Morning Coffee: Why McCain's Health Reform Plans Frighten Me (August 25, 2008)

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The biggest economic bad news is that health care costs keep rising. The total bill charged by insurers for employer and employee averages $12,100 for a family of four--twice the level of seven years ago, and comfortably more than the full-time earnings of a minimum-wage worker. On top of this come the taxes for government health care programs. The American health care bill is over $7,600 per person per year.

This matters for American businesses. Businesses pay for health insurance coverage for 165 million non-elderly Americans, for the high-wage jobs that make use of the educations, skills, and high potential productivity of American workers come with benefits. This creates a direct link between rising health care costs and slower economic growth. When health costs rise, the costs of employing workers in high-wage high-benefit jobs rise as well. Businesses find that they cannot afford to expand employment as rapidly as they would otherwise: higher health care costs make maintaining their old workforce and expanding it via new hires very expensive. They economize. They hire fewer workers. They offer lower wages. Workers resist. The result is slow employment growth and higher unemployment until workers recognize that the scarcity of good jobs and the higher risk of unemployment teaches them they have little bargaining power--a process that takes years. Meanwhile workers who ought to be in high-skill high-wage high-productivity jobs with benefits find themselves in low-skill low-wage low-productivity jobs without benefits instead. This is a waste. Workers who could hold down high-productivity jobs don't, and so don't get the wages that they deserve. Firms who could employ high-skill workers don't, and so don't get the profits that they deserve.

Successful economic growth requires a more efficient, lower cost health care sector. John McCain and Barack Obama propose diametrically-opposed plans for trying to get the health care system to where we all want it to be.

John McCain proposes a root-canal surgery approach. The problem, he and his health-care advisors believe, is that good jobs are linked to health-care benefits. Break that link--remove the expectation that good high-productivity jobs come with benefits--and the health care sector will no longer be a major drag on the American economy as it goes its own way, whatever that way might be. Hence John McCain proposes, relative to the current system, to penalize employers that offer high-value employer-sponsored coverage and subsidize individuals who get health insurance outside the employment relationship.

We see two problems with McCain's approach: the journey and the destination. The journey: The McCain plan works in the long-run by making employer-sponsored coverage more expensive in the short- and the medium-run. It thus attempts a cure by giving American business a worse case of the rapidly-rising health-cost disease from which it currently suffers. Rapidly rising health costs are a drag on high-wage high-profit high-productivity employment now, and they will be a much worse drag on high-wage high-profit high-productivity employment under the McCain plan--at least until we come out the other side and enter a world in which it is no longer expected that high-productivity jobs come with benefits.

The destination: The biggest problem in health care today is that insurers are rewarded not for keeping their customers healthy but for figuring out which customers are likely to get sick first--and then dumping them onto other insurers or onto the government. At present, this problem is restrained by the institution of employer-sponsored insurance: bid for an employer's contract and ERISA requires that you take any of their workers who want to purchase your plan. The destination of McCain's plan is a place where insurers have much more freedom to spend money, administrators' time, and computer power separating the healthy sheep from the costly and sick goats--but the profits to doing this for one insurer are not savings for the system because the sick and uncovered do show up at the emergency room eventually and are more expensive to treat when they get there. We believe that when the McCain plan does move us to a world in which the expectational link between high-productivity jobs and benefits is broken we will then have a system that works even less well than our current one.

Barack Obama, by contrast, offers a much more conservative approach to the problem of health care reform. Instead of using tax penalties and incentives to break the existing system and create a whole new set of untried health care financing institutions, Barack Obama proposes to build on those components of our current system that do work--and to make them work better.

But I've talked for More than Long Enough

Comments

[Alex Tolley]

It is indeed remarkable how health care has fallen off the agenda. One would have thought that McCain's position would be debated. Hopefully we will see his ideas exposed during the debates, although I wouldn't bet on it if the Democrats also want to avoid teh issue in case they are seen as big government spenders.

[Jrossi]

No, no, no, no! The biggest problem in HC financing is not adverse selection--it is the fact that technological advance in HC increases costs instead of decreasing them--for a lot of reasons. Go ahead and kill the insurance companies dead as a doornail, realize some one-off savings. Will this be sufficient to control HC inflation. Hell no. Just a first baby step.

[Jrossi]

One more micro-rant. Prof DeLong's comments imply that he believes that early and/or preventive care saves money. Most preventive interventions probably don't(NEJM Feb 14 2008 article on prevention will get you started). As far as early care goes, it probably depends on the disease in question. I have not seen good data that regular check-ups, good hypertension control, etc, save money. Maybe it's available, but I haven't seen it. Clearly prevention and early treatment decrease suffering and death, so as a doctor I'll all for them (It's kind of the whole point of medicine), but if you think eliminating insurance company adverse selection games will solve our HC money crisis, you definitely have another think coming.

