Once upon a time I interned for a state senate healthcare chairman. During that internship and since, I have consumed information about healthcare policy with a somewhat unnatural interest. But unlike most people who write about policy, I now work full time as a hacker/entrepreneur. As such, I am beholden to no faction ( except for the nefarious hackers cabal). Thus I give to you a piercing, unvarnished analysis of the Great Healthcare Debate.
Understanding the American System of Healthcare
The United States healthcare system is not a free market . Those who call it a free market, lie (well, more likely they are just deluded). The American system is one part socialist and three parts guild and cartel. There is no laissez faire to be found this side of homeopathy. Medical companies and associations have government endowed privileges, rights, and monopolies. For example:
- The AMA has put strict limits on the number of doctors allowed to graduate each year. The American population has grown by ~40% in the last thirty years, yet the number of graduates has remained flat. Doctors have the monopoly privilege of dispensing certain kinds of life saving elixirs and procedures. The supply cap generates a huge transfer of wealth to the doctors and the medical schools. Worse, in America Medical school comes on top of four years of college, which drives the price of creating new doctors far above the cost in other countries.
- “Certificate of Need” laws prevent hospitals from adding new MRI machines. Big urban hospitals lobby Congress to ban startup specialist hospitals. Hospitals lobby cities to ban low cost, Walmart-style walk-in clinics.
- A web of regulations grants privileges to existing insurance companies and make it very hard to compete. Laws prevent health insurance companies from competing across state lines. Government tax breaks and approval processes favor incumbents. Hospitals give discounts to big insurers and charge people paying out of pocket multiples more.
- Many states have mandates that require insurance companies to cover certain treatments. Yet numerous studies have shown that a large amount of healthcare simply has no value-add. A RAND study that compared people who had everything paid for versus people who had to pay for care out of pocket, showed that the people paying out of pocket consumed half as much care, yet had the same health. Cross country comparisons show that Singapore spends one quarter per capita what America spends, yet they live longer. Mandated treatment simply forces higher premiums to cover care people do not need. For instance, a while ago I underwent an MRI that I never would have done if I had to pay the two grand out of pocket.
The various levels of government spend ~8% of GDP on healthcare. This is comparable to many other developed countries with single payer or socialized care. Yet that level of spending only manages to cover 28% of the population. The New Yorker has a great article explaining Medicare’s utter inability to control costs and spending. Politically the administrators running Medicare have very little incentive to override a doctor’s recommendations for treatment. The money does not come out of their pockets, and no one wants to be the subject of 60 Minutes special about how they denied someone cancer treatment. So Medicare pays for any procedure a doctor prescribes. The only check is Medicare fighting to underpay for the procedure, but that’s not much of a check.
Even if the non-government sector operated with Singapore-like efficiency, that would still push total spending up to 10% of GDP. But when you add the supply caps the large amount of government spending simply drives up the cost of care. The other 75% of the population must then buy care at a price that has been bid up by Medicare/Medicaid/VA. And they must buy more than they want, thanks to mandatory coverage laws. They use a system that is designed to produce procedures in order to get insurance re-imbursement.
An analysis of the proposed plans
All the plans proposed by Congress or Obama include a mandate. The mandate is nasty. Massachusetts passed a mandate several years ago. The healthcare industry has lobbied that a “certified” insurance company must cover a huge range of dubious medical procedures. As a result a middle aged, single, freelancer has to pay premiums of around $600 a month. The mandate ends forces me to transfer money from my wallet to healthcare industry’s coffers, whether I actually want the care or not. For some families the premiums have risen so high that they have decided to forgo insurance, pay the tax penalty, and pay out of pocket.
On the plus side the plan will help those of the Americans who slip through the patchwork system without being covered. The horror stories are real. But remember, the vast majority of those without insurance end up getting care. The problem is the enormous financial stress it places on them. But if you mandate insurance and do not control costs, as Massachusetts has done, you instead force financial stress on everybody.
The plans also miss the simplest possible change that could make healthcare costs go down: raise the limits on the number doctors that graduate each year. Even better, eliminate medical school requirements entirely. Simply require that doctors pass a rigorous set of tests and undergo a residency. Whether they learn their knowledge from a book or from a professor is up to the prospective doctor. Alas, neither Democrats nor Republicans would dare mention such a measure. The power of the doctors guild waxes strong.
