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Why did the HMO revolution fail?
Mark Thoma cites this passage from Paul Krugman:
During the 1990's it seemed, briefly, as if private H.M.O.'s could play that role. But then there was a public backlash. It turns out that even in America, with its faith in the free market, people don't trust for-profit corporations to make decisions about their health.
Read the whole link for a recap of Mark's debate with Arnold Kling. In my view what people objected to was not the for-profit status of HMOs per se but rather that they could be told they can't get all the care they want. That view will remain. That's one reason why covering 45 million or so additional Americans will lead to rising rather than falling health care costs.
On the administrative expenses of private health insurers, that is, at best, a one-time savings and health care costs still will be rising. It's also hard to argue that a) the really sick people are often denied care or coverage by private insurance, and b) we can pick up those same people and still lower total costs. It's the sick people who account for most of the costs, at any margin, and most of those costs come from medical procedures.
As the possibility of a real Democratic majority draws closer, expect to see more and more cognitive dissonance on this issue. There's a perfectly coherent case for greater government involvement based on the desire to spend more resources to alleviate the financial insecurity of many sick Americans. But you are going to hear the "free lunch" version of the argument instead, based on the belief that the properties of American and European health care systems are somehow interchangeable at will.
That said, people on my side of the issue should admit that we could lower overall health care costs (or at least slow their rise) by having a true single-payer plan and putting most doctors on fixed salaries in small cooperatives, thereby altering their incentives to spend on wasteful capital expenditures. (How many years would it take for costs to fall?) That's not, however, what we'll be getting, so beware the bait and switch. Under any plausible health care reform scenario, health care expenditures in America will rise rather than fall. If only we had a betting market on this...
Addendum: Here is Arnold's more direct reply. Here are related remarks from Megan McArdle.
Posted by Tyler Cowen on July 31, 2008 at 06:24 AM in Medicine | Permalink
Comments
"In my view what people objected to was not the for-profit status of HMOs per se but rather that they could be told they can't get all the care they want. That view will remain. That's one reason why covering 45 million or so additional Americans will lead to rising rather than falling health care costs."
Very insightful. In the way that many (most?) Americans have an over-inflated sense of self-entitlement, this sense is very apparent when it comes to health care. What's going to happen when someone receives a terminal diagnosis that their family can't accept? I'm afraid that, eventually, it will mean that the government, meaning taxpayers, will be forking out billions for treatments and procedures that will have no effect on the patient's outcome.
Posted by: LogicRules at Jul 31, 2008 7:40:46 AM
"...even in America, with its faith in the free market, people don't trust for-profit corporations to make decisions about their health."
Bwahahahahahahahahahahahahahah!!! Ahem. Hmmm. Bahahahahahahahahahahahahah!!!
Krugman's BACK baby!
Posted by: Andrew at Jul 31, 2008 7:53:56 AM
Okay, I admit that by lowering quality and the ability to buy stuff, we can reduce expenditures on THOSE products. Anything else?
Posted by: Andrew at Jul 31, 2008 7:58:28 AM
Okay, sorry, that's good work. Just got a little carried away at Krugman.
Posted by: Andrew at Jul 31, 2008 8:00:33 AM
People are always going to complain about not getting all the care they want for free...you are right on that one. From my personal bias, and this is NOT a rational rebuttal, it somehow offends me a whole lot more knowing that my (theoretical) care was denied so that someone else could get richer/make a profit. I am personally less offended by inefficiency than greed. This isn;t a perfect substitute but....
I of course, have a more liberal bent.
Posted by: Tony Cohen at Jul 31, 2008 8:13:30 AM
And I think Tyler is wrong about
...That said, people on my side of the issue should admit that we could lower overall health care costs (or at least slow their rise) by having a true single-payer plan and putting most doctors on fixed salaries in small cooperatives, thereby altering their incentives to spend on wasteful capital expenditures.
This plan will drastically reduce the number of hours that physicians will want to work, could encourage physician unions, and will discourage many from medical training. Access to quality physicians will be reduced. I am unsure how much we can continue to drain medical talent from developing countries if we reduce incentives here while their home countries increase in wealth and opportunities.
