Topic: Health Care & Welfare

Selling the Rope with Which They’ll Hang Capitalism

From the Washington Post:

Late last month, the U.S. Chamber of Commerce began broadcasting television ads that extolled several Republican lawmakers for supporting the new Medicare prescription drug program. The spots were part of the chamber’s $10 million midterm advertising and voter mobilization budget.

Even if the Medicare expansion were popular – which is not at all clear – the Chamber of Commerce’s ads would just encourage voters to increasingly expect transfers and handouts from Washington. If the Chamber of Commerce praises Republicans for expanding entitlements by a trillion dollars over the next decade, then it’s just contributing to an environment in which spending and deficits and unfunded liabilities continue to soar. Surely the Chamber could find something good the Republicans have done to highlight in its ads.

Couldn’t it?

Medicare and Overall Health Spending

MIT’s Amy Finkelstein argues that much of the increased use of technology in American medicine (what I term “premium medicine” in Crisis of Abundance) has been induced by Medicare, which reduced out-of-pocket costs and thereby increased the demand for care.

Perhaps the easiest place to grasp her work is at an archived presentation at the AEI, particularly the powerpoint slides that may be found as a link there. Also, see links given by Tyler Cowen.

Finkelstein compares the change in insurance coverage induced by Medicare across different states–in some states the elderly were relatively well insured prior to Medicare, and in other states they were not. Using this “natural experiment” methodology, she finds that Medicare accounts for a large share of the increased spending on health care since 1965. However, she does not find any corresponding increase in health. She does, however, argue that Medicare had a very large risk-reduction benefit, by saving the very sick from having to suffer huge financial costs.

To me, this suggests trying to maximize the insurance benefits of health insurance (reducing financial risk) while minimizing its distortionary effects. The proposals in my book would head in that direction.

My proposals are politically radical but economically sensible, as the research of Finkelstein reinforces. You can hear more about Crisis of Abundance at this this Cato event on August 29th, which also will feature journalist Sebastian Mallaby and Democratic wonk Jason Furman.

P4P Hubris

Dr. Rob Lamberts also comments on my paper on pay-for-performance (P4P) in Medicare. Lamberts (like Holt) seems to have blogged that paper having only read the press release. Though the paper probably would answer most of the questions they raise, I’ll respond to two of Lamberts’ comments.

1. Lamberts argues that a P4P experiment in Britain’s National Health Service (NHS) refutes my claim that “provider-focused P4P incentives can encourage inappropriate care or reduce access to care for patients with multiple illnesses or low incomes.”

Not quite. A P4P scheme can avoid those effects, but not without causing other problems. For example, the financial incentives could involve only additional payments to physicians and no payment reductions for “low-quality” care. That’s what the NHS did; physicians’ gross incomes increased by an average of $40,000.

A rewards-only approach reduces the incentive for physicians to avoid very sick or very poor patients, who make it difficult for the physician to meet the performance goals. However, that approach makes the P4P effort more costly. Lamberts himself suggests that Medicare’s P4P efforts should be budget-neutral, which would make it more likely that physicians would give outlier patients inappropriate care, avoid those patients, or otherwise game the system.

Another way the NHS experiment avoided inappropriate care or a reduction in access for outliers was by allowing physicians the discretion to disregard as many of their patients as they wished when calculating their compliance score. But the availability of such “exclusion reporting” also gave physicians an opportunity to game the system. Rather than provide the desired type of care to their patients, physicians could use exclusion reporting to increase their incomes without changing their behavior. The authors of the study cited by Lamberts note: “More research is needed to determine whether these practices are excluding patients for sound clinical reasons or in order to increase income.”

2. Lamberts writes that the Brits “were able to achieve astonishing improvements to their quality numbers and improve physician incomes at the same time.”

Of course, these two ends are not in conflict. It’s easy to get people to do what you want when you dangle $40,000 in front of them.

But we can’t even be sure that the NHS P4P experiment made any improvements in quality — much less astonishing improvments in quality. Although median reported achievement was an impressive-sounding 83.4 percent, according to the authors of that study:

There is no baseline with which to compare performance in the first year of the U.K. program, although the quality of care was already improving before its introduction.

If we don’t know what compliance rates were before the NHS introduced financial incentives for compliance, and quality was improving anyway for other reasons, how do we know whether or how much their quality numbers improved, or how much of that change was due to P4P? 

If we don’t even know that, we certainly don’t know whether the effort was worth the $3.2 billion the NHS spent in 2004.

Medicare Reform: It’s All about Control

Matthew Holt of The Health Care Blog takes a thoughtful stab at my recent paper on “pay-for-performance” and Medicare. 

Pay-for-performance is one of those hip health policy buzzwords that comes with a catchy acronym: P4P. The idea is that private insurers or the government can improve health care quality through financial rewards for providers who deliver what the payer considers “quality” care. P4P stands in contrast to “pay-for-volume,” which is how third-party payers have traditionally paid providers.

