About a month ago, Froma Harrop wrote an article titled “Why Consumers Can’t Drive Healthcare,” in which she argued against any health insurance model based on consumer choice. You can read her article here. Unlike some of the other articles I’ve been refuting recently (Michael Lind comes to mind), Harrop’s article is professional, well written, mostly logical, and respectful to her opponents, which I appreciate. I’ll try to be as polite in return – that’s how productive discourse is advanced, and it’s much more enjoyable for both writers and readers.
Some of you might not know what “consumer choice” means for health insurance, and Harrop kindly provides a nice summary. Most consumers would likely choose a high-deductible plan such as a health savings account:
“An HSA marries a high deductible (paid before insurance starts picking up the big bills) to a tax-favored savings account from which people can tap money for smaller medical expenses. What we most fear are medical "catastrophes" leading to bankruptcy or the inability to afford appropriate care. This kind of coverage protects against financial traumas. Meanwhile, asking consumers to dig into their pockets for routine care makes them more careful about spending.”
This is how insurance works in almost every other field of insurance. Home insurance protects our homes from catastrophic destruction – fires, tornadoes, sinkholes, stray Mythbusters cannonballs, etc. – but it usually doesn’t cover every-day fixer-uppers like a broken window, a leaky shower, or a faulty electrical outlet. Car insurance works the same way: it doesn’t cover a cracked mirror or a broken radio, but it does bail us out if we get in an expensive crash. This is what makes insurance affordable; if home insurance companies had to cover every clogged toilet and carpet stain, they’d have to charge much more for their services. It’s also what makes those small, everyday repairs affordable. Since the free market is allowed to set the prices for these things independently of the disaster risk, plumbers, mechanics, electricians, painters, and lawn care specialists can stay all stay in business on a pay-per-service basis, as can the Home Depot or other do-it-yourself providers.
Inversely, this is why Obamacare (as well as the Massachusetts plan it was based on) are both proving abysmal at containing healthcare prices. Instead of encouraging people to economize on their superfluous health expenditures, it forces everybody to be insured every minute health problem that could possibly arise. This expands demand by removing any incentive for cost consciousness on the little stuff, without providing for the expansion of supply (in fact, tightly limited AMA licensure quotas ensure doctors are limited – and well paid).
So, why can’t the home and car insurance models work for health insurance? Harrop writes:
"Here's the problem: You and I may nod in agreement over the merits of catastrophic coverage. We are informed, and our financial lives are organized. We make it our business to save for retirement. We budget for unforeseen expenses. We know not to rack up big balances on our credit cards.
Other, perhaps most, Americans don't do these things."
Translation: Americans – except the clever few who read my articles – are just too stupid to choose wisely about their own health. Bureaucrats, particularly those bureaucrats who agree with me, can choose better for them than they can choose for themselves. The only reason besides stupidity that somebody might conceivably choose to decline a health service, Harrop figures, is poverty:
“Or they would if they weren't supporting families on low-paying jobs. Loss of work, death of provider or punishing education costs might leave no budgetary room for a doctor's visit. If the choice were buying textbooks for your child or skipping a physical, which would you do?”
I might buy the textbooks. But contrary to what Harrop insinuates, there would be nothing wrong with that decision. As a healthy 20 year old who exercises regularly, most of my physicals are an inefficient use of time and money. And as John Goodman of the National Center for Policy Analysis explains, this isn’t just true for me, but for the healthcare system at large:
“[there are] literally hundreds of studies from over the past 40 years that show preventive medical services usually increase medical spending ... Contrary to popular belief, checkups for children and adults do not save the health care system money."
If I were to skip a physical and use that same money for, say, some vitamins to round out my diet, it would not be irresponsible or reckless; it would be a rational cost-benefit analysis based on a sound risk assessment. This is exactly what happens in every other sector of the economy: scarcity requires us to rank our wants and needs, and allocate our resources accordingly. Consumers must make tradeoffs, and since each individual has unique circumstances and a unique budget, Pareto efficiency is maximized when we are permitted to make our own choices. Foregoing healthcare for something we value more dearly makes us wealthier and better off in our own estimation – which is the only estimation that matters.
The reason Harrop and her liberal counterparts are unable to accept this is that they’ve convinced themselves healthcare is a right. By this logic, any situation in which somebody somewhere wants healthcare, but doesn’t get it, is perceived as an intolerable injustice. That the person in question might want something else more than they want healthcare is dismissed as irrelevant. It appears the only rational decision Harrop feels people can make, indeed the only decision they should be legally permitted to make, is to buy all-inclusive mega-coverage for every stubbed toe and runny nose that could possibly befall them. Only then can the “right” to healthcare be ensured.
