An Unrealistic, Impractical, Utopian Plan for Dealing with the Health Care Opportunity

Felix Salmon deploys me as a weapon in an internecine struggle with his fellow Portfolio magazine writer Russ Mitchell Kevin Maney by blogging a piece of our coffee yesterday at Strada, at the corner of Bancroft and College, in Berkeley:

Finance Blog - Market Movers by Felix Salmon: How to Deal With Rising Healthcare Costs - Portfolio.com: Russ Mitchell weighs in on the subject of healthcare today, and specifically the problem that healthcare technology is driving prices up so far and so fast that at present rates it won't be all that long until there's no money left over for anything else. Mitchell's solution... is, in a nutshell, better healthcare for the rich.... "A real menu of health care packages, so people can choose from a variety of programs matching their needs with their ability to pay, from basic Mazda to luxury Mercedes. Employees (and the government, for the uninsured) can decide what packages they'll provide for how much."...

By coincidence, I'm in Berkeley myself right now, and took the opportunity to have coffee yesterday with Lance Knobel and Brad DeLong.... Brad painted a picture of people having spare eyeballs and kidneys stored... in a hospital basement... to... replace the existing ones if they failed for whatever reason.... I'm sure I'll get the details wrong, but in a nutshell, Brad would like to see a health insurance plan or plans in which the deductible is very large: 20% of any individual's pre-tax income in the previous year. Insurance would... [be] against catastrophically large medical expenses, as opposed to the present situation, where consumers have no real skin in the game and therefore no incentive to try to drive down prices. Where consumers do pay their own money, Brad notes, as with laser eye surgery, prices have a tendency to come down quite impressively.

Brad's system isn't perfect, of course. The cost of very expensive procedures would probably not come down much, since people would be losing their entire deductible anyway.... [M]any people might end up not getting necessary healthcare because they didn't want to pay for it. But it's still a very interesting idea which tries to seriously tackle the problem of health-cost inflation – an area where the present health plans from Democratic presidential candidates are quite weak...

Well, now that I am outed, let me explain. First, it's definitely not a plan, and it's certainly not a proposal for the current or any forseeable future policy and political environment. Think of it as a utopia--and think of it as a utopia coming from a guy who is not a real health economist but has an undeserved reputation because he was good at translating the economese spoken by real health economists like David Cutler, Sherry Glied, Ken Thorpe, Len Nichols, et cetera in a way that made it intelligible to senior Bentsen aides like Marina Weiss and Michael Levy.

So here it is:

20% Deductible/Out of Pocket Cap: The IRS snarfs 20% of your family economic income. 5% of it is an increase in taxes (but that replaces your and your employer's current health insurance premiums). 15% of it goes straight into your Health Savings Account. That HSA is then used to pay all your family health bills. If your expenses in a year are less than what's in your HSA, the balance is rolled into your IRA (or, if you prefer, returned to you with your tax refund check).

Single-Payer for the Rest: If your HSA is emptied and you still have more health bills that year, the federal government pays them. The main point, after all, is insurance: if you fall seriously sick, you want right then and there to be treated whether or not your wallet biopsy is positive.

Sin Taxes: on Tobacco, Gorgonzola, Three-Liter Bottles of Liquid High-Fructose Corn Syrup, Tanning Clinics (Melanoma), et cetera: Sin taxes (and, perhaps, someday general revenues) pay for an army of barefoot doctors and nurses and mobile treatment vans roaming the country, knocking on doors, and providing preventive and other long-run lifestyle services for free: Let me examine your prostate. Mind if I check your refrigerator and tell you how to eat healthier? Have you exercised today? I'm a Pilates instructor, and we could do a session now? Are you up on your immunizations? Anybody here have a fever and need antibiotics? Come on out to the van and I'll clean your teeth." The idea is to make the preventive care cheaper-than-free, to insure that nothing with a high long-run benefit/cost ratio gets left undone because people would rather get a bigger check the next April to use to buy an HDTV.

A Lot of Serious Research on Best Public-Health, Chronic-Disease, and Hospital Practices: Made easier, of course, by linking the payment records from the health branch of the IRS to hospital records to the wirelessly-transfered logs from the barefoot doctor vans.

That's it. No deduction for employer-paid health expenses. No insurance companies.

The key is that we face not a health-care financing crisis but a health-care treatment opportunity. Technologies are going to do marvelous things: we are going to have livers grown from our own tissue on reserve in hospital basements in case we go picnicking and eat the wrong mushrooms. We need to figure out (1) how to spread the benefits of current and future medical treatment options as widely as possible while (2) also making sure that a lot of thought and energy goes into figuring out what effective treatments have the highest benefit/cost ratios--i.e., cost least--because those are the ones we can collectively afford to do the most of, and while (3) making sure that we collectively earmark as much of our total resources to health as we really want. Government programs are good at (1). Markets are good at (2). And insurance is good at (3) if we can deliver the right incentives to insurers. These three goals are in considerable tension.

The package above strikes this relatively ignorant economist as likely to give us the best chance of getting as close as possible to utopia.

Why the 20%? Because I am very impressed by the use of technology to drive the cost reductions--which means the reductions in doctor and nurse time: the increases in the number of procedures that a given treatment unit can perform, and thus in the number of people whom we can, collectively, treat--in beneficial-but-optional areas like eye surgery and lenses. It does seem to matter that consumers are cost conscious and economize when they have financial skin in the game. This is the mother of all Health Savings Account proposals.

Why the barefoot nurses? Because there are an awful lot of games where we don't want economization. This is the mother of all public-health and subsidize-preventive-medicine proposals.

Why single-payer above 20%? Because I think there's no space left for insurance companies. Insurance executives' and actuaries' incentives are horribly wrong--they are either to figure out how to exclude the sick from their coverage or to skimp on preventive stuff because twenty years hence the patient will be covered by some other company. You want doctors to have incentives to deliver necessary and appropriate care better. You don't want insurers to have incentives to deliver shoddier and cheaper care in hard-to-monitor ways.

---

But for the current political climate, I like Obama and I like Edwards (and I am likely to like Rodham Clinton too, when it emerges): either they would succeed enough to get us to a much better place than we are at now, or if they fail they will fail in interesting ways that will make it obvious both policy-wise and politically what the next step is.

If, for example, we were to adopt Obama's plan and it were to start leaking money because young healthy yuppies were going uhcovered in large numbers, it would be clear that the needed fix was a mandate. If Obama's plan were to start leaking money because insurance companies were using the Health Exchanges and figuring out how to insure only the healthy while dumping the expensive sick into the the public part, that would create the--currently nonexistent--political will to shut the health insurance companies down.

And I am not a real health care economist. I just play one in the weblogosphere.

Comments

[spencer]

There are a whole host of technology optimist out there on health care. But on some points I really have to question their reasoning.

A big problem is that new, breakthrough technology is expensive. In most technology applications like computers we follow a well established pattern. The first users are willing to pay a high price and the market works fine. Over time the market expands and concurrently economies of scale kick in and prices also fall that leads to an even larger market. This works fine for things like computers and consumer electronics where the eventual market is for several million units a year. But for many of the new technologies in health care the eventual market is just for a few thousand, OK maybe a couple of hundred thousand units. But this means the standard model of expanding to large scale output with large economies of scale and falling prices will not work for these new technologies. In something like computers even after you go through several generations you have still only scratched the market and can still look forward to selling millions of units. But with many of the new medical technologies the market is so small that it is quickly saturated and you reach a limit on the scale of production and falling prices in short order.

So if you are a technology optimist how do you get around this problem?

[Star Lawrenece]

All of this seems so theoretical to you people and to Giuliani and some others with the blather about owning our health care and that stuff. In the real world, I have a policy for the uninsurable that was underwritten by tobacco money in AZ and now is in the red. I pay $700 a mo for it...almost $9K a year. They are now going to bump premiums another 20%, change it to include high deductibles, 10% coinsurance, this that and the other unaffordable thing. I will probably have to go without ins for the first time in my 25-yr career as a writer.

