The Corner

Who’s for Irrational Rationing?

Ramesh Ponnuru’s piece in the New York Times last week generated a fair amount of commentary from critics, and able responses from Ramesh himself, of course, as well as Michael Cannon over at Cato.

There’s no real need to go over the substance of those exchanges again here.

But one issue that did come up in the back and forth that would seem to warrant some additional comment is rationing. More specifically, who in this debate can rightly be accused of supporting irrational rationing of medical care?

Ezra Klein thinks it’s the conservatives. He asserts that easing up on state benefit mandate laws would lead to scary, profit-driven rationing by insurance companies. For instance, he says a carrier might exclude bone marrow transplants for cancer victims.

Klein’s right, of course — at least in theory. If there is no regulatory requirement enforcing inclusion of a covered benefit, insurers could try to exclude it.

But this is really a straw man argument. It assumes that consumers would not be able to rationally select products that provide the financial protection they would really need.

More importantly, providing more benefit flexibility does not mean the government would provide no mechanism for socializing the costs of pre-existing conditions. It is well within our reach to have a competitive market for insurance which provides strong incentives for insurance carriers to cover the sick as well as the healthy without overly onerous governmental regulation (notice I am not saying no regulation). Many conservatives are perfectly willing to accept backroom risk adjustment among participating insurers as a protection against excessive market segmentation by health risk. With risk adjustment, funds would move among insurers based on the relative-risk profiles of their covered populations using pre-arranged data collection methods and formulae (it works best if it is handled entirely by the insurers, not the government). Alternatively, the government could establish an enlarged program for high-risk insurance enrollees, which would mean socializing their added costs through taxes and transfers, not premiums. Either way, the risk of large numbers of Americans going without coverage for mainstream cancer treatment would be virtually non-existent.

Unfortunately, the same cannot be said for the reform program many Democrats want to push through Congress this year.

Ramesh did not stress this in his piece, but the great virtue of moving toward a fixed, refundable tax credit for health insurance is that it would create millions of cost-conscious consumers. They would want to get the most for their money because if they bought expensive insurance the balance would come out of their own pocket (today, in job-based plans, much of the additional cost for expensive insurance is implicitly financed by the federal treasury). That desire to keep costs down would create pressure on insurers, and the networks of hospitals and doctors they pay for services, to provide better coverage and better health-care for the premiums they charge to enrollees. The dismal science is all about the allocation of scarce resources — rationing, in a sense — but this kind of market-based rationing is rational, with consumers and suppliers finding the best ways to improve productivity and provide the highest value possible for the prices people are willing to pay.

The only alternative to building such a marketplace is centralized governmental control. Instead of consumers, insurers, and service suppliers figuring out the best way to stretch the health-care dollar, the government would try to do it. The Democratic majority in Congress won’t admit it, but that’s their plan. For now, they say they want to improve the efficiency of health-care with information technology and research into what works and doesn’t in medical practice. But these steps won’t come close to “bending the cost curve,” as the president says he wants to do. In time, the Obama administration and their allies in Congress will be forced to put on the table the kinds of arbitrary cost-control mechanisms used by other countries — price setting, premium limits, and fixed capital budgets for facilities. 

And that’s a sure-fire recipe to get exactly what Klein says he does not want — irrational rationing of care.  Whenever a distant national government imposes cost constraints, it leads to a reduction in the number of willing suppliers of services, waiting lists, and government-driven rationing of care. Indeed, quite frequently, it is cancer victims who have the hardest time getting access to the services they need on a timely basis.

Klein is absolutely right that the public should be fearful of opening the door to arbitrary rationing of health-care in the U.S. That’s why they should reject the kind of reform program Klein and others advocate.

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