been reading about.

I am sure you will tell me that you really need the diagnostic services ordered by your physician. Then you should find a way to pay for them. I understand that these services can cost hundreds of dollars, but I would imagine that there are other things in your life that are equally costly – car payments, vacations, new clothing, and so forth. Don’t you give equal or higher priority to your health? If so, then perhaps by next year you will set aside the extra money you will will need for these tests. If not, then how can you say that you really need them? If you are unwilling to pay several hundred dollars for medical tests, then you must not hold your life dearly. Why then should others pay for you?

I know that I sound excessively harsh, and if your financial situation is such that purchasing these services will push you over the financial brink, I apologize. You are in a rough situation for sure. But consider that if your employer offered a more generous health plan, the premiums would have been thousands of dollars higher. Think of how this would have affected your job situation. Many employers, perhaps most, have to hold the line on wages when health insurance costs increase, so you may well have seen a substantial wage cut. If your employer could not reduce wages, then your very job might have been threatened. I doubt you would have preferred either of these outcomes to the present situation. The real problem isn’t that your deductibles increased; the problem is that healthcare is so darn expensive.

All of this rational economic analysis may leave you cold, and I understand that you cannot possible like the present situation. There are alternatives that you might prefer. Under a government-run system, you wouldn’t have to pay for many diagnostic services. But to keep costs under control, the list of free services would be chosen by the government, not your doctor. The new health law moves us in that direction and many Americans like the new direction we are taking. Others would prefer to let market forces work to control costs. Part of that solution would require us to face more of the financial consequences of our healthcare decisions while still having protection against financial ruin.

There is no going back to the old days. Pick your poison.


David Dranove

September 22, 2010

Profit-seeking Health Insurers Seek Profits

Filed under: Health insurance,Health Reform,Uninsured — David Dranove and Craig Garthwaite (from Oct 11, 2013) @ 1:02 pm

No one who sees this headline should read any further. There is no news here. So why is everyone getting lathered up about it? Let me explain.

Healthcare reform becomes official this week, as many of the provisions of the legislation kick in. One provision requires insurers to accept children with preexisting conditions while capping what they can charge, undoing a standard industry practice. Several insurers have indicated that they will stop selling child-only policies. Industry officials are having a field day criticizing insurance industry greed.

Maybe these officials haven’t noticed, but insurers are greedy and there is nothing anyone in the Obama administration can do about it. Maybe it needs repeating. Insurers are greedy, have always been greedy, and always will be greedy. So are all investor-owned companies. People don’t invest in health insurance companies (or any other investor-owned companies) for charity. They invest in them to make money. (Investors tend to be greedy too, and that includes the pension funds that most working Americans rely upon for their comfortable retirements.)

Greed lends a certain degree of predictability to policy making. If the government requires a company to alter a product in such a way that it cannot make money selling it, then the company will refuse to sell that product. Usually our legislators have enough wisdom to understand that they cannot banish greed, but not this time. Didn’t anyone tell President Obama that insurers have relied on preexisting condition exclusions to make child-only policies profitable? (A disproportionate percentage of individuals who seek child-only policies do so because of preexisting conditions and this appears to be a far worse problem in the child-only insurance market than in the adult market.) If the government bans these exclusions, insurers will naturally stop selling the policies. Why is anyone shocked when managers do the bidding of their owners?

By choosing to heavily regulate the insurance market, President Obama has shown the same policy ambivalence that seems to mark his entire administration. Here he wants to sustain privately financed healthcare and simultaneously achieve the end results of government financed healthcare. He can’t have it both ways. If he really wanted a privately financed system, he should have done so with the least amount of intervention and let the profit motive work for the greater good, as it does in most markets. Economists have shown how to do this: End the tax subsidy, provide financial incentives for insurers to cover the very ill (risk adjustments? separate high risk pools?) and accept that some individuals will still fall through the cracks and have to rely on safety net providers. If he really wanted the end results of government financed healthcare, then he should have jettisoned the market-based insurance system altogether. We know how to do this to, by following Canada’s lead. Socialized medicine is not without its benefits, and perhaps markets don’t have all that much to offer in healthcare anyway. (That is a debate for another blog, or one hundred blogs.) Pick a side! Healthcare reform is devilish, but the devil you know is better than the one you don’t.