Do doctors make wasteful capital expenditures? That is a big assumption. Look at the history of polio. In the beginning the only treatment offered was palliative care. Then extremely high cost options such as an iron lung became an option. Lastly, medical science advanced and virtually eliminated the disease. That is the way medical science tends to advance.
Should we have limited access to x-ray machines because in the beginning they were rather expensive? Or should we encourage the market to decide if the widespread adoption of technologies makes sense, safe in the knowledge that competition will give us cheaper, better options in time combined with declining costs. I imagine the biggest cost of an MRI machine is in the initial design phase. The marginal cost of each additional machine must decline, with a big decline after some critical mass. If the machines are widely available, and dropping in price, the public has access to a superior technology - a technology reserved for a few becomes widespread and affordable. Only if you assume that the state of medical knowledge has reached a peak, and increases in health outcomes are not worth the investments they require, should you support such views.
"...even in America, with its faith in the free market, people don't trust for-profit corporations to make decisions about their health."
No, in America, people don't want to hear no when they are seeking medical care. Putting the control into government hands will not change the fact that when people get ill they want unrestricted access.
BTW if the government takes over health care you better hope that you have a disease that the politicians think is worth treating.
Posted by: DanC at Jul 31, 2008 8:31:41 AM
If the government had been the single payor for the last thirty years, whether we should pay to treat AIDS would have been a political issue. And I have no idea what the outcome would have been.
Posted by: Cyrus at Jul 31, 2008 9:08:20 AM
BTW
Want to save a lot of money in health care make it illegal to treat premie babies born under 4 pounds and make it illegal to treat any person with less then a 90% chance to live (with cognitive functioning intact) for 1 year. Let the government start making such tough life and death decisions to reduce health costs and then we will see the reaction of Krugman and others. Do you want politicians and government agencies make these decisions? Do you want your doctor to be an advocate for you or do you want doctors as government employees?
Posted by: DanC at Jul 31, 2008 9:09:48 AM
No hard choices = no money saved
Per DanC's comment: I can tolerate living in a world in which premie babies born under 4 pounds are allowed to die from lack of care unless their parents are rich.
(I've also lost an infant, so I'm aware of the sorrow.)
For the cost of trying to save that small premie, many more pregnant women and infants can be provided normal levels of care.
Posted by: ZBicyclist at Jul 31, 2008 9:42:47 AM
"I am personally less offended by inefficiency than greed."
I think this sentiment is due to a misunderstanding of the role of profit in allocating resources. It is true that the sentiment as phrased admits the possibility that the profit motive may increase "efficiency" but "efficiency" for many people who hold this moral position often is taken in a quite static context.
For example, people might argue that "we can afford to redistribute" or "we can afford to regulate" so that we quash greed and help the poor. But what does it mean to be able to afford something?
If today I have enough money to purchase something then I can afford it. But if purchasing it today means that tomorrow I won't be able to buy something else because that thing won't exist, this changes my calculation about whether or not I want to spend the money. Efficiency is rightly thought of in a dynamic context.
If we eliminate large profit opportunities in an industry such as medicine, it isn't just today's efficiency that suffers, it is tomorrows medicine. Tomorrow we won't have the luxury to say that we can afford to subsidize the cancer medications of the day for those poor in need of them, because those medicines won't exist. Those which don't exist today won't be invented and those which are expensive today won't have gotten cheaper.
So, to say that you are willing to sacrifice efficiency in health care in order to quash greed (or help the poor) is also to say that you are willing to sacrifice tomorrow's available health care and tomorrow's poor.
Posted by: liberty at Jul 31, 2008 9:50:16 AM
"it somehow offends me a whole lot more knowing that my (theoretical) care was denied so that someone else could get richer/make a profit."
Care is denied because you (society) chose a cheaper plan.
In countries that have done this nationally, you may not even choose to pay more for better service. I am much more offended by this than anything else.
