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Saying ‘No’



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Ezra Klein argued yesterday that in health care and higher education, government should be empowered to make more decisions because government can say “no” where consumers often cannot. Megan McArdle has done her usual superb job thinking through the education part of the argument, and I would only add a few thoughts on the health-care element, below. 

Klein’s argument is characteristically serious, informed, and interesting, but it ultimately points to a core disagreement between the left and the right that he doesn’t really acknowledge. He writes:

Saying “no,” after all, is how consumers typically restrain costs. If Sony wants to charge you too much for a television, you can walk out. You might want a television, but you don’t actually need one. That gives you the upper hand. When push comes to shove, producers need to meet the demands of consumers. But you can’t walk out on medical care for your spouse or education for your child.

But surely the cost of televisions (and most other things, including many necessities) is kept relatively low not because people can do without them but because people have a huge range of options in a very competitive market. Sony can’t charge you too much because you’ll just buy a television made by someone else. Health insurance (let alone care) can’t always be treated like that kind of commodity in every respect, of course, but I think (as conservatives tend to) that they can be to a far greater extent than most people on the left seem to believe. 

A market in which providers have a fair amount of freedom to design insurance products to appeal to consumers and consumers have the resources and freedom to make choices could surely better enable people to say “no” to high cost and low quality options and so encourage the development of lower cost and higher quality ones. That’s roughly the direction conservatives want to move in—using public dollars to enable consumer behavior by all while leaving providers a lot of freedom to attempt different business models and products. Obamacare, as a general matter, moves our system in the opposite direction: narrowing and consolidating the definition of insurance and then compelling consumer purchases of the resulting product. 

Klein continues, saying that, because health-care consumers can’t really say “no,” we might best contain costs by having the government do so:

If the government is going to pay, then perhaps it can use its huge market share to do what consumers can’t: Say “no,” or at least be more cautious about when it says “yes.”

This is the core cost-control idea behind Obamacare. The government is using the money it spends for Medicare and Medicaid to try to push the health-care system away from fee-for-service medicine and toward pay-for-performance.

This insight is the basis for a bevy of experiments, from gathering mountains of data on care quality and treatment effectiveness to penalizing hospitals with high rates of preventable readmissions, to setting up accountable care organizations that make more when they spend less, to “bundling” payments so providers get a lump sum for all treatment around an illness rather than getting paid for each individual intervention.

This is the case for an economy of large players using their weight to achieve the proper outcome for all. But surely the story of the last four decades of government health-care entitlements suggests that our kind of government is particularly terrible precisely at saying “no” to health-care spending. 

The federal government got into the business of paying for health insurance in 1965, when Medicare and Medicaid were created. Those two programs are generally thought to have reached some maturity in 1970. The significant net growth of the federal government as a percentage of our economy over the subsequent 40 years can be accounted for entirely by the growth of those programs. In 1971, federal health spending accounted for 1 percent of the economy while all other spending combined (except interest) was 17.1 percent. In 2011, four decades later, federal health spending was 5.6 percent of the economy, while all other non-interest spending combined was, again, 17.1 percent. Giving over a greater portion of health-financing decisions to the entity responsible for that trend doesn’t seem like a great cost-control idea. More data on health-care outcomes and options would certainly be great, and government can play a role in making such data available. But the idea that it is government agencies that would best use that data and make consumer decisions doesn’t seem well supported.   

We can see the inability of our political system to say “no” on health care all the time. Each year, for instance, Congress makes a big show of putting off for a year the restraints on Medicare spending it imposed by statute in 1997. This “doc fix” is an emblem of our inability to say “no” through the political system. 

The sorts of experiments that Klein points to have been attempted for decades as well, and they seem always to run into the problem that the political system cannot treat different providers differently over the long run, because the losers in such a process have the power to influence both Congress and the executive branch and get their way, and for that matter all the providers in the system are better served by a system that doesn’t discriminate by quality. So while the technical task of choosing high-value providers across the system is immensely complicated, the political pressures against such an approach are simple and powerful. That’s a formula for failure. 

