Are Market-Oriented Economists Wrong About Health Care?
Tyler Cowen posted 10 common mistakes of market-oriented economists the other day, paired with 14 common mistakes of left-wing economists. That prompted Ezra Klein to propose his own list of mistakes and others are chiming in.
I think it’s too bad that economists are classified as right and left. After all, economics is a science and reality is reality. Why should political preferences interfere with the scientific quest for truth? Milton Friedman once said there are only two kinds of economics: good economics and bad economics. I not only agree, I think only “good economics” qualifies as “economics.” But I’ll yield to convention for the remainder of this post.
On health care, Tyler says right-of-center economists go wrong in two ways:
- I’m all for Health Savings Accounts, Tyler writes, but unless done on a Singaporean scale, and with lots of forced savings, they’re not a health care plan to significantly benefit most Americans.
- There is less of a coherent health care plan, coming from this side [the right] than one might like to think. There is already considerable health care cost control embedded in the Affordable Care Act (ACA), most of all for Medicare, and this is not admitted with sufficient frequency.
On the first item, I have four rejoinders:
(a) We are not going to solve the triple problems of cost, quality, and access unless patients control the marginal dollars and are required to choose between health care and other uses of money for every elective decision.
(b) We do not really need to force people to manage their own money in a Health Savings Account (although I admit that most of these accounts are currently a form of paternalism). It is in the interest of third-party payers to create them.
(c) Major efforts are already underway to give patients control over health care dollars, and they are successful — they’re just not called “Health Savings Accounts.”
(d) There are serious health reform proposals on the right — every bit as comprehensive as ObamaCare and much better.
Let’s take (c) first. Due mainly to pilot programs funded by the (not-very-right-wing) Robert Wood Johnson Foundation and administered by the (not-very-right-wing) Medicaid bureaucracy, thousands of homebound, disabled patients are managing their own budgets. They can hire and fire the people who provide them with services and they can use the money they don’t spend in other ways. Satisfaction rates in this program (called “Cash and Counseling” in most places) exceed 95% — something unheard of in any other health care program in the world.
A Commonwealth Fund study describes similar programs underway in Europe and they are increasingly popular. In addition to the homebound disabled, cash payments are viewed as a less expensive alternative to providing long term care services to a variety of patients. As I argued in Health Affairs some time ago, we have barely scratched the surface on patient empowerment for the chronically ill. Numerous studies have shown that patients managing their own care get results as good or better than under conventional care. To get the incentives right, patients also need to manage the money that pays for that care. In most cases, we don’t need forced savings, however. It’s in the self-interest of employers and insurers to make the deposits to the accounts on behalf of the patient.
The South African health insurance market has made major strides in this direction. True, in Singapore deposits to Medisave accounts are mandatory. But as far as I can tell, South Africa has made even greater progress without mandates.
Another overlooked phenomenon is the Flexible Spending Account (FSA). These are not liked by economists because they are use-it-or-lose-it accounts that encourage wasteful spending at year-end. Even so, as The Wall Street Journal discovered, FSA owners are careful shoppers with their own money. And if the accounts could roll over and grow tax-free, we could have 33 million health savers in addition to the 23 million who have HSAs and Health Reimbursement Arrangements (HRAs).
Finally, the Coburn-Ryan-McCain approach to health reform is every bit as comprehensive as ObamaCare and it is more progressive. It is partly based on a what Tyler would probably call “right-of-center” proposal that Mark Pauly and I described in Health Affairs and it would be even better if the politicians had followed our advice more completely.
On Tyler’s second point, there is not just “considerable” cost control in Medicare under the new health reform law, it is huge. And that’s the whole problem. It’s too huge to take seriously.
On paper, ObamaCare cut Medicare’s unfunded liability in half the minute Barack Obama signed the health reform bill. (A reduction of more than $53 trillion — looking indefinitely into the future!) Going forward, Medicare will grow no faster than the economy as a whole. This means that Medicare spending will grow no faster than the payroll and income taxes that fund it. (No more increasing Medicare deficits!)
What makes this fiscal good fortune possible? According to Medicare’s Office of the Actuary, Medicare payments to doctors and hospitals will fall further and further behind payments made by the private sector and other payers. In fact, by the end of this decade, Medicare payments will fall below Medicaid’s. (Elderly patients will be less desirable than welfare mothers to the doctors who treat them!)
