Fallacies in Healthcare Reform (Updated)

As I read the New York Times editorial this morning on financing healthcare reform:

If health care reform falls apart again in Congress, the most likely cause will be failure to agree on how to subsidize coverage for tens of millions of uninsured Americans. The cost will almost certainly be at least $1 trillion over the next decade and perhaps much more, depending on how generous the reform might be.

It occurred to me how many out and out errors, fallacies there are in the discussion.

For example, why do so many people not understand that the number of uninsured that’s bandied about includes both illegal immigrants and those who are able to afford insurance but elect not to have it, presumably because they’re young and healthy? The number comes from the Census Bureau and if you’ve got the inclination you can search through my recent posts for the link. The Census Bureau does not identify legal status but the number of foreign born who don’t have insurance is quite large. You do the math. It’s the reason I don’t believe that healthcare reform can be disaggregated from immigration reform. It is not intellectually honest to cite the figure of 46 million uninsured and then claim that you don’t plan to insure illegal immigrants.

Another fallacy is that we know how to reduce costs in healthcare. We don’t. For example the NYT’s statement:

Our preference would be to extract savings from the bloated, inefficient health care system — but also to raise revenues from a wider pool, preferably from well-to-do Americans who could be taxed more for a badly needed reform that would benefit all Americans.

in my opinion reflects an artifact. We pay for procedures. That’s how our healthcare system works. Further we subsidize healthcare to the tune of 50% or more, much of it through Medicare and Medicaid which pay for procedures. Of course we get more procedures. If you subsidize something, you get more of it. BTW, that’s part of the reason for my opinion of the frequently noted fact that much of healthcare spending is in the last year of life. If we stopped subsidizing healthcare for the elderly (something I don’t recommend), we might be able to disentangle the need from the effects of the subsidy but as it is we can’t. Given the choice between pauperizing themselves and their family and performing that one additional unproven procedure, I suspect that a lot of elders would forego that extra treatment. I further suspect that if we only subsidized healthcare in the first year of life most healthcare spending would be on obstetrics and neo-natal.

Here’s another error: the notion that we can magically reduce the number of people whose care we’re subsidizing by subsidizing the care of more people. That’s implicit in the Times’s statement above. Contrariwise, I think that we’re more than likely to create a positive feedback condition under which an ever-increasing number of people’s healthcare is being subsidized to an ever-increasing degree.

And another: we can afford just to do nothing. We can’t. At the present rate of growth healthcare spending by the government is either going to produce an unsustainable level of taxation or an unsustainable level of debt or both.

I welcome other suggestions for errors and fallacies about healthcare reform in the comments. Please note that controversies are not errors, they are disagreements, frequently on priorities. When you disagree with somebody else’s priorities, it’s generally not an error on their part, simply a difference of opinion.

Update

Here’s a little data to support my claim made above of the artificiality of the “last year of life” statistic. Here’s a graph of the per capita spending for some OECD countries broken out by age demographics:

All sorts of interesting things leap out at you from this graphic. First, note how much more we spend on people aged 65 and above. Coincidence? If you think it’s because elders in, say, Germany are substantially under-treated, I’d like to see some evidence of it. Not anecdotes, real evidence. Second, note that if we reduced the spending on those 65 and above to its relative proportion in other OECD countries, we wouldn’t be so completely out of line with what they’re spending and IMO we wouldn’t be complaining about the high cost healthcare now (remember that the cost of healthcare insurance necessarily follows the cost of healthcare). Kind of makes you wonder about the “Medicare for all” notion, doesn’t it? Ceteris paribus it would bankrupt us.

And note that we actually pay less for those aged 0-64 than Germany, France, or Britain. ‘Splain me that, Lucy.

Update 2

I’ve been thinking more about the graph, wondering especially if it’s possible that Germany’s division of spending is the artifact. Although the idea is somewhat appealing, I don’t think so and here’s why: Japan. Despite its modernization Japan continues to be a Confucian country and elders are revered and taken care of so I don’t think that Japan is managing its healthcare system to reduce healthcare for elders. And Japan’s relative spending is more like Germany’s than it is ours. Consequently, the question is why are we spending so much treating the elderly? I think it’s an artifact.