Oh, and before I lose it, I better decide whether to have my eye taken out or if I can continue to treat my multiple eye problems. Hurry up--eye in or out....Time's awastin', plug about to be pulled, come on, make a decision. Wonder if you guys or Rudy ever faced that?

We need to let everyone buy into Medicare if they want to...that is expensive out of pocket, too, but better than some of this.

[Cranky Observer]

> But for many of the new technologies in
> health care the eventual market is just for
> a few thousand, OK maybe a couple of hundred
> thousand units. But this means the standard
> model of expanding to large scale output
> with large economies of scale and falling
> prices will not work for these new
> technologies.

Some do and some don't. The first MRI (then called NMR) machine in Chicago took up a small office building, had a 3 month waiting list, and cost thousands of dollars per scan (maybe 10s of thousands; can't remember). I suspect that within 5 years (2012) there will be knee/elbow-sized MRIs at your corner Walgreens, the results zapped a radiologist in India to read and send to your doctor.

Blood oxygen monitors: $3000 fifteen years ago; available for $75 in aviation catalogs today.

The question is why some medical technologies come down the price curve and some don't. That might be a good thing to study.

Cranky

[David Lloyd-Jones]

Spencer,

New breakthrough technology is not expensive. New breakthrough technology always and everywhere does stuff that was done before at a radically cheaper price.

The telephone replaces the servant carrying a cleft stick on horseback. The computer replaces the roomful of young women at rows of tables in numerical work, or the trip to the library for personal use. And so on.

Your problem with medical devices is that they aren't breakthrough technology. What is it you suppose is "broken through" by a multi-million dollar machine that slightly improves doctor's guess about the size of a tumour, say? Where's the "technology" is surgeons charging tens of thousands of dollars for temporarily popular and complicated routines du jour?

Brad,

Congratulations on positing high fructose corn syrup as a candidate for sin taxes. Why shouldn't Coca Cola be taxed like beer? Indeed more: Coke doesn't have the medical benefits of your daily shot of ethanol.

But why 10% of income as the deductible? Overall medical costs (as opposed to insurance company overheads) are never more than about 10% of anybody's GDP. Surely half that is a high enough deductible.

[David Lloyd-Jones]

Spencer,

New breakthrough technology is not expensive. New breakthrough technology always and everywhere does stuff that was done before at a radically cheaper price.

The telephone replaces the servant carrying a cleft stick on horseback. The computer replaces the roomful of young women at rows of tables in numerical work, or the trip to the library for personal use. And so on.

Your problem with medical devices is that they aren't breakthrough technology. What is it you suppose is "broken through" by a multi-million dollar machine that slightly improves doctor's guess about the size of a tumour, say? Where's the "technology" is surgeons charging tens of thousands of dollars for temporarily popular and complicated routines du jour?

Brad,

Congratulations on positing high fructose corn syrup as a candidate for sin taxes. Why shouldn't Coca Cola be taxed like beer? Indeed more: Coke doesn't have the medical benefits of your daily shot of ethanol.

But why 10% of income as the deductible? Overall medical costs (as opposed to insurance company overheads) are never more than about 10% of anybody's GDP. Surely half that is a high enough deductible.

[David Lloyd-Jones]

Spencer,

New breakthrough technology is not expensive. New breakthrough technology always and everywhere does stuff that was done before at a radically cheaper price.

The telephone replaces the servant carrying a cleft stick on horseback. The computer replaces the roomful of young women at rows of tables in numerical work, or the trip to the library for personal use. And so on.

Your problem with medical devices is that they aren't breakthrough technology. What is it you suppose is "broken through" by a multi-million dollar machine that slightly improves doctor's guess about the size of a tumour, say? Where's the "technology" is surgeons charging tens of thousands of dollars for temporarily popular and complicated routines du jour?

Brad,

Congratulations on positing high fructose corn syrup as a candidate for sin taxes. Why shouldn't Coca Cola be taxed like beer? Indeed more: Coke doesn't have the medical benefits of your daily shot of ethanol.

But why 10% of income as the deductible? Overall medical costs (as opposed to insurance company overheads) are never more than about 10% of anybody's GDP. Surely half that is a high enough deductible.

[urban legend]

Moron seems to forget that while 20% of $200,000 may be $40 K, 20% of $10,000 is $2000. Anyway, beneath it employers and insurance companies will offer "gap" insurance, with variable deductibles and co-pays for variable premiums that are far, far less than today because of the cost ceiling. Use Medicaid to fund gap insurance for the poor and unemployed. Or sometimes hospitals will have to eat $1K or $2K.

After we get some experience and free up hundreds of billions getting out of Iraq, etc., plus re-taxing the rich at the level to which they should be accustomed, we can have the political battle on how far we bring down the deductible on the catastrophic insurance.

The thing is, it's the insurance that comes first. Job No. 1 is that everyone must be insured, forever and ever, against the catastrophic loss that will wipe them out financially. Everyone who might get fired tomorrow -- that's everyone -- shares that need. In other words, "Lennie -- millions and millions of voters." Go for the votes first, which means focus completely on the insurance first. Let the good government cost-containment stuff tag-along later. (Some of that will happen anyway as Kerry said, just from rationalizing the system.)

So, considering the level of brutality in the world we have now, Brad is definitely on the right track. Even a conservative should recognize that there are some times when using our government to insure ourselves against huge risks makes sense. We do it against old-age poverty, and everybody loves it. Why not against catastrophic loss from a health problem? Everyone who actually believes a candidate will succeed in doing it will vote for that candidate. That's a lot of votes. The plan is simple, which gives it a good shot. "Universal lifetime catastrophic health insurance." I love the smell of a a simple universal health insurance plan in the morning. It smells like . . . victory!

[ken]

That a truly dumb plan.

It is not designed to work. It is designed to make Brad DeLong look like a serious thinker about deep issues.

Health care plans that work start with extending Medicare to everyone. Everything else is just posturing.

[John]

OK, "smart" Ken, how do you pay for extending Medicare to everyone? Brad was honest about his method -- what's up with your silence?

(awaiting the "tax the evil rich" and "more regulation!" response)

[ken]

John,

Medicare is the least expensive way to provide the best medical care in the world. That is what it does for everyone 65 and over in America.

As for how do we pay for it? Well, how do we pay for health care now?

We just redirect that money to Medicare.

[CapitalistImperialistPig]

I don't think it can fly. Twenty percent off the top is enough to put many low-income workers in the homeless category. If you're in that category, getting the money back at the end of the year is not much compensation for a year of living on the street and eating out of dumpsters. The rich will scream about their twenty (or five plus interest) percent too, and won't have much trouble pointing to the effect on the poor for support.

There are lots of sensible ideas here though. How about just making that twenty percent a little progressive?

[zinc]

There may be ways that consumers can bring down health care for a while .... but ultimately any cost savings will be un-done by the industry.

The elephant in the room that no one talks about is that health care is a monopoly. The medical profession regulates the price of healthcare through a system of licensing, laws, control of supply, and collusion. I laughed my ass off a few years ago when I read that the government was paying medical schools hundreds of millions to limit enrollment because there were too many doctors.

The health insurance middlemen is just a layer of added expense, and totally corrupt. My personal experience with United Health Care was bad, a company I will never pay another premium.

The government should look to foreighn providers to offer services in direct competition to the US monopolist, triple the number of doctors being educated, offer tax incentives for price cutting organizations that will make the "boutique" medical structure a thing of the past.

I know the AMA will never allow it. More money to the medical industry may not improve care or costs. It is a monopoly.

[CapitalistImperialistPig]

The uninsured, you might notice, have had "skin in the game" for a long time. How does your market theory explain why they pay five times as much for an MRI than my insurance company and I pay?

