Topic: Health Care & Welfare

Health Policy Straw Man

In today’s Wall Street Journal, David Wessel writes:

It’s fashionable these days, particularly in Washington, to argue that the best way to improve the quality and restrain the cost of health care is to make the market for health care more like the market for everything else.

It’s also fashionable for opponents of free-market health care to caricature the case for market-based reform. 

I don’t know where Wessel comes down in that debate.  But he does employ a favorite straw man of those who oppose market-based reforms: that the case for markets “rests on the belief that health care is – in most respects – like any other product.” In fact, the case for markets does not rest on that assumption. 

That assumption is obviously false.  As Charles Phelps writes in his leading textbook Health Economics, health care markets face challenges such as extensive government intervention, uncertainty, asymmetries of information, and externalities.  Also, health care is scary, involving life-and-death decisions.  Of course, each of these dynamics is present in many markets.  What makes health care unique is how many of these factors converge in one place.

The case for markets is that markets do the best job of dealing with all those sticky wickets.  Take asymmetric information.  Critics say that the knowledge gap between doctor and patient is so great that consumers cannot be assured of quality.  But information asymmetries occur everywhere; every day, I am positively besieged by them.  I don’t know how to sew, much less build a car or a computer.  But those information asymmetries between me and a seamstress or Subaru or IBM do not prevent me from driving to work fully clothed and blogging about health policy.  Markets thrive on informational asymmetries, which are an essential part of specialization. 

So why is it that when consumers need to close that knowledge gap, or at least obtain assurance that they’re getting a quality product, they have an easier time doing so when it comes to Subaru than their doctor? 

Part of the reason is probably medical professionals’ traditional reluctance to compete with one another on the basis of price and quality.  But the larger problem is that government has insulated patients from the costs of their medical decisions.  With patients asking fewer questions about cost and cost-effectiveness (i.e., value), the rewards for generating that information are smaller.  (And herein lies an irony:  Opponents of market-based reforms argue that information asymmetries are an enormous problem, and then turn around and support further cost insulation, which exacerbates that problem.) 

That largely explains the interesting study Wessel cites, which found that patient satisfaction does not necessarily correlate with what the experts deem high-quality medical care.  It should be noted that measures of patient satisfaction and recommended care should not correlate perfectly; patients often have good reasons for not wanting what the experts consider “the best” care.  But excessive insulation at once contributes both to patient ignorance and to providers being able to get away with delivering sub-optimal care.

Federalism This Ain’t

According to Kaisernetwork.org:

Reps. Tom Price (R-Ga.) and Tammy Baldwin (D-Wis.) on Wednesday at a joint event by the Brookings Institution and Heritage Foundation encouraged lawmakers to back a bill (HR 5864) that would “allow states to act as laboratories where lawmakers could test methods to reduce the number of uninsured Americans,” CQ HealthBeat reports.

In an online debate with Stuart Butler of the Heritage Foundation (here, here, and here), I argued that this approach would favor government-expanding health care proposals.

Those in search of a free-market health care agenda should look elsewhere.

NHS: Let No Good Hospital Go Unpunished

This one’s about a month old, but still worth comment. In early August, Telegraph.co.uk reported that Britain’s National Health Service (NHS) is punishing hospitals that don’t make patients wait for care.

Since the NHS is bleeding money, the bureaucracy wants hospitals to observe minimum waiting times for non-emergency care (e.g., 122 days) as a way of limiting expenditures. Hospitals that do not impose those minimum waits – i.e., that treat each patient as soon as they can – lose funding. According to the Telegraph, “One gynæcologist said that he spent more time doing sudoku puzzles than treating patients because of the measures.” One hospital was penalized £2.4 million for eliminating their waiting lists. All this is happening while the Labor government has promised to reduce waiting times.

It’s not that the minimum-wait policy is so outrageous – given the task of the NHS. It’s that the task itself is outrageous and guaranteed to produce such perverse results. As the Telegraph editorialized:

This bizarre situation arises from the Government’s pseudo-market system, which creates conflicting objectives for “purchasers” (PCTs) and “providers” (hospitals).

In a real competitive market, increased demand can allow prices to rise, thus increasing profits, which allow the market to grow. Efficient producers can then reduce their unit costs and their prices, and so give a better deal to the consumer. The prevailing logic is that the more customers who are served - or products that are sold - in a given period of time, the better the business does.

But PCTs have budgets that are predetermined by Whitehall spending limits, and there is no way for them to conjure extra revenue out of the air or to grow their market. As a result, the hospitals that are most successful in providing prompt treatment are running through the finite resources of their PCTs at an unacceptably rapid rate.

