Government and Health Care: The Good, The Bad, and the Ugly

November 28, 2007 • Commentary
This article appeared on TCS​dai​ly​.com on November 28, 2007.

Suppose that instead of looking at health care policy as a means to push an ideology or score political points, we examine it from a pragmatic American vantage point. What works? What does not work? What backfires? Those are the good, the bad, and the ugly, respectively. The table below summarizes our experience in terms of three goals of health care policy: improving access to care; improving the quality of care; and lowering the cost of our health care system.

–high‐​risk pools
data analysis data analysis
Bad –mandates
P4P cost containment
Ugly national health services malpractice suits licensing regulations

Providing Access

The first goal is access to health care. The expectation is that taxpayers will ensure that people are not denied necessary health care.

What poor people need are clinics that are convenient to where they live. Ideally, clinics would succeed at pro‐​active outreach and promoting issues of public health, including vaccination and disease prevention. Government can establish these sorts of clinics for poor neighborhoods, or it can offer subsidies to the private sector to provide these services.

Another way for taxpayers to help people with low incomes is to provide vouchers that could be used to purchase health insurance and to pay for health care. Vouchers would be means‐​tested. In other words, the poorest families would receive large vouchers, but the size of the voucher would decline as income rises.

Health care vouchers would work like food stamps. Food stamps allow poor people to shop at the same grocery stores as everyone else. There are concerns with food stamps, including high obesity rates among the poor, but on the whole they work relatively well in delivering benefits to the intended recipients.

High‐​risk pools are for people who have expensive medical conditions that make it impossible for them to get low insurance rates. In states that offer high‐​risk pools, private insurers cover people with pre‐​existing conditions, with premiums subsidized by the taxpayers of that state. High‐​risk pools are a reasonable way to help people who otherwise might fall through the cracks of the insurance system.

A bad way to provide universal coverage is through mandates. With a voucher, the family decides what type of health insurance meets its needs. With a mandate, the state decides what type of health insurance everyone should have.

The reason that mandates do not work is that politicians are under too much pressure to “gold‐​plate” the required insurance policy. Organized lobbies and provider associations work the political process to force insurance to cover fertility treatments or eye care or other services, rather than let individual families pick packages based on cost and need.

The failure of mandates is evident in Massachusetts. As Maggie Mahar reported,

Uninsured citizens earning more than 300% of the poverty level are expected to buy their own insurance. Here, the state hoped that 228,000 of its uninsured citizens would sign up. So far, just 15,000 have enrolled.

Medicaid does not solve the problem of health care access for the poor. In Maryland, earlier this year we read about a boy who died from a tooth abscess. The article pointed out the difficulty with finding a dentist who will treat Medicaid patients. A voucher system, which would allow a family to choose any dentist rather than be limited to those who work with Medicaid, would seem to be a better idea. In the case of this particular family, I suspect that the best chance of avoiding the tragedy would have been by making health care more convenient through a local clinic.

Medicare is a bad approach for providing access. It does cover many people with expensive medical conditions. However, as I have said before, it is the fiscal equivalent of the Titanic. The iceberg that it is headed toward is tens of trillions of dollars of unfunded liabilities.

National health services, such as those found in Canada or the United Kingdom, are an ugly way to provide universal coverage. In theory, everyone has access. In practice, however, too many people wait for care and too many people receive low‐​quality care.


Health care quality is an issue in the United States, as well. For example, a paper that can be found on the web site of the Centers for Disease Control states that more than 90,000 people a year die from infections that are contracted in hospitals.

One good thing that the government can do about health care quality is to gather, analyze, and disseminate information. Statistics that pertain to the risk and effectiveness of common medical procedures would be very helpful. In addition, information on how outcomes of procedures vary by hospital and by doctor could be quite useful.

A bad idea to improve quality is a government‐​run “pay for performance” system. In theory, it is an excellent idea. The government would figure out what sorts of processes and treatments are most effective, and it would pay bonuses to providers who use such best practices.

In practice, as the United Kingdom has found, “P4P” is a system that is ripe for gaming, because it is political. Doctors in the UK were able to build in an “exception” system, where they could designate certain patients as requiring exceptions from best practices. In theory, this makes sense, because there has to be some flexibility in medical care. In practice, the exception process was used so cleverly by doctors that the bonus payments amounted to a 20 percent increase in physician pay, even though the administrators of the P4P program did not believe that there was anywhere near a commensurate improvement in quality.

An ugly idea for improving quality is malpractice lawsuits. It only works to the extent that being sued successfully is highly correlated with being a bad doctor. Instead, the pricing of malpractice insurance suggests that being sued is highly correlated with being an obstetrician.


The problem of restraining health care costs is quite acute. I believe that cost is the most urgent issue of all for health care reform. It is impossible to envision making progress in dealing with access or quality without doing something to address cost.

All of our health care finance systems are under stress. The government system is completely unsound–the Titanic headed toward the iceberg of unfunded liabilities. Employer‐​provided health insurance is a questionable concept in theory that is unraveling in practice. The individual insurance market is a disaster, with something like 3/4 of all families who do not get insurance through work or government electing to remain uninsured.

