Posts Tagged ‘health care’

Health care drives federal spending.

For all of the discussion regarding the expected, astronomical growth of government in the coming decades, America’s fiscal outlook is predicated mostly upon one aspect of the budget: health care.  The above graph (originally found here) indicates that by 2050, federal health programs will cost more than every other function of the federal government (other than paying off our debt!) combined.  As Yuval Levin puts it, “The federal government will basically be a health insurer with some unusual side ventures like an army and a navy.”

Admittedly the graph is somewhat misleading on first glance.  Federal spending as a percentage of GDP is sky high right now, its present total surpassed only during World War II when we were busy killing Nazis and saving the world from real Fascists, not “fascists.”  Thus the mild decrease in non-health federal spending as a portion of our economy doesn’t keep the enormous size of current federal spending in perspective.

Presenting the net growth (in this case, the growth is negative) of all non-health federal spending in relation to the economy’s size masks the fact that some specific programs are projected to grow substantially beyond their current share of our economy.  At the same time, other programs, such as counter-cyclical “safety net” programs, will decrease in relative cost when the economy grows and employment increases.  However, the graph allows the naive individual to claim that everything besides health care as a share of our economy is shrinking.  But it’s not.  Some programs will grow, some programs will shrink.

Matt Yglesias presents our options (in quite biased terms) in light of the expected growth of health care costs:

1. Higher taxes.
2. Systematic change to the cost structure of American health care.
3. Abandonment of the government’s commitment to provide health care to the poor and the elderly.

The graph in discussion only shows how significantly America’s public health insurance programs promote deficits, debt, and federal spending.  Both parties can reasonably agree to shrinking health care spending, if only to a slight extent according to some, but the real problems are of public choice and ideology, not facts.

Arnold Kling outlines his “two-tier” health insurance system,

1. Currently, government programs for health care involve open-ended commitments to reimburse doctors for whatever services they deem appropriate. This is too expensive (although you can see why key constituencies would find it popular).

2. The government needs to get control of its health care budget. It is likely to do this by reducing its reimbursement for discretionary health care services, such as diagnostic screening, futile late-stage care, and other procedures that have been found to have high costs and low benefits.

3. Regardless of how government draws the line between necessary procedures and discretionary procedures, it will not allow people to be deprived of necessary procedures for lack of money. Nor will it prevent people who can afford discretionary services from obtaining them using their own resources.

4. Hence, we will see a two-tier system. Necessary procedures will be available to all (which is pretty much true today, through the proverbial emergency room). Beyond that, wealthier people will be able to purchase more costly discretionary medical services, just as they can purchase fancier cars or more expensive food.

To those who study health policy, and even to those who only understand the basics of the American health care system (ignoring the tin foil hat types), this is indeed a “blinding glimpse of the obvious.”

What Kling fails to acknowledge is that we already have a two-tier health care system and that while the PPACA changes some things, the beast remains. In general, Medicaid is for the poor, Medicare is for the formerly working elderly, and private insurance is for the middle and upper classes with prestigious jobs or high incomes.

As much as Obama likely idealizes a complete health care overhaul, Medicaid and the various state-only plans for specific poor populations will continue to generally provide less coverage than Gold and Platinum Medicare plans.  In turn, these will offer substantially less coverage than many private insurance plans. Medicaid participants will continue to be less affluent than private health insurance consumers.  Those with high-paying jobs and post-secondary education degrees will be far more likely to receive or purchase private insurance with coverage above and beyond the coverage of Medicare and Medicaid.

My disagreement with Kling comes from his point #1.  Despite his allusion to the grandeur and limitless supply of public health insurance subsidization, reality’s contrast is stark.  Medicaid frankly isn’t that great for most people.  Medicare Part A isn’t that great either.  This is because each is in fact not a black hole of money and endless coverage.  We ration via limits on services, deductibles, and blatant limits on coverage (for example, catastrophic coverage is different than long-term care).

What we ultimately will see with the PPACA is more of the same: a two-tier system in which the poor largely depend upon Medicaid and state health insurance plans while the middle and upper classes receive better treatment with better Medicare plan options with peripheral private health insurance coverage or employer-provided health insurance plans. The PPACA is a plan to make John Rawls proud: the poor will continue to receive less health coverage than the rich, yet even the poorest will receive better coverage than before. That is, until we perhaps realize that we cannot afford our promises and must decide how we will truly ration health care.