[bigTom]

I really don't think we will fix our healthcare system, until we have first hit rock bottom. Clearly any system that leaves the current for profit insurance companies in charge, is just going to further escalate costs. Perhaps McCain's plan will dump enough of the well to do voters off the corporate insurance roles, thus insuring eventually that politics will demand some form of nationalized program.

[RW]

"The biggest problem in HC financing is not adverse selection--it is the fact that technological advance in HC increases costs instead of decreasing them"

No, no, no, it only increases costs because of economic rent seeking, gate-keeping and other modes of enforced scarcity: Moore's Law fer crying out loud, medical technologies more than 5 years old would normally have been completely commodified by now.

[Leila Abu-Saba]

Early and/or preventive health care - you ought to see all the healthy-looking, fit, young cancer patients with me in the chemo ward at UCSF. We are a good-looking bunch - or we were before losing our hair, eyebrows, fingernails and so on. In fact early detection means we are costing the system lots and lots of money. we are young and strong enough to survive cancer treatment. We find out we've got cancer early so we can seek expensive treatment, new drugs. And we're pissed off, most of us, because we were exercising, eating organic, meditating, breastfeeding (if female) and getting our checkups. Why the hell did we get cancer? We were doing everything right!

I used to be a smug believer in good habits as prevention against terrible disease. Now... I am just not so damn smug.
PS my hospital sends me statements every month saying that my chemo & blood work costs ~60K - per four-week chemo cycle. Then my health insurance company sends me statements once a quarter in which I discover that the insurance is only paying, and the hospital is indeed accepting, about 55% of that number. So does my chemo cost $60K a month, or $33K a month? and how much of that expense goes to paper-pushing, code-punching, drug marketing and general overhead and busywork? I read a figure that 50% of our healthcare $ in this country goes to overhead.

Does my chemo therefore cost $60K, or $33K, or actually a mere $16.5K a month? and how long is my husband's employer going to want to carry me and my expensive self? If he had to look for a new job, would they consider his wife's health issues as a negative factor? I dont' like to think about it.

[Neal]

How long before we hear an argument in favor of the current brand healthcare spending consisting of the fact that 16% of the GDP consists of health care spending and that removing the insurer will cause catastophic disruption of the economy?

[Dirty Davey]

I am astonished that the Democrats have not made more effort to emphasize:

If you have employer-provided health insurance, John McCain wants to make you pay taxes on it.

Shouldn't that simple statement swing some votes? I know it doesn't speak to the uninsured or underinsured, who are the primary constituency for a plan to increase coverage... but there are plenty of folks in the "my coverage is OK, so I'm not concerned" bloc, who might be inclined to distrust a Democratic proposal but might not realize the extent to which the McCain plan hits them in the wallet. If they realize what McCain is talking about, I see them being a lot more open to the Obama plan.

[Patrick Schoenfelder]

OK. I agree with Brad on all of this, except possibly the role of “prevention” in saving health care costs.

The biggest problem with American health care is the lack of access (lack of insurance and underinsurance and lack of services geographically) that denies coverage to 15% of Americans and gives inadequate coverage to 40% or more, interfering with their ability to get health care at all. McCain’s plan will obviously make this much worse, and probably much, much worse.

The biggest economic problem is the rising cost of medical care due to technology and innovations that increase the cost of medical care, and which may or may not increase effectiveness, coupled with our pattern of adopting these innovations without proof that they really work. The quaint habit of lower level health care employees wanting a living wage also contributes.

Prevention is a complicated issue because people are lumping too much under that heading -- there is too much baggage on that mule.

Prevention or early intervention falls into three classes, one not generating savings and actually increasing costs, one clearly generating significant potential and real savings, and one not yet understood in terms of its economic impact.

In comments on other topics, I have already pointed out that improved health habits actually lead to increased health costs in the long run. This has been proven by the Dutch national system in a set of long term studies dealing with smoking, obesity, and exercise habits. If you actually think about this, it also becomes intuitively clear. Healthy people live longer. They absorb the same amounts of health care when they are young – possibly more due to sports injuries, etc. They absorb less health care in the 45 to 65 year range than unhealthy people, but then absorb more as they age, simply because they are still alive and a large portion of the high risk people are dead. In the end, they absorb amounts equal to or exceeding the advantage they gained in the 45-65 age when they finally undergo collapse of health and death in their 70’s, 80’s, and 90’s. In our system, good preventative health habits save money for private insurers and HMO’s that cover people under 65, but cost money for the government paid programs that cover retired people.