Sick people are in a very weak bargaining position.

[Jasper]

So, those of us who get sick get screwed out of a fifth of our income, and those of us who stay healthy get fat checks deposited into our IRAs? Am I understanding this proposal correctly? I must be missing something. I don't see what's so utopian about it.

[brock]

Prof. DeLong,

You're "impressed by the use of technology to drive the cost reductions ... in beneficial-but-optional areas like eye surgery and lenses."

But how well will this carry over to general medical care?

I suggest looking at a very similar industry, with rapidly advancing but expensive technology, but one where consumers very rarely have insurance, viz. veterinary care. Has overall spending on veterinary care outpaced GDP growth, as has health care for humans?

I don't have access to statistical data, but based on my experience and anecdotes, the cost of veterinary care is consuming a greater share of pet-owner's income. (A co-worker just had $2000 surgery performed on her dog, which had been eating sand.)

If that's correct, we can't expect to slow the growth of health care costs by putting consumers' "skin in the game."

[Keith]

Extend Medicare and Medicaid and achieve universal health care by having the government outsource major procedures to high-quality facilities in developing countries.

So you're guaranteed an operation in a very good Indian hospital. Want something better? Pay for it (or the insurance) yourself.

Done.

[another moron]

Huh, apparently my last comment was a little too, um, shrill for our host. Very well then, since I think it was an important (and I would think obvious, but apparently not) point, I'll restate it without the snark: "urban legend", above, has forgotten that some costs are not elastic. 20% of $10,000 may be "only" $2,000, but a person (nevermind a family) making $10k/year pays a much higher percentage of that income for food and shelter than someone making $100,000/year must. Taking $2000 out of their hands and then only giving it back to them at the end of the year if they've stayed healthy (good luck with that at $8k/year) is not, I think, good policy.

[Sonia]

A couple of points. Cost sharing has been shown in the Rand experiment and elsewhere to discourage effective and ineffective care.

While the high deductible option in the Rand experiment did not appear to have a statistically significant effect on outcomes, during the course of the experiment, changes in medical technology e.g. statins and improved blood pressure drugs, and better treatment of diabetes mean that "preventive" medicine really may improve health. Unfortunately preventive care really mostly means delaying illiness and death and overall cost savings should not be expected from most "preventive" medicine over a lifetime.

High deductible plans with HSAs mean that persons with chronic illinesses will end up with far less in their retirement savings accounts. Persons with chronic illinesses are likely to have lower income than otherwise similar individuals and switching to high deductible will tend to make matters worse. Traditional comprehensive employer insurance and most nationalized health plans somewhat level the playing field between the less and more healthy, provided the less healthy has the insurance. Why do we want a reform plan to excerbate inequality for workers currently with insurance?

If we really want to reduce costs it needs to be at the high end. Cost sharing at high levels of expenditures as in Medicare B without supplemental insurance would probably be the most effective way to reduce medical spending growth without heavy non-price rationing.

Single payer means the political process will even more heavily influence what is covered and what is not. Is this desirable? I wouldn't expect that, to name an example, back surgeons will suddenly agree to reduce surgery even though there is a fair consensus that back surgery is overdone.

[jonfernquest]

This is the third time in recent past that I have lapsed into understanding what is involved in the healthcare debate.

The first time was when my friend's wife died of a stomach problem after a month of hospital in and out in a developing country, also without a single diagnosis.

The second time was when Krugman explained the Edwards and Obama plans.

This third time is brilliant. Hope it is taken seriously.

Healthcare innovation is important and 1. we must think "rationally" about it, and the mobile prevention analogy helps you do this, 2. healthcare for the wealthy could benefit the poor in both the US and the world, by testing out new elective treatments

[Nat]

Skin in the game is a stupid concept. I am self employed, have an individual policy and skin in the game does not make me a smarter consumer. It makes me forgo treatment. When I seek treatment I follow the advice of my physician. I am not competent to question a gastroenterologist or oncologist no matter the level of my Google skills.

Might I suggest a few things that I have not seen discussed:

First, all medical training should be paid for by the federal government. No debt excuses for future Dr. Kildares. You wanna be a doctor, it's on US.

Second, no more expectation of charitable giving for medical care. No more laws that say 10% has to be pro-bono or whatever to retain a charter. Everything is paid for. Period.

No more special programs for needs based coverage. Every major city and county in America has a needs based entitlement. Plus Medicaid. End them. No more Ryan White or Breast Cancer programs in order to pay for care.

Negotiate a most favored rate from all of pharma. Everything is paid for so pharma no longer has to have charitable programs for ridiculously expensive drugs. And hospitals do not need to administer those programs.

Raise the level of compensation for Medicaid and Medicare. Pick a number, 10%, 20%, whatever. The Medicare payment level pisses a lot of physicians off. I think a more reasonable fee with vastly fewer paperwork headaches makes it much more pleasant to practice medicine. (It is absurd that a given procedure by a given physician costs different amounts for each patient depending on insurance plan.)

Very few small business owners have insurance in this county. The small auto repair shop, the independent trucker, the kiosk guy in the mall do not have insurance. If they do, it is through the city or county entitlement. Taxpayers are already paying for this coverage out of local sales and property taxes. Middle class earners do not qualify for these benefits.

Under no circumstances should the new single payer system be administered as an HMO. The whole concept just pisses people off.

Penalize poor use of the preventive services in the system. Failure to get a colonscopy between the ages of 50-55 costs you money on your income tax. Failure to get a kid vaccinated costs you money (it already can cost Medicaid eligibility.)

Reward better care with better fees. Reward more challenging practices or rural practices with better fees instead of penalizing them for a lower cost of living.

All malpractice insurance should be handled by the government. No physicians or hospitals have to pay a fee. What is at risk is a fine, or a license to do business, or jail time.

Yeah, and I like the idea of an extra special tax on high fructose corn syrup.

[Robert Waldmann]

Brad you do not want your name attached to that utopian proposal. I propose you claim you heard about it from your friend Milton Tze Tung.

Notice a key part of it (on which Mao and Friendman certainly agree) is the one plan for all so no adverse selection. Mitchell's Mazda to Mercedes approach implies that young healthy people will get Mazdas. His is a genuinely terrible proposal.

I don't know about the barefoot nurses going around offering to examine prostates. My guess is that you would have to pay people a whole lot of money to get them to do that job (the barefoot doctors were, you know, working in a command economy). Anyway, I suspect that you were mostly joking.

Cheaper than free preventive medicine sure (my thought when reading the high deductibles part). I would use cash prizes for reduced weight, reduced blood preassure, reduced blood glucose, reduced blood LDL cholesterol and quitting smoking). Public labs to test would be needed to prevent fraud.

On "skin in the game" you might want another example. Maybe laser eye surgery has become cheaper, because it is a new technology with naturally rapid improvement at first. Many things have become cheaper (like reducing blood cholesterol). One could look at how much money is saved in health care for the uninsured who certainly have skin in the game (hint I'd guess it is negative). It is an important issue and one example is not proof.

[mind]

Let's raise taxes and increase the size of the federal government, so that when the next neocon is elected, we have plenty of money for more wars of aggression! The best tax is no tax. If you want to eliminate poverty, stop supporting it.

[R. Stanton Scott]

Why is it that people think getting consumers' "skin in the game" would lead to a reduction in the cost of health care? Isn't health care expensive, really, because demand is so very inelastic--and providers get to decide how many new providers enter the market?

Simplistic, perhaps--and I make no claim of economic expertise--but it strikes me as silly to think that relating health care choices more closely with out-of-pocket spending will help keep costs down. This is because in the final analysis, people have very little choice about whether to consume health care, especially the most expensive items. When your heart stops you have to have it started again, and there is no time to compare products in search of the best quality and features for the price.