Posted by: Tom at Jul 31, 2008 10:03:18 AM
Kaiser-Permanente, which I believe is a non-profit HMO, seems to be still building out here on the west coast. I like it, and pretty much trust them. I laugh when they tell me my EKG is unusual but not dangerous :-/
I really think government vouchers for HMOs (themselves profit and non) is the way to make single-payer work with market choice.
... but yes, I see something that simple and efficient would face a hard slog in congress. Perhaps we must wait for a medical care "crisis."
Posted by: odograph at Jul 31, 2008 10:09:31 AM
Regarding the idea that governments can save money spend of unproductive healthcare, I was very disappointed watching the PBS Frontline “Sick around the world”. It seems that other countries do not cut useless procedures; in fact they seem to cover wacky stuff like traditional Chinese medicine and acupuncture. They save money by squeezing providers with various forms of price controls.
Normally price controls will cause shortages and there are some shortages and waiting but in a situation like we have of exercise licensing where the supply of providers is artificially restricted, squeezing provider does not cause as much harm as normal. It may lower the quality of student entering medical school or nursing school but the quality today is much higher than it needs to be and so no shortages of doctors and nurses should occur. Hospitals today are over equipped so shortages or equipment will be blunted, hidden and come on slowly. The effects on drugs will be completely hidden since it will not affect supply of current drugs.
Posted by: floccina at Jul 31, 2008 10:12:41 AM
If I don't want to pay for my own health care, why on earth would I believe anyone else should want to?
It seems most people cannot fathom the logic of the above statement.
Posted by: Dan at Jul 31, 2008 10:13:33 AM
A little OT but I just ran across this idea:
Why look at other countries for medical spending reduction idea when we can look at Utah:
http://www.statemaster.com/graph/hea_tot_sta_hea_car_spe_percap-state-care-spending-per-capita
Utah spends about half the USA average on healthcare.
http://images.businessweek.com/ss/06/09/life/source/4.htm
Utah
Life Expectancy: 78.7 years
State ranking: 3
The top two counties in Utah with the highest life expectancy are Morgan and Summit Counties, both at 80.8 years.
http://www.usatoday.com/news/health/2006-09-11-life-expectancy_x.htm
Posted by: floccina at Jul 31, 2008 10:15:21 AM
Dan, surely you are not arguing that every American family that wants to pay for its own health insurance is able to do so.
Posted by: odograph at Jul 31, 2008 10:16:20 AM
Agency capture seems like it would be a major concern with a single-payer system. You'd have lots of motivated, intelligent doctors who regulators deal with every day -- almost perfect conditions for capture.
I wonder if agency capture could perversely explain the lower costs in other countries? If costs come disproportionately from innovation, a regulatory environment might protect existing doctors by avoiding investment in new technologies (which require retraining, make old skills obsolete, etc.).
Posted by: Zach at Jul 31, 2008 10:22:37 AM
Krugman's comments that people don't "trust" for-profit corporations about their health is idiotic. There are many for-profit hospital chains (HCA, CHS, Tenet, etc.), and mostly they are doing fine. Most people don't know or care about the profit status of their hospital or HMO. I can't recall ever having a patient tell me, "I'm going to Hospital X because it's not-for-profit" or "I'm not enrolling in HMO Y because it's one of those nasty for-profits."
Single-payer systems save money by rationing care. Period. And most physicians never engage in large capital expenditures, wasteful or otherwise. Such a statement makes me wonder how much you really know about the real world of health care economics (very little, I suspect).
Posted by: Ned at Jul 31, 2008 10:40:21 AM
You know, I regularly mention vouchers here, but the idea is never attacked or endorsed. It falls in a well. That seems a little strange, given how quickly libertarians rose to endorse vouchers in education.
Is this a tactical choice? When government has the schools, vouchers are better ... but when insurance companies have medical care vouchers are better left unconsidered?
When Zach and others talk about single payer, is their assumption of single provider fair, or is it tactical?
Posted by: odograph at Jul 31, 2008 10:45:20 AM
Ned, do you think the US has care which could be rationed?