My thesis is that P4P has promise, but is very, very tricky. A bureaucracy that rewards providers for what it considers high-quality care can actually encourage low-quality care for the poor saps who happen not to be the average patient. 

There’s nothing wrong with P4P, so long as patients who are getting short-changed have the right to opt out (i.e., switch insurers). P4P’s potential is sure to be lost if the Centers for Medicare and Medicaid Services (CMS) get into the game. For example, since Medicare’s P4P scheme would be emulated by Medicare Advantage plans and other private insurers, many patients would have no escape.

Holt tries to link (reconcile?) my opposition to P4P in traditional Medicare (and support for P4P in Medicare Advantage plans) with my suggestion that Medicare should subsidize seniors with a risk-adjusted voucher rather than coverage. Let me see if this helps thread the two together:

There’s a difference between helping someone in need and making all her decisions for her. Medicare has traditionally tried to do both, offering subsidies to seniors but also dictating what their coverage looks like, payment rates, etc.  If CMS starts defining “quality” for 45 million seniors (and by extension, millions of non-seniors), the government will be making even more decisions that it’s really not qualified to make. Better that Congress just give seniors the cash and let them make their own decisions about coverage and care and quality. Markets have a funny way of helping people make those decisions.

Yes, there will still be some seniors who are ill-equipped to do that. But that small minority of seniors already needs — and gets — similar assistance. They can be taken care of without turning the rest of the health care sector into a high-cost, iffy-quality, rent-seeking cesspool. 

Republicans for Big Brother

The Cato Institute has noted for some time that conservatives and Republicans have abandoned their limited-government principles when it comes to health policy.  Examples can be found here, here, here, here, and here

The New America Foundation just made our job a little easier, by producing a paper titled, “Growing Support for Shared Responsibility in Health Care.”  In this context, “shared responsibility” means allowing the government to force all Americans to purchase health insurance – a power the Left has craved but no government had dared assume until Massachusetts did so this year.

The paper helpfully compiles a list of comments that Republicans and Democrats have made in support of this new expansion of government power.  The Republicans included:

  • Massachusetts Gov. Mitt Romney (no surpise there)
  • Former Bush HHS Secretary Tommy Thompson
  • California Gov. Arnold Schwarzenegger
  • Former Bush Treasury Secretary Paul O’Neill
  • Former House Speaker Newt Gingrich

One might add to that list the Heritage Foundation (whose health policy scholars wrote the Massachusetts mandate) and Ronald Bailey of Reason magazine. 

Next to those, Schwarzenegger is probably the biggest disappointment, having once bragged that Milton & Rose Friedman’s PBS series Free to Choosehas changed my life,” and that “Being free to choose for me means being free to make your own decisions, free to live your own life, pursue your own goals…without the government breathing down on your neck or standing on your shoes.”  Now that he’s governor, “being free to choose” presumably means being free to choose for you.

This new expansion of state power would be less frightening if it delivered more affordable or higher-quality health care.  But as Mike Tanner demonstrates in two papers on the idea (here and here), it will do neither of those things. 

Unfortunately, there has been too little debate within the limited-government camp over this idea.  This is in part because Heritage Foundation scholars have repeatedly declined to debate Cato scholars or other free-market critics of their proposal.

Until we’re able to have that fuller debate, here’s a helpful algorithm for judging this and other health care proposals:

  1. Does it limit government power?
  2. If not, move on to the next proposal.

Capitalism Saves

The Sunday New York Times has a great article — the first of a series on aging — titled “So Big and Healthy Nowadays That Grandpa Wouldn’t Even Know You.” Reporter Gina Kolata begins with this 19th-century biography:

Valentin Keller enlisted in an all-German unit of the Union Army in Hamilton, Ohio, in 1862. He was 26, a small, slender man, 5 feet 4 inches tall, who had just become a naturalized citizen. He listed his occupation as tailor.

A year later, Keller was honorably discharged, sick and broken. He had a lung ailment and was so crippled from arthritis in his hips that he could barely walk.

His pension record tells of his suffering. “His rheumatism is so that he is unable to walk without the aid of crutches and then only with great pain,” it says. His lungs and his joints never got better, and Keller never worked again.

He died at age 41 of “dropsy,” which probably meant that he had congestive heart failure, a condition not associated with his time in the Army. His 39-year-old wife, Otilia, died a month before him of what her death certificate said was “exhaustion.”

But his modern-day descendant, living in the same town of Hamilton, is healthy and going strong at 45. Kolata interviews doctors, economists, and gerontologists to find out why Americans are taller, heavier, healthier, and living longer. Describing the research of Nobel laureate Robert W. Fogel and his colleagues on Union Army veterans, she notes:

They discovered that almost everyone of the Civil War generation was plagued by life-sapping illnesses, suffering for decades. And these were not some unusual subset of American men — 65 percent of the male population ages 18 to 25 signed up to serve in the Union Army. “They presumably thought they were fit enough to serve,” Dr. Fogel said….

