Health Wonk Review Review: In Which the Wonks Review Other Wonks

by Avik Roy

The latest edition of Health Wonk Review, hosted by Louise Norris of Colorado Health Insurance Insider, contains a number of interesting items in which health care bloggers review policy articles by other authors.

John Goodman asks the “question that is rarely asked”: given that everyone complains that we spend too much on health care, exactly how much should we be spending?

When it is asked, the answers are almost never sensible…To an economist, the titular question has a straightforward answer, at least at the theoretical level. We should spend on health care until, at the margin, a dollar’s worth of health care is equal to a dollar’s worth of anything else money can buy.

As a practical matter, I have no idea what tradeoffs you’re willing to make between health care and other uses of money. And you have no idea what tradeoffs I’m willing to make. That’s why, whenever possible, we should favor institutions that allow individuals to make these decisions on their own. People will reveal their preferences through their actions…

In the current system, however, people rarely have the opportunity to trade off a dollar’s worth of care against a dollar of other goods and services. In general, every time we spend a dollar on health care, only 12 cents is coming out of our own pockets. This means we have an incentive to overconsume care — until it’s worth only 12 cents on the dollar, at the margin. To the degree that we act on these incentives, we will spend until 12 cents worth of care would have provided  a dollar’s worth of other consumption — if only we were free to allocate where our money goes.

Unfortunately, plenty of policy experts believe that it’s better if…experts determine on Americans’ behalf what the optimal amount is to spend on health care. Goodman observes:

Medicaid, for example, was designed by people who think precisely this way. Suppose a single mother with children loses her job and is temporarily unemployed. She has difficulty putting food on the table for her children and is in danger of becoming homeless if she doesn’t pay the rent. Her automobile is about to be repossessed if she misses another car payment. Yet if she is on Medicaid, she has (at least on paper) access to everything the health care system has to offer, with no copayment or deductible. Even most members of Congress don’t have coverage this generous.

Normal people in this situation would trade in their gold-plated health plan for a silver or a bronze, and use the savings to buy food, pay the rent, etc. But Medicaid makes these choices impossible. If we applied the Medicaid mentality to housing, poor people would be forced to live in a luxury abode, even if their children were starving.

Medicare was also designed by the social engineering mentality. Enrollees can spend an unlimited amount of taxpayer money on end-of-life care, but they are not allowed to spend those same dollars to avoid the foreclosure on a home, provide home care to prevent nursing home confinement for a spouse, or make a bequest to their kids.

How would you like the government dictating to you how you must spend 40% of your disposable income?  Not a pleasant thought?  This is what the government routinely does to the elderly, the disabled and the poor. (And under ObamaCare, it will do it to many, many more.) Medicare insurance, at an average of $11,000 per enrollee, is as much a part of the income of the elderly as Social Security is. Yet while seniors can spend Social Security dollars without restriction, the $11,000 benefit they get from Medicare can be spent only on health care.

Read the whole thing.

Aaron Carroll of The Incidental Economist takes on the health cost issue, from another perspective. He criticizes the recent report by the Congressional Budget Office assessing the impact of obesity on health care costs. He cites a 2007 McKinsey Global Institute report that argues that obesity isn’t a significant contributor to health care costs. McKinsey employs a lot of smart people, and the report contains a fair amount of useful data, but it repeatedly reminds us of the danger of a little knowledge. As the report acknowledges, it isolates obesity from many of the cardiovascular, metabolic, and respiratory diseases that are closely correlated with obesity. Regardless of what obesity costs our system, however, it’s not obvious that less obesity would lead to lower costs. After all, we all have to die of something.

While many people are confounded by the rise in health costs, the central cause is quite simple. As John Goodman points out above, widely held, heavily subsidized health insurance incentivizes people to spend money on things they don’t need.

Hank Stern of InsureBlog points out one of the popular misunderstandings of health insurance, as repeated by Reed Abelson of the New York Times. Abelson writes, “Instead of sharing the pain, as they have generally done in the past, employers chose to keep their costs steady by passing the higher costs onto workers.” Except that this sentence implies that, if employers don’t pass those costs on, that insurance is somehow “free.” It’s not: it comes directly out of employees’ paychecks and gets sent directly to the insurers. Employers are simply the unseen intermediary. Rich Elmore of Health Technology News notes the recent number-crunching by the Kaiser Family Foundation, which analyzes the other ways in which employers are striving to control costs.

Joe Paduda of Managed Care Matters approvingly notes the latest issue of Health Affairs, the influential health policy journal, which is focused on tort reform. A study published in the issue argues that the costs of medical liability, “including defensive medicine, are estimated to be $55.6 billion in 2008 dollars, or 2.4 percent of total health care spending.” There are some problems with this study, which I will address in a future post. But even if we accept the study’s methodology, which I don’t, is $55.6 billion a year something to sneeze at? That money would have paid for more than half of Obamacare’s $1 trillion in new spending.

Paduda goes on to argue that lousy medicine is the real cause of high costs. We can all be against lousy medicine, but until consumers have the ability to control their own health care dollars, there can be no effective accountability in the practice of medicine.

Brad Flansbaum of The Hospitalist Leader, an admirer of Don Berwick, laments that Berwick’s recent op-ed in the Washington Post more resembled “a Whitehouse press release, not the scribing of an innovative clinician and scholar.” The politicization of policy is one of the inevitable consequences of government control, something that we free-market types have been pointing out repeatedly.

Jaan Sidorov of the Disease Management Care Blog points out the new study from our friends at the Dartmouth Atlas, in which the authors conclude “that the local availability of primary care may have little relationship with local health care quality.” Given that left-of-center policy analysts have long sought to increase the prevalence of primary care physicians at the expense of specialists, the Dartmouth study is provocative.

David Williams of Health Business Blog notes that many insurers are trying to tamp down on the usage of out-of-network hospitals and doctors as a way of keeping a lid on costs. This is exactly what insurers should be doing—and, notably, what traditional Medicare is barred from doing.

And finally, Jason Shafrin of Healthcare Economist is back with another post in his series on health care systems around the world, this one on Australia. The Australian system is heavily, but not completely, socialized, with 68 percent of national health expenditures funded by the government.

The Agenda

NRO’s domestic-policy blog, by Reihan Salam.