This means that providers can almost literally charge as much as they wish for their product. The problem isn't that technology makes health care more expensive--it's that when someone needs health care, they don't really make the purchase in a free market. Laser eye surger got cheaper because no one *has* to have it--and consumers can comparison shop.

What this is really about is rationing--whether we ration according to need, or ability to pay. Note that the system Mr. DeLong proposes here would still provide more health care to the rich, since they would have less incentive to keep costs under the out-of-pocket cap so they can get some of this money back.

At the end of the day, we face a collective moral question here: Is health care (and by implication life itself) a thing people can own and should have to pay for individually, or is it a basic human right that we should pay for collectively?

[bakho]

Preventive care is important to long term cost containment. Why not start in the schools? Why not have a school doctor that could examine each student once per year? Why not have a school dentist that would do a checkup for each student? This would also save parents time off work to take kids to medical appointments.

Parents could teleconference with the doctor/dentist.

[mike]

I think the plan is brilliant.

Folks, it sounds simple, and would involve some financial pain for lower income folks with medical costs near their deductible. But not devastating pain.

There would be a small opening for insurance companies to insure deductibles--"the gap" as commenter put it. But for most it would be most wise to self insure.

An interesting thing about the deductible being tied to income. It means there will be a big potential benefit from income inequality, with those of differing incomes keeping an eye on different kinds of health cares costs. Low-to-middle income folks will encourage competition for lower ticket item, as these will constitute the bulk of their costs. High income folks with high deductibles would watch bigger-ticket procedures. Yet, extreme outcomes for all would be fully insured.

And all the wasteful bickering between doctors and insurance companies, a growing share of medical expenses, GONE.

This plan is simple, brilliant, and would work well. The problem is insurance companies will never let it happen.

The small things are brilliant too--from sin taxes to barefoot doctors to unused deductibles being rolled into IRA accounts. This is policy that makes sense.

We need more good reporting of ideas like this and why they make sense.

[jim]

Lasik is doing too much work in your proposal. It's highly unusual. There's a large population could benefit and it's totally optional. There is a "willing buyer, willing seller" situation and lowering the price does bring in more patients, so it's worth investing in a way to lower the price. Other optional services haven't come down in price. Presumably the market for tummy-tucks is not large enough for it to be worthwhile investing in research to find a way to do it at a lower cost. That's normal in medicine. Look at the problem of orphan drugs. The market isn't large enough to support the investment manufacturing capacity.

Most medicine isn't "willing buyer, willing seller" anyway. I can't tell a doctor, while an appendectomy might well be beneficial, I think his price too high; when he can bring it down some, I'll reconsider. Even before the mess the insurance companies have made with "managed care", doctors' fees weren't set by a market. I remember my insurance in the '70s talked about reimbursing "usual, customary and reasonable charges". Doctors' fees were set by custom. We've now broken that custom, though, and have no way of recovering it.

While I like the idea of an army of barefoot doctors and nurses roaming the country, you have to recognise they can't be limited to the preventative scope you've outlined: "While you're here, doctor, can you just take a look at my knee?"

And if I'm going to pay the doctor, let me pay the doctor. The doctor to whom, after our encounter, I represent a remote reimbursement from a third party payer, once I have been abstracted into a set of procedure codes, will treat me differently from a doctor to whom, after our consultation, I write a check for services rendered. It may be wrong, but there is power to callous cash payment.

[kate G.]

I'm with R. Stanton Scott, whose posts I've admired elsewhere, I just don't get the necessity or the wisdom of the "moral hazard/skin in the game" argument especially for lower income people or large families. I read a long essay about it in the New Yorker and still couldn't see that it made any sense. The vast majority of people in this country don't get the basic healthcare they need precisely because health care, or the time to get it, or the bills associated with it, are a very high cost to most working people. Just taking time off from work when you work at an hourly wage or two or three jobs, is a very high cost. The dollar amount Brad is envisioning comes on top of those hidden costs. Most people would rather avoid seeing the doctor at all. We don't really have to worry that much about abuse of medical care and billing as much as we do people becoming incapacitated or unproductive through lack of basic medical care, do we?

There is a large baseline of health care costs for people in their childbearing years that won't be covered by 20 percent of their income (if they are poor or have several children). The costs to society of asking people to triage those costs, to ignore those needs, or to spend down the HSA to get to full coverage is just absurd. When your kid has asthma you'd either bust out the HSA in the first months of the year or, if you try to conserve on costs and doctors visits, you'd end up missing work or producing a sicker child and, eventually, a less productive worker.

Pretty much every health care expense I've had as an adult with children has been an entirely necessary health expense. I'm insured and I stgill avoid going to the doctor, often until what might have been handled easily has blown up into something serious. Choosing between cheaper options hasn't been *necessary* because the costs have been hidden, true, but its pretty clear from the items that have not been covered that cost is a factor for my insurance co. Letting me see the prices and pay for them out of pocket doesn't reduce the necessity for treatment X all it does it force me to choose between various options. if my optimal health, or that of my family, is the goal why should i be allowed or forced to choose less effective options?

I'd like to see full coverage for all child health expenses, for full yearly checkups for adults, for catastrophic care for everyone. No coverage for expensive or designer eyewear but full coverage for eye doctors and for one set of glasses every couple of years if people need it. Full coverage for preventive and emergency dental care and maybe subsidized coverage for cosmetic dental care given how important good teeth are to people getting and maintaining jobs where they have to be seen by the public.

I'd stop paying for unnecessary wars and tax the wealthy in this country at 40 percent on everything. Because that's the kind of person I am. If someone can think of a less painful way to get there I'm happy to entertain that.

kate G.

[c.l. ball]

I think people are missing the bigger picture Brad is painting -- his proto-plan would get rid of normal health insurance premiums that employers and employees now pay. I paid roughly 6% of my gross salary in medical insurance premiums; I assume my employer paid even more. That money becomes salary and investment.

Also, Brad uses 'family economic income' not adjusted gross income, so some albeit slight progressiveness is built in since FEI includes "imputed rental value of owner-occupied housing, fringe benefits" and other items, which tend to be higher as a percentage of salary for wealthier families.

[jamzo]

market opportunities is probably more imporatnt than economic theory in analyzing the various health care reform schemes

health savings accounts are a tremendous market opportunity for health insurance companies, banks and other financial service businesses

consider the impact of the 401K and the resulting changes in pensions and in stock market invsestment

consider the size of the market opportunity if social security, medicare and employer health care benefit dollars are made available in 401k like individual accounts where the financial managers get management fees and the power to invest the funds

[Paul J. Reber]

The moral hazard in health insurance concept keeps coming up here and it's making me feel stupid because I don't get it at all.

Doesn't anybody else find the concept of "skin in the game" completely ludicrous with respect to health care? It's health! We have nothing but literally skin in the game.

I have several young children. If I reflect for a minute on the significant charges made to my health insurance they are things like procedures for my children, labor and delivery. I cannot fathom in my wildest dreams bargaining with the hernia surgeon, or the anaethesiologist administering an epidural to my wife. Making the decision to schedule hernia surgery or trying to decide if labor is going to be smoothly enough to be tolerable without significant pain medicine is already fantastically difficult. Somehow making me include financial issues is supposed to be tolerable and lead to utopia? The whole idea is bizzare.

And this new plan seems even more horribly unfair than anything I've seen trotted out in a long time. Is it supposed to be fair that a child with type I diabetes will spend their entire life with a 20% income disadvantage? I thought the whole concept of insurance is to spread this type of risk across a large group -- charge everybody a few pennies so that one person isn't hugely penalized by misfortune. This plan seems to complete reject the concept of insurance.

And there seems to be huge pressure to avoid preventative care. It's not just routine vaccinations that are supposedly delivered by this come-to-your-house crew, but what about getting your kids' ear infection treated before it becomes damaging? Getting a possibly broken bone checked on? Determining if there is a food allergy that is the cause of that chronic pain?

