Garygrams

The context for our consideration of health care policy options is the central conclusions derived from Parts 1 and 2.  They are:

• The majority of Americans now support at least basic health care as a fundamental right to be provided universally without regard to ability to pay.
• Neither the marketplace for health care delivery nor for health insurance is meaningfully competitive.
• The US health care system currently constitutes a near-worst-case scenario, as we spend roughly 17% of our GDP on health care without universal coverage while the rest of the developed world spends 5-10% with universality.

Keeping this context in mind, I typically find it useful to consider public policy options on a continuum with the most centralized (largest role for government) at one end and the least centralized (largest role for private markets) at the other.  This will be useful here so long as one important distinction is made – that between health care delivery and health care funding.  Put simply, it is quite possible for health care delivery to be at a much different point on the public-private continuum than is health care funding.

Given this distinction, let’s consider four points along the public-private continuum (there are obviously further policy gradations between these points).  At one end is the public delivery-public funding policy option.  Here not only is the universal health care program funded publicly through tax dollars, but the health care services themselves are provided by government care providers in government facilities.   In spite of the overused and misused label “socialized medicine,”  this is in fact the only policy option that actually fits the description.  Few national health care systems around the world conform with this option, with the United Kingdom and Sweden being the closest.  Somewhat ironically the US Veteran’s Administration (VA) and armed forces health care sub-systems also fit the model.  Nevertheless, for purposes of this discussion we will assume for fairly obvious reasons that the public delivery-public funding model is not a good fit politically and ideologically in the US.

At the opposite end of the spectrum is the private delivery-private funding model.  Here both the delivery of health care and its financing occurs in the private marketplace,  as in pre-1960s America.  This is mentioned only for symmetry given our conclusions in Parts 1 and 2.  Whether for moral, political and/or economic reasons this model has been rejected as unacceptable and unworkable around the world, and now in the US.

So not surprisingly the extremely centralized and extremely decentralized models will not work in the US, and in fact are found very rarely elsewhere.  So what’s in between? Most of the developed world actually, but let’s focus on two significant variations of the private delivery-public funding approach that are particularly relevant for America.

The first is Obamacare-like options.  Under this approach health care universality is achieved simply by mandating it to some combination of consumers, providers and/or insurers.  What could be more straightforward?  In practice of course attempting to impose mandates on a largely private delivery system is fraught with complications.  As Nobel laureate Paul Krugman notes, such efforts are essentially “a matter of redistributing from the lucky to the unlucky,”  and they come with both direct and indirect costs.  For example, mandating that health insurers must cover preexisting conditions or dependent family members to age 26 means higher premiums for healthier and dependent-less individuals.  It also creates perverse incentives (for dependents to stay at home and for everyone to remain uninsured until sick), which shrinks the risk pool and drives premiums even higher.  So you must also mandate participation, which in turn requires providing both penalties to non-participants and subsidies paid for by taxes for those who can’t afford the premiums.

This complex system is the essence of the non-Medicaid part of Obamacare, and it is based on the typically unspoken premise that the private health care marketplace can still provide universal health care efficiently if only the right combination of mandates, penalties and subsidies can be found.  But we’ve already observed that these markets are not competitive to begin with, and that they have resulted in exorbitant costs without corresponding health care quality.  And yet we are supposed to believe that extensive but largely experimental government regulations will cure this very sick patient (sorry for the predictable metaphor)?

Fortunately there is another private delivery-public funding option that makes much more sense – the single payer approach.  This policy option can have many variations, but the principles are straightforward.  There is ample evidence that the high health care costs in the US are significantly related to the fragmented and noncompetitive US marketplace still dominated by private health insurers.  Therefore simple logic, as well as much accumulated experience from other nations, suggests that achieving affordable and universal health care requires replacing the fragmented private insurance system with a single payer fund to pay for the health care costs.  While the single payer fund can be controlled by any agency, it is typically organized and overseen by the government. According to the World Health Organization more than half the industrialized countries in the world have some form of single-payer system of universal health care.

