The Illusion of Cost Control

Just as people are starting to notice that both the Republicans and the Democrats are off in never-never land about the fiscal deficit, so Robert Samuelson thinks that the Obama administration is dealing in illusions about cost savings in the health care reform package.

Here's the thing, and I've said this before (and I'll probably say it again), you can't reduce prices by increasing demand. According to the fundamental rules of economics, increasing demand (all other things being equal) causes increased prices. One of the reasons that health cares costs are as high as they are is that Medicare, Medicaid, and various employer-paid insurance plans have increased the demand for medical services. Providing another 30 million people with health insurance will increase demand that much more, and that means higher prices. Samuelson goes into this at a more detailed level.

In an article in the Atlantic I recently read (November 2009 issue, I believe), the author pointed out that the insured and the uninsured spent about the same amount of their own money on health care each year. The insured, however, spent about three times as much of other peoples' money than the uninsured. So, you can expect spending by those 30 million to quadruple once they have insurance, and that, together with the provisions disallowing "pre-existing conditions" clauses is going to push up costs.

Three Obstacles to Health Reform

I mentioned in my previous post that I had submitted an essay to The Washington Post's pundit contest. This is not that essay; it is the original version, before I realized that the contest had a 400-word limit. (This piece runs 655 words, or so Word tells me.) I hope you enjoy it.


I think I’m a pretty typical American, so far as my health insurance situation is concerned. I get my health insurance through my employer, and my share of the cost comes out of my bi-weekly checks in an amount small enough to cause me very little pain. I’ve been happy with the service I’ve gotten from my healthcare providers, including my radiation treatments for prostate cancer, though I was irritated to learn that my favorite eye doctor was excluded from the latest list of preferred providers. I think it’s really too bad that some people don’t have insurance, and I worry that my own insurance might either go away or become so expensive that I won’t be able to afford it.

There are problems with our current system, and I think something ought to be done about them. At the same time, I don’t want to wreck a system that seems to produce pretty good results most of the time. So I welcome the initiatives by the Obama administration and the Congress to reform the system. There are just a couple of areas in which I think the pro-reform forces (and their opponents) seem to ignoring the elephants in the room.

First, there’s the simple matter of supply and demand. If demand for a good or service goes up, what did our economics teachers tell us would happen to the price? The price will go up as well. What does the act of providing insurance to many uninsured people, or insisting that their employers and the insurance companies provide coverage, amount to but an increase in demand? As many as twenty-five million people who do not have insurance today will be able to walk into a doctor’s office or a hospital, flash a card, and demand service. That is a ten percent increase in the demand for medical services, and I would expect the prices of such services to increase accordingly.

The second elephant in the room is the rate schedule. Doctors and hospitals complain that Medicare and Medicaid pay less than the “cost” (read: list price) of various procedures and tests. Congress has declined to enforce limits on payments to doctors in the past. And some doctors won’t take Medicare patients. When people compare the U.S. system to that in other countries they need to note that the rates for some procedures are set much lower than those here, and that doctors and hospitals aren’t permitted to decline to treat people. One way to lower costs is to enforce a reasonable rate schedule and demand that all doctors and hospitals accept payments according to that schedule or lose their licenses.

Third, there is the shibboleth about coming between the doctor and the patient. We don’t want, says President Obama, to have any bureaucrat, government or private, coming between the doctor and the patient. Well, we may not want that, but that’s exactly what we need to do. We need to stop doctors from ordering unnecessary tests (especially when they own a share in the laboratory), from performing unnecessary procedures, and from prescribing unnecessary drugs. The total of healthcare costs is the total income of hospitals, medical workers, insurance companies, pharmaceutical companies, and the government agencies involved (Medicare, Medicaid, USPHS, Indian Health Service, and so on). In order to lower healthcare costs, we have to lower the incomes of some of those people and organizations.

There are a lot of specific improvements in the healthcare reform bills before the Congress. A lot of good things are going to be done. But none of those things will lower the cost of the healthcare system unless we face the three problems I have outlined above. Frankly, I don’t think that Congress is capable of dealing responsibly with problems whose solutions are likely to be very unpopular. But I can always hope that there are some adults up on Capitol Hill. I’d like to think that there are.

Catching Up with Health Care

Tomorrow is the first day of Autumn, officially, which means that today is the last day of summer. I've had a good summer, generally speaking, including two very good vacation trips - one to Tennessee and one to the Four Corners region. But I have been neglecting my blog, and my e-mail, periodical, and other reading has piled up. So I've been playing catch-up here in September. Earlier today I posted on a column by Daniel Gross, who writes for Slate and Newsweek. Today I have Mr. Gross's column from September 10, which is only (only!!!) eleven days ago.