If we actually did this, what would it mean? According to Harvard health economist Joe Newhouse, senior citizens would be forced to get medical care from community health centers and safety-net hospitals — just as many Medicaid patients do today. Those who can afford it will pay out-of-pocket for concierge services.
Is this real reform? Is it politically survivable reform? On the second question, note that Congress has been unwilling to carry out cuts to doctors’ fees called for by previous congressional Medicare “reforms” — hence the “doc fix.” Is there any reason to think that some future Congress will have more courage and more resolve than this one?
And even if we go forward as planned, and the cuts are made, remember: the savings don’t go to pay down the national debt. Every penny of savings has been committed to a new entitlement. It’s called ObamaCare.
What I find fascinating is the conceit that assumes that market oriented health care reform economists can be faulted simply because they lack “a coherent health care plan.”
One of the main things that economics teaches is that a price system that transmits accurate information to a population that is free to respond to it is far, far, more successful than any plan.
A reasonable strategy is to run far, far, away, with one’s wallet firmly attached, the moment an economist announces that he has a “plan” that you will have to follow.
If seniors had HSAs, funded with their own and government contributions, one could ratchet down direct Medicare payments to providers even further — say, to 20 percent of private sector fees — prepatory to phasing them out altogether. Then you’d have a reform the CBO would have to score as eliminating the Medicare deficit altogether.
It is impossible to even imagine what our health care system might look like if a free market existed without excessive third-party payment. Critics charge we had such a system 70 years ago – and it did not meet the needs of the poor, the elderly or the sick. But in the years prior to Medicare and Medicaid (and health insurance), hospitals were places you went to convalesce. As David Gratzer explains in his book The Cure, in the early part of the 20th Century doctors had few effective tools to treat diseases commonly treated today.
Absent market distortions, we potentially could have experienced a burst of innovation in health care similar to the innovation experienced in other service industries (such as retailing). We did experience growth in technology; but no improvement in the convenience (and efficiency) of how care is delivered).
Of course they are not wrong. I think I’ve said this before at your site: Tyler Cowen does’t know anything about health care. I don’t know why he bothers to write about it.
I agree with Stephen.
Cowen’s number one listed mistake for left wing economists is “Suggesting that money matters in politics far more than the peer-reviewed evidence indicates.” Cowen’s point is interesting as historically the medical community knows what happens when practitioners focus too much on the “science” of healing and forget the patient…or did we forget? Dr. Goodman points out some issues with publishing biases regarding peer reviewed evidence and pilot programs. Rigorous science research is fundamental to medicine, but I would also argue that money and peer-reviewed evidence does not supersede the autonomy of the patient in policy decisions. Market-based economics is consumer (patient) focused, and strives to maintain their autonomy through choice.
I think it’s fair to put economists into left/right brackets. With economics, it’s far more likely that your values will determine what you see as true instead of what you see determining what you value. At least compared to other sciences, like physics or chemistry. I trust a chemist to give me an unbiased assessment of reality than I do an economist, so I thinks it’s important to know if an economist is right/left wing so I can take into account this bias.
John:
It may be, as you put it, “too bad that economists are classified as right and left. After all, economics is a science and reality is reality.”
But economists are being classified in this way, whether we like it or not, perhaps because it is so easy to package ideology into both theory and empirical (econometric) work. It is widely done, all along the ideological spectrum on which economists as human beings are arrayed.
As you say, “reality is reality.” We have to face up to it.
UER
John G writes: “Milton Friedman once said there are only two kinds of economics: good economics and bad economics.”
Thomas Sowell once said there are two types of intellectuals: Good intellectuals and bad intellectuals and both types get tenure and promoted.
Do you really believe, Dr. Goodman, that the average consumer/patient is knowledgeable enough to make informed decisons about how best to spend his/her money? The RAND HIE did not show this, at least in terms of individuals being able to judge between effective and ineffective care when faced with co-pays. Do you think a person with acute chest pain is first going to do web-based comparison-shopping to decide which hospital ER (if any) to go to? Certainly not, from my observations as an ER physician.
@ Linda Gorman
Agree, but you have to get from here to there. And that is where a plan is needed.
@ Simon
It is true that economics is very focused on individual actors — they are the unit of account. It’s possible that there is an implicit value judgement in doing that.
@ Neal W.
