american health care policy issues

8/9/2019 American Health Care Policy Issues

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Aica Halh Ca

Plic I

Arnold Kling

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American Health Care Policy Issues

by Arnold Kling


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Arnold Kling graduated rom Swarthmore College in 1975 and received a Ph.D.in economics rom Massachusetts Institute o Technology. He worked as an eco-nomist in the Federal Reserve System rom 1980 to 1986 and served as a senioreconomist at Freddie Mac rom 1986 to 1994. Kling is an adjunct scholar with the

Cato Institute and teaches statistics and economics at the Berman Hebrew Aca-demy in Rockville, Maryland. Furthermore he is ounder and co-editor o EconLog,a popular economics blog.


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Contents

Introduction 5

The Worlds Greatest Health Care System? 5

Haphazard Insurance 9

High Costs, Low Benets 13

Sustainability 14

Conclusion 16


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Introduction

On February 25, 2010, President Obama met with Congressional leaders or se-

veral hours in an attempt to iron out dierences and move orward on healthcare reorm. Although this health care summit ailed to produce a legislativeagreement, there was a consensus on several matters. Democrats and Repu-blicans both epressed the view that America has the greatest health care sys-tem in the world. Both sides agreed that gaps in health insurance coverageaect many Americans. Both sides cited research suggesting that roughly one-third o spending on health care in the United States goes or medical proceduresthat are ineective. Both sides pointed out that standard projections show thathealth spending in the major government-unded health programs Medicaidor the poor and Medicare or the elderly are on an unsustainable path.

This paper will be organized around these areas o agreement. The commonly-held views are likely to shape the direction o health care reorm in this coun-try, not only in 2010 but over the net decade. The belie that America has theworlds greatest health care system implies limits on how much reorm thepublic is willing to accept. Gaps in health insurance coverage are a source orustration and an impetus or changes in government policy. The belie that

Americans waste resources on health care raises the issue o who should beempowered to make dierent choices. The unsustainable projected scal pathsuggests that politically unpopular reorms are on the horizon.

The Worlds Greatest Health Care System?

The World Health Organizations World Health Report 2000 ranked the Ame-rican health care system as the 37th best in the world1. Implicitly, this rathermediocre ranking was rejected by the participants in President Obamas sum-mit, who instead armed that United States has the best health care systemin the world.

The contrast between the view o Americas leaders and that o the WorldHealth Organization shows that not everyone shares the same values or the

1 World Health Organization, The World Health Report 2000: Health Systems: ImprovingPerformance (Geneva: WHO, 2000), http://www.who.int/whr/2000/en/inde.html


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same perspective when it comes to health policy. Glen Whitman, an Americaneconomist, subjected the WHO rankings to a critical analysis.2 He points outthat three o the ve main actors, accounting or 5/8 o the weight in WHOsranking system, are distributional in character. For such measures, a country in

which every citizen receives equally bad health care paid or with ta dollarswould be scored better than a country where more costs are borne privately orwhere some citizens receive ecellent care and others receive only good care.

To an American, the WHO ranking system comes across as ecessively ocusedon distributional issues. Americans preer to look at what we call the bottomline: What is the quality o care that individuals receive? Our system ensuresthat poor people have access to care, through the Medicaid program and throughsubsidies to hospitals so that they will treat people who lack health insurance.Beyond that, however, WHOs ocus on equality would strike many Americansas a strange etish.

The point here is not to argue that American priorities are correct and that WHOsrankings are mistaken. Instead, I am suggesting that the American health caresystem probably refects American values airly well. I our system seems un-desirable to people rom other countries, that may in large part refect culturaldierences that ocus on dierent values.

American culture tends to include a strong aith in progress. We believe thatmedical research and innovation have improved the quality o lie, and we e-pect this to continue in the uture. Americans epect our scientists to one daynd cures or cancer, Parkinsons Disease, Alzheimers Disease indeed or everymajor ailment, and or many lesser ones as well. Nobel Laureate Gary Beckerhas commented that perhaps this aith in progress eplains why so many youngAmericans are obese.