This column should be a sobering reminder to those of us who rely on employer-provided health care programs that change is coming, with or without the reforms being pressed by President Obama and the Democrats in Congress.

President Obama's Speech on Health Care Reform

Courtesy of Slate magazine's news summary from Thursday, September 10, I have attached the Los Angeles Times lead story on President Obama's speech to a joint session of Congress Wednesday night.

I watched the speech, and I thought that the president got off to a very good start. The first thing he did was to remind us of two of the main problems with the current system:

1. About 45 million people have no health insurance, and many, many people are without coverage from time to time;
2. Although most people are satisfied with the coverage they have (and that means about 265 million people), many are concerned that they could either lose their coverage, or that their insurance won't cover what they need it to.

Some time ago, I posted about an article in Commentary in which the authors identified three major problems of the health care system; President Obama dealt with two of them. (The third, the increasing cost of Medicare and Medicaid as the population ages, Mr. Obama, like everyone else, sidestepped. That is a scary subject. I'll refer to that later.)

I agree that these are major problems, and I agree that the "President's plan," which is actually embodied in five - that's five - bills in Congress addresses them to a substantial degree. The plan would provide coverage for many of those 45 million people. It would not guarantee coverage for illegal aliens, of whom there may be 10 million in the country. It would prevent insurance companies from denying coverage to people with pre-existing conditions, it would require many employers to provide health insurance for their workers, it would provide subsidies to help poor people pay for their insurance, and it would even require people who don't want (and would say that they don't need) health insurance to buy it.

These provisions, taken as a whole, also deal with the number two problem: concerns about losing one's coverage. The president's plan does not provide for full portability of health insurance from one employer to another, but it does take steps to ensure that people don't lose coverage when they lose or change their jobs. In particular, the provision about pre-existing conditions should reduce the fear that one could lose insurance coverage by accepting a better job.

Taken by themselves, these provisions are going to cost money: $900 billion over ten years, according to Mr. Obama's figures. If we assume that the average employer's policy on a worker costs about $12,000 per year, and that the 35 million additional people to be covered work out to about ten million households, that would come out to $120,000,000,000 ($120 billion) per year, or about $1.2 trillion over ten years, about 33% more than the president's estimate. The total may be reduced by providing low-ball (low-coverage, high-deductible) policies for a lot of the people who are currently without insurance.

The pre-existing conditions provision means that insurance companies are going to have to cover people they have intentionally avoided in the past. That is going to raise rates for everyone, because it is going to increase the risk the insurance providers are taking on. I'm not sure anyone knows how much the insurance companies are going to want to set aside to cover this increased risk.

One of the more interesting points is that this plan does not impose a government run health care system on the country. The U.S. Government is not nationalizing the health insurance companies or requiring them to transfer their policies to a government insurance agency. The proposed public option would be an insurer of last resort, and would probably have trouble competing with the private insurance firms. What remains unsaid is that a very large part of the health care costs in this country are already covered by U.S. Government agencies, and it is their fiscal problems that are going to break the system.

Some 80% of health care costs, that is, payments to doctors and hospitals, nursing homes and other providers, not insurance premiums, goes to pay for care for people over the age of 75. These people are, by and large, not covered by private insurance, but by a combination of Medicare and Medicaid. (Some of them receive services from the Veterans Administration.) In addition, the government pays for health insurance for its civilian and military employees and runs a system of military hospitals all over the world. So the government is already paying something like 80% of the charges incurred by the health care system, and is a significant provider of health care services. These costs are only going up, and the premiums for Medicare are not rising to meet them. What happens if millions of Americans are told that Medicare won't pay for Mom's bills at the home, and that they're going to have to pay for her care out of their own insurance, or out of pocket? Nice question.

Of course, the real question is which of the various Congressional proposals will make it to a conference committee, and what kind of Frankenstein's monster of a bill will be sent to the president for signature. (Remember that Victor Frankenstein was a doctor!) That's when we'll see how serious these people - both Republicans and Democrats - are about reforming health care.

Health Care Costs - A Blast from the Past

After my previous post on this subject, on July 27, 2009, a friend wrote to point out that the US pays much more for healthcare than does France, and yet our measures of health outcomes are worse than those of the French. Is this a sign of a bad healthcare system?

