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Public Option will lead to a Single Payer System

Why is Washington having so much trouble reforming health care?

Goodman on June 22, 2009

Why, if they do pass a major overhaul, are the problems of cost, quality and access almost certain to get worse?

Answer: Because they don't understand health care. By that I mean, almost no one in Congress understands health care as a complex system. When they campaign, most politicians claim that health care problems could be solved with a few simple reforms. Now that it's time to legislate, they are discovering that health care is very, very complicated. In fact, there is no solution that even comes close to being simple or easy.

As Nobel Laureate Frederick Hayek taught us, a complex system is a structure that is so complicated, that no one person can even begin to grasp it in its entirety. The best each of us can hope for is to master the small part of it we interact with.

The economy, for example, is a complex system. To allow us to think about it — if only imperfectly — economists have developed a highly simplified model over a period of 200 years. In fact, the only reliable model that exists to understand complex social systems is the economic model. Yet we have completely suppressed normal market forces in virtually every aspect of health care. So what we are left with is almost certainly the most complicated market of all and no reliable model with which to understand it.  In complex systems, a change in a parameter in one place inevitably causes other — often surprising and unforeseen — changes elsewhere. Perturbations intended to bring about one result inevitably have other unintended consequences as well. In health care the unforeseen surprises are even more palpable because reforms are inevitably designed by people who either deny the existence of economic incentives or in any event routinely ignore them. I suspect that:

Most members of Congress were genuinely surprised to learn that if an SCHIP children's health program is offered for free, half the enrollees would drop their private insurance in order to take advantage of it. I suspect Sen. Kennedy's staffers were surprised to learn that a highly subsidized "exchange" outside the workplace would cause millions to drop their employer-provided coverage to take advantage of it.  They were probably also surprised that — given the chance — millions would leave Medicaid for highly subsidized private insurance. They were probably devastated to learn that you can spend $1 trillion over 10 years and ultimately reduce the number of uninsured by only 20%!

One thing economists are confident about is this: No matter how complex the system, the incentives faced by the individual actors matter a great deal. For example, if all the actors in a complex system have perverse incentives, the social outcome is likely to be undesirable in many respects.

In health care, almost everyone faces perverse incentives. This includes almost every patient, every doctor, every nurse, every hospital administrator, every employee, every employer, every insurance company, every government agency….. (did I overlook anyone?).  By perverse incentives I mean that when people act in their own interests, they usually impose external (social) costs on others. This means that social cost is likely to exceed social benefit for every actor at every margin.

Take total spending on health care. It is the outcome of about 300 million patients and about 800,000 doctors all interacting in complex ways.  But it is also the simple, straightforward sum of what I and my doctors spend on my care plus what you and your doctors spend on your care….. etc., etc.,…..summing over 300 million people. No matter what else happens, if I and my doctors don't change what we are doing for me and you and your doctors don't change what is being done for you….. and so forth….. aggregate spending will not change.

If I am a representative patient, every time I spend a dollar only 13 cents will come out of my own pocket. So my economic incentive is to consume care until it is worth only 13 cents on the dollar to me. This is very wasteful. But I'm wasting your money (you being the other members of my insurance pool), not mine.

Under a reform plan of the type proposed by Sen. Kennedy, third-party coverage becomes much more expansive; and we may have to pay only 4¢ or 5¢ out of pocket every time we spend a dollar. Under this arrangement, I will spend more than I currently spend. So will you. Because this is a complex system, it is very hard to predict how all this new spending will affect the system as a whole. But we can be fairly confident total spending will rise — and probably by a lot.

Now consider the problem of access. Under a Kennedy-type plan, millions of uninsured people will obtain insurance and millions of people who are currently insured will get more generous insurance. As a result, these people will use their newfound coverage to try to obtain more care. But where will they get it?

As you look around the health care system, how many idle resources do you see? How many primary care physicians have empty waiting rooms? How many ERs have no patients waiting to be seen? If there are no significant idle resources, then how will the increased demand for care be met?

Clearly, there will be a rationing problem, and those paying below market rates (Medicaid patients, e.g.) will experience more severe problems than others. This is precisely what is happening in Massachusetts right now. As previously reported here, waiting times to see doctors in Boston are more than twice as long as any other US city. Casual observation suggests that access to care has not improved, even though the number of uninsured has been cut in half.

For more than two decades, scholars associated with the National Center for Policy Analysis have sought to reform the health system by improving the incentives faced by the actors in it. We believe this approach is absolutely essential if real problems are to be solved.

Congress is choosing a different course. Under reforms being considered, almost everyone's incentives will become worse, not better. The tragedy is that Congress is almost completely unaware of the harm it is about to unleash. (At least that's the charitable assumption.) The irony is that this same tragedy has been repeated in almost every other developed country in the world.