Unfortunately for liberals, rights are not merely things which it would be nice if everyone could have. Rights are things we already have inherently as human beings; life, liberty, etc. Anything which requires the efforts of other human beings to provide cannot meet that definition, and healthcare certainly takes time, money, research, technology, training and expertise to create. Healthcare is therefore not a right; it is a product and a service. Like most products and services, healthcare is scarce, which means not everybody can have as much of it as they like. That reality is unavoidable no matter what system we adopt; no matter how sad it makes us, the mathematical laws of supply and demand are not suspended when people get sick. And operating within this reality, it doesn’t make sense to buy every health service that any doctor, clinic, yoga instructor or mystic healing guru might offer.
Or maybe it does – for some people. That depends on our preferences and personal risk tolerance. Some people may feel safer and happier knowing they’re covered for everything, and that’s fine. The left just needs to learn that there’s a difference between disagreeing with those people and being “irresponsible.” Harrop continues:This is my favorite bad argument for the individual mandate, because it presupposes the necessity of another counterproductive government intervention. Yes, taxpayers do pay for the ER visits of uninsured people – but only because it was demanded by the very same politicians who now bemoan its consequences. Liberals cannot lament the moral necessity for taxpayers to cover ER visits in one decade, and then bitch about how much it costs to do so in the next!
“Yes, there are those who could easily afford health coverage and don't buy it, preferring to roll the dice that nothing awful will happen. If they lose, they're still let into the emergency room. The responsible ones will pay for their care.”
With that said, I do agree with Harrop that this policy is unfair; smart people like her should not be made to subsidize care for someone who does a wheelie on his motorcycle without a helmet. But those costs are not imposed upon her by the cyclist; they’re imposed by the government. Saying otherwise is equivalent to blaming poor people for stealing from rich people by accepting welfare. If theft is occurring, it’s not the poor who are doing it; the government is doing it. We can’t ignore the middle man. It’s tragic when misfortune ruins lives, and I’d happily donate money to a private charity that helps those unlucky few. But I won’t enlist the state to force everyone else to do the same. If Harrop supports that practice, she cannot blame others for the injustices it causes.
Proponents of this policy also must articulate a distinction between health related disasters and any other kind of disaster. If I decide to forego home insurance and my house burns down, I’m shit out of luck (at least from a legal perspective). Why are health disasters any different? Americans are allowed to take chances with their homes, their cars, their belongings, their investments and most other things. Why shouldn’t they be allowed to take chances with their own bodies, too?
Once again, Harrop’s answer to this is that we just aren’t smart enough:
“Consumer-driven health care is still fee-for-service. Patients are the ones to decide when they are being sold too much or too expensive medicine. But how many of us can second-guess our doctor on what treatment we should have? Doing so may be wise, or it may be dangerous. Thing is, average, or even above-average, Americans probably don't know which."
This may be true today, but only because average Americans lack an incentive to be cost conscious. If we could save money by shopping around, Ronald Bailey explains, keeping doctors honest could be much easier than Harrop imagines:
“Once consumers are unleashed, the medical marketplace would be transformed. Most likely, a lot of routine care would be done through retail health centers located in shopping malls, drug store chains, and mega-stores. Such centers would not be staffed with physicians but with nurse practitioners or other qualified personnel. Consumers would generally pay for routine, everyday care directly out of their health savings accounts.
Competition would also transform the medical information market, making it radically transparent. In fact, baby steps toward transparency have already begun. Angie's List now allows consumers to submit reports about their experiences with physicians. Sources of information for medical comparison shopping would proliferate, just as there are now dozens of publications devoted to comparing the features and prices of cars, computers, guns, and vacations. A core of savvy shoppers in the medical market will mean better price and quality comparisons for everyone.
Wondering what shopping in a competitive medical market might be like? Check out the admittedly clunky California government's common surgeries and cost comparison website. Browsing reveals that the cost for heart valve replacement varies from $72,000 to $368,000, and the cost for angioplasty varies from $9,000 to $204,000. Other websites, such New Choice Health, enable consumers to go shopping for relatively routine procedures like colonoscopies, laparoscopic hernia repair, and MRI scans. Prices for colonoscopies in Washington, DC, for instance, vary from $580 to $1,386, hernia repair from $974 to $2,519, and abdominal MRIs from $936 to $1,960.
Opponents of markets in health care worry that patients in extremis will be in no position to negotiate. Actually, the slow progress of the kind of chronic illnesses that are driving up health care costs—cancer, coronary artery disease—allow consumers time to shop around for suitable treatments. Prostate cancer patients can evaluate and choose between options like watchful waiting, various radiation therapies, surgery, and soon, a new biotech immunological treatment. Information gathering would take no more time than the current wait for a follow up appointment.”
I can give an anecdotal example of this possibility from my own family. I’m not sure if Harrop considers my father an “average” or “above average” American, but I do know he’s willing to overrule his doctors and make his own health decisions. Dad hurt his back a few weeks ago, and is now going to a chiropractor to ease his discomfort. However, since his deductible is high, he’s paying over $80 per visit out of pocket. This has made him cost conscious, and because he feels the chiropractor is recommending more sessions than he feels are necessary, he’s decided to skip some of the sessions to save money. He’s essentially calling her bluff; he knows how his back feels, he’s done the research online, and he thinks she’s stretching out his treatment to save money. It’s possible this will backfire and he will reinjure himself, just as it’s possible not replacing every valve your mechanic recommends will cause your engine to explode. But in both cases, it’s also possible to save money on unnecessary treatments by regulating one’s own expenditures. Weighing those odds should not be up to Froma Harrop. Nor should it be up to a bureaucrat with no stake in the outcome. It should be up to my father, because it’s his wallet and his back on the line.
