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?

April 14, 2011

What I Learned in the Stalls at the U of C

Filed under: Health Reform,Medicare — David Dranove and Craig Garthwaite (from Oct 11, 2013) @ 8:22 am

So President Obama has responded to the Ryan/Enthoven voucher proposal with a plan of his own. The President will not dignify the voucher proposal with a serious critique. But he will save Medicare by making deeper cuts to provider payments. In going this route, Obama is proving to be as anti-intellectual as his predecessor in the Oval Office. This is rather alarming considering how much time Obama spent in Hyde Park. Perhaps he hung out at the University of Chicago not for the mental stimulation but because he thought it was a good career move.

Rather than engage in a meaningful debate about the voucher proposal, Obama and others claim that the Ryan/Enthoven plan will increase the financial burden on seniors. If this is the problem, the solution is easy. Make the vouchers bigger and means-test them. One of the beautiful things about the Ryan/Enthoven plan is that it gets the economics right and limits the debate to the simplest of questions: how much should we transfer wealth from taxpayers to seniors? I suppose the real problem is that seniors may not like the answer.

Obama would be hard-pressed to debate the voucher plan on its merits because the very arguments he might muster against it – the potential for adverse selection and the need to assure that everyone uses their vouchers – are the same arguments that have been leveled at his insurance exchange proposal. So the President offers an alternative that is far worse. Anyone who ever used a bathroom at the University of Chicago knows that you can’t get what you refuse to pay for. If the government keeps slashing Medicare payments, doctors and hospitals will either refuse to see Medicare patients, or cut back on the quality of care, or both. I can see seniors lining up at their local CVS for treatment, because no one else will take them.

When Ronald Reagan was elected President in 1980, there was bipartisan support for Alain Enthoven’s vouchers. Nearly half of Congress was prepared to vote for the proposal; all it needed was a push from the White House. But Reagan was opposed to any plan that would require new taxes (to pay for the means-tested vouchers) and did not support the plan. How ironic that a President from the other end of the political spectrum has once again refused to consider Enthoven’s brilliant plan.

April 11, 2011

To the Barricades!

Filed under: Health Reform,Medicaid,Medicare — David Dranove and Craig Garthwaite (from Oct 11, 2013) @ 12:29 pm

Last week, Republican Congressman Paul Ryan unveiled his plan to save Medicare and Medicaid. Supporters hailed the plan as revolutionary; critics decried the plan as revolutionary. For something so revolutionary, it sure is based on some old ideas.

In 1978, Stanford Business School professor (and my soon to be advisor) Alain Enthoven published an article in the New England Journal of Medicine in which he described his “Consumer Choice Health Plan.” Enthoven proposed tax-funded vouchers that all Americans could use to purchase health insurance. The amount of the voucher would be tied to income and individuals could use their own money to purchase a plan that cost more than their voucher. Enthoven even included some rules limiting the ability of insurers to cream skim healthier enrollees; new and improved versions of these rules are written into the insurance exchanges as part of the Affordable Care Act.

In 1986 I published a paper that described how states were trying to control Medicaid expenses by regulating the prices they paid to hospitals. I pointed out that states had surprisingly little interest in reining in hospital costs because the federal government paid for half or more of the Medicaid bills. The solution was apparent to any economist – convert the “percent of Medicaid spending” formula to a block grant, so that the states are 100% responsible for the costs of Medicaid expansions.

Ryan’s “revolutionary” proposals for Medicare and Medicaid reflect an age-old principle of microeconomics: in the absence of consumption or production externalities (e.g., pollution), efficiency demands that decision makers are 100% financially responsible for the marginal expenses they incur. Ryan’s proposals make so much economic sense that some version of them might even have a chance to survive. If I had to choose, I would put my money on Medicaid block grants. I think that the states will embrace block grants provided that the federal government gives them flexibility in choosing plan design, enrollments, and coverage. Once states are 100% responsible for the marginal Medicaid dollar, we might see sensible reforms like a massive shift away from nursing homes to home care, and a movement of younger beneficiaries into low cost, narrow network HMOs. Some oxen will be gored, of course, but you can’t spend less money on health care without spending less money on health care. That ought to be plain enough.

