Not my father: David Goldhill’s father. In this stemwinder, Goldhill goes through some of the wacky incentives with which our health care system is laced. The title is somewhat misleading: although he does establish that American health care killed his father, most of the article is about incentives and he doesn’t literally establish that the result for his father would have been different had the incentives been better. Still, it’s a first-rate article, with keen insights on virtually every page.
Some highlights:
All of the actors in health care–from doctors to insurers to pharmaceutical companies–work in a heavily regulated, massively subsidized industry full of structural distortions.
To achieve maximum coverage at acceptable cost with acceptable quality, health care will need to become subject to the same forces that have boosted efficiency and value throughout the economy. We will need to reduce, rather than expand, the role of insurance;
For fun, let’s imagine confiscating all the profits of all the famously greedy health-insurance companies. That would pay for four days of health care for all Americans. Let’s add in the profits of the 10 biggest rapacious U.S. drug companies. Another 7 days.
If seniors were the true customers, they would likely flock to geriatricians, bidding up their rates–and sending a useful signal to medical-school students. But Medicare is the real customer, and it pays more to specialists in established fields.
Health care is an exceptionally heavily regulated industry. Health-insurance companies are regulated by states, which limits interstate competition. And many of the materials, machines, and even software programs used by health-care facilities must be licensed by state or federal authorities, or approved for use by Medicare; these requirements form large barriers to entry for both new facilities and new vendors that could equip and supply them.
Better information technology would have improved my father’s experience in the ICU–and possibly his chances of survival.
But my father was not the customer; Medicare was.
I don’t agree with all of his solutions. He wants to force everyone to buy health insurance and he wants the deductible on health insurance to be $50,000! I buy my daughter’s catastrophic health insurance plan, one for which neither she nor I gets a tax break–so you can’t accuse the tax system of causing us to overconsume–and we have chosen an annual deductible of $5,000. Nevertheless, his powerful article is worth reading.
READER COMMENTS
Shayne Cook
Aug 29 2009 at 8:00am
David:
What is a “stemwinder”?
Shayne Cook
Aug 29 2009 at 9:02am
More to the point, I also noted the logical inconsistency. Goldhill does a wonderful job of describing several significant problems with the U.S. health care industry. But then he proposes the U.S. government apply its coercive powers to compel U.S. citizens to both expose themselves to that system and to financially support its continued growth/vitality.
It strikes me that lots of folks, when considering significant, complex problems, quickly come to the conclusion that application of government coercive powers is the one solution – government coercive power as the one, all-encompassing, ever-elegant, universally applicable solution to every problem.
I rather prefer folks apply persuasion to induce my cooperation, rather than coercion. Persuasion seems to give me less of that, “being mugged in an alley” sensation. But perhaps that’s just me (and Adam Smith, but then, he’s dead).
Matt
Aug 29 2009 at 10:10am
Just out of curiosity, is banning insurance companies to travel across state lines constitutional? What is the justification for this?
Lauren
Aug 29 2009 at 11:24am
Matt asks a fascinating question:
I don’t have an answer, but I have some personal observations that may contribute.
I worked as an actuary for Travelers’ Insurance in Hartford, CT, in their health insurance division in the mid-1970s; and later with AAIS in Chicago–one of two “competing” authorized insurance rating agencies at the time. I started out as a just-out-of-college innocent and was lucky to have positive experiences side by side with a lot of smart, thoughtful, experienced actuaries. I have to admit, though, that I ended up as skeptical as you. Any time I tried to probe into why there were insurance rating agencies like ISO (the top dog) or AAIS (the underdog), in addition to actuarial probabilities assessed within a single company, I was discouraged or deterred.
Sometimes, and most believable of all the stories, I was told that local companies–within a small region which could be as small as a community or even as widespread as across a region over a few states–could not hope to collect enough data (for which the technical term is “experience”) to make it possible for an individual company to do a good job outside of its region of experience. Ten companies competing in a single region might within a course of only a few years each only have insufficient data to work out a reliable rate of injury/accident/incident. Hence there were special agreements across state lines to create agencies that would ostensibly objectively pool the data and let subscribing companies know the experience–the rates of accidents or health problems. ISO and AAIS, and probably a few other rating agencies were viewed as sensible ways to pool data across state lines.
I was never too comfortable with that, though the logic sounds clear. As a youth, I just enjoyed and needed having a job. But it became increasingly clear to me that there were special accessions that had been made to insurance companies and insurance rating agencies, political accessions that went way back and crossed state lines.
I second your idea that the history of regulation of the insurance industry is very complex, both across state borders and within states. People take for granted the status quo; but in fact, that status quo emanated from another era and may have in fact deterred competition in the emerging industry of health insurance.
David R. Henderson
Aug 29 2009 at 1:46pm
Matt asks:
Just out of curiosity, is banning insurance companies to travel across state lines constitutional? What is the justification for this?
I’m pretty sure that insurance companies are not banned from traveling across state lines. Rather, when you buy insurance from a company, wherever it’s headquartered, the company’s policy must comply with the law of the state that the consumer lives in. The current controversy is over whether consumers in state X should be able to buy insurance from company in state Y that complies with state Y’s laws.
Best,
David
Matthew
Aug 29 2009 at 4:07pm
I agree David, that was a great article, by far the best one I have read in the mainstream media about health care reform.
It is sad that his thoughts and observations are not at the centerpiece of the current debate, the “reforms” being considered mostly seem to move in the opposite direction to what is required to improve health care and control costs.
John Watts
Aug 30 2009 at 11:56pm
So what will it take to insert these ideas into the national discussion??
Merlyn Clarke
Sep 3 2009 at 5:49pm
As to John’s question, given the cacophony on health care, I’m not sure. But, for the heck of it, I’m faxing Goldhill’s article to my Senators and representative. Nothing like casting one’s bread upon the water.
Regarding an earlier comment that people shouldn’t be forced to have insurance, what about your auto insurance? The alternative is forcing other people to pay for your health care. The beauty of Goldhill’s proposal is that this insurance would be infinitely less expensive than we now pay (remember to calculate what your employer does NOT pay you because he/she is paying premiums on your health care package, plus the cost of medicare taxes) plus the fact that you would be building up a health savings account that, after a certain ceiling, you could spend, or you could pass on to your heirs if you happen to be lucky enough to die healthy. We now kiss off 1.7 million dollars in health insurance premiums with questionable returns, and nothing left afterward.
Amritpal Singh
Sep 10 2009 at 6:02am
@Shayne Cook
I don’t find it inconsistent at all that he proposes a requirement for all US citizens to invest in Health Savings Accounts (HSAs) because they are technically not insurance. They are more similar to a 401k except that you can withdraw before retirement ONLY for legitimate medical reasons.
Otherwise, he believes that only catastrophic insurance be provided by the government (above $50,000). Since so few people would actually reach this amount (especially if market pricing and competition bring the price of health care down as it should), this would be an insignificant amount.
Finally, he proposes that medicare and medicaid be changed from insurance programs to direct subsidization plans handled on a case by case basis therefore contributing to subjecting health providers to markets that set prices eliminating what he determines to be distortions caused by the insurance institution in this nation.
For everything that falls in between an HSA and the government plan, he proposes that people pay for their health care the only other way they have: credit. Again, this may not be practical today since the prices of today’s health care are incredibly inflated and overpriced, but once the health care industry is subject to true competition, market prices would bring these prices significantly down and this becomes far more practical of a solution.
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