There is, of course, a far more cynical explanation for what is going on. Perhaps President Obama really does prefer socialized medicine, but realizes that he has neither legislative support nor the support of voters. (I doubt I am the first to offer this conjecture.) So he gives us a plan that is sure to fail and lays the blame at the feet of private insurers. Heck, most Americans rank private insurers right down there with tobacco executives, so this populist approach could have traction. After Obama gets done thrashing insurers over these child-only policies, Americans might further lower their opinion of insurers, ranking them right alongside Congress.

September 14, 2010

The Health Insurance Purchase Mandate: Peeking Into Pandora’s Box?

Filed under: Health insurance,Health Reform,Tax deduction,Uninsured — David Dranove and Craig Garthwaite (from Oct 11, 2013) @ 8:58 am

Governors from most twenty mostly red states are suing to block the implementation of health reform. I have no idea whether they will win on the legal merits. But when it comes to the economics of the issue, they are on the wrong side. But even as my head says that the mandate is a good thing, my heart tells me otherwise.

Mandating the purchase of a good or service should be anathema to any card-carrying economist. But healthcare is unlike other goods and services in one critical way. No one will sell you food or clothing or anything else that you cannot pay for. But if you need surgery to save your life, someone will operate on you. Healthcare providers are trained to “treat now, bill later.” And while providers pursue (and sometimes harass) the uninsured for payment, the lion’s share of their costs end up as bad debt or charity write-offs. So the uninsured get their care while the rest of us pay for it. An insurance mandate is supposed to prevent such free riding. It is as if we are saying, “We can’t stop ourselves from taking care of everyone who needs medical care, so we will force everyone to pay their fair share.”

This concern about free riding is how we got health insurance in the first place. During the Great Depression, many patients couldn’t pay their bills. So hospitals and doctors encouraged individuals to prepay for their share of the community’s medical costs in exchange for guaranteed access. Even then, many remained uninsured and some had trouble getting medical care. By the 1950s, the new Hill-Burton program subsidized nonprofit hospitals in exchange for guarantees that they would take in the uninsured. A building spree of taxpayer funded county hospitals and community health centers further bolstered the safety net.

This safety net worked quite well for a long time. Thanks in part to tax subsidies, most Americans purchased insurance. Health insurers generously reimbursed private providers and the government had little trouble raising the money to subsidize county hospitals and community care centers, so there was enough money to care for the uninsured. The uninsured might not have had immediate access or seen the best providers, but few died on the streets. But this safety net has grown torn and tattered amidst a perfect storm of economic forces. Providers are either competing away their profits or using market power to build up empires to deter future competition. Either way, they have lost their appetite for serving the uninsured. Counties are cash poor due to the skyrocketing costs of running their hospitals and clinics. And all of this is occurring even as the percentage of uninsured is reaching new highs.

For the better part of the past half century the U.S. healthcare system could accommodate the free riders, but not anymore. So what are we to do? Let the uninsured die on the streets? (I call this the “Dickensian” proposal.) Eliminate market competition so that providers can make enough money to restore the safety net? (If we do this, we might as well embrace the “Canadian” proposal.) Force providers to increase their charity care and bad debt burden? (Although many nonprofit hospitals do not do enough to justify their tax exemptions, this won’t go very far.) Seen in this light, the insurance mandate makes a lot of sense to a lot of people. The uninsured impose a wealth externality on everyone else. Why not use the classic economic solution to externalities and “tax” the unwanted behavior?

But take off the economist’s glasses and the slippery slope comes into view. I am not concerned about mandates, per se. Purchase mandates are hardly exceptional. Children must get vaccinations. Car buyers must pay for airbags. Homeowners must have smoke detectors. Heretofore, most of these mandates have something to do with health and public safety and in many cases, there are genuine health externalities to justify the mandates. But in the last few years, policy makers are increasingly justifying mandates with wealth externalities. Force motorcycle riders to wear helmets because the cost of their head injuries drives up insurance premiums for everyone. By similar logic, tax cigarettes and banish sugary soft drinks from our schools. Why stop there? We can mandate (and monitor?) twice-weekly turns on the treadmill and, God forbid, ban deep dish pizza, char-dogs, and all the other delicacies that make life in Chicago worth living. Health insurance creates a Pandora’s Box of wealth externalities. Perhaps it is best to keep the lid on tightly.

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.”