Is it irrational to gain weight? Not necessarily. I I were a teenager now, Imight well decide that the consequences wont be so bad. We already havedrugs to mitigate high blood pressure and high cholesterol, and well pro-bably see similar progress with diabetes, the disease most closely associatedwith obesity.3

2 Glen Whitman, WHOs Fooling Who? The World Health Organizations Problematic Rankingof Health Care Systems. Cato Institute Brieng Papers No. 101, February 28, 2008. http://

www.cato.org/pubs/bp/bp101.pd3 The Nobel Roundtable: Arrow, Becker, Milken and Scholes tell it all to you, Milken Institute

Review, July 2007, p. 89-90. http://www.milkeninstitute.org/publications/review/2007_7/84-93MR35.pd


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Economists Kevin Murphy and Robert Topel estimated that the value o gainsin health and longevity that accrued between 1970 and 2000, i included inthe national income accounts, would have increased annual GDP by 50 percentover the conventional measure.4 William Nordhaus has drawn similar conclu-

sions.5

Using a variety o methods, various authors have attributed very largebenets to medical research.6

Daniel Callahan, a medical ethicist who is highly critical o Americas healthcare system, recognizes the ways in which it refects our values. In his bookTaming the Beloved Beast, Callahan attacks

the super-elevated stature given to steady medical progress and technolo-gical innovation in American culture, medicine, and industry. Progress andinnovation seem sel-evidently valuable, not to be questioned. The righte-ning thought that the innovation that has saved so many lives and reducedso much suering could itsel be playing a leading role in our health carediscomort is hard to accept, dicult to talk about openly, and politicallycontroversial7.

He continues,

I do not believe that we can eectively cope with the practical managerial,organizational, and policy issues without attempting to change many un-derlying cultural, social, and ethical premises. We have a culture addictedto the idea o unlimited progress [...]. American health care is radicallyAmerican: individualistic, scientically ambitious, market intoicated,suspicious o government, and prot-driven. I put changing those valueswithin health care in the class o a cultural revolution dedicated to ndingand implementing a new set o oundational values8.

I do not share Callahans antipathy toward American cultural attitudes. However,I do agree that those attitudes help eplain some o the dierences betweenhealth care in the United States and health care in other countries.

4 Kevin M. Murphy and Robert H. Topel, The Value o Health and Longevity, Journal of PoliticalEconomy, 2006, vol. 114, no. 5.

5 William D. Nordhaus, The Health o Nations: The Contribution o Improved Health to LivingStandards, NBER Working Paper No. 8818, February 2002.

6 Kevin M. Murphy and Robert H. Topel, Measuring the Gains from Medical Research : An

Economic Approach, University o Chicago Press, 2003.7 Callahan, Daniel, Taming the Beloved Beast: How Medical Technology Costs are Destroying

our Health Care System. Princeton University Press, 2009, p. 2.8 ibid, p. 7.


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Canadas single-payer health care system is requently cited as a good eampleby Americans who would like to see a similar system here. However, Americansoten encounter anecdotal evidence that when Canadians want state-o-the-artmedical care they come south. Indeed, at President Obamas health care summit,

one o the participants mentioned the story o Newoundland Premier DannyWilliams, who, when queried about his decision to come to the U.S. or heartsurgery, replied, But this is my heart. Its my health and its my choice.9

Americans place a high value on medical procedures that oer hope, even whenthe chances o success are not very high. I saw this with my own ather, whoat age 88 and with terminal cancer o the esophagus, suered a broken hip.He received hip surgery, and attempts were made to give him rehabilitation. Hewas given treatment in eight dierent medical units in two weeks. While theintentions o the health care providers were heroic, their eorts did not savehis lie or spare him a painul nal month. He died three months later, withoutever leaving the hospital or walking again.