Why would a single payer system be better for the US?  Put simply, as compared to our current disjointed private-public system it would result in equal or better health care at a much lower cost.  The cost advantage occurs for several basic reasons.  First, to make a profit private insurers must screen out high-cost unhealthy customers, spending large sums of money on what’s called underwriting to deny coverage and limit benefits.  Public single-pay insurance systems, which by definition cover everyone, avoid these costs. Further administrative cost savings are possible because with less fragmentation there is much less paperwork imposed on health care providers.  As a result public systems typically spend 2-4% of their resources on administration, while private insurance companies spend 10-15%.  In addition, a large single payer such as the US government has much greater bargaining power in negotiating lower prices with suppliers, especially pharmaceutical companies. This is one of the primary reasons why US residents not covered by Medicare, Medicaid or the VA pay much higher prices for prescription drugs than do those of most other industrialized countries.

Why has the US been so reluctant to adopt what most of the developed world has seen for decades as a superior model for universal health care provision, especially since we basically already have a form of single payer for low-income, elderly and active duty military/veterans?  The criticisms fall into two basic categories – political and financial.  On the political front opposition has come from predictable sources – private insurance companies, some health care providers who benefit from the current dysfunction, and ideological conservatives who fear ‘socialized medicine’ no matter what the cost of the market-dominated status quo.  While these special-(self)interest groups continue to have and exert considerable political power, they simply don’t have much credibility when their views are weighed against the evidence.

The financial criticism is also predictable, albeit incomplete – a single payer system is expensive and will require substantial tax increases to fund.  True and true.  But if the current system results in exorbitant overall costs and a single payer system will lower those costs, the overall new system costs should be substantially lower.  Yes, but lower system costs will not equate to lower costs for everyone.  As with any public policy, including the market solution, there are winners and losers.  

For example, the relatively generous Bernie Sanders “Medicare for All” proposal is estimated by the Sanders camp to cost $1.38 trillion annually.  Ouch you say!  BUT they also estimate that the plan will cost over $6 trillion LESS over the next ten years than the current system. The winners under this plan would include the currently uninsured or under-insured, lower and middle income Americans whose taxes wouldn’t go up but whose out-of-pocket health care costs would go down, and those employers whose employee health insurance savings would exceed the new  plan’s proposed employer tax.  The losers under the proposal would be some employers, some health care providers, insurance companies, pharmaceutical firms and the wealthy (>$250,000 in annual income) whose marginal tax rates go up under the plan.

So maybe we’ve finally identified the often unspoken core of our infatuation with an outmoded,  dysfunctional and outrageously expensive health care system: it imposes disproportionate costs on the least powerful (the sick, the uninsured or under-insured, low and middle income Americans) while rewarding powerful insurance companies, large health care providers, pharmaceutical firms and the wealthy.  And of course a meaningful universal health care system would essentially reverse these winner and loser categories.  So we can’t avoid the dreaded (especially in the US) R word – redistribution. But political power and narrow self-interest are not forces limited to the US.  They have been overcome elsewhere and recent experience suggests that the stars are aligning here as well.

President Trump recently noted that health care reform is “complicated.”  Yes and no.  The details can be mind-numbing.  And reasonable people can disagree about the merits of a redistributional public policy that imposes higher overall costs on society, as they sometimes do.  But that’s not the case here.  When the result would almost certainly be much lower social costs with equivalent or better care it should actually be a no-brainer.

In Part 1 of this blog entry I made the case that American society has finally accepted the proposition that at least basic health care should become a right.  By definition this means that health care distribution should not be determined primarily by the marketplace, and that the federal government has a necessary role to play in guaranteeing the universality of the right.  It’s tempting now to jump right to the obvious policy question, i.e., what is the best public policy model to employ to achieve universal and affordable health care?  Sorry, but that’s the topic for Part 3!  In order to consider that question intelligently it’s first necessary to review briefly the nature of the US health care marketplace and the insurance that dominates its transactions.

Let me start with the bottom line – the marketplace for health care in the US, or any other nation for that matter, is not and cannot become meaningfully competitive.  This proposition was established convincingly more than a half century ago by Nobel laureate economist Kenneth Arrow in his immensely influential 1963 paper entitled Uncertainty and the Welfare Economics of Medical Care.  We’re all familiar with the basic economic principle that competitive markets benefit both consumers and society by meeting buyer needs, encouraging efficiency, spurring innovation and lowering prices.  For these competitive forces to be truly effective, numerous powerless buyers and sellers who all possess relevant market information must interact in a free marketplace uninhibited by restrictions on entry, exit or resource mobility.  No one, including Arrow, disputes this principle.

