Plain talk on Healthcare

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The Future of Health Care Policy Font Size:



By Arnold Kling : BIO| 10 May 2006

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I have eagerly awaited the publication of Crisis of Abundance: Re-thinking How We Pay for Health Care, which is the subject of this essay. However, since I am the author, this does not count as a book review. Call it a commercial.


I should start by saying that the book does not contain a single major policy recommendation that is politically palatable today. That fact will greatly limit its appeal to most Washington wonks. To gauge their reaction to Crisis of Abundance, imagine how you would react if, while waiting in the checkout line at a supermarket, you pulled a paperback novel off the sales rack, thumbed through it, and didn't find any sex scenes. What was the publisher thinking? Who would buy this?


I can't speak for what the Cato Institute was thinking when they asked me to write a book on health care policy. What I was thinking was that I would do a straightforward, fact-based economic analysis. My approach was to get on the economic trail and follow it to wherever it leads. Where it leads turns out to be a political wilderness, as I will explain below.


Pain in Every Direction


In March, I gave a talk sponsored by the Mercatus Center, in which I said that the main take-away from my book is that any direction that we take in health care policy involves pain:


If we go straight ahead (making no changes to health care policy), then the problems that we face now will get worse. Health care spending will continue to rise, so that our health care finance systems will continue to unravel. Employer-based health insurance will continue to struggle. The price of health insurance for individuals will rise, and more individuals will choose to remain uninsured. Medicaid's burden on state budgets will continue to increase. The trillions of dollars of unfunded liabilities of Medicare will continue to pile up.

If we turn left (increasing government's role through a single-payer health care system), then we will have to use a national health care budget to ration care. Other countries find it acceptable, for example, that not everyone who is recommended for heart bypass surgery can get it within three months. Our culture is not ready for that. If you thought that many Americans reacted badly to managed care, imagine how they will react to managed care with government in charge.

Turning right (a market-oriented solution) also would produce culture shock. We are used to obtaining health care services without having to worry about what they cost. Over 85 percent of health care spending is paid for by third parties -- about 45 percent comes from government and about 40 percent comes from private health insurance. A market-oriented solution, as I propose in Crisis of Abundance, would limit government support to the poor and limit health insurance to covering catastrophically large expenditures. Most consumers clearly prefer -- or at least are used to -- health plans that insulate them from a much larger share of the costs than would be the case with true health insurance.

Why Spending is High


The United States is an outlier in terms of health care spending. In my book, I point out that in 2002, 14.6 percent of our GDP went for health care (more recently, this figure probably has reached 16 percent), while for most other countries the percent of GDP devoted to health care is closer to 10 percent or less.


I believe it would be unwise to claim that our high level of spending on health care is a good thing. That would be true if spending were not distorted by perverse incentives and/or it could be shown to yield noticeable benefits. However, the incentives are distortionary. Moreover, while most statistics used to measure overall quality (such as international longevity comparisons) are too flawed to enable one to draw definitive conclusions, based on the information that I found while working on the book, I believe that it is likely that we are not getting good value for all of the money that we spend on health care.


One explanation of high health care spending is that it reflects the inefficiency and greed of our capitalist system, compared with the more socialized systems of other industrial countries. This viewpoint is popular on the left, but it does not stand up to close scrutiny. In the United States, it is the intensity with which we utilize health care services -- particularly specialists and high-tech equipment -- that is responsible for our soaring health care expenditures.


We are getting real health care services for our money. Although there certainly are ways to improve efficiency in health care, efficiency measures cannot provide enough savings to enable us to consume the same services we consume today at drastically lower cost. The only way to rein in health care spending is to change the way that we consume services.


Real Solutions


My TCS readers know that I see our current notion of health insurance as fundamentally flawed. In the book, I describe what we call health insurance as "insulation," and I contrast it with what I call real health insurance. I spell out how a long-term, catastrophic health insurance plan might work.


