Chris Wage has some interesting thoughts on health care reform. Unfortunately, they’re misguided:
[H]ealth “care” is different than health “insurance”. Even in casual debate, it’s rare that you hear anyone even bothering to distinguish between the two things. The word “insurance” is used nearly interchangeably with “care” regarding health. Right now our entire system: the “market” (or lack thereof) and the subsidization are built entirely around an insurance model. Insurance models differ significantly from a commodity market in that you pay regularly for something you may never get. You’re hedging against the risk of something catastrophic that you would not be able to afford, should it happen. Insurance markets work great for this sort of thing: car insurance, flood insurance, etc. In the health world, this sort of model has its place as well for catastrophic health care — e.g. getting hit by a bus, falling off a ladder and breaking your leg, and so on.
A commodity market is different, and much simpler. I pay you X dollars for Y product. You’re paying money for a tangible product that you need regularly. Much of modern healthcare [sic] falls into this category — it’s a raw, predictable commodity, and yet, we’re applying an insurance model to it. This distorts the market horribly in many ways — namely that we’re (over)paying money regularly for a commodity in terms of insurance rates. And worse, insurance companies (until now) have had the ability to deny certain elements of commoditized care based on arbitrary insurance-market justifications — e.g. pre-existing conditions. This is why I think it’s good that our new legislation bars insurance companies from denying care based on pre-existing conditions, but it just further compounds the surreality of the fact that what these companies are providing is not insurance.
Worst of all, the fact that health care is “insured” means that it removes any incentive for the consumer (the insured) from doing any price-shopping. Because health care is an “insured” thing, the mentality is that you either have it or you don’t. There’s nearly zero incentive for your average consumer to price-shop the cost of drugs, medical procedures, et al. Even purchasing a generic vs. brand drugs is a factor that doesn’t matter at all to the consumer, except occasionally in the form of marginally higher co-pays. Thus you get the silliness of insurance companies spending money to advertise to their own customers to educate them that they should choose generic when possible. The result has far-reaching consequences: consumers (patients) with little to no involvement in their own health matters — preventative or otherwise. Consumers that do little to price-compare for anything, with the expected corresponding result: super-high healthcare costs nationwide.
But what is striking to me is that we’re all talking about what the government should and shouldn’t be doing, and not what really needs to change: the market model we’re using to provide healthcare. We need to be treating health care as a commodity and paying the providers directly for it. As for who does it — the government in a “single-payer” model via socialized medicine in some form, or “the market” in a libertarian free-market utopia — I don’t care. It’ll work better either way. Once we start treating certain elements of healthcare as the commodities they really are, market efficiencies will explode, one way or another.
It will mean, though, that some difficult and interesting questions will have to be answered as to what constitutes a commodity. There are some facets of healthcare that are no-brainers: regular checkups, immunizations, the occasional bouts with colds/flu — these are all things that are expected and commonplace. There’s no insurance model needed here. But take cancer, for example. Cancer, by and large, is tragic, no doubt, and I don’t mean to belittle the horrible process of watching someone you love die — usually slowly and painfully. But a curious phenomenon has emerged: as technology and safety have improved, life expectancy has gone up. We no longer die of typhus, or being mangled in a thresher. The leading causes of death for Americans are, in order: heart disease and cancer. That’s how most Americans die. Cancer is tragic, and painful, yes — but if we’re being real with ourselves, it’s not a surprise. It’s essentially one of the mechanisms by which we currently die. In this manner, is it really something that fits or requires an insurance model, as well? We know it’s going to happen, so how is it not a commodity to be purchased (or subsidized by whomever) like anything else?
Chris makes some common mistakes, far from unique to him, and they seem to be common all across the political spectrum, so I thought I’d unpack them here (below the fold).
For starters, I’ll address where Chris is right. Health insurance is not like most other types of insurance. In truth, it’s more like a mix between car insurance and a car’s extended service plan. It covers both the routine stuff (oil changes, regular checkups) as well as the catastrophic stuff (blown cylinder, ER visit). But it’s important to note that we’re not talking about apples vs. apples here. Worst case, if something terrible happens to your car, you can junk it and buy another one. That’s simply not the case with your body/health.