I can't see how anybody in a financially stressful situation would ever go to the doctor before needing emergency care under this plan. Are people supposed to be too stupid to make the connection between their payroll deduction, health care costs and refund each year?

I don't get it at all.

[Matt Festa]

Brad,

This plan has some good ideas. I don't think I would support it in it's current form, but I believe with some modifications it could actually be feasable within the next 10 year time frame (and this is coming from a conservative.

1) I agree that health savings accounts are a good way to skim some costs off the top. So 20-25% of medical costs should be paid from these accounts.

2) I agree that the government should probably pick up at least part of the tab for serious diseases (cancer, heart attacks, etc).

3) However, I think the flaw in your plan is that the government ends up being the sole provider. I know everyone here supports single payer since it is supposed to reduce costs. But I would argue that Single Payer has negative aspects that Americans would not accept. For instance, the waiting periods for service are so long in Canada that the Supreme Court ruled in favor of private medicine. Keep in mind that Americans are starting from a point of premium service. A good portion are going to have to accept longer waits and less care. They are not going to like or vote for a one size fits all model if there is no "out" for them.

4) I think an easy compromise out of this is to steal from France. That is, the government picks up a portion of the costs for diseases. Say, for instance, they cover 80% of cancer costs. You are then responsible for 20%. We set up a pooling mechanism ala Massachussets where people can then choose plans on top of this. This way people aren't forced into a one size fits all government run plan. The government sets a floor for service, and then those people (probably a large portion) who want more care can then pay for it in the form of higher premiums via the pooling mechanism.

My belief is that if we make insurers accept the clients from the pool rather than individually we can avoid the extra costs that insurers use to "screen out" sick patients.

[Maynard Handley]

Brad, the big flaw in every economics based problem is the following. There is no one item called "healthcare" for whose price I can shop. There are, instead, ten million different procedures, all of which I, as a non-medical person, know nothing about.

My doctor tells me I need to get a DXA Bone Density scan.
(1) Do I really need this? Obviously it makes the doctor's life easier but how do I evaluate the risk/reward pay-off for my particular income?
(2) OK, I need to get it. What should the price of this scan be? I've not a clue. Heck, it's a difficult enough problem trying to find a medical entity in my neighborhood that does the procedure. Do the letters DXA mean anything significant? Is there is a DXB Bone Density scan that gives almost as good information but costs 70% less? Is there a way I can say "screw HIPAA", I don't care if you digitize my data and get a radiologist in Thailand to look at it, if it will save me 30%?

I really have to wonder what freaking planet economists who think the market is going to save us here live on. Doesn't there come a point where you are finally willing to admit that information issues here are way way way beyond the capacity of normal people to deal with?
- we don't know the medical issues and alternatives
- we don't know the alternative providers
- we don't even know the prices involved --- you can try to ask up front what a stay in hospital will cost, but the nickel-and-diming that will be added to your bill makes hotels look a model of reasonable behavior.

[Cranky Observer]

> (2) OK, I need to get it. What should the
> price of this scan be? I've not a clue.
> Heck, it's a difficult enough problem
> trying to find a medical entity in my
> neighborhood that does the procedure. Do
> the letters DXA mean anything significant?
> Is there is a DXB Bone Density scan that
> gives almost as good information but costs
> 70% less? Is there a way I can say "screw
> HIPAA", I don't care if you digitize my
> data and get a radiologist in Thailand to
> look at it, if it will save me 30%?

Actually, my primary care physician had software for his PalmPilot that would advise him on this. After saying "I think you need a DXA, but let's check" he would punch in some diagnostic codes and the proposed test and the software would pop up a list of options cross-referenced with various health insurance plans. Sometimes that would lead him to say exactly what you propose: "A DXB plus an extra blood test is just as good as a DXA for 70% less; let's start with that".

The problem is he (and I) am still constrained by the fact that there are three large hospital labs in our town, one is blackballed by my health plan, and he isn't affiliated with the other one.

So regardless of what we choose there are significant constraints on the markets. Then there is the whole issue of the list price vs. the health plan price. I did have a DXA (so to speak) once and the first invoice was for $7500! I almost fell out of my chair but I waited. Sure enough the paperwork started flying back and forth between the lab and my health plan; the final bill was for $2700 and my share was down to $125. How can any individual be expected to 'bargain' in that type of environment? My purchasing leverage is exactly zero compared to my health plan's; if I had walked in off the street they would have put the $7500 on my credit card upfront with no recourse.

Cranky

[Cranky Observer]

> I remember my insurance in the '70s talked
> about reimbursing "usual, customary and
> reasonable charges". Doctors' fees were set
> by custom. We've now broken that custom,
> though, and have no way of recovering it.

We have also destroyed all the community-based hospitals, community-based health care plans, and mutual insurance companies that used to support that system. I have never understood how we as a society are supposed to have been made better off by that misguided bit of Schumperism.

Cranky

[jim]

Some more random thoughts about reducing this to practice (even though it's advertised as impractical):

1. From the health care provider's viewpoint, this looks like single payer. The doctor gets paid by the govt., the govt does internal accounting to determine on whose behalf it made the payment and charges that against the 15%, right? The doctor, presumably, has to accept what the single payer provides. Is it illegal for the doctor to charge more (there are practices which ask for an annual fee from their patients)? Is it illegal for me to go "privately" to the doctor, pay her directly, possibly more than she would get from the govt., perhaps jump the queue, get treatment, get an appointment faster? If not, I'd be tempted to do that. It's my money after all. If the govt. doesn't have to pay her, I'll get it back in April. How do we keep transactions inside the system? Give the market an inch and it'll take over.

2. Are there exclusions? Cosmetic surgery? Abortion? IVF? Transplants? Durable medical equipment? If there are, then I have to go privately for them. If I can go privately for them, why can't I go privately for other services? If there aren't, are we willing to have this cover facelifts and tummy-tucks for the poor?

3. What's the accounting entity for the 15%? The family? Individuals? If the family, is it the IRS definition? Are lesbian couple domestic partnerships families for this purpose? They are now for at least some insurance plans. If individuals, then a millionaire's trophy wife gets all her treatment free (including her cosmetic surgery, if it's not excluded): it's not counted against *his* 15% and *she* has no income.

Even in Utopia, these sorts of questions arise.

[kate G.]

I think the other thing that this whole debate reminds me of is this. I'm going to botch the joke, though.

Brad wants what seems like a utopian solution to the health care problem and some of his readers support his version, or some version like it, because it at least makes a stab at removing some of the more egregious aspects of our current insurance scam and employer based system. All well and good, though many of us are instantly able to poke holes in the coverage and how it would work for actual people.

Then someone comes back and says "but at least Brad is trying" or "At least Brad's plan is a step in the right direction."

but in this field a step is as likely, or unlikely, to happen as the whole jump. The "partial" good solutions brad proposes are actually as impossible to get as a really great solution. And a really great solution, though significantly different from Brad's solution, has as great a liklihood of being implemented as a partial, not so great solution.

So what I ended up being reminded of was a joke I saw, possibly here at Brad's blog, early on in the war. It went something like this:

One side believes that we can win in Iraq by invading, bombing, and continuing to bomb and occupy a hostile country indefinitely.

the other side believes that martians will appear from outer space and magically solve the problem right away.

Which one is crazier? I've got to go with plan A) is crazier even if plan B. is never going to happen.

Kate G.

[Cranky Observer]

> [...] All well and good, though many of us
> are instantly able to poke holes in the
> coverage and how it would work for actual
> people.
> [...]
> he other side believes that martians will
> appear from outer space and magically
> solve the problem right away.
>
> Which one is crazier? I've got to go with
> plan A) is crazier even if plan B. is
> never going to happen.

