The Recent Health Care Bill

I’ve stayed quiet during the recent health care debate, primarily because the bill under discussion was so long and complicated that I wasn’t sure I understood the issues well enough to weigh in intelligently. That doesn’t seem to be an obstacle for most economists, but I try not to fall into the trap of thinking that publishing some papers on one topic automatically makes me an expert on every topic.

For people who are interested in my views on health care — I’m not sure there is anyone who falls into that category in the first place — my suggestion is to read Gary Becker‘s excellent blog post on the subject. His conclusions are remarkably similar to my own, but his views have the virtue of being anchored in a careful analysis of the specifics of the legislation.

In Becker’s opinion, the health care bill that passed recently is a disaster for at least two reasons. First, it seems to do little or nothing to deal with the single most important shortcoming of our current system: the fact that people pay very little on the margin for the medical care that they receive. Imagine that you could show up at a car?dealership and have any car you wanted, and as many cars as you wanted, for no marginal cost. The market for cars would be in complete chaos, and people would have too many cars, and the ones they had would be too nice.

That is more or less the situation we now have with health care. It isn’t pretty to talk about, but if it costs $200,000 to keep an octogenarian alive for a month, someone has to pay for it. If it were the children of that octogenarian who had to cover part of the bill, and paying for that last month of life was the difference between being able to pay for the octogenarian’s grandchildren to go to college or not, there would be some hard choices to make. With health care expenditures approaching 20% of GDP, there are going to be tough choices. Markets cannot function when the people who receive the benefits of a good or a service are not the ones who are paying for it.

The second huge flaw in our current system, as Becker points out, is that health care is provided through employers, leading to job lock, lost coverage when people become unemployed, etc. While the bill does have some elements that weaken the link between employers and health care, it also has other features that strengthen it.

Ultimately, it is hard to believe that this bill will be a net positive. It remains to be seen whether it will be a wash, or far worse.


kevin

I'm sure you'll be flamed for your comments.

The GOP should have found a better way to get Becker-like analysis out earlier, rather than allowing an uninformed few to be the "oh no socialism!!" drum.

The bill, though it will cover many who were not previously covered, and it will prevent insurers from cheating people based on the fact they got sick at some point.

But, the major problem is exactly what Becker states: this is a law that is a fix on top of other broken policies. Neither side should be very happy with this. But, politics and the "something must be done; we can't wait; and something is better than nothing" mentality prevailed.

Jim Farmer

Says it all: http://www.theonion.com/articles/freakonomist-keeps-close-eye-on-ge-stock-versus-he,17202/

gattrell

You clearly have health insurance that actually pays for your healthcare. Many pay and get little or nothing, or have none at all. We all pay when they become ill. I don't think you can possibly understand until you have to go without food so your child can have the medicine he needs. Or until you have been told that you need surgery and you can't have it because it would bankrupt the family. It is more than beans that are being counted. Healthcare is not an option. It is a necessity, and while this bill may not be perfect, it is a start. Even the rich depend on the poor to work for them so they can amass more wealth. We need to make sure all the people are healthy and able to contribute. It benefits the well-being of the whole nation.

Brett

I can't imagine the existence of anyone who wanted THIS health care bill to pass and didn't fall into one of the following two categories:

1 - They didn't understand the contents of the bill and how it would effect Americans, but were swayed by the rhetoric of people who sell ideas for a living.

2 - They didn't care about the effects this bill would have on Americans, but understood that their own financial or political capital would increase as a result (GE stock holders, politicians, etc.)

DaveyNC

This thing won't work because it was, in the end, a means for the Democrat Party to create another entitlement along the lines of Social Security and Medicare that quickly becomes a "third-rail" type of issue. This allows the Dems to claim they acted to help the people when in fact it allows them to threaten future voters that unless they vote for the Dems, the evil Republicans will take health care away.

It gives them a big club to swing the way that they swing the Social Security club. Remember what happened when Bush tried to put a bill through that would have allowed people to designate 2% of their Social Security payment into a self-directed account? You would have thought that Bush was proposing sending that 2% to the Republican party coffers.

