Sunday, March 11, 2007

Affordable Health Care

A friend who has been reading my posts suggested that I try to tackle affordable health care. More to the point, since I don't think I have a prayer of "tackling" it (especially since it is such a complex space that I know almost nothing about), that I at least do what I think I'm pretty good about doing: distilling it down to the key issues so that at least one can have an honest debate/discussion.

I think the premise of his suggestion is a fair one: health care is broken. I did a quick Google search and found this site which I think sums up the problem: the United States spends more per capita than almost any other nation, yet each incremental dollar we spend does not appear to increase our longevity. I recognize that longevity and overall health are hardly the same thing, but they obviously correlate and it certainly illustrates the point.

I'll make an assertion from this sort of data that we have a highly inefficient system in terms of converting dollars into health care. If that's a controversial point, then I suppose the rest of this post is probably moot, but please indulge me on that. The question then is "how do we get a more efficient system?" My friend posed the question a bit differently, asking how we achieve affordable health care, but I'm deliberately reframing the question because I think that if we can make the system deliver health care more efficiently then I think we can deliver affordable health care. Heck, in the extreme case, look at the citation above. Cuba is just below us in life expectancy, yet spending ~4% what we spend. I'm not proposing that we adopt the Cuban system, but it shows that there is a long way we go, and if we could get even 20% more health benefit per unit of health care delivered, I think the whole notion of "affordable health care" becomes much more realistic.

Broadly speaking, I think there are two sources of inefficiencies: transactional and allocation. Maybe there are others, but these two stick out to me.

The first is the inefficiencies along a single health-care transaction. This includes things like health insurance overhead, malpractice insurance overhead (which is probably a topic all by itself), and in fact a whole slew of crazy policies that result in perverse incentives. My favorite example is that most insurance policies cover Viagra and childbirth but don't cover birth control pills. Whose bright idea was that? There are secondary effects here two, I'm sure. For example, fear of malpractice lawsuits undoubtedly drives some degree of tests and treatments that are not strictly necessary. I can't prove it, but I'd guess that advertising of prescription drugs leads to increased patient consultations, which cost money even if no treatment ultimately ensues.

The second realm of inefficiency is in the allocation of health care. To pick an egregious and provocative example, how many people could have received basic primary care for what it cost to keep Terri Schiavo alive through even one court appeal? If we could allocate dollars more to the needy, we might get more longevity (or other "overall health") points per dollar. More to the point (and to the source of my friend's question), we have a huge imbalance in this country in who has access to health care, and for what. How do we make it so that nobody has to go without?

My friend raised an interesting analogy, which I think is quite good: food security. As a society, we have over the years decided that we don't think people should go hungry. And by and large, we do a pretty good job of ensuring that nobody need be hungry. We have welfare and soup kitchens and a wide variety of programs and charities that try to make sure that people don't starve to death. While hunger certainly has not been eliminated, the number of people that die of malnutrition annually is (thankfully) small. Yet we don't view food as an entitlement from our government or employer, nor as something that we don't have to pay for. And we don't resent the fact that eating at a fancy restaurant costs more than eating at the corner deli.

I'd suspect that this may be part of the key of the issue: how do we make health care security like food security?

A few things come to mind to consider:
  • Provide skin in the game. One of the unintended consequences of insurance is that, in shielding the customer from the costs or risk associated with a transaction, the customer has no incentive to limit their use. I believe that this is part of the reason that low-income people (many uninsured) use the emergency room disproportionately - especially if they ultimately do not have to pay the cost of that emergency room usage. Basic marketplace principles: People need to have skin in the game if they are to make rational decisions beyond what is easiest for them. Think about how we would eat if food were provided by insurance. We'd be ordering lobster for dinner as often as we could, especially if the copay for lobster was the same as the copay for tofu.
  • Perhaps I should reformulate the "skin in the game" argument as "return insurance to being insurance." The point of insurance, after all, is to spread risk, to limit downside exposure. Health insurance does that, but it's also become its own entitlement program, providing a "health benefit" rather than a safety net. (Again, we have food insurance in this country in a variety of forms, yet nobody feels weird paying for food out of pocket.) In the way that a portion of our telephone bill goes to ensure universal telephone coverage, we should consider funding the insurance side of the equation not just through individual premiums, but through a portion of what gets paid for pay-for-service.
  • Increase choice and competition in the system. Easy to say but hard to do, but I can enumerate some of the places where increased competition could lead to greater efficiency:
    • Choice of health plans. Most people are ensured by their employer, and they are stuck with a one-size-fits-all plan (or perhaps a menu of 2 or 3 options).
    • Drug patent reform. I struggle with this because I really do believe in the value of patents and I recognize how much it costs to bring a new drug to market. But we also have companies that tweak a product slightly in order to extend a patent's lifetime, and who do not license cheap generics or competitors. I think we should try to find ways to compensate the companies for the investment and risk they bear to develop drugs, while making it as easy to crank up the volumes (and down the prices) on those drugs as we can.
    • Malpractice reform, as a way to make it easier for more doctors to get into the field (increased competition), and to reduce the incentive for them to practice defensive medicine.
There's a tension in most debates about healthcare between the single-payer model and the pure free-market model. I think this is a false debate because neither model works. The single-payer model is inefficient because it lacks competition, choice, skin in the game, and often has rationing of service or long delays for service. The free-market model works much better, but only for those who can afford it. The trick is to take the best of both models: provide a safety net so that nobody goes without essential health care, but wring enough efficiency from the system so that most people can afford to pay for the health care that they need.

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