I also show how a combination of long-term catastrophic health insurance and savings could substitute for Medicare. That makes my book the only health care policy discussion that offers an effective way to prevent the fiscal train wreck that Medicare threatens to become.


I also propose that government charter a commission to study the benefits of different medical procedures. American consumers undergo many health care procedures that have very little expected benefit. Cost-benefit analysis would help consumers make better decisions, particularly if some of their insulation from health care costs is removed, which would give them an incentive to compare benefits and costs in making their decisions.


The Policy Establishment


The health care policy establishment in Washington, including the Heritage Foundation, the American Enterprise Institute, and every think tank to their left, dismisses real solutions to health care financing as politically irrelevant. Instead, the wonks are looking for gimmicks that will "contain costs," which means that they are looking for clever ways that government can cut prices charged by health care suppliers or "improve" markets to make them more efficient.


Where I claim that any direction we take in health care involves pain, the establishment is circling its wagons around the Massachusetts health care plan, which promises a free lunch. Where I say that we need to make realistic promises in our entitlement programs, the establishment says that such talk is politically absurd.


The health care policy establishment today reminds me of the macroeconomic policy establishment in 1967. At that time, inflation was a growing menace, and the establishment blamed the "wage-price spiral." The wonks of that era focused on designing "incomes policies," which were ways for government to intervene in wage bargaining and price-setting. That same year, Milton Friedman was President of the American Economic Association, and he gave an address which laid out the basic economic theory behind what is now enshrined in textbooks as the vertical long-run aggregate supply curve. His back-to-basics economic analysis showed that the way to curb inflation was to control the money supply, rather than use "incomes policies."


The policy establishment did not listen to Milton Friedman in 1967. The next dozen years saw incomes policies tried, failed, and finally abandoned. Only when they had unsuccessfully attempted everything else did the establishment give Friedman's policies a chance, in the 1980's. They worked.


What I try to do in my book is provide that same sort of back-to-basics economic analysis for health care policy. Maybe some years down the road, after the public is fed up with health care gimmick policies that don't work, the policy establishment will discover the ideas in Crisis of Abundance.


Arnold Kling is a TCS contributing editor and adjunct scholar with the Cato Institute.

[jbuck919]

That preface is so badly written ("In my book, I point out that in 2002, 14.6 percent of our GDP went for health care (more recently, this figure probably has reached 16 percent), while for most other countries the percent of GDP devoted to health care is closer to 10 percent or less.") that it immediately calls into question the author's credibility.

The US is an outlier? An outlier is an extreme value that tends to mess up statistical analysis. How can we know that 14.6% is extreme when he doesn't explain what "most other countries" means, as if that term were a suitable subsitute for "other countries on average" on the one hand, and as if it didn't make a difference whether or not he was figuring anybody but the USA's reference group of countries into it on the other.

[Corlyss_D]

I should start by saying that the book does not contain a single major policy recommendation that is politically palatable today.

So much for that . . .

[Ralph]

I should start by saying that the book does not contain a single major policy recommendation that is politically palatable today.

So much for that . . .

*****

And the subject isn't really important either.

[Corlyss_D]

That preface is so badly written ("In my book, I point out that in 2002, 14.6 percent of our GDP went for health care (more recently, this figure probably has reached 16 percent), while for most other countries the percent of GDP devoted to health care is closer to 10 percent or less.") that it immediately calls into question the author's credibility.

Are you saying the US is less, or other countries more?

Health CareExpenditures

In 2003 the United States spent 15 percent of its Gross Domestic Product (GDP) on health care, a greater share than any other developed country for which data are collected by the Office of Economic Cooperation and Development (figure 8, Health, United States, 2005, table 118). After almost a decade of stability from 1992 to 2000, a period of robust economic growth, the share of GDP devoted to health increased sharply from 2000 to 2003, although the 7.7 percent rate of spending increased more slowly in 2003 than in 2002. http://www.cdc.gov/nchs/data/hus/hus05.pdf

After increasing 8.7 percent in 2001, national health expenditure (NHE) growth is projected to be 8.6 percent in 2002 and 7.3 percent in 2003. This slowdown would follow five consecutive years of accelerating spending growth from a low of 5.0 percent in 1996. The acceleration deceleration reflects slower rates of growth in disposable personal income, medical price inflation, and Medicare spending.