Of course, consumers are not infallible decision makers in any market, and proponents of market-based solutions do not need to prove otherwise for healthcare. All we must do is demonstrate they make better decisions for themselves than the government can make for them (*see comment below). This shouldn’t be hard, because no government in history has ever been able to set prices well. Yet Obamacare will try, and Harrop specifically endorses this practice:
“Rather than charging a fee for every service, providers would be paid a set price to cover soup-to-nuts care for a particular condition. That would take away the financial incentive to overprescribe tests and office visits. And because doctors don't earn more if their care is substandard and the patient has to return, they have an incentive to do it right the first time.”
What Harrop omits is that fixing prices also skews incentives in all sorts of other ways. Severing prices from the forces of supply and demand inevitably creates inefficiencies in unforeseeable ways. For the sake of argument, though, I’ll try to foresee some anyway. Off the top of my head, here are just a few problems that might result from the system Harrop describes:
- If prices are fixed, there can be no competition between providers, which eliminates the only pressure to lower prices. From iPods to computers to Lasik eye surgery, competition drives prices down over time in every market-based industry, expanding access to those who were previously priced out of the market. But with fixed prices, this isn’t possible. This means that even if technological advancements are discovered or inefficiencies are corrected which lower the cost of providing healthcare, producers will reap the benefits rather than consumers.
- Patients don’t have big flashing signs which reveal what their “condition” is. Diagnosing this condition is sometimes half the battle, and doing so may require a battery of tests and procedures before any actual treatment is administered. Those tests and procedures are not free, so if doctors aren’t getting paid for them, they have an incentive to skimp on this portion.
- Even after diagnosis, patients oftentimes cannot be neatly categorized by condition. Sometimes, they have more than one condition, or a condition which leads to another condition, or a condition with complications that must be treated as independent symptoms. In such situations, the line between one condition and the other may be blurred, the price doctors are owed unclear, and the incentives doctors face skewed even more.
- Not everyone with the same condition costs the same to treat. The cost of “soup-to-nuts” care for a given condition may vary based on the individual; for example, maybe elderly or obese patients take longer to recover after a certain surgery, and so require more nights in the ICU than would a younger or healthier patient with the same condition. This makes some patients more profitable to treat than others, and may render other patients not profitable at all, creating an incentive to deny those people care. By severing the link between provider cost and consumer price, policymakers inadvertently harm the costlier demographics.
- Speaking of obesity, some “conditions” are largely brought about by the patient’s own actions, and some “treatments” are really up to the patient to administer on themselves. Many conditions, like heart problems, artery blockages, nutrient deficiencies, or diabetes, the doctor can only instruct the patient to exercise and eat right. If the patient doesn’t do so, they wind up “having to return” for the same condition, not due to substandard care or any fault of the doctor, but just because they’re a fat fuck who can’t manage their own lifestyle. Offering a “soup-to-nuts” price for the treatment of these conditions makes the doctor’s time, resources and profit subject to the irresponsibility of the patient, which is hardly fair and once again creates an incentive to deny care. If doctors were paid per service, this problem wouldn’t exist.
- The price fixers will essentially just be guessing based on estimations, and when they inevitably guess incorrectly, resources will be reallocated in inefficient ways. Let’s say some bureaucrat overestimates how much it costs to treat syphilis, and underestimates how much it costs to treat chlamydia. To maximize profit, pharmaceutical companies would disproportionately invest their resources in syphilis treatments, even if the market was demanding more treatment for chlamydia. This would create artificial scarcity in the antibiotics designed to treat chlamydia, and unnecessary abundance in the treatments for syphilis.
In summary, consumers spending their own money are much more efficient cost cutters than bureaucrats with no stake in the game. That may mean people choose not to insure themselves against everything, and that’s okay. The man who chooses textbooks over a physical is not a moron who government must benevolently save from himself. Rather, he is making a rational decision based on his unique circumstances and preferences. The way to encourage him to buy health insurance is not to require it by law; it’s to offer health policies that look like an attractive, affordable proposition.
The plans we advocate are just that. What makes insurance worthwhile is the pooling of small but frightening risks, such that minute contributions from everyone can cover the monumental costs of an unlucky few. This gives participants peace of mind at an affordable price. But the price is only affordable so long as the company payouts are rare, and payouts are only rare so long as the risks they cover are tiny for each individual participant. The larger the likelihood that a thing will need to be paid for, the higher the price insurance companies must charge to cover it – and the more likely people will think that coverage is not worth the money. Oftentimes, they’ll be right.