So I guess I need someone to help me understand what goes on in Germany then. The United State sundered its strongest cultural ties to Germany in 1915, and has changed a lot culturally since then, but we remain a very Bismarkian culture. Certainly in my business travels I found it easiest to work (not the same as get along with) my German coworkers as compared to the French, Belgins, UKians, and even the Australians. While there are strong differences between Germans and USians there are also some strong similiarties in terms of outlook on life, comforts, etc.

Yet the Germans seem to have evolved an entirely different health care system from ours - one which provides good amounts of high-quality care (hey, they are Germans!). Certainly none of my German coworkers ever scheduled a trip to the US so they could "suddenly" realize they needed a local health care voucher (something my UK and even Canadian coworkers were known to do). Germans seem to live as long as we do and are generally healthier by most measures. Yet the whole thing is handled single-payer no-fuss, everyone is covered (even visiting American students) and there are no real barriers to the wealthy buying more care outside the system.

How do they do that? Why can't we?

Cranky

[anne]

http://www.cbpp.org/6-1-07health.htm

June 1, 2007

Can Incentives For Healthy Behavior Improve Health and Hold Down Medicaid Costs?
By Pat Redmond, Judith Solomon, and Mark Lin

The impact of individual behavior on the cost of health care is attracting a great deal of attention from policymakers. A number of state Medicaid programs are offering rewards for healthy behavior or considering this step, assuming that financial incentives will improve the health of Medicaid beneficiaries and help hold down health care costs.

Florida and Idaho, for example, recently launched programs that would reward Medicaid beneficiaries for certain behaviors. California, Kentucky, Michigan, Missouri, Pennsylvania, Texas, and Wisconsin are considering this strategy. West Virginia is taking a different approach by making the availability of certain health care benefits contingent upon specified behaviors.

The concept of "health care consumerism," promoted by the U.S. Department of Health and Human Services and the Center for Health Transformation (a policy institute founded by Newt Gingrich), envisions an overhaul of the health care system based in part on paying patients "for compliance." According to this model, healthy behavior should be rewarded financially, because financial rewards for healthy choices are "a powerful motivator."

Because behavior, such as smoking, diet and physical inactivity, accounts for a significant amount of premature mortality, the idea that financial incentives could improve behavior is appealing. States providing or considering incentives for behavior generally aim to either increase the number of beneficiaries who obtain regular health screenings or to decrease the incidence of smoking and obesity. These are unquestionably valid goals for state Medicaid programs. There is, however, little hard evidence that incentive programs will actually achieve these goals, particularly in terms of reducing smoking and obesity.

Little Evidence That Rewards Result in More Preventive Care for Medicaid Beneficiaries

A substantial body of research shows that financial barriers make it more difficult for low-income people to get health care services. Yet there is little evidence that financial rewards will lead Medicaid beneficiaries to obtain more preventive services. Few rigorous studies have been conducted on the impact of financial rewards on health-related behavior.

Several recent literature reviews conclude that providing rewards (such as coupons for products or services) for simple behaviors (such as a doctor's visit) appear to be effective, but these reviews also note that the research is sparse and often has limitations, such as small sample sizes. None of these reviews focus specifically on incentives provided to Medicaid beneficiaries....

[Cranky Observer]

> Several recent literature reviews conclude
> that providing rewards (such as coupons for
> products or services) for simple behaviors
> (such as a doctor's visit) appear to be
> effective,

Meanwhile the processed food industry alone is spending 10s to 100s of billions of USD per year to incentivize Americans in the other direction...

Cranky

[anne]

Along with Cranky, I am much taken by the German health care system but I would look for any from Australia to Spain for ideas.

[Sol]

"And this new plan seems even more horribly unfair than anything I've seen trotted out in a long time. Is it supposed to be fair that a child with type I diabetes will spend their entire life with a 20% income disadvantage? I thought the whole concept of insurance is to spread this type of risk across a large group -- charge everybody a few pennies so that one person isn't hugely penalized by misfortune. This plan seems to complete reject the concept of insurance."

This bears repeating.

[jim]

@Sol:

The concept of insurance has long been rejected in health care finance. Back in the '50s, we had the notion that there was such a thing as normal medical expenditures and that one insured against the (cost) risk of an abnormal medical condition (which, it was felt, could be defined: there was a list of them). When my wife was pregnant with our eldest (in 1977-8), my then insurance didn't cover "normal delivery." It did cover Caesarian delivery. But since then we've gradually moved to the notion that all medically related expenditures are on an equal footing. We still, because we are linguistically conservative, call the entities that manage medical expenditures "insurance companies." But they aren't insuring. They're financing.

If anything, Brad's proposal brings back the concept of insurance. But instead of insuring against acquiring one or more of some named set of conditions, it insures against having to spend more than 15% of one's "economic income" on health care, liberally defined. The premium to be paid for insuring against this risk is 5% of economic income. I have no idea whether this is actuarially sound or whether it's a number Brad has pulled out of the air. But it is, actually, a concept of insurance.

[Cranky Observer]

> Along with Cranky, I am much taken
> by the German health care system

Actually I am genuinely curious. I never had to use the German system when I was there, so I have only anecdotal reports from my coworkers. I would like to know how two nations with a fair number of cultural similiarities ended up with such different systems, and how the Germans manage to keep theirs working in the face of the same economic and social issues that are said to afflict any US single-payer concept.

I think Ezra Klein has done a little work in this area, but I would like to see some good studies.

Cranky

[kate G.]

Cranky,
I'm sorry if I wasn't clear enough in my post. I totally agree with you. My point, such as it was, is that if we are going to dream of solving our health care crisis why *shouldn't* we dream of actually solving it, instead of just tinkering around the edges. I,too, have heard very good things about germany and france. I think we are just as likely to be able to solve the rpoblems by gthinking big and by insisting on very goode solutions as incrementally trying to insure people against just one problem in the system (high costs, or catastrophe, or bankruptcy, or something).

Something else that I think is important is making sure that the system encourages everyone to get all the health care they need--not to triage their needs and try to stave off using the system until an emergency. Any system that tries to cost people out of usage is as bad as a system that "makes people wait" but only one of those "problems" is seen as a problem (the "ohmygod in canada people have a hard time making an appointment to see a doctor" thing. Of course plenty of people "ohmygod lost my insurance when I lost my job...can't get new insurance because of a pre-existing condition...pregnancy is a pre-existing condition" but somehow that is seen as normal and normative.

We have to start working to push the overton window as far over as we can so that the lack of comprehensive, complete, and thoughtful medical care is a scandal on a par with the fast coming 4.00 a gallon gas or a sin tax on bullets. Where is the health care version of the NRA? The "take no prisoners" consumer lobby?

Kate G.

[vtcodger]

A bunch of points

US health care costs are clearly out of control and employer provided health care is not an approach that any sane person would pick from a menu of choices. It is pretty clear that almost any alternative system would probably be better, probably by a factor of around .3 to .5 based on what other developed countries pay.

I can't say that the DeLong plan looks all that great. A 20% health/retirement tax may be great in economic theory and might work out if it had been implemented gradually in place of the Kennedy, Reagan, Bush tax cuts. It would have to be phased in over decades unless you plan to cripple major economic sectors like new automobile sales, residential real estate, and construction for a great many years.

20% of income catastrophic seems very high. Unless we make conspiring to provide health insurance a felony, I'd guess that we'll still have insurance companies and they will work just as badly as they do now.

Breaking out optional health care as a separate catagory and trying to foster competition and customer choice in that sector might make sense. But much expensive health care doesn't fall in that catagory. People don't/can't defer cancer treatment or trauma treatment until the kids are out of college.

Are not the numerous ads for prescription drugs on TV pretty much indicative of what healthcare consumer choice is likely to devolve to in America's current culture? Poor (and expensive) decisions based on systematic misinformation.