The underlying driver of costs is that Americans make extravagant use of medical procedures with high costs and low benefits. See Crisis of Abundance or Overtreated.

A good way to help bring down cost is to provide patients with better information on the benefits and risks of medical procedures. As we have seen, this information will help with quality as well. In addition, consumers should be given transparent, advance information about the costs of alternative treatments using alternative providers.

Once consumers have the means to evaluate the benefit of procedures and to compare costs, they need to be given the opportunity to use that information. From the standpoint of opportunity, Maggie Mahar writes,

The well‐​informed patient, on the other hand, appreciates the grey areas of medicine. His doctor has been open in describing the uncertainties. As a result, this patient is more willing to accept answers like “We don’t know.” Or, “It depends.” And he is more likely to listen to a doctor who tells him that the most aggressive approach is not necessarily the best approach. He is more likely to hear a physician who says: “Try physical therapy first. Try drug therapy. Try a change of diet and exercise.”

This is why I think that, if doctors and patients work together, they can contain the cost of health care, paving the way for a sustainable, affordable, health care system that offers the right care to the right patient at the right time.

I believe, however, that having the means and the opportunity to make better choices is not sufficient. Consumers also need a motive, which is why I think that our system needs to eliminate the insulation provided by our poorly‐​designed forms of health insurance. Instead, I would like to see insurance policies with higher co‐​payments and higher, longer‐​term deductibles.

I would be very modest in portraying government’s role in giving consumers the means, the motive, and the opportunity to make more cost‐​effective decisions. I think that government can contribute to gathering data and providing analysis, because it would be difficult for a private provider to profit from such an undertaking (information wants to be free). If doctors and patients need to have better conversations about treatment options, I do not see government as the natural driver of that. Finally, if the nature of insurance is going to change to give consumers more responsibility, that is going to require a less politically‐​tilted health care finance system, including a higher age of eligibility for Medicare and fewer tax advantages for employer‐​provided health insurance.

A bad idea for dealing with cost is “cost containment.” What that means is cracking down on the prices and incomes of doctors, hospitals, and drug companies. Government attempts to do this run afoul of organized political opposition. Moreover, it is very difficult to implement heavy‐​handed negotiations on price without at some point stifling innovation and hurting quality. When it is allowed to operate, the market generally does a better job of cost containment. The example of laser eye surgery is frequently cited to support this in health care.

The government gets ugly when it regulates health care providers. My pet peeve is the requirement in Maryland that someone must obtain a doctorate to become a physical therapist. That regulation clearly was enacted for the benefit of incumbent physical therapists (who are exempt, of course) and works to the detriment of patients.

If health care is ever going to be rationalized, made efficient, deploy technology in a cost‐​saving way, and so forth, then practice regulations and licensing regulations will have to be revised. The anti‐​competitive nature of today’s regulatory environment is discouraging.

The Superior Efficiency of Socialism?

One question concerning cost is whether costs would decline if we went with a single‐​payer health care system. Two arguments are typically made in support of the idea that socialism is the route to superior efficiency.

1. Other countries have single‐​payer systems, and they spend less on health care than we do.

2. Health insurance companies do not disburse all of their premiums to health care providers. Instead, they “keep” a large portion to pay for overhead and profits.

The amount that a country spends on health care is mostly a function of supply. In fact the amount that an individual state within the U.S. spends on health care is mostly a function of supply. One of the reasons that Massachusetts is a difficult state in which to try to offer universal coverage is that the supply of specialists and high‐​tech equipment is so high there. Given the vast supply of expensive health care providers in the United States, there is reason to doubt that shifting to a universal system provided by government would bring down spending.

Government is not as efficient as it might seem. While the government can operate without profits, it cannot operate without taxes. Taxes discourage work, thrift, and risk‐​taking. The deadweight loss from taxes as a percentage of revenue is higher than insurance company profits as a percentage of their revenue.

As to eliminating overhead, if all of private health insurance were ended, government would face a new responsibility: setting price schedules for every medical service in every section of the country. As it stands today, prices are negotiated with private insurers, and government programs feed off of these “usual and customary” charges. Deprived of this market information, government would have more overhead and would have difficulty correctly assessing the relative values of different services.

Overall, I am not persuaded that socialized medicine will prove more efficient in the United States. However, I am not a big fan of the insurance industry as it operates today, and I think that it would be interesting to see an experiment with single payer at a state level.

As it stands, none of the leading Presidential contenders is advocating single payer. Instead, some candidates propose additional government mandates and/​or subsidies, while keeping our existing private insurance systems intact. It seems unlikely that this will reduce the cost of providing insurance.

Solving the Problems

I believe that there are things that government can do to enhance access, improve quality, and lower the cost of health care. However, I believe that we would be best served by having government focus on the policies that I put into the “good” category–clinics in poor neighborhoods, vouchers, high‐​risk pools, and better information on the effectiveness of services and the performance of providers. If we look to government to take a larger role in running our health care system, then my prediction is that things will get ugly.

About the Author
Arnold Kling

Senior Affiliated Scholar, Mercatus Center at George Mason University