August 6, 2010

Howard Dean: Who Are You Crapping?

Filed under: Health insurance,Health Reform,Health spending — David Dranove and Craig Garthwaite (from Oct 11, 2013) @ 1:43 pm

Democratic honcho Howard Dean wants to do away with the insurance mandate. Why? Because purchases of private insurance enrich evil insurance company executives. Here are his own words:

“The bill was supposed to give Americans choices about what kind of system they wanted to enroll in. Instead, it fines Americans if they do not sign up with an insurance company, which may take up to 30 percent of your premium dollars and spend it on CEO salaries — in the range of $20 million a year — and on return on equity for the company’s shareholders.”

Let’s fact check this a bit. Total private health insurance premiums in the U.S. approach $1 trillion. A lot for sure. Dean wants you to believe that a big chunk of this, as much as 30% or $300 billion, goes for CEO salaries. This would require 15,000 insurance CEOs each making $20 million annually. With all the consolidation that has occurred, I am not sure there are even 150 insurance companies (and perhaps not even 50), let along 15,000. Let’s be generous to Dean and suppose that there are 150 CEOs and other top industry executives making $20 million. This works out to $3 billion.

Dean suggests that whatever doesn’t go to CEOs goes to shareholders. In a good year, health insurers enjoy returns on sales of about 3%. (Returns on assets are strong because assets are relatively small.) With annual revenues of $1 trillion, this translates into aggregate profits of about $30 billion.

If we add together CEO salaries and insurer profits (and ignore the fact that a lot of plans are nonprofit Blues plans that do not have shareholders), we can account for about $33 billion out of Dean’s $300 billion. Thus, Howard Dean has overstated his case by a factor of 9. In the immortal words of Da Coach, Mike Ditka, “Howard Dean, who are you crapping?”

(Liberal bashers take note, in an earlier blog I take to task highly paid insurance executives. But let’s not pretend that we fix anything merely by cutting their pay and trimming profits. $33 billion represents about 1.6 percent of total U.S. health spending.)

August 4, 2010

The Insurance Mandate Revolt

Filed under: Health insurance,Health Reform,Uninsured — David Dranove and Craig Garthwaite (from Oct 11, 2013) @ 8:56 am

Missouri voters have passed a symbolic referendum renouncing the Obama insurance purchase mandate. This follows on the heels of a Virginia federal district court judge agreeing to hear arguments on the constitutionality of the requirement. I can’t comment on the latter but I can’t keep quiet about the former.

I wonder how Missourians would have voted on the following proposition: No one shall receive medical care that they cannot pay for. We don’t have laws like that in other markets for the simple reason that sellers won’t normally sell you something unless you can pay. Maybe our doctors are lousy business people (or maybe they are good humanitarians), but if you need medical care in the U.S. you will receive it, whether you can pay or not. Surgeons don’t ask for your bank statement before they sew you up! But if you don’t pay for your surgery, rest assured someone else will.

We require, through the tax system, that everyone contribute towards the cost of government sponsored education. If we had a nationalized health system, we would do the same — raise taxes and give everyone government sponsored health care. Is that what Missourians want? It seems a worthy goal to avoid socialized medicine and yet make everyone pay their fair share of medical costs. The current system has too many free riders. Say what you want about Obamacare, but if you believe in individual responsibility, you should support the purchase mandate. Unless you are willing to die on the operating table if you can’t afford the sutures.

July 29, 2010

My Blago Blog

Filed under: Health insurance,Uninsured — David Dranove and Craig Garthwaite (from Oct 11, 2013) @ 12:21 pm

Yesterday, attorney Sam Adam Jr. said this about his client Rod Blagojevich:

“I love Rod Blagojevich…I love that man,” Adam said outside the courtroom.” My daughter was born 1 pound six ounces and All Kids was the reason she was allowed to live…my wife and I now have a beautiful 35 pound baby.”

The All Kids program is supposed to be for low income individuals who can’t afford health insurance. Sam Adam is, by all accounts, one of the most successful trial attorneys in the country. Given his proven abilities, I will be careful about what I say next. Either there is more to the story of his daughter’s eligibility for All Kids than meets the eye, or he has been feeding at the public trough. If the latter, this has to be the worst example I have ever seen of “crowd out”, where someone who can afford their own insurance lets taxpayers buy it for them.

And Adam says it all with a straight face. What a 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?

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