I know an old girlfriend got her teeth cosmetically capped because the dentist wrote it up as a necessity.
Posted by: odograph at Jul 31, 2008 10:48:21 AM
16 million of those 45 million uninsured are working-uninsured--that is, they make over $50,000 a year and can generally afford health insurance.
Similarly, the average unpaid medical bill (the amount that causes people to declare bankruptcy) is $3,600 to the average $12,000 cost per medical episode. Why aren't these people purchasing insurance? Like Tyler says, HMO objections are largely attributable to lack of options rather than for-profit status.
For those advocating the single payer system: A Second Opinion, by Arnold Relman, does a really nice job outlining the expectation that, "Payment for comprehensive health care services on a prepaid per capita basis would greatly simplify national budgetary planning and would avoid most of the overhead costs." Alternately, though, George Halvorson argues for the continuation of a market-based system in his Health Care Reform Now! He says that, "Market forces...shape participants through both the wholesale and retail marketplace. [...] Healthcare, [he believes,] also needs to figure out how to use both wholesale and retail market models and functionality in order to simultaneous improve quality and reduce prices." He does not, therefore, advocate for a change to the way the insurance system is run, but rather for increased consumer awareness about healthcare costs so as to create a dynamic market environment where low cost and high quality wins out—much like any other competitive, market-driven economy.
Posted by: MSD at Jul 31, 2008 11:18:16 AM
"He does not, therefore, advocate for a change to the way the insurance system is run, but rather for increased consumer awareness about healthcare costs so as to create a dynamic market environment where low cost and high quality wins out—much like any other competitive, market-driven economy."
I think that's rather a too optimistic view of human nature - and if it relies on an idealized view ("if everyone were a proper libertarian household budget-balancer like me") what good is it?
On those rational buyers:
"Car Buyers Downsize, but Spend Big on Options"
"Now people of all income levels are buying small cars to pinch pennies at the gas pump, but they are not scrimping on creature comforts. Instead, they are spending hundreds or even thousands of dollars on options, like heated leather seats and high-end entertainment systems, usually found in luxury cars."
“If you do the math, financially it’s not worth it,” Mr. Schafer said. “But we figured if we buy something that’s small and fun we can achieve some gas savings. It just kills me personally when I take a ride by myself and I’m getting 10 miles to the gallon and I have nothing in the back.”
http://www.nytimes.com/2008/07/17/business/17compact.html
... kinda off-topic, but after being told so many times that the Prius "hybrid option" didn't pay for itself it's pretty funny.
(a single payer, voucher, multiple provider system works IMO with humans as they are.)
Posted by: odograph at Jul 31, 2008 11:37:10 AM
Seems to me we could lower health care cost by not letting food producers put so much weird crap in the food we eat (partially hydrogenated oils, high fructose corn syrup, "corn fed" beef), etc.
Posted by: d at Jul 31, 2008 12:30:32 PM
"...people on my side of the issue should admit that we could lower overall health care costs (or at least slow their rise) by having a true single-payer plan and putting most doctors on fixed salaries in small cooperatives..."
Obviously, setting up a monopsony (single buyer/payer) would lower overall cost of the product, but must also lead to a shortage of the product provided (care). Just like a decree to set a price ceiling would make the "price" lower but cause great welfare loss. I couldn't have really understood this sentence to mean that knowledgeable economists should back a single payer plan, right? Just coming out to admit half the scenario (lower cost) and not mention the other half (wait lists, shortages) would give the public an unrealistic vision of what the policy would mean. If we admit one, we must caution and temper expectations with the other.
Posted by: Pharius at Jul 31, 2008 1:00:51 PM
"Obviously, setting up a monopsony (single buyer/payer) would lower overall cost of the product, but must also lead to a shortage of the product provided (care)."
Does any contender in the US system propose a true monopsony, one which would dis-allow supplemental private insurance, cash and care, or private doctors?
The trick I think is to make the "shortage" in a monopsony map to "extra" or "cosmetic" care.
Posted by: odograph at Jul 31, 2008 1:08:45 PM