So the NHS is faced with a perverse outcome: hospitals providing precisely the kind of immediate access to treatment that patients want and that Government ministers profess to demand, are punished financially by another arm of the Whitehall machine. Any government that wants to reform NHS funding will have to address this conundrum that lies at the heart of a tax-funded monopoly healthcare system.

Britons are lucky that they can opt out of such a perverse system – but that’s only if, as Jacques Chaoulli observes, they are lucky enough to be able to pay twice.

Schwarzenegger Will Veto Single-Payer Bill

In yesterday’s post, I worried about whether California Governor Arnold Schwarzenegger would follow through on his promise to veto a single-payer health care bill in that state. It now appears that he will do so. That’s good news for the people of California. But the fact that the nation’s largest state came so close to a government-run health care system should serve as a wake up call. Unless health care is reformed in a free market direction, a government takeover is only a matter of time.

California Single-Payer?

It’s been largely under the media radar screen, but California may be on the verge of establishing a single-payer health care system.  Late last month, the California Assembly passed legislation establishing a Canadian-style, government-run health care system.  The legislation had earlier passed the California Senate, and while there are small differences that will have to be reconciled, there is no doubt that the bill will be sent to Governor Schwarzenegger.  The question now is whether Schwarzenegger will veto the bill.  In the past he has said he would, but it’s an election year and he is under big pressure from unions and others to sign it.   Schwarzenegger has caved in other issues recently, from prescription drug price controls for MediCal to vehicle emission controls to state budgeting.   If he signs this bill it will be bad news for Californians and a terrible precedent for the nation.

Under the bill:

  • Private health insurance would be abolished.  The state would become the sole payer for all health care services.  The bill does not specifically prohibit paying for a procedure “out of pocket,” although it states several times that its intent is to have “a single payer.”  We will probably have to wait to see how this would be interpreted by the commission established to oversee the new program, and later by the courts.  The bill does, however, require that doctors take all patients and in the order that they apply for service.  Thus, you couldn’t jump the queue by paying cash.  Nor could a doctor set up a cash-only practice.
  • The bill establishes global budgets for health spending in the state.  If the budget is exceeded the state could cut reimbursements to providers or prohibit capital expenditures.  The latter would impact the quality of health care nationwide, limiting research and development and undermining many of the nation’s top hospitals.
  • The bill contains no funding mechanism (beyond using federal Medicare, Medicaid, SCHIP, and VA funding).  Earlier versions of the bill proposed funding the proposal with a 3 percent income tax hike and a job-killing 8 percent hike in the payroll tax.  The latest version would have a commission decide how to pay for it.

Interestingly, the Assembly amended the bill to strike out the words “health care consumer” wherever they appeared and replaced them with “patient.”

Much Ado about Crisis of Abundance

The American Prospect’s Ezra Klein and Berkeley’s Brad DeLong have each weighed in on Cato’s book forum for Arnold Kling’s new health policy book, Crisis of Abundance (Cato Institute, 2006). 

Kling notes that we had invited The New York TimesPaul Krugman to speak. I was disappointed that Krugman had to decline. I would have loved to see that matchup, as I have for some time thought of Kling as The Anti-Krugman.

Now comes word that Harvard’s Greg Mankiw recommends the webcast of the book forum.

All Snark, No Substance

Brad DeLong endorses Ezra Klein’s comments (see my earlier post) about Cato’s recent forum for my book Crisis of Abundance. The event was really a health care symposium, with New York University’s Jason Furman offering comments and the Washington Post’s Sebastian Mallaby offering comments on the book.

Concerning the latter commenter, DeLong offers the following:

I challenge the classification of Sebastian Mallaby as a “professional domestic policy thinker.” It would seem to me that it would be more accurate to call him a lazy hack journamalist [sic].

Memo to Cato: putting Sebastian Mallaby on a panel as a health care “expert” gains you brownie points among the journamalists [sic] of the Washington Post. It doesn’t boost your reputation among the reality-based community.

Memo to DeLong: I’ll debate anyone of your choice. I understand that Cato tried really hard to get Krugman, and I am willing to travel to Princeton.  At least Jason Furman (or is he just another hack?) and Sebastian Mallaby were willing to engage.

The main criticism of Mallaby is that he argued against insurance coverage for wigs. Actually, if you think about it, there is much to be said for Mallaby’s point. Just because wigs go to cancer patients, and we feel sorry for cancer patients, does not mean that insurance should cover wigs. Wigs are neither necessary nor sufficient for curing cancer.

If a critic wants to “score points with the reality-based community,” I suppose he should use snark. But snark can be the refuge for someone who is having difficulty with substance.