It's not clear that technology is going to solve the US healthcare problem. Medical hardware and software largely demands a level of product quality that we reserve for passenger aircraft and (hopefully) nuclear power plants. That's not what American techies are used to providing and it's not cheap. (And offshoring the work might reduce costs but would probably exacerbate quality problems). The high cost, numerous cost overruns, and occasional spectacular failures of the military procurement system should be all the warning we need that technology may NOT be a panacea for high medical costs. I actually know something about THAT. I could write volumes about the pitfalls if medical technology follows a similar path

I don't see anything that addresses what I see as massive cost shifting within the medical care system. Costs are routinely shifted from those who can't/won't pay to those with deeper pockets or to those with less negotiating power. This may not be a big deal if we are talking about HDTVs, but is it really a good idea with health care?

And how well can 'market forces' work without much competition? My impression is that many American consumers have one choice when it comes to where they will get major health care, and no power whatsoever to negotiate prices. Many others have a very limited choice and no power to negotiate prices. Competetive forces don't work well in with monopoly service providers.

"Barefoot Doctors". Now there is a concept that might actually have legs and can be done no matter what system is implemented. How about training a substantial body of decently paid professionals with say 5 years of post high school training whose purpose is to provide low level health care and to screen patients who really need to see a real doctor? Give em pay equivalent to teachers-firemen-police, reasonably decent benefits, and long term job security. Make them immune from malpractice and let the government handle licensing. Will there be problems? You bet. But overall it might well reduce costs and improve care.

Healthcare costs are an opportunity not a problem. No offense, but given 21st Century America's lack of skill at problem solving -- and a collection of politicians unmatched in incompetence and ineptitude since the unfortunate spiral down to civil war in the 19th Century -- healthcare costs are a huge problem. ... no way, shape or form, an opportunity.

[spencer]

vtcodger -- isn't your concept of a barefoot Doctor about what we call a Nurse Practitioner?

[mike]

Many seem upset about the whole idea of moral hazard or "skin in the game."

Perhaps this is because, awhile back, Delong did a nice job of framing the health care debate as one between those who think moral hazard is the big problem (Republicans) and those who think adverse selection is the big problem (Democrats).

Moral hazard and adverse selction are economist jargon. In plainer terms, the idea of moral hazard is that people pay little attention to the health care they buy or the health risks they take if they are insured. Since there is little incentive to pay attention to costs, costs are too high. So, in line with most Repbulican thinking, we can control costs by forcing individuals to pay more of the bill.

Adverse selection is the idea that insurance companies will only want to insure the rich and healthy, leaving the poor and unhealthy to be undercared for. Or go to emergency rooms where costs are much, much higher.

Most commenters are liberal-leaning and therefore subscribe to the adverse selection story and not the moral hazard story.

But there is a LOT of evidence underpinning BOTH stories. I agree with most of you (and Brad, I suspect) that the bigger of the two problems is the adverse selection story. But the moral hazard story is real. It has been well documented that some very expensive medical procedures are used much more frequently in some parts of the country as compared to other, but with little or no health gains. There is a lot of unneccessary care out there.

If you deny the moral hazard problem you're never going to get libertairian/consevatives to listen to your adverse-selection concerns.

The beauty of Brad's plan is that it deals with both adverse selection and moral hazard in a simple understandable way. It hits all of the big cost problems I've read about.

Granted, there are other problems: market power of the AMA, too few rural hospitals, etc. While important, these issues are smaller than those addressed by this plan. And they can be addressed in other ways.

[Cranky Observer]

> Most commenters are liberal-leaning
> and therefore subscribe to the adverse
> selection story and not the moral hazard
> story.

Except that moral hazard also applies to insurance companies, big pharma, and the politicians who derive the majority of their financial support from those two entities. Yet in the public discussion "moral hazard" only seems to apply to Joe Lunchbucket who can't wait to get his hands on some public money so he can schedule himself for a prostate biopsy every month.

Cranky

[jim]

It's probably worth taking a macro-level view. Total health care costs (which "health insurance companies", in aggregate, finance) depend on the total number of hospitals, the staffing levels of those hospitals and the toys they collect, the total number of labs (broadly defined), their staffing levels and toys, the total number of doctors, their offices' staffing levels and their income. Oh, and administrative overhead. To reduce total health care costs, you have to reduce one or more of those numbers.

Managed care, over the last fifteen years or so, has succeeded in reducing doctors' incomes. Anecdotal evidence suggests something close to a 50% reduction. Hospital staffing levels have also been somewhat reduced. Ask any nurse. It's not clear there's much more to be gained in these areas.

The notion that patients will tend to defer elective treatments if they have to pay for them and that this will reduce total health care costs depends on an assumption that if business drops at hospitals, some of them will close. It's not clear that this is a viable assumption. It's hard to close a hospital. Local politics interferes.

It may well be that "expensive procedures" are more used in some parts of the country than others. It doesn't follow that cutting out those expensive procedures would actually reduce costs. Other procedures would become more expensive. A great deal of managed care effort to restrict the use of particular procedures only succeeded in pushing the air around inside the balloon. Hospitals have to cover their costs somehow. If they can't charge them to this procedure, they'll charge them to that.

[Cranky Observer]

> Total health care costs (which "health
> insurance companies", in aggregate,
> finance) depend on the total number of
> hospitals,

Hmmm. You seem to have left out the demographic profile of the United States and the probability distribution of ailments requiring treatment as applied to that population. Also the societal attitude as to when a person is no longer valuable and should be left to die rather than treated. If we were a society of 23 year olds who were morally OK with putting granny out in the backyard in the winter until she "went to sleep" then health care costs would be pretty low, eh?

There is also the moral issue of how the total wealth of our society should be distributed. Even Andrew Carnegie didn't think that every penny of his fortune could have been accumulated by his personal effort without benefit of labor and support from others.

Cranky

[jim]

@Cranky (most recently):

"[T]he demographic profile of the United States and the probability distribution of ailments requiring treatment" drive the location of doctors (to some extent), the construction of new hospitals and the expansion of old ones. But once a hospital is built, its running costs (and paying off its bonds etc.) become part of the total health care bill.

What I want to emphasise is that whether granny goes into the hospital or not, the hospital's running costs have to be paid as long as it remains open. If granny does go into the hospital then there's an extra occupied bed across which to amortize those costs. If granny doesn't go into the hospital, then the costs have to be amortized across one fewer beds. Some other patients get charged more, eventually. Across some period of time the books have to balance: income must equal outgo.

Yes, if there's fewer patients you can try cutting costs. And managed care has pressed hospitals to do that. But hospitals are 24/7 kind of places. There really do have to be nurses on the wards all the time. There really do have to be doctors there all the time. There really do have to be ERs and ORs available all the time. And hospitals have to be clean places. Dirt means infection. So there are real limits on how far costs can be cut. It wouldn't surprise me if managed care pressure has achieved what can be achieved. And the costs that remain have to be covered. By someone.

[Maynard Handley]

"
But the moral hazard story is real. It has been well documented that some very expensive medical procedures are used much more frequently in some parts of the country as compared to other, but with little or no health gains. There is a lot of unneccessary care out there.
"

Calling this phenomenon moral hazard is idiotic. These differences in procedure are being caused be either
- different populations in these different places (Florida vs the Bay Area) which seems quite legitimate or
- bad practice on the parts of the doctors and hospitals.

The point is that there is no way that they are being caused by patients because they don't have to pay. I mean, WTF do you think is happening --- people are saying "let's go get an angiogram; it's the cool thing to do these days"?
There may be some (I am guessing small) amount of people saying "Joe got an angiogram and it detected a condition, maybe I should get one" but it is still the responsibility of the doctor/hospital to say "No, you don't need one. Now piss off."

The system just does not work like Starbucks --- you don't simply wake up one day, drive to the hospital, order an angiogram, and say "Charge it to my PPO" without at any stage being vetted by a professional. This is completely different from the sort of moral hazard you would have by, for example, giving employees a company car and telling them that from now on they don't have to pay for their driving expenses.