I think the key flaw in his logic is the assumption that it is the abstraction of costs for routine services that’s been driving health care costs ever more skyward. In fact, that’s not the case. Regular checkups and most commonly-taken prescription drugs are already fairly reasonable. And, indeed, once you get outside of employer-sponsored HMO or EPO-type plans, health care consumers are, in fact, having to pay out of pocket for much of this.
Next time you go to the doctor’s office for a routine visit using your insurance plan, wait a few weeks, and you’ll receive a notification of benefits in the mail. It will show you the full cost of the visit, the negotiated discount, and the actual claim paid. The full cost is what you would have paid if you were paying out-of-pocket, and while it’s more expensive than your $15 or $30 copay, you’ll generally find that it’s not stratospheric. I had an office visit earlier this year, and the full price of that visit was $80. They had to send some blood off to the lab for testing, and that would have added another $35. $115 total, “street” price. Perhaps out of the reach of some, but do we really believe the magic of the market would drive that cost substantially lower, or that $80 office visits are what drive health care costs skyward?
As I said, Chris ultimately makes a mistake that’s common all across the political spectrum: he assumes that people will shop around for health care services in the same way they shop around for cars or washing machines or TVs. The thing is, economists have known for over four decades (since well before the current insurance model became ubiquitous) that this simply isn’t the case (PDF). Krugman also explains, more briefly. What people actually do is find a doctor they like, stick with that doctor, and do pretty much whatever that doctor tells them to do, within the context of what they can and cannot afford. And while this isn’t a problem for the routine stuff, it can be a very big problem for the “big ticket” items.
It’s not too different from when people need car repairs done. They generally find a shop they like and trust, and stick with it. They may shop around for routine stuff like brake work, oil changes, etc., but those typically aren’t terribly expensive, and there generally isn’t all that much cost variance from one shop (or doctor’s office) to the next. Where it gets tricky is when you start to get into the larger repairs / health issues. Continuing with the car example, suppose your A/C compressor goes out. That repair gets close to $1,000 no matter who’s doing it. But if you try to comparison shop, you almost can’t: just about ever shop will be unwilling to give you a firm price estimate until they’ve personally inspected your vehicle — for a fee, of course — to confirm for themselves what the problem actually is. So there’s a real cost barrier to shopping around, not to mention the time investment needed. (And anyway, the market has already “decided” that the only meaningful difference will be labor rates, because almost any shop you go to will just charge their hourly rate for whatever amount of time the Chilton’s manual says the repair should take, no matter how much time it actually does take.)
It’s no different with medical issues. I suppose you could call around to compare prices for gall bladder removals, but who would? Even if you did, you’re not likely to find much variance for most services. Plus, when shopping for TVs or washing machines or cars, you generally have two things going for you that you often don’t have going for you when you need health care: the luxury of time, and the ability to walk away without doing/buying anything at all.
So if lack of consumer choice and comparison shopping isn’t the problem with health care, the thing that’s driving costs ever higher, then what is? On that count, I’ll do the hip and trendy thing and direct you to Atul Gawande, who points out that the problem seems to be the pay-for-service model coupled with pervasive conflicts of interest. Doctors, clinics, and hospitals make more money by selling you more health care, not necessarily better health care. Since, as I noted above, people tend to do what their doctors tell them, if the doctor says they need these five tests done, then they get these five tests done, no (or very few) questions asked. Costs tend to be highest, surprise, surprise!, in areas where the doctors also own the labs and clinics that perform — and profit from — the testing procedures they’re recommending. They have a direct financial incentive to recommend more services, whether or not their patients really need them.
So does the HCR bill that has just been passed address this? Yes, sort of. Per the WSJ, in 2013 a set of pilot programs based on a pay-for-results (rather than a pay-for-service) model will be initiated within Medicare. And if some of these programs are successful in controlling costs, they’ll be emulated elsewhere. There’s also the Independent Medicare board that starts making binding recommendations in 2014, using (finally) science-based medicine.
In conclusion, while Chris raises some valid points, his main argument falls short in my estimation, because he incorrectly identifies what the problem actually is.
H/T: E-mail from Glen Dean