But it’s also widely accepted that market imperfections in the real world frequently lessen or even eliminate these beneficial effects.  Arrow, and many other commentators who followed, argued persuasively that health care delivery deviates in fundamental ways from effective competition, and that therefore government intervention is necessary to improve results.  In brief, some of the most significant health care marketplace imperfections identified by Arrow and others are:

• Market Power – Instead of ‘numerous powerless buyers and sellers,’ big hospital chains, provider groups and insurers dominate many local markets (economists call this phenomenon bilateral oligopoly).  A common result is fewer patient choices and higher prices.
• Asymmetrical Information – The buyers of medical services (patients) know far less about medical care than the sellers (physicians, PAs, nurses, etc.).  Beneficial competitive outcomes require that buyers possess the relevant information to make an informed consumer choice.  Ironically, at the same time patients know much more about their own health than do insurers.
• Idiosyncrasies of Payment – Because patients don’t see the bill until after the non-refundable medical care has been provided, and because they are often given little information about costs or prices, patients are typically unable to shop around for a medical service based on price or value.  Sometimes, of course, the urgent nature of the care need also precludes comparison shopping.
• Unpredictability – Unlike our need for food, clothing or most other commodities and services, our health care needs are largely unpredictable.  But when needed the care can be urgent and very expensive.

For these reasons health care cannot be bought and sold like milk or tennis lessons.  These fundamental characteristics of the health care marketplace violate almost every requirement for effective competition noted earlier.  And permeating them all is a further complication.  In health care markets there is a third major player besides patients and caregivers that also frequently possesses market power and asymmetrical information.  As a further payment idiosyncrasy, this third party actually ends up paying most medical bills.  And the uncertainty and risk inherent in health care create the classic conditions for this third party to emerge.  Of course I’m referring to health insurance and its providers.

The basics of all insurance are pretty straightforward.  Insurance is a form of risk management or risk sharing used to hedge against an uncertain loss.  It involves pooling funds from many insured entities (the risk pool) to pay for the losses of a relative few.  Insured entities assume a relatively small but certain loss (premium payments into the fund) in return for promised compensation for a larger uncertain loss.  With health care insurance the uncertain loss is the cost of medical treatment for the covered array of illnesses and injuries (ignoring preventive care coverage).

Health Insurance may be provided by private insurance companies, either directly to insured individuals or indirectly through e.g. employers, or by government programs. Unfortunately, many of the same imperfections such as market power and asymmetrical information that pervade the health care market also exist in the marketplace for individual health insurance.  And there are others, such as adverse selection, free rider, biased selection and moral hazard problems.  The curious reader can read up on these imperfections in private health insurance (see e.g. The Economics of Health Insurance and the Health Care Market:  Econ 101 at aneconomicsense.org 1/27/14).  For our purposes it’s sufficient to note that all these imperfections permit a major market player or players (patients, medical professionals, insurance providers) to game or exploit the system.

So we return to the bottom line – the US health care marketplace is not and cannot become meaningfully competitive.  It follows that this marketplace cannot generate the many private and social benefits that a more competitive environment would assure.  Is there evidence to support this?  Absolutely, in abundance, and widely reported even if selectively comprehended.  Here’s just a brief sample.  According to the International Federation of Health Plans the 2012 average daily hospital room (not treatment) charge in the US was $4,287, while the comparable rates for six other developed countries (Canada, Spain, Switzerland, South Africa, France and Chile) ranged from $429 and $1,472.

This same report did similar comparisons for 28 different health care services. For example, the average US charge in 2012 for an angiogram test was $914, while the other countries’ averages ranged from $35 to $378; US average angioplasty charge = $61,649, average range for other countries = $2,851 – $14,636;  US average charge for hip replacement = $87,987, average range for other countries = $3,365 – $27,810.  And so on.  The US ranges from high to low were also much greater than the counterpart nations.  These are not cherry-picked examples, as  you can see for yourself (see International Federation of Health Plans, 2012 Comparative Price Report  at static.squarespace.com).