On the other hand, interventions that prevent curable diseases from reaching a crisis point do save money. A patient with a regular family doctor who gets an outpatient treatment for a mild pneumonia using oral antibiotics and a little rest at home costs far less than a person who continues working her minimum wage jobs until she collapses at work and gets an ambulance ride to the ER and 4 days in the ICU for advanced pneumonia. Immunizations probably work in this way as well, since in the current medical environment the diseases they prevent would only rarely be fatal but could lead to increased hospital use and costly long term disabilty. There are a large number of conditions, ranging from infections to asthma to fractures, where timely early intervention saves significant amounts of money. Lack of insurance or insurance that introduces significant “moral hazard” in health care has been shown to lead to greatly increased costs in this regard, costs often born by the public either through taxes or increased hospital bills for other services.

Finally, there is a group of measures that do not have a proven economic impact. This includes things cited by Dr. Rossi. Check ups, blood pressure control, and so on probably have a mixed impact. To the extent that they act like the smoking-obesity-exercise model, they probably increase health costs for the same reason. To the extent that they act like the antibiotics for mild pneumonia, they probably save money. Thus, because blood pressure control probably allows a lot of people who would die before age 65 to live to be 85, it costs money. However, to the extent that blood pressure control prevents events like survivable subarachnoid hemorrhage, where the patient would receive a costly high tech workup, get a very expensive surgery, then spend 8 days in ICU, 6 days in step down, and 12 months in therapy but would then return to near-baseline health (see, for example, Joe Biden,) it saves money.

All this is not to argue that for human (contrasted with economic) reasons people should not be encouraged to have better health habits and should not receive proven effective interventions leading to longer and more healthy, albeit more expensive, lives. We should do this as an issue of human rights (life, liberty, etc.), but we should not expect to save money.

Health care issues are both complicated and simple. They are complicated because there are so many variables, some poorly understood. But they are simple because the solution has already been found by almost every other developed country, where coverage is much better, outcomes significantly better, and costs much lower. Adopting a single payer or social insurance model is like adopting anti-lock brakes. They were both developed in other countries, but have clear advantages for the US if we just have the sense to use them.

[Jrossi]

RW, Your comments are implied by my phrase "for a lot of reasons." Patrick elaborated well on this.

[Patrick Schoenfelder]

A comment on “commodifying” health care technology.

The reason health care tech never seems to reach the commodity level is that pharm companies and tech companies NEVER stop offering “new improved” models. For example, CT scanners were introduced in the US in 1974, but there is almost no similarity between the EMI “Emerald” scanner introduced at the Mayo Clinic and a current state of the art 64 detector helical scanner. The health tech companies are working hard to make that technology obsolete as well. For this reason, state of the art CT scanners always cost around $1.2 million. Of course you can buy a scanner that uses technology a couple of generations old for as little as $300,000, but in today’s market that would put you at a considerable disadvantage in terms of not being able to perform the operations that the new tech allows. This resembles micro-computer technology during the phase of rapid increase in CPU and RAM capacity – a time when most computers had a useful life of 2 to 3 years if you wanted to be able to use all the latest software and internet innovations.

Some of these new uses are questionable at best – the current rush to implement CT coronary angiography is an example of an application searching for a mission, but that does not stop hospitals and doctors from rushing to obtain the technology.

Some may be minimally better than older tech. I take a beta blocker developed in the early 1980’s, now long into generic or “commodity” status. There are newer beta blockers that have some added benefits, but I don’t feel the benefits are worth the great increased cost. I will wait until they too become generic before considering a switch.

In the end, this all amounts to an excellent argument for requiring that new or improved health care technology be submitted to good scientific evaluation by large population, controlled studies before being adopted widely. These types of studies are routinely required in many if not most other developed countries before payment is allowed, and this not only leads to cheaper health care but to better health care. Of course, if the other country is Canada, seeing the rapid spread of new technology in the US leads to dissatisfaction with their own system because of the concern that they are being denied important new technologies, independent of the real value of those technologies.

[JonF]

Re: and how long is my husband's employer going to want to carry me and my expensive self? If he had to look for a new job, would they consider his wife's health issues as a negative factor?

Indefinitely, because by law they aren't allowed to do anything else. Ditto for the insurer: they can't cancel your coverage, or refuse it under another group plan as long as you haven't been uninsured longer than 62 days. I've changed jobs (and coverage) wiuth chronic asthma, and I have a friend who has done so with HIV-- there's no problem with this.