Update 3

James Joyner makes this point in a post on the “ecological fallacy” in the healthcare reform debate:

But here’s the thing: most of us aren’t viewing this debate in the aggregate but rather as individuals. Most of us have the sense that ourselves and our families would be worse off in a system where the government was even more influential and even more people were free riding. Statistics about national level costs and outcomes don’t address that concern.

In reference to something he discusses in the body of the post, although I’m sure that France’s and the Netherlands’s systems are very good for those countries, I don’t think they’re transferrable. Neither France nor the Netherlands shares a 1,500 mile land border with a country with a per capita GDP a quarter of theirs, for one thing.

Update 4

Megan McArdle ends an interesting post on Medicare administrative costs with this:

My critics will want me to explain why, then, Europe can do it cheaper. The answer is threefold. First, most European nations have better governance than we do–the American political system is a Public Choice disaster. Second, they pay people less money in a way that’s hard to replicate here (and even if it wasn’t, would be a one time savings that wouldn’t check the rate of growth). Third, we’re still driving quite a bit of product innovation. Our messy, organic, wasteful, unfair, irrational system allows experimentation, and they cherry pick the best results. If we stopped doing this, their system would stop looking so good.

As the graph above shows major OECD countries only “do it cheaper” for their component of healthcare we already subsidize here. How this translates into an argument that we should be subsidizing more people in order to save money eludes me.

Update 5

Steve Verdon takes the theme of administrative costs and riffs on it at OTB:

For the sake of argument let us assume that Medicare’s administrative costs are lower than those of the typical health insurance company. Does this imply that Medicare is more efficient than the private company? I’ve been skeptical of this view point since one thing I’ve learned in economics is that firms want to maximize profits. You don’t do this by wasting money. In fact, at the profit maximizing level of output the firm is minimizing its costs. So, does it make sense that a health insurance firm is going to spend money it doesn’t have to on administrative costs?

23 comments… add one
  • Andy

    One error you’ve cited frequently in the past is the administrative cost savings from single payer and how that savings would be enough money to fully fund healthcare and those 46 million uninsured.

    One thing I’ve been thinking about recently is that I don’t think anyone really knows what a “procedure” actually costs. What is actually charged is highly variable depending on insurance and a host of other factors that aren’t directly related to the actual cost of performing the actual procedure. At least that’s my impression.

  • One thing I’ve been thinking about recently is that I don’t think anyone really knows what a “procedure” actually costs.

    One of the many reasons that the notion that we’ve got a market in healthcare is a pious fiction.

  • PD Shaw

    I work almost daily on claims to a state insurance program for environmental clean-ups. I find it extremely odd that some people believe that administration/paperwork expenses would be any less if the government was in charge. It’s like a scene from Brazil where I stand.

    But the other point Andy raises is true of this program as well. The government so dominates this area that it has lost any ability to know what costs are. Until a few years ago, the state created secret rate sheets based upon the averages of the reimbursements sought for different procedures. It was kept secret because they feared the claimants would start gaming the system by submitting what they thought would be reimbursed, creating an inflationary spiral. That system was ruled invalid for a variety of reasons that have to do with the state’s obligations to provide open, fundamentally fair procedures. The new procedure retains significant problems with government price discovery.

  • I work almost daily on claims to a state insurance program for environmental clean-ups. I find it extremely odd that some people believe that administration/paperwork expenses would be any less if the government was in charge. It’s like a scene from Brazil where I stand.