Health care market failures or a lack of demand?  You decide.  From Mark Perry:

“Next time you want a blood test, you could get it at a strip mall. A store-front lab firm is now open in Plymouth. It is the first business of its kind in Minnesota, but it will not be the last.

53-year-old Elaine Warren came to Any Lab Test Now to get her cholesterol checked. “I had an annual exam. It was up just a little bit so I thought I’m going get ahead of the game,” says Warren. Her insurance covered her annual exam back in January, but to have her cholesterol checked now at her regular clinic would cost her $57 for the test, and a $45 co-pay for a total of $102. Her visit to Any Lab Test Now cost her $49. She was told she would get her results in about two days.

Too often we underestimate the power of markets.  If this business proves successful, I could see this model spreading quickly for those looking to cut their health care costs.  Even if the business fails due to an unreliable product, regulations that do not allow it to effectively compete on price with other care providers, and/or limited access to important markets.

Unfortunately, demand for such business is artificially suppressed because publicly subsidized health care creates a moral hazard by incentivizing the pursuit of convenience, customer service, etc. disproportionate to each quality’s natural, marginal utility.

For example:  Suppose a complete stranger comes up to you one day, informs you that he is a multibillionaire, and tells you that he will pay for any health care costs you ever incur.  Because your health care carries no monetary cost, you do not care about price as much as you otherwise would when shopping for health care.  Meanwhile, the other characteristics of health care becomes more valuable to you.  This drives you to more often pursue costly treatments featuring great customer service, aesthetically pleasing offices, or whose marginal benefit decreases dramatically with increases in price.

Thus Any Lab Test Now is more prone to fail, despite providing great value within a free market, because consumers are desensitized to price discrepancies due to government intervention in health insurance markets.

In her article today, Froma Harrop repackages some of the Obama administration’s arguments for governmental regulation of health insurance markets with a new twist.  She claims that government can help promote Medicare and Medicaid efficiency via more involvement in the regulation and research of health care provision.  She cites information asymmetry,  the principle-agent problem between medical providers and consumers, and our current fee-for-service system as the primary reasons why liberalizing America’s public health insurance system  is a bad idea and government should further intervene in insurance markets and medical service provision.

She goes on to say:

…What patients and doctors need is a U.S. government website run by an enlightened, well-intentioned policy elite that studies various treatments for the same condition and compares their performance. That’s how we can find effective, less costly care.

In essence she argues government should further limit the services covered  under Medicare and Medicaid, using comparative effectiveness research (CER) to choose more cost-effective treatments in an effort to curb spending or decrease the opportunity costs of using tax dollars for a more expensive procedure with similar outcomes.  She further declares it absurd that conservatives oppose such measures, which could justly be called “death panels” if they did not produce equal outcomes to more expensive treatments and administering health care did not require the recipient’s consent.

I have to agree with Harrop on the absurdity of conservatives rejecting public investment in CER, given the current public health insurance system.  Ideological conservatism is deeply paternalistic.  Those of the “compassionate conservatism” vein should gladly accept the adoption of a system of expert doctors deciding how to optimize the public subsidization of health care.  Both replacing Plato’s philosopher kings with “medical kings” and saving money are consistent with conservative thought.

Now here is why libertarians should support subsidization of CER:

Say the patient insists on getting the $50,000 treatment because it takes two hours less. The insurer (be it government or private) pays $10,000, and the patient comes up with the $40,000 difference. Thus, consumers have the freedom to obtain whatever expensive regimen they want, but others don’t have to subsidize their extravagant care.

If we keep the structure of our fee-for-service health care system (a big ‘if’), libertarians should gladly accept public subsidization of CER, provided that the research costs do not outweigh the long-term savings of discovering a comparable, but cheaper, medical service.  CER encourages less public health care spending (read: less redistribution) for equally effective treatments, decreases the costs of health care rather instead of shifting health care costs onto the poor, and promotes innovation in many health care markets.

Of course, most libertarian visions of health insurance markets involve substantially less government intervention, less public subsidies, and a move towards pure capitation (or for moderates: bundled payment or outcome-based payment)  and away from fee-for-service provision.  That “big if” is a pretty enormous assumption, but a move towards CER is nonetheless a pragmatic move towards less government spending.