As I pointed out in my earlier post, a lot of the cost factors are due to internal processes within the healthcare system. I also noted that universal insurance would, by increasing demand, tend to increase the price of healthcare.

In the comparison with France, we see another factor driving demand.

As regards the better health outcomes in other countries, such as France, a lot of people use that figure as if it were due to the health care system. Actually, a lot of that effect is due to people's behavior which keeps them out of the health care system altogether. For example, we don't have more people with diabetes because the medical care system treats diabetes patients badly. We have lots of diabetes patients because people pursue patterns of eating and exercise which lead to Type 2 diabetes. If they didn't do so, they wouldn't get into the health care system at all.

I tend to look at the medical care system in conventional economic terms, although I'm aware that there are some interesting anomalies in that system. If demand for services goes up, then the price will also rise. If, therefore, people in country X have a healthy lifestyle, avoid obesity, eschew risky behavior, their demand for medical services will be low, and the price of these services will also tend to be low. If the people in country Y eat too much, exercise too little, and subject themselves to chronic diseases, then they will end up demanding lots of medical services, and the price of medical service will rise.

I might also note that 80% of medical costs are attributable to a rather small number of elderly people. Thus, the miserable health outcomes numbers, and the high price of medicine, are due to people smoking, drinking, eating too much, eating the wrong things, and living sedentary lifestyles in the 1950s and 1960s. Lacking a reliable time machine, there isn't a whole lot we can do to remedy that situation.

Going forward, I might note, the health care system, as presently constituted, is not responsible for stopping us from eating fried chicken, which may be, with smoking, the single largest risk factor for diabetes, high blood pressure, and high cholesterol, which are, in turn, risk factors for heart attacks and strokes. Maybe the department of Health and Human Services should take on that task, including the fight with the department of Agriculture which is busy promoting the sale of unhealthy food. But the medical system isn't going to solve our social problems.

Where Are the Savings in Health Care Reform?

One of the problems with the health-care debate is that it is, as President Obama implicitly acknowledged the other day, about health insurance, not about health care. If one is interested in reducing the cost of health care, there is very little in the current debate, or in the legislation before Congress, that actually addresses that issue. The reasons that we aren't going to reduce the cost of health care very much involve problems with challenging our trust in our doctors, and problems with accepting higher risks of bad outcomes.

If you ask why health care costs are so high, you'll get all sorts of answers, some of them, to fall into Aristotelian parlance, about efficient causes, some about material causes, some about formal causes, and some, I suppose, even about final causes. I'm going to look at efficient causes, and I'm going to look at some comparative data. There are a number of studies that have shown that costs per person vary from state to state, as well as within states. Here is one example from 2001 http://www.ppinys.org/reports/jtf/2001/Table%2042.htm. At that time, the Medicaid costs per person served in the United States were $4,307. But that concealed a variance from Tennessee at $2,075, to New York at $8,961. According to recent reports, the two most expensive cities in the country for medical care are Miami, Florida, and McAllen, Texas. (Here's an article from the New Yorker about McAllen - http://www.newyorker.com/reporting/2009/06/01/090601fa_fact_gawande.)

Now, how do we get to the cost of something? The usual way is the number of items purchased, multiplied by the price of each item. If you buy six bags of mulch at $4.00 per bag, your cost of mulch is $24.00 (plus tax). In the health care area, the cost per item doesn't vary all that much from place to place, partly because the government and the insurance carriers set some limits on how much they'll pay for given procedures. So, McAllen is more expensive than other places because the doctors there order more procedures, more tests, more prescriptions for their patients than doctors elsewhere. So, the reason that some states have higher costs than other, and perhaps the reason that the U.S. as a whole has health care costs much higher than other countries, is that doctors order too many tests, too many procedures, and too many prescriptions.

If the cost of health care is highly variable, and if one of the major factors driving it up is that doctors prescribe more tests and procedures than are really needed, the obvious solution is to drive down the cost of health care by eliminating all of those extra charges. That is what HMOs were supposed to do, and that is why HMOs are hated and derided across the country. The problem here is very simple: your doctor makes money by prescribing these things. If your doctor refers you to a surgeon for gall bladder surgery, he gets a referral fee, and the surgeon gets a nice fee for himself. Not for everything, but for many of the things doctors order, the doctor has a financial interest the product. Just think about that for a minute - your doctor makes money by selling you medical services.

