The Real Source of Rising Healthcare Costs

D. Greenwood: Healthcare Costs

REPRESENTATIVE PAUL Ryan has proposed to replace Medicare with a voucher system. Individuals would be expected to use vouchers to purchase private medical insurance, and would be left to their own devices if they couldn’t do so at a price covered by the vouchers. The plan ensures that this would happen: the voucher amount would increase with inflation, but medical costs are increasing far faster—and Ryan’s plan, by further empowering insurance companies, would be likely to make them increase faster still.

Thus our current system of single-payer, governmental insurance for the elderly would gradually be replaced by an increasingly private system in which each individual would be responsible for financing the bulk of his or her own medical care. According to economists Dean Baker and David Rosnick’s report on the Congressional Budget Office’s analysis of the plan, by 2022, when the program would take full effect, the projected cost for sixty-five-year-olds will be over one-third of their mean income. However, medical costs rise with age, so that number radically understates the costs to older people and, of course, sicker people. Costs for eighty-five-year-olds are likely to be double the costs for sixty-five-year-olds.

According to the CBO’s projections, Ryan’s plan not only places unfair burdens on those least able to bear them, but also would increase the cost of medical care by close to half. John Rawls famously suggested that inequality can be justified under limited conditions: if it makes the worst off better off than they’d be under more equal conditions. Paul Ryan’s plan would reduce equality and make all of us worse off, and the worst off most of all.

The purported advantage of this system is that it would enable us to begin the process of rationing expensive medical care without government bureaucrats actually deciding to whom to deny care. Instead, insurance company bureaucrats would decide what procedures insurance would cover. Presumably those who are unable or unwilling to buy insurance at the going rate would be left to die on the streets, or, more likely, to receive more expensive and less effective care in emergency rooms. In the end, we would end up paying more both individually and collectively in order to reduce the dignity of the elderly and make our already crippled system less efficient.

The plan is morally revolting and economically absurd. We are nowhere near the point where we need to discuss how we are going to deny medical care to people who need it. We are the richest country in the world; we can afford to provide ourselves with medical care.

What we cannot afford is to pay twice as much for it as any other country does. We need to reduce the astonishing inefficiency of our market-based medical insurance system. In our system, insurance companies waste stunning sums attempting to exclude people who might require care from low-cost pools, and providers and payers create enormous duplicative bureaucracies to process (and debate) individual claims. We need to reduce the inefficacy of our market-based hospitals, driven by fee-for-service payments to ignore results and focus instead on returns to investors and executives. And we need to replace our horrendously costly system of subsidizing drug companies with legally created monopoly rights (patents) in the vain hope that, contrary to all economic theory, they will use the resulting rents to subsidize useful research rather than inflate marketing costs.

We may even need to reduce the pay of our actual doctors, who are paid far more than their international counterparts—although they are not nearly so overpaid as the executives and investors who mismanage private payment systems, medical bureaucracies, and pharmaceutical production.

If we reorganize our failed medical sector to get its costs in line with other countries and its incentives in line with human needs, the problem of funding Medicare will be trivial. If we do not, then medical care will be unaffordable regardless of what we do to Medicare.

Ryan’s plan avoids all the difficult issues of reducing abuses by powerful incumbent economic actors and fixing our failed incentives. Instead, he proposes to concentrate the pointless and cruel pain of the private system’s failure on those least able to defend themselves. Instead of reforming the medical care system, he wants to shift administration of the medical payment system to individuals. The obvious (and presumably intended) result will be to make reform less likely: no individual acting alone is in a position to negotiate fees, let alone change the perverse incentives of insurance and pharmaceutical companies or medical providers.

Thus Ryan manages the extraordinary feat of proposing extraordinary cruelty, unjustly distributed, in order to promote unsustainable inefficiency.

The real answer is pretty simple technically, if not politically.

First, we need a single insurer, to eliminate market incentives for insurance companies to cherry-pick clients. It needs to be nonprofit and governmental, to eliminate the incentive to reject valid claims in the hope of generating unearned profit. It needs to be competently run, to eliminate the need for providers to have huge staffs to deal with the unwieldy insurance company bureaucracies. It needs to be staffed by civil service employees at civil service rates, to eliminate the enormous overhead of overpaid private sector executives and investors. And it needs to be required to keep comprehensive records of treatments and results, in order to provide the database that researchers need to determine efficacy. Basically, we need to open Medicare to all Americans, while eliminating the current restrictions on its ability to determine and negotiate for fair prices.

Second, we need to eliminate pharmaceutical and medical appliance patent monopolies, to bring the price of prescription drugs down to something resembling their cost of production. This needs to be accompanied by a rational system of funding medical research not based on the accident of past monopoly profits or the incentives of future monopolies. Instead, we ought to have a federal grant system, funded by a percentage of medical spending that could be set at two-thirds of the amount to be saved by eliminating monopolies, administered by a peer-review system that operates similarly to the way our National Institutes of Health fund scientific research. Grants, of course, should be based on likely impact on health, not likely impact on investor or executive bottom lines.

Third, we need to fund hospitals in a rational fashion, based on the quality of the care they give and the medical students they train. Measuring quality is difficult and likely to be controversial. However, even discussing quality, rather than profits, as a goal for hospitals is a good start. The Affordable Care Act took some preliminary steps in this direction. If we had a national insurer, it could go further by summoning practitioners to debate and determine best practices on an ongoing basis and by giving higher payments to those providers that adopt them.

Fourth, we need real competition to win the benefits of the market as well as sensible planning. So insurance companies should be free to offer supplemental and replacement plans to compete with Medicare-for-all, provided that replacement plans be offered to all customers at a fixed price without cherry-picking the healthy and leaving the sick for the government system.

And the Veterans’ Administration system of government-provided care should be opened to all Americans who would prefer to enroll in it rather than Medicare-for-all, so that private sector providers face genuine competition from a system motivated by professionalism rather than fee-for-service profits.

Politically, however, this plan would require real bravery: standing up for the American people and true democratic capitalism against the malefactors of great wealth—the economic powers-that-be in three of our most powerful industries. That kind of bravery seems in scarce supply today.

Daniel J. H. Greenwood teaches law at Hofstra University. He has published numerous law review articles, book chapters, and popular opinion pieces on corporate law, corporate speech rights, and the role of corporations in politics, as well as on minority religious rights and related topics.