Health Care Cost

I've been avoiding it for now, but the one issue that you can't really leave off the table when you talk about the US's long-term budget outlook is health care.  Contrary to what Republicans might tell you, overpaid public workers, social security, and public unions aren't the problem.  Contrary to what Democrats might tell you, military spending also isn't the problem, nor can the budget problem be solved by keeping health care (including MediCare and MedicAid) the way it is is.

Right now, health care takes up about 23% of the federal budget.  That's not far out of line from defense (20%), social security (20%), and discretionary spending (19%).  But unlike the other 3, which have been pretty constant over the years, and which can be tweaked, health care spending truly has been running out of control.  And not just Medicare and Medicaid (which have actually done a better job of cost control than private insurance), but the entire sector.  Take a look at Chart 3 from this link to the Kaiser Family Foundation.  Heck, look at all the charts.  Since the 1970s, our health care costs have grown more than any other developed country's, and they've way outpaced inflation.  And no, we don't do the best job at treating patients (our life expectancy is pretty average), and no, you can't chalk that average life expectancy entirely up to "Americans are fat."  So it's very clear that if we don't do something about health care, costs will explode and we'll turn into an economy where every third dollar we consume is on some kind of health care product or service.  And that's not sustainable.  So at some point, we'll have to cut back.

Paul Ryan has a plan to do that, which he calls "premium support," and which he claims is "the same as the plan congresspeople get."  Paul Ryan is lying.  Right now, the way Medicare works is that a central office pays providers (doctors) for doing procedures that the doctors deem necessary.  Ryan's plan involves giving senior citizens vouchers to buy insurance in the market, and allowing the price of those vouchers to appreciate at the rate of GDP growth.  It's a horrible idea for very simple reasons.  The whole reason Medicare and Medicaid have grown as much as they have is that medicine as a whole has gotten more and more expensive.  At a rate much faster than the growth of the overall economy.  So the amount of medical care that you could buy for $250 in 1980 was a heck of a lot greater than the amount of medical care you can buy for $250 today, even if you adjust today's dollars for inflation.  Ryan's plan does nothing to control that growth.  So your voucher will buy old people less and less health care, meaning that they'll either have to suck it up and die, or pay out of pocket.  And if you think those are appealing options, then voting for Ryan is the way to go.

Ryan's claim is that the magic of the market will drive down costs, as seniors will comparison-shop for the best plans.  Now, for a supposed believer in free markets, Ryan happens to have absoltuely no idea how they work.  The reason Medicare was created is that magic insurance markets don't want anything to do with covering old people.  As anyone who passed second grade science knows, old people take lots and lots of medicine, and are sick a lot more often than young people.  To put it in insurance parlance, providing health insurance to old people is like providing flood insurance to someone living on a beachfront in New Orleans-- you don't want to be anywhere near it, and if you are, the premium you charge will be through the roof.  Problem is, in the flood insurance market, someone can always opt not to buy flood insurance.  Or they can move to Denver, where flood insurance costs like $6.  But handing old people a voucher and telling them to go buy health insurance is like handing someone a voucher and telling them to get that beachfront flood insurance in New Orleans-- it's not gonna buy you much insurance.  And the old person equivalent of moving to Denver is getting younger.  Which would be a pretty sweet option, if it were possible.  So Ryan's plan is essentially to cut the amount of healthcare old people can get, and after that let them rot.  And if you think that sounds like a sweet deal, well, then by all means vote Ryan.

But I DON'T think that's the way to go.  So we've gotta look for another solution.  I think the important premise to start with here is that we want everyone to be able to get healthcare if it's necessary.  It sounds radical, but it really isn't at all.  Healthcare is unique among economic goods and services in the sense that everyone is always in the market for it, whether they like it or not.  Before the passage of the Affordable Care Act (ACA), you didn't have to buy health insurance.  But that didn't mean you weren't in the health care market.  If you didn't buy health insurance, even if you didn't visit a doctor or buy medicine, if you were out riding your bike and got hit by a car, an ambulance would come and take you to the hospital and do emergency surgery and do all of that without digging into your pocket to figure out if you had health insurance.  And if it turned out that you didn't have any savings to pay for the procedures and you were uninsured, well, that was called medical bankruptcy.  Your medical costs ended up covered, through higher cost of care for those who DID have insurance.  So how to deal with that? The answer is, simply, through a mandate.  Typically, people who didn't buy health insurance before ACA were young people who thought they didn't need it.  And those were the exact people insurance companies wanted to cover because chances were pretty good they'd make money off of covering young, healthy people.  By forcing those people to buy insurance, you end up subsidizing the costs of those who are more expensive to cover (i.e. older people), and you also end up keeping people from entering the insurance market only when they get sick.  So if you start with the idea that everyone is going to get health care, whether they have insurance at all, you end up inevitably with a system in which everyone has to buy insurance, and if you make everyone buy insurance, then you have to provide subsidies for poor people who wouldn't be able to afford it.  Organically, you end up with something that looks, well, pretty much exactly like the insurance reform portion of the ACA.

But that only covers reforming the market.  That part doesn't deal with costs.  So what's our cost issue? I think the problem is incentives.  Right now, health insurers (Medicare included) pay physicians and pharmaceutical providers by the procedure.  If Uncle Charlie goes to the doctor's office, gets 185 procedures and dies in 6 months, the doctor gets paid a whole lot more money than the other doctor who might give Uncle Charlie 3 procedures, but keeps him alive for 9 months.  So the incentive is to provide not just more procedures, but procedures with bigger profit margins.  That means, given a choice, MRIs instead of X-Rays, not necessarily because MRIs are better, but because they're more lucrative.  This is where critics usually step in and argue that the doctors are practicing "defensive" medicine because they might get sued.  That's also baloney.  Medical malpractice suits (insurance premiums, settlement payments, payouts, etc.,) and all associated costs combine to make up less than half of one percent of health care costs.  And, when Texas passed a law capping punitive damage awards in malpractice suits at $250,000, the number of suits shrank dramatically... but the cost of health care remained completely unchanged.

So what do we do? The answer is, rationing.  You can call it "death panels" if you like, but right now, we have remarkabkly little research on which procedures are effective and which aren't.  So the first step is doing that kind of research.  Which is actually in ACA, but has been demagogued as "death panels."  Figures.  The next step is aligning incentives so a market in health care can function.  That means setting up a system where physicians who get better results treating similar problems are compensated better, and those that can get those results with less cost can keep a chunk of their savings.  Of course, that's easier said than done, and that kind of system has to be designed by someone who understands the dynamics of health care markets a lot better than I do.  But I think that's the abstract goal, and it's one that tends to get lost by Democrats who claim single-payer is a universal elixir, and Republicans who want to invoke the "magic of the market" without bothering to figure out how the market in health care actually works.

Just as a last note, I think the best article I've read on health care cost control is this piece by Atul Gawande in the New Yorker a few years back.  If you read one article about health care cost control, this is the one.