Overall, over one-ourth o Medicare spending (or about 10 percent o all U.S.health care spending) goes or patients in the last year o lie. Studies suggestthat we could greatly reduce the number o procedures perormed on termi-nally-ill patients without adversely aecting outcomes. However, this would

require signicant changes in cultural norms. In the United States, it is simplyconsidered wrong to allow someone to die when there is the means to prolonglie. It is considered wrong to deny someone a procedure that might cure his orher ailment, even i the cost is high and the chance o success is remote.

Again, Daniel Callahan is a critic, as he describes

one o the endemic problems o end-o-lie care, that o embracing hope

and unlikely treatments and o reusing to grant the obvious act that thepatient is dying. Do not give up: provide one more round o chemothera-py10.

9 Newoundland Premier Danny Williams deends U.S. treatment, National Post, February22, 2010. http://www.nationalpost.com/story.html?id=2599186

10 Callahan, Taming the Beloved Beast, p. 15.


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Later, he writes,

There is a need or a public and proessional recognition o the nitenesso lie and resources. That would mean a dierent set o underlying values

about health, aging, and death a truce with them in place o the presentand increasingly epensive war against them11.

It is not just terminally ill patients who absorb disproportionate medical resour-ces. Americans are willing to see hundreds o thousands o dollars spent on asingle at-risk inant or an individual with a comple chronic illness.

In summary, American culture places a high value on medical progress. We viewour doctors as engaged in a heroic struggle against death, even when peopleare very old and very sick. We believe that treatment is justied even i it oersonly slight hope or relie. Some o the peculiarities o our health care systemrefect these preerences. Relative to our values, we probably do have the besthealth care system in the world.

Nonetheless, the consensus at the Presidents health care summit was thatAmericas health care system has serious problems. In the ollowing section, Iturn to these issues.

Haphazard Insurance

How can the worlds richest nation have roughly teen percent o its popu-lation carrying no health insurance whatsoever? In other respects, our system

is not so dierent. We are not the only country where health insurance is notuniorm in Switzerland insurance varies by canton and in Canada the healthsystem varies by province. We are not unique in the share o health care spen-ding paid or by consumers in act, the share o personal health care spen-ding paid or out o pocket in the United States is only 12 percent, a bit belowaverage among OECD countries.

What is unique about our health insurance system is that it has no central de-sign. Other countries central governments designed their health care systems,

mostly in the decades ollowing the second World War. Instead, our health care

11 Callahan, Taming the Beloved Beast, p. 217.


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system inherited some o its key institutions rom beore and during the war,and it has evolved in a haphazard ashion since. Even recent reorm proposalsare heavily conditioned by previous reorm eorts, so that they would not ullyclose gaps in insurance coverage or create a system that fows rom a single

consistent design.

Modern American health insurance began in the 1930s with Blue Cross andBlue Shield, which are still major insurance providers today. These were an in-termediary between doctors and groups o patients, with the groups typicallyconsisting o workers in the same occupational trade or rom the same employer.The Blues oered assurance to consumers that the cost o treatment would becovered, and they oered assurance to doctors and hospitals that they wouldbe paid. The health care providers were more interested in obtaining reimbur-sement or services than in providing individuals with something that an eco-nomist would consider to be insurance.

Insurance, such as re insurance, covers catastrophic events. Consumers rare-ly make claims, but when they do make claims the amounts can be large. Thepremiums are relatively low.

In contrast, health insurance in the American tradition o the Blues works more

like a prepaid health plan. Consumers le claims whenever they obtain medicalcare, even or small dollar amounts. Premiums have to be high enough to coverall o the health ependitures o an average consumer. As medical technologyhas advanced, average health ependitures have soared, and premiums haverisen accordingly.

The Blues oered no mechanism or ing the health care budget. They did notchallenge the doctors on their medical decisions or prices charged. In short,

they did everything to encourage the use o medical procedures and nothingto restrict the incomes o health care providers. Given that they were createdby doctors and hospitals, this is not surprising12.