I trust chemists to be objective. I used to trust climatologists as well. All that changed when global warming became an issue, millions of dollars of grant research money became available and all of a sudden we have “left-wing” and “right-wing” climatologists. Politics has a corrupting influence on science.
@ Uwe
See the comment immediately above and add the confounding fact that so many people in health policy seem to be really bad economists.
@ James
I don’t think the average person knows any more about biology than he knows about cameras or computers or automobiles. Lack of knowledge is not a reason to suppress markets in any of these fields.
John:
I believe your response to Neal makes my point precisely: politics (or ideology) has a corrupting influence on science — all along the political (ideological) spectrum.
I’m glad you agree.
I call it part of the human condition.
There are, luckily, some pure scientist imprevious to ideology. One does not usually hear from them in public forums. They hide in their labs or offices.
You cite Tylor — “I’m all for Health Savings Accounts, Tyler writes, but unless done on a Singaporean scale, and with lots of forced savings, they’re not a health care plan to significantly benefit most Americans.”
The standard that something must benefit “most” to be of any value is itself misguided. That is not how markets work. Markets are wonderful, in fact unique, in that they can customize solutions to the needs of very small segments of the population.
Politicians (and politically oriented economists) never understand the distinction. They believe that to have any merit an idea must have 51% support before it is even tried. Marketers never think in those terms. They look for a market niche that will be successful. Sometimes those niches are so successful that the entire population jumps in. But that is not a requirement or even a goal of developing a new product or service.
@ Uwe
Agree. Other than you and me, few can resist the corrupting influences of politics. It’s a lonely world.
@ Greg
You are absouletly right. And a small part of the market can change the behavior of the entire market.
John,
I am sure you have an exhaustive list of “worst features”, but here are a few you may not have thought of.
Today’s employers are paying approximately $14,000 for their employees with families health insurance. The employee typically pays $4,000 and the employer pays $10,000.
Come 2014 an employee can go to a state exchange and even earning $50,000 a year can get better health insurance coverage than they have today and pay net of subsidy less
Than $4,000, while the employer pockets $10,000 pays a $2,000 penalty so net $8,000 to the good. PPACA will transfer a huge health care expense burden from employers to taxpayers.
With guarantee issue in the individual market and an ineffective mandate, people will be highly incented to wait until they have a major illness or injury to buy coverage which will create huge anti-selection costs in the individual market.
With no ability to pool risks across state lines, national players who today can spread their catastrophic claims costs across their entire book of business will with the 80% MLR requirement will have to eat high claims costs in those states where in a given year they have catastrophic claims yet in states where no catastrophic claims occur have to rebate to insureds, creates a heads I win tails you lose scenario for any national player in the individual market. The whole premise of insurance is to create large enough risk pools to spread claims cost across a large pool of risks. PPACA destroys the whole “risk spreading principal of health insurance!!”
I fought with AHIP and HHS over the best mechanism for handling the uninsurable population. I proposed that AHIP create a not for profit cooperative to administer an industry wide high risk pool, through an industry wide reinsurance mechanism. The cooperative would have three main functions. First, it would establish and oversee the underwriting criteria to determine eligibility for an individual insured to be treated as a “high risk” insured. Individuals with morbidity risks in excess of 200% of “standard morbidity” would be eligible. They could obtain coverage from any individual insurer operating in their market, at rates not to exceed 150% of “standard fully underwritten rates”.
At year end, each insurer would cumulate the claims experience from their “high risk insureds” and apply for reinsurance relief to the cooperative for claims costs in excess of 80%.
High risk insureds would have their health claims reimbursed at medicare rates to get providers to have some skin in the game since with more uninsurable covered their bad debt expenses should be significantly less than today. The cooperative would receive payments to cover the reinsurance claims expenses plus their administrative expenses from
All health insurers including self funded plans, large and small group, and individual so as to spread this claims costs across as large a population as possible. This mechanism would obviously replace the need for state high risk pools, so any funds currently earmarked for state high risk pools would go into this cooperative.