So, we can't really expect doctors to slash their own incomes by reducing the numbers of procedures they prescribe, no matter how many studies we do and guidelines we issue. What is needed is a third party to decide whether every test or procedure ordered by the doctor is really necessary, and to refuse the order if it isn't. Such a person is the insurance company spoken of with disgust, the government bureaucrat the AMA warns you against, but that is the only way to reduce costs, as long as doctors make their money by prescribing things. As I mentioned above, one problem with this approach is that it implies that your doctor may be ordering you to have tests or procedures you don't really need, and that may put you at risk, in order to keep up the payments on his mansion. Most people, I believe, don't even want to think about this possibility, because if they can't trust their doctor's advice they have bigger problems than meeting their insurance premiums.

The other option, of course, is to stop the fee for service system altogether. Stop paying doctors like auto mechanics, and they'll stop acting like auto mechanics, who will, as Click and Clack say, estimate the cost of your auto repairs according to the size of their boat payment.

This little essay just scratches the surface of this issue. Let me say one more thing: The current debate about reforming health care will do one thing, and one thing only. By increasing the number of people with some form of insurance, it will drive up the cost of health services by increasing the effective demand for them. So we're looking at massive tax increases or trillion-dollar deficits as far as the eye can see, unless we get real reform. And that kind of reform is not on the table yet.

Supply and Demand in the Health Care System

The Law of Supply and Demand lacks the physical power of the Law of Gravity, but it has a similar effect. Just as acting against the force of gravity requires the expenditure of energy, so opposing the force of supply and demand exacts a price. It is just as possible to affect market operations as it is to launch a rocket into orbit, but it can be just as expensive to do so.

The Law of Supply and Demand holds that the supply of a good varies directly with its price, while demand varies inversely with the price of a good. On the other hand, the price of a good varies inversely with the supply of the good and directly with the demand for it. To take a current example, if the demand for corn rises as a consequence of increased production of ethanol, the price of corn will tend to rise also. If sufficient new land is planted with corn, increasing the supply, the price will fall again.

Most proposals for reforms of the health care system in the United States seem to ignore supply and demand. Political candidates state that their proposals will both provide universal health care and lower costs. Since the provision of universal health care insurance coverage amounts to a large increase in demand for health care services and products, it is unlikely that, in the absence of countervailing measures, prices for these goods would decrease.

Insurance doesn’t provide medical treatment; it merely pays for medical care. Universal health care insurance would give 47 million additional people the ability to pay for medical care. That is a substantial increase in demand. As stated above, in the presence of an increase in demand, the tendency is for prices to rise. In the absence of increased supply, universal health care insurance will cause health care costs to rise.

A health care plan will be incomplete, or will fail of its intended effect, unless it also provides for some means to increase the supply of health care goods and services. Along with universal health care insurance, for example, the government could expand the U.S. Public Health Service, and the Veterans Administration could accept Medicare and Medicaid recipients in its hospitals. If we do not acknowledge the Law of Supply and Demand by planning to balance increased demand with increased supply, the law will exact its price in a host of unintended consequences.

Commentaries on Commentary: "Health Care in Three Acts"

Commentary is a magazine of strong, and sometimes unpalatable, views. It is, perhaps, most famous as a neoconservative magazine: Norman Podhoretz is Commentary's Editor-at-Large. Other prominent contributors in a conservative vein are Gabriel Schoenfeld, Joshua Muravchik, and Victor Hanson Davis. In addition to its political side, Commentary, provides criticism, book reviews, and a "Letters" department that prints the longest letters I have ever seen in a magazine. Even though I disagree with the contributors more often than not, I find Commentary fascinating because the articles are usually well thought out, well-written, and thought-provoking. On top of all that, Commentary provides insight into Jewish (and Israeli) culture and thought which is all terra incognita to this Gentile.

The tradition of commentaries is long and rich. I would imagine that most of my readers have read Machiavelli's Discourses on the First Ten Decades of Tito Livio. (If you haven't, run right out and get yourself a copy.) In the Discourses Machiavelli uses the stories in Livy's history of Rome since the founding of the city to generate and illustrate a variety of political and military lessons. Many of the essays of Montaigne are also based upon his reading in the classics.

I am not trying to establish the essays in Commentary as equal to Ab Urbe Condita. I am merely invoking the tradition of one author using the words of another as starting point for his own reflections. There are, of course, other sources upon which one may draw as an inspiration for one's essays. In any event, I plan to comment upon a number of articles from Commentary. Those who are interested in seeing the orginals are invited to visit commentarymagazine.com.

