Why Reduce Health Care Costs?

One rare point of elite consensus is that the US needs to reduce health care costs. Frightening graphs expose America as a spendthrift outlier. Before he decamped to Citigroup, the President’s OMB director warned about how important it was to “bend the cost curve.” The President’s opponents are even more passionate about austerity.

Journalists and academics support that political consensus. Andrew Sullivan calls health spending a “giant suck from the rest of the working economy.” Gregg Bloche estimates that “the 30% of health care spending that’s wasted on worthless care” is “about the price of the $700 billion mortgage bailout, squandered every year.” He calls rising health spending an “existential challenge,” menacing other “national priorities.” Perhaps inspired by Children of the Corn, George Mason economist Robin Hanson compares modern medicine to a voracious brat:

King Solomon famously threatened to cut a disputed baby in half, to expose the fake mother who would permit such a thing. The debate over medicine today is like that baby, but with disputants who won’t fall for Solomon’s trick. The left says markets won’t ensure everyone gets enough of the precious medical baby. The right says governments produce a much inferior baby. I say: cut the baby in half, dollar-wise, and throw half away! Our “precious” medical baby is in fact a vast monster filling our great temple, whose feeding starves our people and future. Half a monster is plenty.

But when you scratch the surface of these sentiments, you have to wonder: is the overall level of health care spending really the most important threat facing the country? Is it one of the most important threats? There are many ways to raise revenue to pay for rising health costs. Aspects of the Affordable Care Act, like ACOs and pilot projects, are designed to help root out unnecessary care.

I am happy to join the crusade against waste. But why focus on total health spending as particularly egregious or worrisome? Let’s explore some of the usual rationales.

Terrible Tax Expenditures and Suspect Subsidies?

Employment-based insurance gets favorable tax treatment, and much Medicare and Medicaid spending is drawn from general revenues. So, the story goes, medicine’s big spenders don’t have enough “skin in the game.” Once health and wealth are traded off at the personal level (as the Harvard Business School’s Clayton Christensen advocates), people will be much less likely to demand so much care. Government can attend to other national priorities, or individuals will enjoy higher incomes and will be free to spend more.

I respect these arguments to a point, but I worry they partake of the “nirvana fallacy.” If I could be certain that leviathan would repurpose all those wasted health care dollars on infrastructure, or green energy, or smart defense, or healthier agriculture, I’d be ready to end tax-advantaged health insurance in an instant. But I find it hard to imagine Washington going in any of these directions presently.

Giving tax dollars back to taxpayers also sounds great, until one processes exactly how unequal our income distribution is. In 2004, “the top 0.1% — that’s one-tenth of one percent — had more combined pre-tax income than the poorest 120 million people.” To the extent health-related taxes are cut, very wealthy households may see millions per year in income gains; the median household might enjoy thousands of dollars per year. Sure, middle income families will find important uses for those funds (other than bidding up the price of housing and education). But at what price? What if the insurance systems start collapsing without subsidies, and more physicians (who are already expressing a desire to work less) start seeking out pure cash practices? A few interactions with the the very wealthy may be far more lucrative than dozens of ordinary appointments.

Consider the math: billing a $20,000 retainer from each of 50 millionaires annually may be a lot more attractive to physicians than trying to wrangle up 500 patients paying $2000 each—or, worse, getting the money from their insurers. There are about 10 million millionaires in the US; that’s a lot of buying power. One $10,000 score by a cosmetic dentist from such a client could be worth 400 visits from Medicaid patients seeking diagnostic procedures. Providers are voting with their feet, and a Medicaid card is already on its way to becoming a “useless piece of plastic” for many patients. Given those trends, simply reducing health care “purchasing power” generally risks some very troubling outcomes for the very people the health care cost cutters claim to protect. No one should welcome a health care plutonomy, where the richest 5% consume 35% of services, regardless of how sick they are.

Is Anyone Underpaid in Health Care?

Health commentators rightly draw attention to big insurer CEO paydays. Top layers of management at hospitals and pharma firms are also getting scrutiny. Wonks are up in arms about specialist pay. Read more

Making the Case for the Public Plan, Part II: Public Option as Private Benchmark

Ezra Klein has given a nice explanation of the advantages of public options in our health insurance ecosystem. He summarizes three different types of options that could develop, including a “trigger plan” (which be “triggered into existence [where] the private insurance market” failed), a “weak public plan” (which “couldn’t use the low rates that Medicare sets” and would just act as another insurer) and a “strong public plan” (which would basically be modeled on Medicare). Klein argues that, whatever public plan were adopted, “The existence of another option changes the market. Individuals will have access to private insurers, but they’ll no longer be stuck with them.”

I agree with Klein that a public option can help us achieve the trifecta of health reform–increasing access, reducing costs, and improving quality. Tyler Cowen challenged Klein today, and I’ll try to answer Cowen.

First, Cowen argues that the public plan will be very expensive, for if “public and private plans are to coexist, the public plan must be attracting the higher-cost customers, namely the higher medical risks.” Even if that’s the case, other industrialized nations have used prospective and retrospective risk adjustment to level the playing field between plans. As I noted yesterday, even private health insurance lobbies have conceded that “spread[ing] costs for the highest-risk individuals” is necessary to guarantee coverage for all. Risk-adjustment should not be seen as a subsidy—rather, it’s a way to keep a level playing field between the public and private plans.

Private insurers’ apparent acceptance of risk-adjustment may seem irrational if you think that they are only in the business of trying to gain the healthiest customers and shed the sickest. Tempting as it is, that cream-skimming is only one part of the broad range of things that insurers do. Many large insurers make substantial “administrative services only” revenue–for example, by administering self-insured employers’ plans. (In that way they avoid financial risk from sick insures–that risk is assumed by the employer funding the plan). Risk adjustment would further reduce their incentives to avoid people with pre-existing conditions. In terms of quality, private insurers can compete with the public plan on several dimensions, including identifying good providers, incentivizing best practices, and fairly determining access to treatment and payments for providers.

It’s that last function—coverage and payment determinations—where the public plan really has a chance at improving insurance for everyone. Today’s default for private insurers is secrecy in pricing, and opaque “gotchas” buried in thick plan documents. As Uwe Reinhardt has noted,
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