Medicare vouchers may seem like a tougher sell, but the idea is not too far removed from the present situation, in which Medicare Managed Care plans have captured 20% of Medicare enrollments in many markets, despite rules that limit beneficiaries’ financial incentives to enroll. I could even imagine shifting Medicare enrollees into the insurance exchanges. And if we need to keep “traditional Medicare” as a “public option,” that compromise might be worth it if we can restore some sanity to this budget chewing nightmare of an entitlement.

I never thought that I would live long enough to see comprehensive health reform on the scale of the Affordable Care Act. President Obama proved me wrong. And I never thought I would live long enough to see economically sensible comprehensive health reform. Will Congressman Ryan prove me wrong again?

January 11, 2011

A Health Reform Christmas Carol

Filed under: Health Reform — David Dranove and Craig Garthwaite (from Oct 11, 2013) @ 9:38 am

I have not blogged for several weeks, mainly because I have been making sense of the curious events that transpired over the Christmas holiday. If you a regular reader of my blog, you know that I have had some harsh things to say about health reform. To criticize a law that brings joy to so many people, it must make me seem like a scrooge. But I really thought that most of the legislation was humbug. And then, in the days leading up to Christmas, I had a series of strange dreams that changed everything. I must tell you about them.

In my first dream, I was visited by a shriveled up old man who seemed to have already passed through death’s door.

I shuddered to see him. “Who are you? What do you want with me?” There was no response. He came closer and closer. I tried to move away but I was paralyzed with fear. Suddenly, he reached out and took me by his cold, clammy hand. As he held me tight we seemed to fly through space and time. Just as suddenly I seemed to be back in the real world. Only I wasn’t in my bedroom; instead I found myself in a conference room in a dreary office building. There was one window and if you craned your neck you could just make out the U.S. Capitol. Everyone attending the meeting wore the same uniform – gray dress slacks and powder blue dress shirts. But what I noticed most of all about their attire was that they all had pocket protectors filled with mechanical pens and pencils.

Then it occurred to me that I recognized a lot of those in attendance. I had seen them at healthcare conferences talking about the latest government initiatives to hold down healthcare spending. And here they were, hard at work. I listened closely and could hear them going on and on about diagnostic codes and relative values, and making exceptions for this drug and that hospital. They talked for hour after hour; it was becoming so excruciatingly boring that I begged my guide to leave. I wanted to go home. He refused and insisted that I listen carefully, for there were lessons to be learned. “Who are you,” I asked my guide again. “Why am I here?”

“I am the ghost of health reform past,” he replied. You are here to see what happens when technocrats try to fix the healthcare system. “CON, PSROs, DRGs, RBRVS – these are the legacies of decades of health reform.”

“But none of these worked,” I replied. I explained that micromanaging one piece of the health system just led to greater inefficiencies elsewhere, and once regulation was politicized, as with Certificate of Need, all hope was lost.

“Stay, listen and learn,” he replied.

But I couldn’t just listen. I spoke to the bureaucrats, “I know that you have good intentions but can’t you see that you are only making things worse?” No one heard me, so I shouted, “You are giving false hope to those who want to truly reform the healthcare system and even worse, you are postponing the inevitable day of reckoning.” I pleaded with them to stop what they were doing but to no avail. The rule making went on and on. As my despair mounted, I once again begged my guide to take me home.

Once again we flew through space. Now I was in a small town, just outside a little cottage. My guide took me up to a window where I could see a family with three small children. One of them had a terrible deformity. I listened through the window and heard the mother and father talking. It seemed that the father had lost his job and, with it, their health insurance. They would have to sell the house to pay for little Timmy’s medical bills.

I started sobbing uncontrollably. Those bureaucrats were worrying about outlier payments and billing code exceptions, and this poor family was losing everything. “Please ghost, can’t we find a way to fix our system?” But the ghost again fell silent. “Please,” I cried, “please!”

The next thing I knew I was lying in a pool of sweat in my own bed. It was only a dream, I told myself, only a dream…

…to be continued.

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.

December 3, 2010

If I Ruled the World

Filed under: Health IT,Health Reform — David Dranove and Craig Garthwaite (from Oct 11, 2013) @ 12:10 pm

This blog is dedicated to my brother Joel, who has inspired me more than he knows. His journey into the undiscovered country will soon begin. May he go in peace.