The actual costs savings ideas included in Obama’s plan are a joke. Preventive medicine does not save money. Malpractice does not eat up a huge percentage of spending. The Medicare oversight commission the plan would create is completely toothless: “The Commission will not be authorized to propose or implement Medicare changes that ration care or affect benefits, eligibility or beneficiary access to care.” The basic problem is basic supply and demand math. As long as the cap remains in place, and the government spends 7% of GDP yet covers only 25% of the people, costs will remain ridiculously high. If the government spends another $100 billion a year, costs will go up even further. This is basic logic. If you want to cut costs, you must start by spending less, not more.
The core problem with American healthcare is cost. With high costs you cannot subsidize care for everyone without driving effective marginal tax rates on the working class through the roof. With high costs, people decide their better off without insurance than paying premiums. Worse, while coverage can always be expanded further, cutting spending is political death, because all spending is someone else’s income. The Congressional plans make the spending/cost problem significantly worse, and in a way that will be impossible to reverse. By killing off catotrophic insurance plans, it eliminates any way of controlling spending by allowing consumers to choose which types of procedure are really worth the money to them. Going forward consumers will forever be mandated to throw their money into the coffers of the healthcare industry.
And even if you disagree, and think the pros of the plan outweigh the cons, almost everyone will admit that this plan is far, far away from actually giving America the ideal healthcare system.
The proposed plans are more regulations, subsidies, exchanges, etc, on top of a broken existing system. But the current system is riven by dozens of different factions, thousands of regulations, and layers of legislative gray goo. In a word the provlem is entropy. You cannot defeat entropy with incremental reform.
The easiest solution is to hire the folks managing Singapore’s healthcare system. Give them free rein to redesign the American healthcare system from scratch. Then implement the plan exactly. Singapore’s system is the best in the world, they spend 1/4 what we spend in America yet live 4 years longer and have the same infant mortality. (source)
Another idea is to adopt Plan Finbarr:
- Create a healthcare exchange. Any insurance company can get listed on the exchange provided it meets the following requirements:
- it must accept any person asking for care
- it must publish audited data on customer satisfaction and customer mortality rates
- it must have a strict, pre-defined separation between profits and reimbursements. So the company must declare up front, “We contractually guarantee that 75% of all premiums are allocated towards reimbursement, while all administration, marketing costs, and profits must come out of the other 25%” This separation eliminates the conflict of interest that exists with most insurance companies. The insurance company does not profit by denying you care, because it must spend the money on reimbursement anyway.
- Take the existing money from the medicare and Medicaid taxes and use it to give every American a voucher. The amount of the voucher depends on age. Young adults might get $500 per year, senior citizens $6K a year. The voucher can only be used to buy insurance from a company listed on the exchange. ( Obviously, this change would have to be phased in over time, current grandfathers would be grandfathered).
- Taxes and spending are both capped. Rather than increasing taxes to meet the rising costs of healthcare, simply decree that whatever the 7% medicare/Medicaid tax buys, it buys.
- People are free to buy any additional insurance or care that they desire, out of pocket
- Require hospitals to have a list price for all procedures. Prices higher than the list price are only enforceable if the customer agrees to the change before the procedure.
- Remove all other mandates and regulations. Insurance companies will be able to offer any coverage they desire, as long as they are upfront about it. It’s up to individuals to pick an insurance company that meets their preference. Since everyone has a voucher, and the insurance companies can only compete over care offered, their incentives are exactly aligned with the consumer.
- Remove all supply caps. If you sign a waiver, you are free to get your meds from a witch doctor. Only by allowing a opt-out, can you ensure that licensing really serves the interest of quality care, rather than that of a guild monopoly.
Under this plan, every American gets covered with insurance that exceeds Singapore’s insurance in quantity. Supply caps are lifted to allow costs to fall back down. It increases competition among providers. Insurance companies will innovate in coming up with different ways to maximize care for the money spent. And it doesn’t require any new taxes. Perhaps Obama would like to hire me as a policy advisor?
There are dozens of different policies that could cover everyone, contain costs, and be acceptable improvements to even hard-core free market types. Megan McArdle offers a plan that’s simple genius: “Any medical expenses more than 15% or 20% of income, get picked up by Uncle Sam.”
Yet none of these plans are being proposed, and none could pass.
Why the above solution will never happen
Three forces shape the actions of American government: populism, factional interests, and institutional expertise. Populism is generally Republican: Sarah Palin, talk radio, Ron Paul, mega churches and tea parties. Institutional expertise is generally Democratic: civil servants, universities, NPR, the NY Times, MSM, the Hill staff, and the original Brain Trust. Factional interests are cross-partisian: the AMA, the AARP, nurse unions, big insurance companies, Wall St. banks, etc.
