Will Government Save Health Care?

Monday October 09, 2006

Referenced articles:

http://www.slate.com/id/2138174/ Michael Kinsley, Slate

http://www.nybooks.com/articles/18802 Paul Krugman, NY Times

For the past 15 years or so, roughly the period from the rise of HMOs to so-called consumer-driven health care, I’ve represented clients — government entities, nonprofit associations and insurers — for whom the health care debate is an issue critical to their survival. Let’s face it, when it comes to health care, most people have already made up their minds on the broad strokes of this issue and spend most of their time gathering information that supports their position.

That’s the feeling I had recently while reading a piece in the New York Review of Books by New York Times columnist Paul Krugman. Krugman argues that our nation’s health care salvation lies in a government takeover of the system.

Krugman makes the usual arguments: For-profit health plans “add cost without adding value”; administrative costs are lower in a single-payer system; and private sector underwriting is a cruel scheme to abandon those most in need of coverage.

Krugman accepts on faith that a single-payer system “would almost surely be both cheaper and more effective than what we now have.” He thinks creating a single massive government entity, eliminating private insurers — and their associated advertising and marketing costs — will generate such massive savings that everyone underserved by the current system can be brought into the fold.

Balderdash. The cost problem in health care is driven by the 80 cents on the insurance dollar that pays for health care services, not the 20 cents that is overhead and administration. And even if insurance companies disappeared tomorrow, some entity will still have to process and pay claims. Even Medicare contracts with insurance companies to manage its claims administration. Because insurers do, in fact, provide value, the burden of Krugman’s Great Satan won’t be cast off so easily.

Commenting on Krugman’s article, Slate author Michael Kinsley makes two brilliant observations. First, he sees through Krugman’s “single entity is always more efficient” argument. Kinsley points out that “even the most competitive industry can seem ... inefficient when described on paper.” He notes that even though we have dozens of computer companies producing thousands of incompatible machines, few people would propose that a government-run computer agency manufacturing “a few standard models” would be a more efficient approach to producing computers. Last time I checked, America is still a capitalist country, at least outside of the newsrooms of the New York Times.

I think our health care system is like a much-despised old car. It smells bad and runs worse, but remains just reliable enough that we are reluctant to toss it on the scrap heap. The crux of the matter is not how coverage is provided or in the potential administrative savings in government-based approaches, but in the cost of the goods and services themselves. It seems to me the only really sure way to fund coverage for all is by raising more money from the healthier folks among us and making sure that everyone pays into the system in same way.

Historically, mandating individual insurance purchases has been an uphill political battle, with auto insurance a notable exception. But until Massachusetts recently passed state legislation, it seemed impossible to find the political will to do that in health insurance. If the Massachusetts plan, passed with great fanfare, works — and let’s not forget that many aspects of this approach are completely untested — it could provide some key building blocks for a real national solution.

The other big political problem with real reform is that the debate on health care costs always gets bogged down in confusion between the cost of insurance and the cost of what insurance pays for — the 80 cents on the dollar I mentioned earlier.

That’s Kinsley second great point. Perhaps the confusion is willful; that people don’t really want insurance any more. Perhaps they really want the one thing they cannot have, a health care subsidy. Kinsley puts it this way: “…society cannot give the average citizen better health care than the average citizen would choose to buy on his or her own.”

Kinsley’s onto something significant here. During the managed care era, I watched consumers’ expectations move beyond “traditional” insurance into what could more accurately be called health care financing. Traditionally, insurance is about lots of people paying into a system that provides payouts only to a few people in rare cases of catastrophic illness or injury. (Back in the 1940s when the employer-based system began to emerge, health benefits were often referred to as “hospitalization.”) Conversely, health care financing is about everyone paying into a system in monthly chunks they can handle and expecting the system to pick up nearly all their costs, including routine medical bills for middling ailments. Kinsley’s point is that people expect the financing payout to significantly exceed what they paid in.

The real question that underlies this debate is: What is health care, really? An entitlement? Or is it just another commodity in a market-based economy?

Krugman’s clearly in the entitlement crowd, as are those here in North Carolina who try annually to amend the state constitution to make health care a “right.” Personally, I think constitutions are created to keep governments from trampling on natural rights, not to promise the provision of goods and services, even those as necessary as health care. But I have to admit, I’m not comfortable with saying health care is just another market-based commodity. As a state legislator told me one day, health care’s just…different.

Back in the ’40s, my old man and some of his buddies helped build a union for railroad employees in Buffalo, New York. This explains two things — the unique shape of his nose and my unwillingness to trust completely in market mechanisms for insurance. My dad’s union had two big demands: the right to take at least one day a week off and…hospitalization. Coming from a hard-scrabble Depression background, my dad knew too many little guys who lost everything when they got sick or hurt. Sad thing is, that’s still happening today.

So for a long time, I’ve found myself on the horns of this unbearable dilemma: I can’t trust the market alone, yet I think the idea of a government entitlement (constitutional or otherwise) would be a disaster.

The market is clearly leaving too many people in the dust, but if we morph health care into an entitlement where no one really cares about the bottom line, where out-of-control cost increases and the system’s uneven quality continue, it’s going to break the bank and even more people will be hurt in the end.

What if health care were a compact, or if you’ll let me get a little biblical, a covenant? A covenant makes sense. Governments agree that no one falls through the cracks. Nobody loses their house because their kid gets leukemia and they work for an employer with a crappy insurance plan or no plan at all.

Individuals, for their part, agree to hold up their end. Everybody buys insurance. And, everyone pays some portion of the cost of the services they use. Maybe they’d pay on a sliding scale based on income, but there would be some ownership of each health care purchase decision.

Under this covenant, individuals also would have to own their own lifestyle. You would pay more, in premiums or co-payments or both, if you smoke, don’t exercise, or have a really bad diet. Insurance would help with the cost of things the individual can’t control — e.g., a family history of cancer that requires treatment — but wouldn’t cover the additional costs for failing to manage personal lifestyle choices.

To make this idea work, we need to radically improve the ability of consumers to be smarter purchasers of care. HSAs and high-deductible products give consumers some “skin in the game,” but that only works when the consumers have access to transparent information about cost and quality — like they do in every other sector of our economy.

So, what is the role for employers in this New Covenant of Health Care? Employers got into the benefits game by accident, when they still considered “fringe” benefits less volatile than wages or working conditions. Many CEOs now view employee health benefits as an intolerable drag on their competitiveness. I’ve been surprised by how many employers actually now ponder openly whether tossing this back to the government might make sense. If the feds stepped in and employers could exchange the whole health benefits mess for a flat payroll tax of, say, 8 percent, I think they'd take the deal. But until we change the price and demand trends for health care services, we'll simply exchange unbearable insurance premiums for an unbearable payroll tax (because, let’s be clear, there’s no way the tax would stay at 8 percent, no matter what the promise.)

Our top priority should be getting the supply and demand mechanics that drive the rest of our economy to function a least a bit better in the health care arena. A formula for managing demand might look like this: prevention + improved quality + healthier lifestyles + transparent pricing = affordability, or at least less rampant unaffordability.

Bottom line: The private sector nature of the delivery system isn’t the problem, so putting government is charge of the show isn’t the panacea. Rather than pushing for this, those unhappy with our health care system should consider whether the New Covenant approach — where everyone has a place at the table, but everyone is responsible for certain costs and actions — might better address the underlying problems of unreasonable expectations and unmanaged lifestyles.

We need to bolster the free market aspects of health care while acknowledging that the market will never be as efficient as other sectors of our society. And we need people to own their lifestyle choices.

I’ll start carving the tablets tomorrow.