The net step in the evolution o U.S. health insurance was the second WorldWar, during which wage controls were imposed in order to hold down infa-tion. To compete or scarce labor, some rms began oering health coverageas a benet to workers. The Roosevelt Administration was not unhappy to seethis development, and so this health coverage was allowed as a means o eva-

12 See John Goodman, Health Insurance, The Concise Encyclopedia of Economics, http://www.econlib.org/library/Enc/HealthInsurance.html


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ding wage controls. Given that the purpose o health coverage was to providecompensation, once again the impetus was toward comprehensive coverageo all medical services, rather than a true insurance model. Many rms in actadopted Blue Cross and Blue Shield as their insurance provider.

Today, large multi-state employers are required to provide health coverage toemployees. In act, this coverage tends to be generous, with relatively low de-ductibles and co-payments, at least until recently.

The precedent o treating health coverage as something other than compen-sation was carried over into the ta code. Employer-provided health coverageis eempt rom income taes and payroll taes. This health care ta eemptionhas become the largest distortion in the U.S. ta code. I the eemption wereended, taes would rise by over $400 billion a year.

The ta eemption represents yet another incentive or rms to oer more thanmere insurance against catastrophic medical epenses. By oering coverage oreven small medical epenses, rms can attract employees with compensationthat is eempt rom ta.

For rms with employees located in more than one o the American states,

American law provides another benet the ability to oer the same policy inmore than one state. I an individual purchases health insurance or his or heramily, that insurance policy must comply with the regulation o his or her state.With ty dierent state regulators, insurance companies ace high overheadcosts o compliance in what amounts to a relatively small market the marketor covering individuals who are covered neither by government programs norby their employers. As a result, there tend to be relatively ew companies oe-ring health insurance in each state. Moreover, in some states, the regulations

themselves impose requirements that signicantly drive up the cost o healthinsurance. Large employers that provide health insurance are eectively eemptrom this Balkanized regulation scheme. Instead, they must comply only withone set o national regulations.

In 1965, the United States enacted universal health coverage, but only or thepoor and the elderly. Medicaid, which is administered and partially unded bythe states, covers people with low incomes. Medicare, which is a national pro-gram, covers people aged 65 and older.

In summary, the U.S. health care system evolved with no central planning. Alarge class o citizens receives health coverage that is heavily subsidized by their


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employers. Another large class o citizens over age 65 receives coverage that isheavily subsidized by the national government. Still another class o citizens,with low incomes, is eligible or Medicaid, administered at the state level.

What remains are people who do not all in any o those three classes, generallyworkers who are sel-employed or who work or small businesses. They conronta health insurance market that is ragmented by state regulation and in whichthey enjoy little or no government subsidy or purchasing health insurance.They conront directly the cost o health coverage, which, given the high utili-zation rates in this country, can amount to $15,000 a year or more or a amilyo our. Faced with these costs, most o the people who all outside the threeclasses choose to remain uninsured. In addition, many people who are eligibleor Medicaid do not enroll, at least until they require ongoing treatment. As aresult, they are counted as uninsured, even though they t under Medicaid.

Overall, about teen percent o the U.S. population does not have health insu-rance. Thus, we have the dichotomy in which most people have comprehensivehealth coverage that pays too much o their medical epenses, while a largeminority has no health insurance coverage at all. The net result is that in theUnited States as a whole, about 88 percent o personal health care ependituresare paid or by third parties government and private health insurance, and 12

percent are paid or out-o-pocket, meaning by the consumers themselves. Theshare paid or out-o-pocket is actually lower than that ound in many coun-tries that have universal coverage, including Canada13.

In summary, the American health care system emerged haphazardly, rather thanby design. As a result, people who are eligible or government programs or whowork or large employers receive generous health coverage. Those who do notall into those classes oten elect no coverage at all.

The lack o design also means that there is no mechanism in our system orcontrolling costs or ensuring rational use o medical procedures. This is dis-cussed in the net section.