The experiments with those efficiency enhancements in Obamacare don’t seem to be going very well so far, at least to the extent that information has been released (which is an oddly limited extent), as Bloomberg noted earlier this month. It’s very early, we will have to see how they go, and I would certainly imagine that at least some of them will perform a little better than the open-ended fee-for-service system, since that can’t be very difficult, but no one seems to expect all that much of them. As a CBO working paper noted this month, the slowdown in per-capita Medicare spending over the past half decade (which was almost as significant as the slowdown of the late 1990s) does not seem to be attributable to such practices.  

In fact, both sides in the health-care debate acknowledge that our political system can’t say “no.” In debating how to contain spending in the one insurance system the federal government entirely controls—the Medicare system—the left and the right both argue for making the system less subject to the direct control of our elected officials. The left argues for a super-constitutional board of experts (the IPAB), while the right argues for a competitive system in which government subsidies empower consumer choices to compel provider competition. Neither thinks trusting the political system either to set prices or to behave like a consumer is going to work. 

The trouble, as Daniel Kessler brilliantly showed in this essay last year, is that the IPAB can’t really be separated from ongoing political control. It is a creature of the Congress, and cannot be otherwise. A regulated premium-support system for Medicare would seem to stand a better chance of so arranging the incentives that there would exist some pressure for more value rather than just more spending, and so that someone could say “no.” It surely wouldn’t do that perfectly, but it looks more likely than a board of experts to be able to overcome the public-choice problem, for all the reasons Kessler ably lays out. 

The notion that the key to reducing health costs is to have government take charge of saying “no” to spending that isn’t worthwhile therefore doesn’t seem very promising, and the reasons go beyond the particulars of health-care financing. Our political system, built as it is on the notion that the protection of life and the defense of individual liberty are the government’s chief purposes, is not well suited to the task. We are used to thinking that our welfare state is “less generous” than those of Western Europe (which are far less shaped by Lockean ideas about the purposes of government and more a product of the continental social-democratic tradition). But that’s not exactly true. Our welfare state extends to fewer realms of life, but in those to which it does extend, it is often more generous, or at least has far more trouble saying “no,” than the Europeans do. The idea of the state saying “no” to an individual on behalf of the interests of the community is far more at home in European social democracy than in American liberal democracy. So once it is up to our government to decide whether to say “yes” or “no” to something in particular cases, it’s pretty much going to say “yes.” 

The instances when we have seen significant improvements in the ability of our system to say “no” to poor health-care options have generally involved insurance companies (in the case of the HMO era of the 90s) or consumers (in the case of Health Savings Accounts) being given more power to say “no.” Neither of those could offer a wholesale solution to the problems of our health-financing system, but they suggest that using public resources to enable everyone to enter the market and then giving providers the room to shape products and consumers the power to make choices among them should offer better results than socializing the selection process. 

It should not surprise us that liberals and conservatives differ on this point. The counterintuitive insight at the heart of capitalism is that efficiency is best produced not by centralized order but by decentralized choice—which often looks an awful lot like disorder. If that is true, then the power to choose, and so the power to say “yes” and “no,” should be placed as far away from the center of the economy as is reasonably possible. The left and the right have been arguing about whether that insight is true as a general matter and is valid in particular instances for the better part of two centuries now, and the health-care debate offers the clearest instance of that argument in our time. 

That the question of how to make our health-care system more efficient points to a deep left-right divide does not mean that Klein is wrong and I am right, or vice versa. But it probably does mean that we will not persuade one another just by arguing about health care. We are both looking at the same thing and honestly seeing it differently, for reasons that run deep. That’s why it’s worth giving some thought to the left-right difference itself. But in terms of persuading the country (which strikes me as significantly more on the right than the left on the underlying question of how the economy works), Republicans have mostly been losing in health care by forfeit, and continue to underestimate the substantive and political potential of serious market-based reform proposals—as alternatives to Obamacare that would be solutions not only to the problems created by Obamacare but to the problems that preceded it.



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