People would work until they died or were so disabled that they could not continue, Dr. Fogel said. “In 1890, nearly everyone died on the job, and if they lived long enough not to die on the job, the average age of retirement was 85,” he said. Now the average age is 62.

Much of this research has surprised scholars:

Life expectancy, for example, has been a real surprise, says Eileen M. Crimmins, a professor of gerontology and demographic research at the University of Southern California. “When I came of age as a professional, 25 years ago, basically the idea was three score years and 10 is what you get,” Dr. Crimmins said. Life span was “this rock, and you can’t touch it.”

“But,” she added, “then we started noticing that in fact mortality is plummeting.”

So why? Why has this epochal change — what Fogel calls “a form of evolution that is unique not only to humankind, but unique among the 7,000 or so generations of humans who have ever inhabited the earth” — happened? Kolata discusses the benefits of better nutrition, cheaper food, vaccines, and antibiotics. But still:

“That’s the million-dollar question,” said David M. Cutler, a health economist at Harvard. “Maybe it’s the trillion-dollar question. And there is not a received answer that everybody agrees with.”

Kolata is a science reporter, so she’s looking for a scientific answer, and she’s found several that contribute to our health and longevity. But she’s missed the forest. What is it that started changing in the United States and northern Europe in the past few centuries? (Fogel’s book on the general trend is The Escape from Hunger and Premature Death, 1700-2100: Europe, America, and the Third World.) Technology, yes. Nutrition and antibiotics and a better understanding of diet and exercise, absolutely. But what caused those things to appear after, as Fogel says, 7,000 generations?

Capitalism.

The introduction of the institutions of economic freedom in the Netherlands, Great Britain, the United States, and then the rest of the world beginning around 1700 caused what historian Steven Davies calls a “wealth explosion.” A great part of the unprecedented wealth creation went into sanitation and more abundant food and later into the research necessary to produce vaccines and antibiotics. Those institutions include secure private property, the rule of law, open markets, and economic freedom generally — or what Adam Smith called “peace, easy taxes, and a tolerable administration of justice.”

Capitalism has made the West rich and thus healthier and longer-lived. It could do the same for Africa, Asia, and the Arab world.

Kolata overlooked this point. Her article never mentions capitalism, freedom, or even wealth as an answer to the trillion-dollar question. But it’s still a great report on just how much better off we are. For more data on such trends, check out It’s Getting Better All the Time: 100 Greatest Trends of the Last 100 Years by Stephen Moore and Julian L. Simon.

Want Electronic Medical Records? Fix the Incentives

Suppose you are traveling, and needed to visit a doctor, who says he’d like to do an MRI. You had one done just two weeks ago at home, but your personal doc would have to snail mail the image to the new doc. The new doc needs to have a look inside you, but another MRI would be expensive.

Now think: in what kind of health care system are you more likely to get electronic medical records, where doctors can send MRI results to each other instantly:

  • A health care system where you are on the hook for the cost of the second, unnecessary MRI, or
  • A system where someone else (Medicare, your employer, etc.) is going to pay for it?

Thanks to government subsidies and the federal tax code, Americans are less sensitive to the price of medical care than even Canadians, whose government is supposed to pay for everything. As a result, most providers still keep patients’ medical records on paper, essentially because the government lets them get away with it. Some providers have started using electronic medical records, but those systems are in their infancy and are unable to talk to each other. That means lots of wasteful spending, plus treatment delays and medical errors.

When Katrina hit Louisiana, thousands (millions?) of medical records were destroyed. But when the World Trade Center went down in a fiery blaze, there was no hue and cry about the loss of financial records, because those were secured, electronically, in various sites. Why the asymmetry? My guess is that the financial services industry has customers who demand value, including responsiveness and security, because they bear the cost. Health care providers that do have price-sensitive customers, such as services like MinuteClinic and TelaDoc, do offer electronic medical records. But most of the health care industry does not have price-sensitive customers, and we have Congress to thank for that.

So when House Republicans plan to vote this week on legislation that would spend your tax dollars to encourage the creation of electronic medical records, it seems like a classic case of one fouled-up government intervention begetting another. Congress has spent the last 60 years doing little in health policy but insulating patients from the costs of paper medical records. But don’t worry, because now they’re going to throw $40 million of the taxpayers’ money at health information technologies (HIT) that create interoperable medical records.

In a further demonstration that Congress is wasting its time (isn’t there a war on?), this week Microsoft announced plans to start producing interoperable electronic medical records. Maybe the fact that the private sector is trying to muster to the task – in spite of Congress’ past meddling – will persuade Congress not to compound its past mistakes. Perhaps Congress will instead look at ways to restore the incentives that encourage providers to offer such cost-saving innovations. One can always hope.