13 See Michael F. Cannon and Michael D. Tanner, Healthy Competition: Whats Holding BackHealth Care and How to Free it, Cato (2005).


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High Costs, Low Benefts

In November o 2009, the United States Preventive Services Task Force released

recommendations to reduce screening on breast cancer. In particular, the taskorce recommended against routine mammograms or women under 50 and itrecommended against teaching women to do breast sel-eams. The recommen-dations created a political restorm, because many women in act are diagnosedwith breast cancer under the age o 50 and/or on the basis o sel-eaminations.(Note that the task orce did not recommend against breast sel-eaminations,only against programs to teach such sel-eaminations.)

Mammograms or women under the age o 50 are an eample o what I callthe gray area in medicine. Gray area medicine means procedures that are notabsolutely necessary to save lives or relieve suering, but which have the po-tential to oer benet in some cases. Oten, screening protocols and precau-tionary tests, such as those that use epensive magnetic resonance imaging(MRI), all in the gray area.

Many discussions o health care policy ignore the gray area. For eample, duringthe health policy summit, members o both parties cited the hypothesis that

one-third o Americas health care spending goes or unnecessary procedures.That makes it sound as i health care is a black-and-white issue, meaning thatthere are only procedures that are absolutely necessary or procedures that areabsolutely unnecessary. What I call the gray area consists o procedures thatare neither absolutely necessary nor absolutely unnecessary.

Another eample o gray area medicine is routine colonoscopy screening orcolon cancer or people over age 50. Such a protocol is not absolutely neces-

sary. Canada does not have the trained personnel or equipment to provide rou-tine colonoscopies or people over 50, and this may be a rational allocation oresources. The cost per lie saved o using the colonoscopy screening protocolmay well be over a million dollars. Yet it would be dicult to argue that thisprotocol is absolutely unnecessary. The colonoscopy procedure has been proveneective at preventing the development o colon cancer.

The colonoscopy protocol and other gray area medical procedures are not with-out benet. However, the benets come at high cost. As a result, many studies


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show that variations in medical spending across dierent regions o the UnitedStates are not associated with dierences in health outcomes.14

Many economists support doing more research into the costs and benets o

various medical protocols. However, as the controversy over the breast cancerscreening recommendations shows, Americans tend to view health care as apersonal, emotional matter, and they are not necessarily ready to embrace al-lowing national standards to override the judgment o individual doctors.

Sustainability

For several decades, health care spending in the United States has grown asterthan GDP. As a result, the share o health care in GDP has more than doubledover the past thirty years. Other countries also have eperienced rising healthcare spending, but starting rom a lower base. Health care now accounts ormore than 16 percent o GDP in the U.S., but only about 10 percent o GDP inother major industrialized nations.

In the United States, the trend o rising health care spending as a share o GDPis known as ecess cost growth. Etrapolating this trend or 75 years, agenciessuch as the Congressional Budget Oce have calculated that by about 2080spending on Medicare and Medicaid will absorb 100 percent o the budget othe national government.

O course, long beore 2080 the United States government will be unable tomeet its obligations i present trends continue. By 2030, the population o peo-

ple over the age o 65 will have nearly doubled rom what it is today. That inturn implies that spending on Medicare and Medicaid will rise rom 3.9 percento GDP in 2005 to 8.7 percent o GDP in 2030, according to standard baseline

14 The most prominent studies come rom the Dartmouth Atlas project (http://www.dart-mouthatlas.org/). They are eatured in Shannon Brownlee, Overtreated: Why Too MuchMedicine is Making us Sicker and Poorer, Bloomsbury, 2007. Robin Hanson, in Showing thatyou care: the evolution o health altruism, Medical Hypotheses, Vol. 70, No. 4 (2008), p.724-742, nds that in act many studies ail to show a relationship between the etent o

medical treatment and overall health outcomes. He suggests in a related essay, Cut Medicinein Hal (http://www.cato-unbound.org/2007/09/10/robin-hanson/cut-medicine-in-hal/),that the United States could improve the quality o lie, including health, by spending muchless on medicine.