[Felix Salmon]

Housekeeping:

Brad, you were right first time. It is Russ Mitchell, writing on Kevin Maney's weblog. It's a bit confusing, but essentially Maney has a blog where many people post, and you have to scroll down to the bottom of each entry to find out whether it's him or someone else.

[mike]

Maynard,

Not exactly textbook moral hazard. But pretty close. Doctors have a big role in this problem, since they have more information than patients do--a problem greatly exacerbated by insurance.

While some procedures may not be fun, some may seek second or third opinions, do more research on their own, etc., if they are paying many thousands of dollars.

Sometimes unnecessary care, like certain perscription drugs, is less unpleasant, physically.

The nice thing about this plan is that those who really cannot pay will be covered by the single payer system. But those who can will, and help keep costs down for both themselves and for taxpayers footing the bill for those who cannot pay.

Compared to other alternatives, I see very little downside and a whole lot of upside to this plan.

Utopian? No. There's no such thing.

[urban legend]

Agree, skin-in-the-game is silly. I have zero control over the big-ticket expenses. The doctor’s office appointment-abuser is small potatoes, an issue worth our time for active imaginations only. And I already do have at least some loss of “skin” I prefer to avoid with any deductible and co-pay.

The only reason I see for high deductibles is what we through our government can absorb. Bush has destroyed any budgetary cushion. We have to start somewhere even if the initial system is imperfect.

The most important thing now is to emphasize the basic principles:

1. Absolutely universal, absolutely portable, forever and ever. Employer completely disconnected from this part of health insurance. Finally, ManyJobs Corporation is freed from worrying about an employee’s total cost seven years from now, or how fast the cost will explode annually. Actual hiring with some predictability can resume, instead of piling on more work on too few or engaging temps only.

2. Protected against complete financial disaster. This is the fundamental principle. 100% covered above deductible. The entire middle class must benefit; it cannot be a welfare program for "the uninsured". For 300 million, not 43 million. The point is that everyone can become uninsured (and uninsurable, too). Examples, middle class family: combined income $120 K. Assume (preferably) at least a mildly progressive deductible: 10% to $100 K, 15% to $100+K to $200 K, 20% $200+ K. Family A decides to buy low-premium high-deductible “gap” insurance, so Family A is exposed to $2000 medical expense annually. Not wonderful, but manageable. Family B has saved $250 K for their kids’ college tuition and a start on retirement, so decides to self-insure the full Federal deductible. Sets aside and preserves $18 K “fund” for self-insured medical expenses, with changes as income changes. (Maybe some favorable tax treatment for this.) Family C is really risk averse, buys “gap” insurance with only a $500 family deductible. Finally, husband in Family A who despises his work for ManyJobs Co. but stays only for the benefits can take a chance on something where he will be more productive. Finally, all earners in these families can at least go to work and make decisions without the cold fear of losing everything and becoming penniless from a single, unpredictable health catastrophe.

3. Simple to understand. If the concept is real simple, we have the best chance of building political support from the broad public (including “Republicans”), major corporations, small businesses, even if insurance companies don’t like it. “Medicare for all” would meet that simplicity test – and what is Medicare except umbrella insurance with small deductibles and co-pays? Even with the Supplemental Insurance, I self-insure to some extent for some services. For the high-deductible alternative such as that espoused by Brad or as set out above, call it “Universal Umbrella Insurance.” Simple, I get it. I want it. Any Republican who fights it is going to have to answer to the constituents, because it’s just like being against Social Security. Administered by the Federal Major Medical Insurance Corporation. So just tell me how much I have to be responsible for myself. It’s still a lot better than what I’ve got, because if I get a punk slip tomorrow, have a massive heart attack, we could lose that whole $250,000 we’ve saved for 27 years real quick.

The minute I propose a plan that says, OK, the Feds will do this, and the employers will do that, and the insurance companies will do this, and the individual will do that – what all the Democratic candidates are doing right now, based on the advice of their policy wonks -- I can see the audiences’ eyes glaze over. Hillary’s plan failed in part because complexity allowed opponents to say anything and get away with it. No complexity: Universal Umbrella Insurance, paid by the Federal Major Medical Insurance Corporation.

Administration? Doesn’t seem too tricky fundamentally. If I buy “gap” insurance, insurance company gets bill from hospital or doctor, covers total expense, gets reimbursed for Federal portion (or sends bill to Feds on behalf of provider). If I don’t buy any gap insurance, provider determines deductible (set each year from previous year’s income, you give estimate before April 15, increments of $1000 only, patient responsible for underestimates, previous year available for checking and inquiry by provider), bills patient for deductible, bills Federal Major Medical Insurance Corporation (“FEMMIC”) for everything else.

Somebody please tell me why this won’t work. No cost control? You can’t do it all at once. Get this fundamental in place first. But also, law could make FEMMIC do a bully pulpit, highly publicize cost information, and make providers publish prominently any excess over FEMMIC caps it will charge. If big shots want to cover that with more “gap” insurance, so they can choose the most expensive doctors, more power to them.

Too expensive? Let the public decide once a simple, universal, perpetual plan, a plan for all of us to share the risk of protecting everybody from a complete financial wipeout from a medical problem, is put in front of them.

Deductibles still too steep? Let experience and politics tell us later if we can bring them down. But get the structure in place now.

[Dick King]

Cranky Observer? The cheapest blood O2 saturation meter I've been able to find is $175 or so. I want one but I would prefer to pay $75. Can you post a pointer?

-dk

[James]

Professor DeLong,

At Econlog, you defended your proposal against Arnold Kling's charge of paternalism by saying that "[I]t's not paternalism: paternalism is making you do things, not making it cheap for you to do things..."

What you suggest involves, among other things, making people fund what they may not wish to fund. You might believe that this is a good idea for any number of reasons, but by your own definition, this is certainly paternalism.

Incidentally, would you be able to claim with a straight face that I should trust you with the power to make people fund what they do not wish to fund? If not, could you claim with a straight face that I should consider the government to be more trustworthy than you are? Just a thought.

[Michael Ash]

Jim notes:
> [The proposal] insures against having to spend more than 15% of one's "economic income" on health care, liberally defined. The premium to be paid for insuring against this risk is 5% of economic income. I have no idea whether this is actuarially sound or whether it's a number Brad has pulled out of the air.

The numbers in the proposal don't work as insurance because of the concentration of health care costs.

"Nearly 30 percent of health care expenditures are accounted for by the top 1 percent of spenders, while more than half of all health care expenditure are accounted for by the top 5 percent of spenders."[1]

Here is some quick arithmetic that suggests that the insurance plan isn't actuarially feasible.

Health care expenditure = 16 percent of GDP

Health care expenditure on sickest 1 percent = 30 percent of 16 percent of GDP = 4.8 percent of GDP

Proposed out-of-pocket expenditure by sickest 1 percent (assuming these folks have average income) = 0.15 percent of GDP

Proposed insurance fund = 5 percent of GDP.

Amount of insurance fund left over after treating the sickest 1 percent = 5 - (4.8 - 0.15) = 0.35 percent of GDP.

Health care expenditure on the next sickest 4 percent = 20 percent of 16 percent of GDP = 3.2 percent of GDP

Proposed out-of-pocket expenditure by next sickest 4 percent (assuming these folks have average income) = 0.60 percent of GDP

Amount of insurance fund left over after also treating the next sickest 4 percent = 0.35 - (3.2 - 0.60) = -2.25 percent of GDP.

With only 5 percent, admittedly the sickest 5 percent, of the population treated, the insurance fund is almost 50 percent overdrawn.

[1] Monheit AC, Berk ML. Abstr Acad Health Serv Res Health Policy Meet. 2000; 17. (Alan C. Monheit, Ph.D., Director, Division of Social and Economic Research, Center for Cost and Financing Studies, Agency for Healthcare Research and Quality.)

http://gateway.nlm.nih.gov/MeetingAbstracts/102272301.html