    Right. That is why I have such a hard time accepting the claims that Medicare is so much more efficient in terms of administrative costs. I don’t usually associate government with efficiency. After all, private firms have a huge incentive to minimize costs…its called profits. The government has no such objective. In fact, one could argue that top level bureaucrats have an objective of expanding their bureaucratic domain. Get higher pay, more prestige, and for political appointees greater visibility for future political considerations. But nope, when it comes to Medicare/health insurance all that no longer applies. Health insurance companies are no longer profit driven…although oddly enough they are when it comes to denying claims. Bureaucrats are saints who slave away in the meanest conditions doing the Lord’s work.

    But the other point Andy raises is true of this program as well. The government so dominates this area that it has lost any ability to know what costs are.

    But…but…but…how can that be?!!??!?!??! Isn’t the government the paragon of efficiency and accuracy? Why is one insurance industry the government is involved in so lost while the other is so damned good? This is the government they are here to help.

  • Andy

    Dave,

    Interesting graph in the update. I think some of the difference among elder populations is attributable to cultural differences, particularly in regards to elders and death. In short, I think Americans are more likely to try to prolong life and house elders in very expensive nursing home environments instead of with family.

  • Note, especially, that we spend less on people aged 0-64 than do Germany, France, or Britain.

    It’s possible to argue that results in poorer outcomes later on. I’d like to see that statistics on that. However, I think it’s just because we’re subsidizing elder healthcare so enormously.

  • Drew

    Musings:

    “One of the many reasons that the notion that we’ve got a market in healthcare is a pious fiction.”

    I don’t believe it follows that poor (or inexact) cost accounting is evidence of market failure. In a manufacturing environment it is relatively easy to account for materials, labor, energy, depreciation etc and an allocation of overhead to arrive at the cost of a widgit. In a service environment we must ask: “what is the service providers time worth?” That’s very subjective. I must admit that PD makes an interesting point that closely held information disrupts price discovery. However, in the end the fact that we have a third party payer system is a much more compelling – and dominating – argument to me in making the case of market failure in health care.

    The Chart:

    My take is a bit different. If I wanted to test the hypothesis that significant amounts of sulfur dioxide can be dissolved in iron in a coal fired boiler I’d test that in a boiler, or its lab equivalent. Similarly, if I wanted to test and measure the efficiencies of various health care systems I’d look to a situation where the incidence of disease or health care need was most prevalent. I know you didn’t want anecdotes……but (don’t roll your eyes): As my doctor father used to say “young people just don’t get really sick.” That of course is a generalization. But in the aggregate, its just simply true. So if you want to identify how various health care systems perform you have to enter the cauldron where the health care expenditures are made, and that’s pretty much the 60 and over crowd. Cancer, heart failure, obesity and diabetes complications, orthopeadic issues, the attendant imaging and other testing requirements …and on it goes. We begin to break down. We need health care services.

    So what the chart says to me is that any old health care system measured in the aggregate performs relatively similarly when health care needs are low. But what about when nut crunching time comes? That is when you will see the differences. So now here is the really anecdotal part (sorry, Dave) – we all have heard of the rationing and leaching that occurs in state run systems. So do you know of people lining up to go to England or Canada for care? But for people with disease, yes, they do come here.

    To paraphrase, you’ll have to pull from my cold dead hand the notion that the real issue in US health care is not the third party payer system, which divorces the patient and doctor from the price mechanism, and turns insurance into maintenance. All else are second and third order effects.

    Dave, I fully understand your challenge on statistical citations of “under treated” Germans and what not. Any rational person would want same. But can you imagine that a reliable statistic exists? So much subjectivity. And even if it did exist, it would be buried for obvious reasons. Some things are just observational, and judgements.

    So I’m left quoting Groucho – “who you gonna believe, me or your lyin’ eyes?”

    PS – the first guy who quotes longevity rates gets a cyber punch in the nose.

  • PD Shaw

    re: graphic. It would be interesting if we could break down the U.S. averages by immigration group. I have a suspicion that, for example, first or second generation Japanese-Americans probably consume health care at a level similar to the Japanese, which means genetics, diet and culture are significant players.

  • Interesting graph of the country-v-age comparison. What’s particularly enlightening is that when we use “the public option” (which is now mostly Medicare), costs skyrocket because people are more inclined to use services that are (mostly) free.