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assumptions15. Along with increased spending on Social Security and higher in-terest on the national debt, this suggests that the United States simply cannotcontinue without making undamental changes to taes, spending, or both.

Broadly speaking, there are three ways that policy makers can reduce the growtho health care spending in order to achieve a more sustainable budget. Eachapproach is raught with problems.

One approach is to try to deliver the same medical procedures at lower cost, byimproving eciency and lower payments to health care providers. However, thisapproach relies on cost-reductions that are unproven (such as the savings thatmight be achieved through use o electronic medical records) or which requirecutbacks in payments to physicians and others that would be politically dicultand might have adverse consequences or the supply o medical services.

Another approach is or government to ration care, by being more selective inthe way that it compensates health care providers. Today, doctors are reim-bursed or services that they provide. Government could narrow the scope oprocedures or which it will provide reimbursement. Another approach that hasbeen discussed is payment or quality, meaning that physicians would receivebonuses or ollowing recommended guidelines and perhaps ace penalties or

ailure to ollow such guidelines.

The nal approach or limiting growth in health spending would be to giveconsumers more responsibility or their health care spending. For eample,instead o reimbursing health care providers, the government could provideits beneciaries with vouchers. Consumers would use these vouchers to payor services. Because they would own the vouchers, consumers would eercisediscretion in selecting procedures and also take into account price dierences

among providers.

The voucher approach has a number o potential pitalls. People on low incomesmight nd the vouchers inadequate. People with epensive medical conditionsalso might not be able to aord necessary treatment. Perhaps these problemscould be alleviated by using a means-tested voucher system and adding a layero catastrophic health insurance.

15 See Committee on the Fiscal Future o the United States, Choosing the Nations Fiscal Future.The National Academies Press, 2010. http:// www.nap.edu/catalog.php?record_id=12808Some material, including the baseline assumptions, is available only at the web site andnot in the printed report.


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There are also psychological costs o using a voucher approach. Throughout theindustrialized world, countries have evolved systems that insulate individualsrom having to pay or their own health care. Presumably, this is because con-sumers and doctors eel very uncomortable about regarding medical care as

a business transaction. Perhaps this is because it involves the body. Perhaps itis because people who need medical care are suering, and it is awkward todemand payment rom people who are suering. Perhaps it is because so manymedical procedures are in the gray area, and people do not want the anietythat is associated with conronting this ambiguity and making choices. Underthe present system, people can simply get the treatments that the doctor or-ders, which perhaps reduces their aniety.

In spite o these psychological considerations, the United States might eventuallyadopt a system that is based largely on vouchers. The alternative o a centralizedrationing system would probably be highly inecient, because it would ignoreindividual circumstances and preerences. It also would be inconsistent withtraditional American values o individual choice and limited government.

Conclusion

Relative to American values, the United States health care system works well.However, everyone is keenly aware o its ailings. A large share o the popu-lation is not insured. Americans make etravagant use o medical procedureswith high costs and low benets. The scal outlook or Medicare and Medicaidshows that they are not sustainable.

The health care reorms that were debated in 2009 and 2010 did not addressthe undamental choices that America must eventually ace. As heated as thedebate became, the proposed changes were only supercial. Down the road,the choices will be more dicult. At some point, we either have to imposestronger rationing o care by the government or we have to orce individualsto conront more o the cost o their own care, perhaps using a voucher systemto und health spending.

Redesigning Americas health care system is etremely dicult, in part be-

cause our system was not designed in the rst place. It evolved haphazardly,and several o the components that are most entrenched and popular, such asemployer-provided health insurance and Medicare, are poorly structured rom


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the standpoint o trying to epand coverage and contain costs. The need orundamental reorm is great, but the political obstacles seem even greater.


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