It does nothing to help the people and in fact, drives costs up even faster than they would have gone up otherwise.

Erik Brynjolfsson

Steve, you're wise to say "I try not to fall into the trap of thinking that publishing some papers on one topic automatically makes me an expert on every topic."

But then why not reference some of the excellent work by people like David Cutler or Jon Gruber who have studied the health care system much more intensively that you or Gary Becker?

They both conclude that the new law is a big improvement over what we have, and all the plausible alternatives. Not only will over 30 million Americans now get health coverage (it's both cruel and inefficient that we left so many people uncovered for so long), but it also saves $600 billion over the next decade (see http://bit.ly/cHg2RN) and even reduces the deficit according to the CBO.

Gruber heads the Health Care program at the NBER and helped design Mitt Romney's Health plan plan. Here's his excellent summary of the trade-offs involved: http://bit.ly/b74HKp

Take a look and let me know if you update your beliefs.

Erik

Read more...

Fritz Mills

None of your points are wrong, but I think they are irrelevant in terms of what the primary goal of this bill was: which was to provide health insurance to everyone. Further, most folks are likely to be opposed to any system that forces people to choose between whether their 80-year old relatives live or die (death panels, anyone?), or their children go to college.

The problems you cite will require a radical overhaul in the way health care is paid for, which is a much more difficult political problem than providing universal health care within the currently existing structure of health care delivery and employer-provided health insurance.

In an automotive analogy, it would be much better if all cars were powered by electricity that was provided by inductive coils embedded in the road surface (thereby eliminating the need for large, heavy batteries in automobiles and limitations on driving range, while reducing dependence on foreign oil). The problem is that those roadways don't exist, and building them would be so expensive and time-consuming that it just isn't ever going to get done.

Read more...

Frank

Just as easily as you tell the anecdotal story of an 80 yr old prolonging her life for 1 month because she doesn't feel the cost, you can tell the story of the 25 yr old who forgoes preventative care (because he feels the cost), only to have huge medial bills down the road. It's a two way street, Unregulated markets often fail when people don't know what's best for them.

BSK

There is a lot to criticize about this bill. But, as comment #1 points out, it's not so much that it makes overpriced health care TOO affordable, it's that the health care was too overpriced in the first place. Why does it cost $200,000 to keep ANYONE alive for a month??? What poor policies are already in place that make health care so damn expensive in the first place? There is certainly a tipping point where health care is TOO affordable; if health care is completely free or the cost is negligible, people will just get every treatment under the sun and doctors will not be able to fill the demand. Now, the free market would say that when there is more demand than supply, that prices will rise to equalize this. But with something as important as health care, this simply can't be the approach. Make health care cheap enough that people who need it can get it, but expensive enough that they will only seek it when they actually need it.

Read more...

ac

You are comparing the health of human beings to CARS? Seriously?

Here's what I like best: " Markets cannot function when the people who receive the benefits of a good or a service are not the ones who are paying for it."

Really?

'Young and healthy' people seem to be reproducing themselve pretty well while society subsidizes their lifestyle.

How about parents pay for obstertical care and delivery"? How about parents pay for all the 'well child care' they have come to expect? How about parents pay for all those pediatrician visits and meds each time the little darling has a sniffle or infection? How about parents pay for their own doctor visits and meds when they catch every little germ that comes home from school?

How about parents give up the their entitlements in the form of mortgage and child tax credits/deductions? How about parents pay for their childs education instead paying for it with everyone elses taxes?

Young healthy people are subsidized by society from birth to death, along with the dependents they create.

Asking them to give something back to the elderly and chronically ill people who have subsidized their lifestyle isn't asking all that much. It's part of the price to be paid for living in a civilized society.

You act as though money is limited in the United States. Money is not limited...it is hoarded by a small percentage of the population. A small, greedy percentage of the population.

Read more...

