Issues 2008: Health Care

Nearly everyone agrees that our health care system requires reform but there’s substantial disagreement on how to do it. There are two prevailing views among economists. Those who favor greater government involvement in our health care system point to something called “adverse selection”. Basically, they note that insurance companies are motivated to reduce their exposure by denying insurance to the highest-cost members in the population. Unfortunately for this view to the best of my knowledge no study has ever found that adverse selection is a major factor in the high health care costs in this country and I know of several that have found little such effect.

The other view, typically held by those who favor a more market-oriented approach, is that health care costs are high in this country because patients are insulated from the actual costs of the health care they receive by employer-paid insurance plans. This view actually has a little empirical support. There’s been a study or two that have suggested, unsurprisingly, that people demand fewer health care services when they’re on the hook for the costs. Nobody has ever produced a study which has shown that people decide what to economize on prudently when they’re on the hook for the costs or that health outcomes are better when that’s the case.

There’s no denying that health care costs are significantly higher here than they are practically anywhere else in the world. We pay three times as much per capita as the next biggest spender (Switzerland). The reason for it is simple: practitioner salaries are three times here what they are practically anywhere else in the world, disproportionately higher than salaries generally.

Health insurance and medical educational costs are high because health care costs are high not the other way around. Insurance, like banking, is a field in which money is flying around and the insurance men and bankers have glue on their hands—some of what’s flying around is bound to stick to them.

In my view universal coverage is a red herring for two reasons. The first is that people who don’t have health insurance do not because costs are high and universal coverage can only be sustained politically if costs go down. If costs went down it would be significantly less of an issue in the first place. The second reason is that most of the problem of those without health care insurance is concentrated in just a handful of states in which the proportion of uninsureds is higher than in the rest of the country. Those states also have a higher proportion of immigrants than other states. I cannot believe that is a coincidence.

Most of these immigrants are from Mexico and, as I’ve pointed out before, we’re the only country in the world that shares a long land border with a country where the average income is a quarter what it is here. I emphatically do not mean by this that there’s something bad about Mexico or immigrants from Mexico, only that our unique circumstances require consideration. However, I believe that economics and demographics will tend to slow the immigration from Mexico and it would be imprudent to undertake major reforms to solve a problem which will be solved by other means, particularly when the secondary effects are as adverse as the plans for universal coverage are inclined to be.

Either the government will subsidize those without the means to pay for health insurance or it will not. If it does not we will not have universal coverage. If we do we will be providing a strong motivation for the indigent to come here in pursuit of health care. I see no way in which such a system can be sustained.

An additional problem with mandated universal coverage is that it will increase the demand for health care (particularly primary care physicians, already in short supply) while doing nothing to increase the supply of health care, which for practical purposes is fixed in this country. When you increase the demand without increasing the supply you will raise the cost or lower the quality or both.

At root there are two reasons that salaries in health care are as high as they are. The first is that the supply of health care is controlled by a cartel. We graduate no more medical graduates per year today than we did 25 years ago.

The second is that for the first 15 years of the Medicare system the system received essentially no scrutiny. When a bill came in, it was paid. During that period salaries in health care rose at several multiples of the non-health care rate of inflation, significantly faster than any other profession. By the time Congress began paying attention to the situation higher costs were built into the system in the form of higher salaries and fees for health care providers, higher insurance costs, and so on.

We not only need to reduce the increase in health care costs we need to reduce health care costs and to highlight that I’ll reproduce the chart from the CBO that I showed the other day:

Unless we control health care costs, they’ll eat us alive. No foreseeable rate of growth will enable us to pay for something the costs of which are rising at that rate. Requiring the elderly with the means to bear more of the costs for their own health care will help somewhat but the reasons that Medicare was enacted 40 years ago remain: without it we’re going to have a lot of sick, destitute old people.

I believe that we need to increase the supply of health care sharply. To do this we’ll need to see dramatic reductions in the cost of medical education while increasing the number of billets in medical schools, nursing schools, and other medical education—a tall order.

Significantly increased automation could help, too, but this has been blocked for decades by the medical cartel. That needs to change. Indeed, we need a general change in how health care is delivered here.

Other participants

Jon Stonger has posted a comparison of the candidates’ proposals and a rather gloomy assessment of the sitution at Heretical Ideas.

10 comments… add one
  • Michael

    As I’ve advocated many times at OTB, the cheapest and fastest way to increase the supply of health care is to let the people who have the knowledge and experience, but lack only a degree, to provide more of the service. For just about anything that doesn’t require a scalpel, I trust a nurse as much or more than I do an MD.

  • That’s one of the solutions I’d support, Michael.

  • Larry

    A health care system that is more and more for profit will never get fixed. I believe the health care system can work for all, we just need to decide if we really want it to…and if we really want to work, we’ll take it apart and fix it.

    Like Wall Street, currently it’s about greed. Remove that and we’ll begin to fix the high cost of health care…the real problem is that too many have there hands in the till, where no actual care takes place.

    Government can and must address the problems of health care and soon…

  • Michael

    Larry,
    A system that will work for everybody is impossible, and attempting it is a losing proposition. If it would cost $n to cover 90% of the population, it would cost $2n to cover 99%, and $3n to cover 99.9%, and I’m probably being generous. It would be better to have a system that efficiently covered 90%, with some alternative method of taking care of the remaining 10%.

    I haven’t met very many doctors who do what they do out of greed, and a nurse who does it out of creed is a masochist. Insurance companies do it out of greed, but they again they’re supposed to, they’re companies. Mostly the problems are maintaining the status-quo, a good measure of CYA, but mainly our inability to accept risk in our health care.

  • Larry

    Hi Michael,

    A health care system more than doctors, nurses, other staff and buildings..you should read Judith Warner’s article from the NYT Diagnosis: Greed, which I read after posting my comment: http://warner.blogs.nytimes.com/2008/10/09/diagnosis-greed/?dpc

    People choose their professions for many reasons, and money is one of them. The health care industry is very large and growing, and so will the cost problems. It’s also a moral and ethical question isn’t it. It can be far better than it is.

  • Alan D

    Greed does have much to do with it…so does the government interaction in the current system. We already have “national healthcare” we just don’t realize it.

    According to a 2006 Harvard study, almost 65% of all medical billing in the US is paid for by the US government. That means that only 35% is paid for by the private market or private individuals.

    The same study also debunks the myth that healthcare costs are a result of the uninsured going to emergency rooms for non-emergency treatment. It says that the percentage of medical billing due to uninured patients is only .23%…yes…less than one-quarter of one percent. Hardly enough to really effect the cost of everyone else’s care.

    There are many factors to the high costs of today’s care.

    The first real problem is that the government medicair and medicaid programs get to dictate how much the healthcare provider can charge for their services, thus leaving them to turn to all of us privately insured people to make up their profit margins. That’s a big reason why our care costs so much. And, that’s where the greed comes in. Who is to say how much they can charge?

    The second cause is frivolous suites and malpractice insurance. My friend is a doctor in Ohio, that has never had a malpractice suite filed against her, yet her malpractice insurance has risen over 450% in the past decade.

    The final problem is the cost of education, as stated above. But it is not limited to medical education…can anyone tell me why the average cost of a four year degree has risen 439% since 1988??? Can anyone say “more government interference…Gauranteed Student Loans???

    There is so much greed going on in our society today that it is overwhelming. However, government intervention is not the solution…it always winds up having the exact opposite effect of its stated intent.

  • Larry

    Perhaps it’s a lack political will that has helped create the problems caused by government intervention, after all, the rules come from politicians, the government just follows the rules. Change the rules, and you change the effects of government intervention.

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