    You’re right. Health care deform will bankrupt the nation.

  • Our Paul

    I hate to sound cheeky, but as I understand our Health Care problems it consists of the following five points:

    (1) We pay more per capita for health than any other OECD country.
    (2) We have worse health care outcomes by practically all measures than other OECD countries.
    (3) The rate of increase in health care costs on a per annum is greater than any other OECD country.
    (4) One out of six Americans have no health insurance, more than 35% of Americans are considered under insured.
    (5) Employer provided health insurance place many of our industries at a competitive disadvantage in comparison to other countries.

    It strikes me that to argue against potential solutions to the above problems without providing alternative approaches is the way ostriches solve potential threats.

    For those of curious minds who may wonder about the origins of this graph a clue can be found in the upper right hand corner. It must be from a publication (working paper?) put out by a German Insurance company. The logo fits. I failed to find the paper, but presumably the data is a distillate of the latest OECD study. That study is well worth a read, points out where significant savings can be made in the Medicare system, and can be found here.

    What surprises me is that our host failed to reference the graph to allow all of us to properly interpret the intent. Any chance for a link, Dave?

    By the way Dave, I would be leery of hanging my hat on the same stand as Mary McArdle. Each of these points she made can be easily refuted:

    First, most European nations have better governance than we do–the American political system is a Public Choice disaster. Second, they pay people less money in a way that’s hard to replicate here (and even if it wasn’t, would be a one time savings that wouldn’t check the rate of growth). Third, we’re still driving quite a bit of product innovation.

    These points show a profound ignorance of European Medicine. The third point is offensive, the Ugly American view of exceptionallism and a remnant of our cousins’ White Man’s burden. She may have credentials of an Economist, but she is working in a cave on the Shinning City on the Hill.

    To be cross posted at OTB

  • Number 5 is completely bogus. What firms care about is total compensation which is comprised of wages plus benefits. So long as productivity increases are as large or larger than increases in total benefits there isn’t an issue of competitive disadvantage. And even in this case employers have the option of reducing total compensation. Its a scholcky argument. Christina Romer thinks so as does Douglas Elmendorf.

    And regarding (1) that is only true for the people over the age of 64. Remove them from the picture and the U.S. beats or ties every one save perhaps the Canadians.

  • Number 5 is completely bogus. What firms care about is total compensation which is comprised of wages plus benefits. So long as productivity increases are as large or larger than increases in total benefits there isn’t an issue of competitive disadvantage. And even in this case employers have the option of reducing total compensation. Its a scholcky argument. Christina Romer thinks so as does Douglas Elmendorf.

    And regarding (1) that is only true for the people over the age of 64. Remove them from the picture and the U.S. beats or ties every one save perhaps the Canadians.

    These points show a profound ignorance of European Medicine. The third point is offensive, the Ugly American view of exceptionallism and a remnant of our cousins’ White Man’s burden. She may have credentials of an Economist, but she is working in a cave on the Shinning City on the Hill.

    I ws thinking of pharmaceuticals. Many countries work by getting good deals from U.S. firms. So if a U.S. firm is recovering costs from U.S. consumers and earning monopoly profits as well, why not then go ahead and pick up a few bucks by supplying other countries at discount rates. The marginal cost for a drug is teeny tiny. The big costs are in R&D. If the U.S. consumer is paying for that, then any thing you get from Europe and other countries is almost pure profit.

    And your comments don’t disprove her assertion. Maybe it isn’t polite to say the U.S. is driving most of the product inovation, but if it isn’t true point to something. And no, a few instances of product inovation wont work. I’m talking about an aggregate level view here. How much innovation comes from the U.S., how much from Europe, how much from Canada, how much from Japan, etc.

  • We need reform however I do not think government is the answer. I think we need to move back to the old type of insurance – indemnity insurance.

    We need to rid ourselves of the HMO overhead and get on with utilizing our health care however we want.

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