Norm

I largely agree, but I will note that the actual discussion that needs to take place (how do we distribute the limited amount of health care actually available) could never take place in an environment where 'OMG death camps' and 'OMG socialism/communism/nazism (because they're all somehow synonymous today)' are common.

No politician that wants to get re-ellected will ever suggest that spending that $200,000 to keep that octegenarian alive might, perhaps, in some situations be better spent in some other way. He would be labled a murdurer by even suggesting that.

We have got to get out of this 'unlimited life extension is a right' mentality that drives so much of health care these days. There has to be a limit.

Tad

+1 on that first comment from kevin.

And I totally agree with both criticisms of our insurance system. I tend to think that setting up Health Savings Accounts would be preferable to using insurance for routine health maintenance; insurance should be reserved for the catastrophic and unexpected. And while employers should be encouraged to match contributions and make appropriate sick time available, the "job lock" problem is a very serious flaw.

But I'd like to ask for clarification from Mr. Levitt on this assumed octogenarian costing $200K/mo.

First: are you assuming that this cost was preventable? Could education of the patient and preventative care & screening have lowered that number? (I have heard Peter Orszag's opinion, and a choir of opposite opinions, to that effect.)

Second, are you assuming that the amount paid out in insurance premiums over this octogenarian's lifetime wouldn't defray some of that cost at this point? The big selling point of the insurance system is that it takes a "little bit" from you now, and puts it in the hands of those who can make that money grow, so that they will pay for you when you need it. The fact that this is an unsustainable business model is not the fault of that octogenarian, is it?

We need to find a solution that doesn't funnel profits away from providers while funneling responsibility away from patients.

Read more...

treebagger

Um, that's how we buy cars now. We put little or nothing down and pay less than helthcare insurnace on a monthly basis. I would bet you that 90% of Americans buying cars on credit do not know the total amount of money they will pay.

Now when it comes to home mortgage, things are even worse. We put little or nothing dowm, are unaware of the total amount we will pay over the life of the loan and when someone tells us we are "under water", we walk away from the responsibility.

Why are you pretending that healthcare is special in this regard?

Russ P

You write "markets cannot function..." The market does not function, it just is. A "non-functioning" market is just one that is being gamed for unfair outcomes. Over-consumption (and provider profiteering) on the one side being met with a chokehold on services (and reimbursements) on the other.

Does not the health care bill contain some provisions that allow for a more fair market? I'm speaking of taking away some of the tools actors on both sides of the equation use to game the system. Will it fix everything? No.

Also, why is the underlying assumption that markets need to be allowed to function unchallenged here? Being buffeted by scare tactics locally one need only look abroad to see excellent and well-functioning (note: not perfect) healthcare systems that eschew the market entirely.

Steve

If one focuses on controlling costs only, your point is solid ... more on that later.

I've been largely focused on the fact that people in the US are now dumped by their insurance companies when they get sick (read: too expensive) and they can then not get new coverage at any reasonable cost because of their preexisting condition. In short, the insurance market is not actually selling the sort of insurance which will help people in the long-run. We all know it and this bill fixes that problem to a large extent. Requiring everyone to buy in is to eliminate the free rider problem as Romney points out.

Controlling costs by requiring patients to put their own cash on the table is a good idea. If there had been a public option where the copay rates are based on income or wealth levels it would certainly help considerably with this. Certainly patients would make somewhat wiser choices (but just ask Mr. Predictably Irrational how rational our choices really are) and certainly if there are cost savings due to such wiser choices, a public option would bring down the costs of other insurance options through competition.

My main peeve with the bill? That Medicare part D wasn't completely overhauled to eliminate the waste there ... where US drug companies will still charge large amounts here when they happily sell the same medication produced in the same plant for half, one third or one eighth over the Canadian border.

I know that Bush gave big Pharma that carrot to get his bill passed and that Obama agreed to not touch it just so that he could face fewer opponents to his current bill, but it galls me that the biggest cost-control issues weren't really touched.

