The Other Shoe

There will be plenty of discussion on health care reform in the next eleven months (only 341 more shopping days until election!), and I believe that a single payer system is inevitable. Yet changes to who pays are only the first and less threatening of the health care problems looming before us. Much worse will be what happens when health care eats the economy, and a single payer system poses risks of accelerating that.

Today our system provides some people a varied baseline level of care in a crazy-quilt matrix of rules, provider networks and payment structures. Access to this level of care is based on employment, preferably with a mid-size or larger employer. There is a social safety net in the form of medicare, which providers hate because the government is fashionably late with the payments.

Providers typically enter into contracts with insurers where the provider will perform services at less than list price. In addition to the business management problems this causes for providers, this leads to ridiculous situations where the only people paying full price for medical services are the uninsured.

Many individuals have no idea how much of the cost of coverage their employer is eating until they have to go out and get their own coverage. People who are self-employed or whose employer does not provide coverage are left twisting in the wind.

Access to coverage in excess of the baseline has been rationed by ability to pay. Is this fair? Compared to what? Here we can meaningfully divide the problem in two: fairness of the baseline and fairness of rationing of care beyond the baseline. A consistent baseline would be more fair. The government thought it had the back-door key to achieving this in the forties, when the current employer-provided system was being worked out. Back then, the economy was all about big companies, and it was assumed that most people would be employed by one. But those assumptions have all gone by the wayside in the past twenty-five years.

A system that offered everyone the same baseline care could address the injustices described by Malcolm Gladwell in his 2005 article. However, the first problem will be locating the baseline. In 1991 Oregon sought permission from the feds to overhaul its health care system (it was denied). The state wanted to broaden access, while at the same time restricting coverage under certain conditions. One change they wanted to make was to refuse to pay for liver transplants for alcoholics. Alcoholics are, in fact, protected under the 1990 Americans with Disabilities Act (ADA), and it is doubtful that it would be legally permissible to refuse to pay for their liver transplants.

The liver transplant example illustrates the moral hazard that Gladwell rails against in his article. His examples are illustrations of the unevenness of the baseline, but the question becomes, where would the baseline be set? The issue is not just one of mean-spiritedness toward the sick; someone has to pay for all this. Creating one giant risk pool of all American citizens and having everyone pay for everyone else increases the likelihood that we will vote ourselves healthy, especially as the baby boomers advance through their sunset years. This is the moral hazard lurking behind health care reform. The hazard is not that poor people will get to have their teeth fixed; it's that a teenager can freely start smoking because society will pay for his lung overhaul in his later years.

Health care will, in an economic sense, always be rationed because it is another domain, like money and time, where resources are limited and wants are not. How do you allocate access to leading-edge cancer treatments that are very expensive? Rationing based on ability to pay is, at least, impersonal and therefore comprehensible. In other forms of rationing, who decides who gets to live and who has to die? Do candidates have to demonstrate need? Worthiness? And by what standard will these be evaluated?

Health care already represents more than 15% of gross domestic product (GDP), and climbing. Despite the sweet seductions of macroeconomics, every dollar of GDP does not represent an equal amount of wealth produced. Two apples are twice as good as one apple. Apples continue being desirable until you approach satiation, where diminishing marginal utility sets in. But health care doesn't work like that. Health care is not a good in the same sense that apples, iPods, back rubs and gallons of gasoline are goods. Health care does not produce wealth the same way that apple farming or gasoline refining produces wealth. Health care also does not increase your standard of living the way a massage does. Doctors, nurses, lab techs and other practitioners certainly earn their money, but if you've had one brain tumor removed very competently, you aren't going to hope to have another so you can experience it a second time.

There is a theoretical upper limit to the portion of the economy that health care can occupy before the economy actually begins to contract, because health care remediates problems more than it increases aggregate wealth (as is also true with auto repairmen and divorce lawyers). Therefore, cost containment is critical to the delivery of more health care to more people, as many proponents of health care reform recognize.

Here is a page authored by two MDs, who recognize "the tendency of bureaucracy to reproduce and amplify itself." Despite making the assertions that "National health insurance could solve the cost-vs-access conflict by slashing bureaucratic waste," the authors offer no specifics of how the risk of bureaucratic expansion would be mitigated.

The current system of health care coverage is a failure. It imposes additional costs on every person employed, reducing job growth, and creates perverse incentives that do not align with the behaviors we want out of economic agents. It needs attention at a national level. But do not lose sight of the need for cost containment, because the problem is waiting right around the corner.