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Health Care Costs

Health Care Costs June 22, 2009

When most of the attention is fixated on the government’s balance sheet (medicare and medicaid), the far bigger problem is private health care. Ultimately, this way of thinking is myopic – you might not be paying for it through higher taxes, but you are paying for it by lower wages (and some people are paying for it by being denied health care altogether – about 2 million each year fall into the ranks of the uninsured). See below:

As to what is behind these costs (remember, the US spends twice as much per patient on health care as other countries, with nothing to show for it), there is a lot of buzz surrounding the article by Atul Gawande. He wanted to know why health care costs were so much higher in some areas than others. He looked at Medicare expenditures, because the data were readily available. So what was the reason? It’s not overall healthiness. It’s when doctors stop being doctors and become free market capitalists. It’s the classic problem of asymmetric information, a cause of market failure. Doctors know a lot more than patients, and if the doctors says you need x, y, and z, then you are in no position to complain. But if the doctor benefits financially from these treatments, then he will run up costs. Gawande even found some sleazy examples of doctors taking kickbacks to send patients to certain hospitals.

And outcomes are no better. In contrast, the best and cheapest health care is where doctors are not free market capitalists. He points to the Mayo clinic, which puts patients first. Crucially, it pooled the money and started paying doctors a salary, breaking the link between treatment and individual compensation.

Health care reform must begin with controlling these costs. It must change the incentive structure facing doctors. Another issue is the paucity of primary-care physicians, because it is not lucrative. Gone are the days of the home visits, and the close doctor-patient relationship, the ultimate embodiment of subsidiarity in health care (it has little to do with whether a government or a gigantic profit-making insurance company pays the bills).

These trends are common to all forms of health care, but private insurance is even more inefficient, as it makes money by denying people coverage, and spends a huge amount of money in the process. The solution here is a mixture of  mandated coverage (to broaden the risk pool and lower overall costs, as the healthy are more likely to opt out) and community rating (stopping insurance companies from discrimination based on “pre-existing” conditions. I personally think single payer is the best system, as it lowers premia from the broadest possible coverage, does not waste money on rent-seeking activity, uses its bargaining power to get better deals from suppliers (including drug companies), and reduces the administrative inefficiencies of multiple systems. But there are other ways to do it.

Single payer is clearly not on the table, but the current debate centers around the idea of a public plan. Many oppose it on grounds of cost (again, in myopic manner, looking narrowly at the government balance sheet). Others say it would have a subsidy advantage. But they even oppose a public plan with no extra subsidies or legislative advantages — one that would deal with the private insurers on a level playing field. This seems like a win-win– if private insurance is as great as its defenders say, the public option will get no takers. And yet, the debate has always been about protecting vested interests and their rent-seeking activities (it’s an economic problem very common in developing countries).

Here’s a perfect example: They even oppose a private coop system, which would take out the government ownership but still compete with the profit-makers. As Ezra Klein muses: “It’s that the current insurance providers would face unexpectedly aggressive competition in the marketplace. Which raises an interesting, and potentially clarifying, question: Are Republicans in this to preserve the healthy functioning of a competitive private market or preserve the profits of the currently dominant insurance companies?” I think the answer is clear.

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