Of course it’s possible that, instead of market failures, our health care costs are so high because our health care quality far exceeds that in other countries.  Possible, but not true.  For instance the Organisation for Economic Co-operation and Development (OECD) compiles measure for health care quality across nations for many medical conditions.  In their most recent compilation the US ranked 5th for colorectal cancer, outside the top 25 for breast cancer, 19th for cervical cancer, 7th for heart attacks and 16th for hemorrhagic strokes. According to the World Health Organization the US life expectancy in 2015 (79.3 for both sexes) ranked 31st in the world, behind such pinnacles of health care innovation as Iceland, Luxembourg, Malta, Slovenia, Cyprus and Chile.  But we did beat Cuba by one slot in the rankings!

So our current private-public health care distribution patchwork,  still based even with Obamacare on the erroneous assumption that market forces will deliver superior outcomes, in fact currently results in pretty much the worst case scenario – exorbitant costs and disappointing quality.  Surely there must be a better way!?  There is but not in this post, which I’m certain has already exceeded some attention spans.  Stay tuned for Part 3 – the long-awaited public policy discussion!

Given the weekend failure of the Republican push to repeal/replace/modify Obamacare, it’s appropriate and timely that my first-ever blog effort be devoted to the topic of  health care policy.  But it quickly became clear to me that some background and context, all too often missing in today’s public discourse, are first required.  So this will be a three-parter with the first two blogs devoted to addressing threshold health care policy questions.

The most fundamental threshold question of all is both straightforward and essential to ask: Should health care be a right in a modern, civilized society?   In a classic but very readable 1975 book entitled Equality and Efficiency:  The Big Tradeoff, economist Arthur Okun laid out the core source of tension inherent in a modern capitalist democracy – the interface between what he calls “the domain of dollars” (the marketplace) and “the domain of rights” (universally distributed entitlements and privileges that cannot be bought and sold).  In the US the latter includes basic freedoms like speech and assembly, but also resource-using entitlements such as police and fire protection and public education that are paid for collectively through taxation.  Every society must decide where to draw the boundary lines between the domain of rights and that of the marketplace.

So on which side of the boundary line should health care fall?  The answer has economic, political and even philosophical dimensions, and reasonable (as well as unreasonable!) people obviously can disagree on the details.  Almost no one today of any political persuasion argues that the unconstrained marketplace should determine life, death or survival when individuals are confronted with serious illness or injury.  Yet unlike most industrialized countries, American public policy has still stopped well short of formally declaring a right to quality health care for all.  It’s tempting to conclude that what Okun noted in 1975 would still seem largely true today in the US, namely that the right to quality health care “has been kept fuzzy, because its fulfillment could be very expensive.”

But I’m not so sure that conclusion would be valid.  After all, almost a decade before Okun wrote Equality and Efficiency the US adopted a national health insurance program for senior citizens and some others.  Soon thereafter the Medicaid program of health insurance for those with lower incomes was added.  Eligibility and benefits for both programs have generally expanded over time, especially in the case of Medicare in 2006 and Medicaid under the Affordable Care Act of 2010.  Medicare and Medicaid each now enrolls more than 55 million Americans (there are some dual enrollees).  In addition, in 2014 66% of nonelderly US workers received an offer of health insurance coverage from their employer.  And especially noteworthy for the question at hand although less well-known, the Emergency Medical and Treatment Labor Act of 1986 (EMTALA) expressly forbids denial of care by hospitals of indigent or uninsured patients based on inability to pay.  Finally, the recent failure to repeal Obamacare provides further confirmation that, as David Leonhardt notes in today’s New York Times, “Americans are generally not willing to go backwards on matters of basic economic decency.”  Even conservative commentator Jennifer Rubin concluded the following after the Obamacare repeal failure: “Americans now think government should help guarantee coverage for just about everyone.”

So where does that leave us on the fundamental question of should health care be a right in the US, substantially removed from Okun’s domain of dollars?   Of course this oversimplified question masks important complexities regarding the minimum quality of care deemed socially necessary.  But putting that complication aside for now, the public policy activity of the last 50 years seems to indicate a pretty clear emerging consensus that the answer is Yes, even if rarely asked or answered this explicitly.*  But that’s just the first threshold question, and the affirmative answer now requires us to ask further questions about the nature of the health care and health insurance markets in the US.   On to Universal Health Care Part 2!

*Edit:  Some are beginning to ask and answer explicitly.   Having apparently read this blog entry 😋, on April 1 respected conservative commentator Charles Krauthammer stated “A broad national consensus is developing that health care is indeed a right.  This is historically new.  And it carries immense implications for the future.”