Health care reform ready for its booster shot

Robert Wright Contributor
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America’s health care system is so sick that it is tempting to believe that whatever comes out of Congress later this month will have to be an improvement over the current ailment. If nothing else, American health care resembles a mash-up of the television medical dramas House and Scrubs, sometimes great but mostly tragically comical. The bleeding edge of global medical research slices into the ignorance of human physiology more deeply in the United States than anywhere else. Yet, America spends far more of its GDP on health care than any other country in the world and in exchange receives average outcomes disturbingly low for such a technologically advanced nation. That is because tens of millions of un- or underinsured Americans rely upon uber-expensive emergency room care while untold millions more receive care a far cry short of the technological frontier being conquered in their own backyards.

As discovered by the New Orleans homeowners whose houses burned down in the midst of Hurricane Katrina’s flooding, even a bad situation can deteriorate. Under the legislation now pending, even with the most sanguine expectations of what will emerge from the reconciliation process, America’s health care system could become gravely ill. No ideological rants to follow here, just a simply theory of the causes underlying economic hyper-dysfunction. At the heart of every serious economic problem — financial crises, construction overruns, egregiously expensive higher education, high divorce rates, inadequate retirement savings, even slavery — lay a hybrid failure, a combination of market and government failures. In each case, government exacerbated economic problems by trying but failing to fix market failures like asymmetric information (moral hazard, adverse selection), public goods (necessary goods that private entities can’t or won’t supply), externalities (like pollution), and market power (monopoly or something approaching it).

So Democrats are partly right, but so too are Republicans. Governments and markets can do great things together but they can also conspire to create chaos. Health care is a tragic example of the latter outcome.

In all likelihood, the bills about to be reconciled in Congress will not fix the health care system’s core cancers, the tying of health insurance to employment and the pay-for-service fee structure. The former is largely responsible for the huge number of uninsured while the latter rewards health care professionals (HCPs) for treating patients rather than curing them, a crucial distinction. Combined, those two problems lead to upward price pressures because patients have little incentive to shop around for the best bargains and because HCPs’ incomes increase the more they treat. Take two aspirin and call me in the morning has thus given way to take a full course of (insert the name of some expensive, symptom-only treating drug here) and call on me next week, so I can bill your insurance company again.

The pending legislation is just the latest of a long string of reforms that treated the symptoms of the health care system’s ills rather than its underlying causes. Before the twentieth century, health care was generally of dubious value so costs were low, so low that workers more desired compensation for lost wages than insurance to pay medical bills. By 1900 or so, medical treatments had improved enough, and prices had increased enough, that health care and insurance became a major policy issue for the first time in U.S. history.

Progressive attempts to implement government health care systems at the national and state levels in the 1910s failed but that did not stop governments from meddling in health insurance markets in the 1930s and 40s. With help from the Great Depression, regulators destroyed a variety of non-profit institutions, including free clinics for the very poor, prepaid doctor and hospital plans where patients paid only when they were well, and industrial sickness funds and fraternal organizations for workers and small business owners. That was a major policy blunder because those institutions had proven their ability, in all but the worst economic conditions, to mitigate the two great banes of health insurance, adverse selection (only sick people desiring insurance) and moral hazard (“malingering” in the parlance of the day). Into the vacuum stepped for-profit health insurers wielding employer-based group policies. During World War II, the government cemented the insurance companies’ position by providing tax incentives to employers that offered health insurance benefits.

But that’s not all. In an attempt to fix the problems it created in the 1930s and 40s, namely rapidly rising prices and a large number of uninsured, the government made matters worse with Medicare, Medicaid, mismanagement of medical malpractice, and stultifying regulations that severely restrict geographical competition as well as policy form innovations.

What would effective health care reform look like? First, it would sever completely the link between employment and insurance. To combat adverse selection, each person should have his or her own insurance policy, preferably initiated in utero, after gender identification but before any diagnostic testing. The government should also ban the insurance of regular physical examinations because known events entail no risk and folding their costs into insurance policies reduces patient incentives to seek the best bargains.

Second, effective reform would mandate pay-for-performance fee schedules or prepaid plans with premiums that are forgiven when patient health drops beyond some threshold. Why should HCPs be paid for their time instead of their effectiveness? (Or anyone else for that matter? For the record, I also advocate pay-for-learning tuition schedules for my own industry, higher education.) Some regulation and government oversight will of course be necessary to ensure that HCPs and insurers honor their promises but in general regulators should get out of the business of mandating premiums and policy forms and grant adult Americans more freedom to contract, including waiving or limiting the right to sue for malpractice.

The reforms suggested here are not panaceas; they will not bring paradise on Earth. People will still get sick, suffer, and die. Because they attack the root causes of the health care system’s ills, however, they would alleviate more human suffering at any given level of expenditure than the current system does. Moreover, they would allow individual Americans to chose how much they wish to spend on health care rather than leaving that decision up to Congress, an entity that should address its own serious problems (from gerrymandering to special interest group pandering) before trying to tackle anything so intimate and important as major health care reform.

Robert E. Wright is the Nef Family Chair of Political Economy at Augustana College SD and the author of a dozen books, including ‘Fubarnomics: A Lighthearted, Serious Look at America’s Economic Ills’ which is forthcoming later this year from Prometheus.