Let’s examine how each force will react to Plan Finbarr.
We’ll start with the institutional experts. The selection process for any official agency ( universities, civil service, NY Times) rewards thinkers who stay close to progressive thinking. People who believe in changing the world via markets do a startup or go into business. People who believe that policy should be managed by a caste of experts go into the official institutions. These people tend to select people who think like themselves as successors. Thus progressive/institutional thinkers rarely generate creative, market oriented solutions as Plan Finbarr. Instead too many official experts busy themselves with proving that the free market cannot work (unless carefully managed by a cadre of official experts) and singing the glories of a European style plan (while somehow leaving out market oriented Singapore).
Plan Finbarr is a simple plan. It has few roles for commissions, agencies, departments, etc. It aims to set a few basic rules that align incentives properly, and then takes a hands off approach. Plan Finbarr wipes out Medicare and Medicaid as they exist. These are deeply rooted Washington programs. Bureaucracies do not commit hari kari. Any simplification or consolidation eliminates both jobs and power for official experts. All the permanent Washington staff operate in a world where these agencies are taken for granted. To abolish them would be unthinkable.
The “populist” forces are either dumb, fickle, impatient, or both. Or at least the people who make noises around election time are both. The populists are the ones uttering phrases like the now famous “I don’t want government involved with my Medicare”. In general, Plan Finbarr will be a huge benefit to the people. The silent majority – not the experts or the interests – are the main constituents and beneficiaries of the program. But the problem is that the wrenching change happens first, and the benefits only come later. Some, especially those about to retire, will lose out at the beginning (after the payments are cut, but before the costs have fallen). Mishaps will happen in transition. Those mishaps will be exploited by any partisan opponent. The benefits will only be obvious five or ten years later. But by that time, the people who created the plan will have been voted out of office.
Every so often the popular web site Facebook.com dramatically changes its interface. The moment it comes out, people hate it. For weeks they gripe and moan. The facebook.com management assumes the air of Frederick the Great and says, “They are to say what they please, and I am to do what I please.” With time the users grow used to it, and enjoy it more than ever. Political decision making cannot operate the same way. The Congressman who votes for Plan Finbarr will likely not make it past the next midterm.
Finally, we get to the factional interests. Any successful plan to reform healthcare by definition will reduce costs. But every cost is another person’s income. Plan Finbarr aims to cut healthcare costs by half. The healthcare industry will lose out over $700 billion a year. Obviously, they will not be happy. The insurance companies, doctor’s associations, nurse unions, pharmaceuticals, big city hospitals, etc, will all join forces to fight the plan to the death. They will spread FUD (“Plan Finbarr allows tax payer money to be spent on witch doctors!”), spam Congressmen with issue papers, and threaten to throw their vote as a block to eject any politician who supports the plan. Some Congressmen will break out of fear. Others will break because the lobbyists convince him. In American politics, the concentrated interest always defeats the general interest. The concentrated always knows what’s at stake. The general interest is disorganized and deceived.
Neither the institutions nor the factions are malevolent or stupid. The experts do not wear hooded black robes and jealously guard their power. Rather there is a selection effect within each agency that rewards people who believe in the mission of that agency. The experts would all sincerely believe that Plan Finbarr would cut essential agencies and lead to ruin. Likewise, the factions do not cackle and laugh as they count the coins they rob from the American people. Rather they simply view it as their job to represent their own constituents in Congress. They believe that if all sides represent themselves, what comes out is a reasonably acceptable balance.
Entropy is the Enemy
There is one commonality among all three forces. All oppose entropy reducing changes. The institutional experts oppose entropy-reduction because it would require cutting jobs and consolidating power. The populists oppose it because the downsides of change hurt more than the upside in the short run. The factions oppose it because it will cost them money.
The Obama plan is all entropy increasing – it adds another commission, more money, and more regulations. Virtually every proposal, from either the right or left, that has ever gotten anywhere in Congress has increased entropy. The key difference between the American system and the European systems is not that the European system is government run and the American system is a “free market”. The difference is that the American system is far older and has more entropy. With every incremental reform, entropy increases, the system becomes more complex, the layer of legislative gray goo grows thicker. The ratchet never turns in reverse.
In 21st century American policy, only one final question matters. How can entropy be reversed?
UPDATE: JRobinson on New Mogul pointed out that the number of doctors has actually increased. I was looking at the number of new graduating doctors, which has indeed been capped ( source). I have updated the post accordingly.