We can only hope that the Republicans come onboard and actually start providing some leadership by showing they are in favor of reasonable cost control measures.

Read more...

MikeM

According to comment #7, Fritz Mills: "most folks are likely to be opposed to any system that forces people to choose between whether their 80-year old relatives live or die (death panels, anyone?), or their children go to college."

Unfortunately, that "system" is what most people who actually think about it for about 10 seconds would call "reality."

Gerard 't Hart

Dear Mr Levitt, I am astonished that an economist of your calibre is giving us such an analysis of a very complex problem. The quality of American health care - the quality of individual treatment by individual doctors is excellent. However it is inefficient to treat larger groups (Americas health care is ranked about 36th in the world), both ion treatment of chronic diseases, and larger groups of the population. Also in the USA more people die during procedures then anywhere in the western world. And in contrary to your article, it is ridiculously expensive. Besides this it is immoral: for such a superpower not to be able to treat all its citizens is economically, financial and morally incomprehensible.

Andrew

I don't totally disagree, but I think your missing several important points.

1) Becker is mostly correct in his assessment, but how do you legislate making tough decisions about end-of-life care when Republicans shout "death panels" in response the current bill? The Democrats have not been great on the subject, but can you really fault them when Republicans use fear to resist even this modest reform that (unfortunately) lacks any substantive health care rationing? Its easy to champion your position, but it is completely infeasible politically. In fact, its many older people who resist change exactly because they think they may be get the short-end-of-the-stick in any health care rationing. Of course, they haven't been paying insurance premiums for 50 years that included such end-of-life care expenses.

(On a side note, while end of life care is expensive, studies have shown that it alone is not a significant driver of health care costs. A simple tax on high-sugar and fat drinks and foods would probably do more in the long run to reduce costs than even a perfect system for end-of-life care.)

2) I think you ignore the fact that the bill contains money for trials. This is not discussed much, but could be the saving grace for this bill. Analysis of regional differences in health care costs suggests that there are methods available to save significant amounts of money WITHOUT changing the (broken) underlying system. This is includes paying doctors with salaries and forming partnerships between doctors in towns so that care can be coordinated and best practices established. Such partnerships help prevent cherry-picking patients and can lead to substantial reductions in cost. Thus, the experiments in the bill could (and I stress could) result in unexpected savings. In the end they may not, but to not pursue them simply because the rest of the bill does not do enough to control costs is cutting off our nose to spite our face.

3) Does extending coverage to millions of Americans for a small total cost count for nothing? Thousands of people die every year from lack of insurance, and we pay for these individuals when the show up at an emergency room anyways. (Sorry to make the obvious reference, but when 3,000 people die on 9/11, we spend 2 trillion or more... but when thousands die every year for lack of health care, we are suddenly unwilling to spend tens of billions of dollars?) This bill may not be perfect... in fact, its the start of the health care reform, not the end. But I don't see how anyone in good conscience can actually prefer the old system the to new one unless your irrationally sacred of "socialism." My hope is that the new bill is a launching point for an eventual health care system that parallels Switzerland's system.

So, unless you can convince me that we would get there quicker in absence of this bill, I will continue to support this reform bill while looking to a future when the current and obsolete (yes, I mean exactly that) generation of older Americans die and our fear of "socialism" becomes reminiscent of McCarthyism. Then - and only then - will we realize that we are all in "it" together. And only then will we be capable of establishing a functional and sustainable health care system.

Read more...

Corban

Any success in this term is attributed to the Democrats. Any failures are the same. Therefore, the GOP has an interest in blocking all successes and magnifying failures. They failed to block the bill, but they did manage to damage it heavily. I don't blame them. That's just how they roll.

Ghost

In our current system, the cost of care isn't determined by Demand, it's determined by Supply, i.e., it's the doctors, hospitals and healthcare facilities that are determining what care is given and the value/cost of those goods. In sum, the analogy to the car market is flawed because your comparison relies on the Demand for cars, not its Supply. You're comparing two different scenarios and circumstances but presenting them as a single one.