The February 2007 issue of Commentary, is rich in material. Joshua Muravchik leads off with "Our Worst Ex-President," attacking Jimmy Carter's Palestine: Peace Not Apartheid as the centerpiece in our 39th president's array of crimes of omission and commission. Two articles on Iraq: "Realists to the Rescue?" by Bret Stephens and "Is Israel the Problem?" by Amir Taheri follow. I can recommend the Taheri article, although the question posed in the title is somewhat disingenuous. It is interesting to compare Taheri to some of the articles and essays in Bernard Lewis From Babel to Dragomans, as a study in the tendency of the Arabs to displace the blame for their failures and shortcomings onto the Israelis, the British, and, naturally, the United States. Gabriel Schoenfeld weighs in with "Why Journalists Are Not Above the Law." Hillel Halkin contributes an essay about Tel Aviv: "The First Hebrew City." Terry Teachout, the regular music and art reviewer, has sent in "Hitchcock's Music Man", a nice piece for anyone who has seen North by Northwest recently enough to remember the way in which Bernard Herrmann's scoring helps to maintain the pace and tension of the film.

The books reviewed include Dangerous Nation, by Robert Kagan (a neoconservative himself); The Emperor's Children, by Claire Messud; Dean Acheson: A Life in the Cold War, by Robert L. Beisner; Resurrection and the Restoration of Israel: The Ultimate Victory of the God of Life, by Jon D. Levenson; and American Islam: The Struggle for the Soul of a Religion, by Paul M. Barrett.

The particular article I would like to discuss here is by Eric Cohen and Yuval Levin, "Health Care in Three Acts." In the interests of full disclosure, let me note that one reason - the primary reason, I enjoyed this article is that I have an analytic bent. The original meaning of "analysis" goes back to the Greek for "breaking down" or "taking apart." I don't have any problem with big, sweeping measures to solve a lot of problems, but I think they should be based upon a process in which the problems are disassembled into their constituent parts and examined severally. This is what Cohen and Levin do in "Health Care in Three Acts." The key sentence comes near the end of the first page of the article (page 46 of this issue of Commentary, for those who are following along).

"In fact, America faces three fairly distinct predicaments, affecting three fairly distinct portions of the population - the poor, the middle class, and the elderly - and each of them calls for a distinct approach."

They go on to further analyze the problem of the poor, in which they break the 46 million uninsured Americans into:

- those who have lost insurance with their jobs
- those who are not American citizens
- those who are eligible for for Medicaid and similar programs
- those ("many of them young adults under 35") who could afford insurance but don't buy it.

The problem of the middle class, on the other hand, is "the uncertainty caused in part by the rigid link between insurance and employment and in part by the vicissitudes of health itself."

Finally, the elderly face different problems based on costs and end-of-life issues.

As Cohen and Levin note, such disparate problems are not susceptible of a single solution.

Let me note at this point that the portability of health insurance, with some means-tested subsidies, would take care of many people both the "poor" (i.e., the poor and the unemployed). There is a program now, COBRA, which allows people to retain their employers health insurance coverage, if they can pay the premiums. Take off the time limits, add a subsidy for those who can't afford the premiums, and allow coverage to continue if a new employer does not offer a health care plan, or if the employee has a pre-existing condition, and you would both eliminate many of the 46 million uninsured, and ease middle-class anxiety about the prospect of losing coverage. Add to that a campaign to educate poor people about the programs for which they are already eligible, and you narrow the numbers a lot. The big remaining question is: Do we, or do we not, want to provide health care coverage for illegal immigrants?

Cohen and Levin opine, and I find them persuasive, that the biggest problem we face, the one we've done least to solve, and the one that is going to be a killer, is how to manage health care for the elderly. Again, we can break this problem down into its constituent parts, but the big problem is that we are not facing the problem at all As Cohen and Levin say:

"Neither socialized medicine nor a pure market approach is suited to America's three health-care challenges, while the bipartisan conspiracy to ignore the looming crisis of Medicare in particular will return to haunt our children." (Page 52)

Let me give you their last paragraph, as they seek to balance practicality and compassion in a complex system:

"Even as we pursue practical options for reform, however, it behooves us to remember that health itself will always remain out of our ultimate control. Medicine works at the boundaries of life, and its limits remind us of our own. While our health-care system can be improved, our unease about health can never truly be quieted. And while reform will require hard decisions, solutions that would balance the books by treating the disabled and debilitated as unworthy of care are no solutions at all. In no small measure, America's future vitality and character will depend upon our ability to rise to this challenge with the right mix of creativity and sobriety."