Insurers could include in their claims expense any moneys spent on wellness, prevention, disease management , etc. so insurers and insureds would be incented to avail themselves of any and all programs to improve their health outlook. Our small AHIP individual market reform task force actually modeled this out using Milliman’s national model and determined that the expected annual cost would be around $28 billion or roughly $9 per member per month if spread across the entire industry. Who better to manage high risk individuals that the insurers who make their living managing health risks!! People would not be mandated to obtain coverage, but would rather face waiting periods if they did not elect coverage in the initial enrollment period. For every month they weren’t covered by a qualified health insurance plan they would have one or two weeks of waiting period after electing coverage. There would also be limited annual enrollment periods so people couldn’t wait and buy coverage except during the limited enrollment period. Seems that you might also apply “pre-existing condition penalties “ if people waited to obtain coverage until they had an unexpected illness or injury.
Anyhow, a couple of thoughts for what it’s worth.
I am not convinced that Econ is a science. Governments cannot delay the effects of stupid physics actions.
What an interesting post. I think I’ve learned more about the health care situation in this country from this blog than anything else I’ve come across. When I had a job, I had good health insurance and a FSA, which I always managed to spend every last dime of, without being at all wasteful. It is sad that there is so much “right” and “left” around this issue, because it doesn’t seem to do anyone any good. I don’t have health insurance or a health savings account or a job right now, so if I needed medical care I would have to do my best to pay for it through my meager unemployment stipend. So my solution is this: Do my best to solve the problem myself, and if that didn’t work, find a doc willing to take monthly payments. I’ve done that before, and what I’ve discovered is that most healthcare organizations are perfectly happy with this arrangement. I know this is off the mark, but from what I’ve learned of Obamacare, it wouldn’t be of any use to me in my current situation anyway. I don’t have children at home for Medicaid, and I’m too young for Medicare. I hope I can keep myself healthy.
” We did experience growth in technology; but no improvement in the convenience (and efficiency) of how care is delivered).”
This makes me think that you know very little about modern health care.
Steve
“See the comment immediately above and add the confounding fact that so many people in health policy seem to be really bad economists.”
I have noticed that when I come here. 🙂
Steve
to Benjamin:
Your suggestions will only prop up a failing system. Insurance for insurance companies! I want them out of the medical business so they can stick to the insurance business.
Here is how: separate ordinary care (no insurance! patients pay as they go or buy service contracts from physicians) and catastrophic expenses, the kind that take your house away and ruin you. Second, outlaw (yes, OUTLAW) third party payments of all kinds. This includes employers buying insurance for their workers and government paying medical fees. And benefits should be paid according to a pre agreed to rate (so much a month for breast cancer, so much an episode for heart operations, etc.) Reimbursement, even with a copay, gives no incentive to doctors or patients to use good judgement. And allow buyers and sellers, not law makers, to decide price and coverage of insurance. Insurance is indeed the way we pool risk. But if the cost is the same no matter what the risk, there will be no pool, only an empty hole in the ground.
I agree with Linda. Governments have made planning a dirty word. It used to mean “How do we prepare for risks?” and now it means “How do we control everything so there are no risks.”
The evil thing that no one is talking about is the devotion to equality instead of freedom. Equality before God means freedom from everybody else.
“economics is a science and reality is reality”
And never the twain shall meet.
None of the examples given deal with insurance, which the health reform law tries to make into a free market.
Today, buying health insurance in the US is like you go into the store to buy a loaf of bread and the cashier first requires you list the last time you ate, the number of calories, the amount you labored since, and then after weighing you, charges $5 (the standard price with $2 profit) or $10 if you haven’t eaten in a day, $50 if you haven’t eaten in three days. And if you don’t have the money, he sends you over to stand in line at the trash can where you take your turn waiting behind all the other poor, to dig through for the crusts others have thrown away, or for the moldy bread.
In dozens of other nations, buying insurance is easier and much cheaper for everyone, no one is turned away, and the service for nearly everyone is much superior to those in the US denied health insurance, the working poor, and only a select few in the US get really superior care in the US to what they would get in Canada, Germany, France, Israel, Japan, ….
mulp: “None of the examples given deal with insurance, which the health reform law tries to make into a free market.”
1984 is upon us, late, but upon us. To call what Congress did to our health care system as “health reform” is New Speak. The bill will have powerful effects on our economy, our politics, our character, our medical services funding. It does not reform “health.” At the end of the day it will harm health, as an objective look at all socialist systems shows. Those who vote will have any little service or good they desire and those who do not (unborn, just born but very ill, so old they are unable to vote) will receive none. And even those who receive services will too often receive them too late to do any good.
And then, to call the oppression from Congress a “free market” is so absurd as to be nearly a lie. New Speak, 1984, and Big Bro is upon us!