I recently had a chance to speak at length with Mark Duggan, a University of Maryland economist who spent 15 months in DC working on health reform. After discussing all the promises and pitfalls of the new legislation, Mark asked what I would have done differently. My response nibbled around the edges of the existing legislation. I should have been bolder. This is what I would have said:

If you study previous attempts to reform healthcare delivery through the private sector, there is one common thread. These attempts all failed because of an absence of proper management information systems. We need integrated electronic health records. And not just to improve medical decision making. We need EHR that can be used for management decision making – for contracting, measuring costs, measuring and rewarding quality; I could go on and on. We are trying to solve management problems in a $2 trillion industry using management information systems that would be an embarrassment in nearly any other sector of the economy.

Of course, the industry has been pushing EHR for decades and there are places where EHR is really first rate. Kaiser is a great example but also a special case because of its thorough vertical integration and long history. And even Kaiser has been unable to replicate itself outside of its core markets. The sad fact is that most providers have little incentive to adopt EHR, and even when they do, they have little incentive to be compatible with other providers. Unfortunately, the network externalities benefit purchasers and consumers a lot more than they benefit providers, so don’t expect the compatibility problem to solve itself.

My proposal is simple. Assemble a panel consisting of medical professionals, managers, and insurers. “Lock them in a room” for 72 hours and tell them to choose from among the many fine existing EHR systems. Tell them they can combine the best features of each if they wish. Once we have settled on an EHR system, give every provider one year to adopt it. If they refuse, deny them Medicare and Medicaid payments. Combine the stick with a carrot – subsidies to providers who have limited financial resources. I believe the total one-time subsidies would be less than $50 billion, a drop in the bucket compared with the size of the system.

And then let the system work. We will see new organization forms emerge, not based on the dictates of Washington, but the workings of the market. We will see rewards for quality and efficiency, again driven by market forces. Waste will be cut out because that is how markets normally work, provided you can find the waste in the first place. EHR will make that happen. If Mark Duggan and his task force colleagues are correct, the current system has hundreds of billions of dollars of waste. I think it is realistic to expect savings of this magnitude. And with proper outcomes measurement (something that EHR will make possible), we should see quality go up.

The only other change I would make would be to greatly expand the presence of managed care in Medicare and Medicaid so that private sector doesn’t reap all the benefits of EHR.

That’s it; my whole proposal. Yet I believe it far reaching. The resulting efficiencies will translate into huge savings for government payers, freeing up existing resources to provide vouchers for the poor so we can expand coverage to the uninsured without expanding Medicaid. (I suppose I would endorse some minimally regulated exchange as a way for individuals to use their vouchers.)

Is it a leap of faith to believe that effective management combined with market forces can save the health care system? Of course it is. But no more so than the leap we take every day when we wake up in a capitalist society and buy our bread and our clothing. In these and most other markets, sellers and purchasers are empowered by information and motivated by the free market; consumers seem to like the results. It is time for healthcare markets to catch up to the rest of the business world.

That is what I wish I had said. Even if I had, it would not have made a difference. According to Mark, the folks who had the final say over Obamacare would never have taken that leap of faith.

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 29, 2010

The Best and the Brightest?

Filed under: Health Reform — David Dranove and Craig Garthwaite (from Oct 11, 2013) @ 9:25 pm

I wanted to follow up on the previous post on the intellectual contributions of the Cambridge community to healthcare reform.

My brother Joel reminded me that there are some parallels to be drawn with “The Best and the Brightest.” As chronicled by journalist David Halberstam, these were the Harvard whiz kids enlisted by Robert McNamara to modernize the Defense Department. I doubt whether these academics ever envisioned that their hard work would help McNamara wage war against the Vietnamese.

It is not well known but a young Alain Enthoven was one of the McNamara whiz kids. After serving as chief executive of a defense company, Enthoven took an interest in health care and, especially HMOs. He developed the principles of managed competition while a professor at Stanford. Enthoven’s ideas formed the intellectual foundation for Bill Clinton’s health reform proposal. But after reading the reform legislation, Enthoven commented “Of the 1700 pages in the Clinton proposal, Congress should throw out 1700 of them.” This is a sad reminder that when academic principles meet political realities, the politicians always win.

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.”

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