As a percentage of Gross Domestic Product (GDP), health care spending is expected to reach 17.7 percent in 2012, up from 14.1 percent in 2001, after hovering just above 13 percent from 1993 through 2000. This increase reflects a combination of faster projected growth in health spending and slower GDP growth. HHS

http://www.gao.gov/cghome/healthcare/

The US is an outlier? An outlier is an extreme value that tends to mess up statistical analysis. How can we know that 14.6% is extreme when he doesn't explain what "most other countries" means, as if that term were a suitable subsitute for "other countries on average" on the one hand, and as if it didn't make a difference whether or not he was figuring anybody but the USA's reference group of countries into it on the other.

Well, you know that 1) the socialized medicine nations in Europe and Canada have their health care systems under price controls and 2) they don't do any medical research worthy of the name - they wait for us to do it all. So it's not surprising that other national health care systems are 10% or less of GDP.

[Corlyss_D]

And the subject isn't really important either.

I know you are being facetious but anything that will eat the budget of the US is important. The uncontrolled spending on Medicare is going to destroy this country long before terrorists do.

[Ralph]

And the subject isn't really important either.

I know you are being facetious but anything that will eat the budget of the US is important. The uncontrolled spending on Medicare is going to destroy this country long before terrorists do.

*****

You're right. We must put down [euphemism] the useless like RETIRED lawyers.

[Corlyss_D]

And the subject isn't really important either.

I know you are being facetious but anything that will eat the budget of the US is important. The uncontrolled spending on Medicare is going to destroy this country long before terrorists do.

*****

You're right. We must put down [euphemism] the useless like RETIRED lawyers.

Maybe so, but as I have said here often, I'm not on Medicare, Medicaid, Social Security, or Supplemental Security Income. Of coruse, Medicare is going to take down the entire edifice, but for what it is worth, it technically don't affect me. So putting down retired laywers on Medicare won't include me.

[Ralph]

And the subject isn't really important either.

I know you are being facetious but anything that will eat the budget of the US is important. The uncontrolled spending on Medicare is going to destroy this country long before terrorists do.

*****

You're right. We must put down [euphemism] the useless like RETIRED lawyers.

Maybe so, but as I have said here often, I'm not on Medicare, Medicaid, Social Security, or Supplemental Security Income. Of coruse, Medicare is going to take down the entire edifice, but for what it is worth, it technically don't affect me. So putting down retired laywers on Medicare won't include me.

*****

It would because the PLAN won't be surgically selective. You're still a menace as a potential beneficiary.

[Corlyss_D]

It would because the PLAN won't be surgically selective. You're still a menace as a potential beneficiary.

Beneficiary of what? I have a contract right.

[Ralph]

It would because the PLAN won't be surgically selective. You're still a menace as a potential beneficiary.

Beneficiary of what? I have a contract right.

*****

Contracts can be broken, obligors can go out of business. You might need MEDICARE!

[Corlyss_D]

Contracts can be broken, obligors can go out of business.

Contract holders have superior legal claims to entitlees. There have been many instances when the muddle-headed congress has tried to legislate its way out of contract obligations only to be rebuffed by the courts. When it comes to fighting over the bones, we'll get first crack before medicare people.

[Ralph]

Contracts can be broken, obligors can go out of business.

Contract holders have superior legal claims to entitlees. There have been many instances when the muddle-headed congress has tried to legislate its way out of contract obligations only to be rebuffed by the courts. When it comes to fighting over the bones, we'll get first crack before medicare people.

*****

Ah yes, the sanctity of contracts doctrine.