Politics of Healthcare Rationing

by Chidem Kurdas

The Obama administration’s remake of the US healthcare system stands on three legs. It makes the purchase of insurance compulsory. It doles out new entitlements via expanded Medicaid, subsidies and certain benefit mandates. And it promises to control the growth of medical costs. The title of the 2010 law, the Affordable Care Act, highlights the cost containment feature and Paul Krugman, for instance, has repeatedly cited a Congressional Budget Office prediction that the changes would reduce the federal budget deficit by keeping down costs.

Now we have more information as to how this supposed cost containment works.

So far, the mandates that came into effect increased the cost of health insurance to employers.  A Kaiser Family Foundation survey attributes to the mandates 1.5  points of this year’s nine percentage point premium increase.  That may not sound like a lot but most insurance plans are not yet affected by the new provisions.

A first step toward cost control came last week with a report from the National Academy of Sciences’ Institute of Medicine. It says the benefits that insurance plans will have to provide under the law should take costs into account and follow the coverage typically provided by small employers, which tend to be less generous than those provided by large employers.  Moreover, it recommends that the expense of any new benefit be offset by savings in the system.

So, some treatments and innovations will not be included in the “essential” benefits package offered under the aegis of the government. The mandated package is almost certain to become a model for most private insurance.

This is the beginning of federally administered healthcare rationing. You could scream death panel, but the real eye opener is how the essential benefits are determined. The administration’s notion is to put the veneer of expert panels on the rationing.

In fact the law and committees already mandate certain benefits that are not part of a typical plan—-click for Mario Rizzo’s comment on one such requirement, contraception.  The Institute of Medicine says employer plans will have to be expanded to include various required benefits, which are more specific than mandated broad categories like hospital care that are usually covered by insurance.

In other words, the coverage of some services are mandatory while other areas are open to rationing. These were political decisions.  Why did politicians mandate some specific services and not others? Best guess is the rationing-proof goodies went to those with the strongest political connections and influence. All medical service providers lobbied but some lobbied with more resources or more effectively.

By all evidence this mode of operation will continue. What it will do to medical costs is at best uncertain, with subsidies and mandates pushing up the consumption of healthcare and hence spending. That it raises the power and income of lobbyists is certain. Currently this is a major effect of ObamaCare, the President’s protests against lobbyists notwithstanding.

There are people who prefer political rationing to market rationing. Perhaps they honestly believe politicians and centralized bureaucrats make better choices than the many players that constitute a market. Or perhaps they themselves are likely to do better under government rationing than in a market. But do they want their medical options dictated by the lobbying success of this or that interest group? Because that is what happens in political allocation of resources, whatever the pretense.

14 thoughts on “Politics of Healthcare Rationing

  1. Dear Chidem,

    You write, “There are people who prefer political rationing to market rationing. Perhaps they honestly believe politicians and centralized bureaucrats make better choices than the many players that constitute a market.”

    This conclusion nicely illustrates two important shortcomings of contemporary Austrian economics. The first is the tendency to advocate markets as the best means of allocating resources without paying sufficient attention to the unique characteristics of the good or service under consideration. Question: does Kenneth Arrow’s classic essay on markets and medical care, with its emphasis on asymmetric information, adverse selection, and moral hazard, play any role at all in current Austrian thinking about the market for health insurance?

    The second shortcoming is the Austrian school’s unwillingness to judge the outcomes of market-based health care vs. alternative arrangements for providing health care and/or health insurance. Thus, whereas Chidem frames the issue as a question of whether “centralized bureaucrats make better choices than the many players that constitute a market,” one might actually look at the health care outcomes (infant mortality, etc.) produced by, say, the U.S. health care system, where the market plays a relatively large role, with, say, the outcomes of the Scandinavian health care systems, where the market plays a smaller role.

    A final question: does a “comprehensive system of social insurance” lead to serfdom? In Hayek’s own words, “There is no reason why, in a society which has reached the general level of wealth ours has, the first kind of security should not be guaranteed to all without endangering general freedom; that is: some minimum of food, shelter and clothing, sufficient to preserve health. Nor is there any reason why the state should not help to organize a comprehensive system of social insurance in providing for those common hazards of life against which few can make adequate provision.”

  2. Greg Hill: your argument about health conditions is not valid. There are too many confounding factors.

    In 1999 the World Health Organization made a comparison of healthcare systems.

    The best (I think 2nd to be precise) health conditions were found in Italy. The most responsive healthcare system was found in the US. The worst health conditions were found in the US (37th if I remember). The worst healthcare system was found in Italy.

    No sane person would consider italian healthcare a success story only because here we live 80+ years on average, eat better than the Germans, drink red wine which is good for the heart, or because the climate is more temperate than in Tampa or New York.

    To consider a healthcare system without removing the confounding factors is bad practise from a statistical point of view.

    On average, healthcare seems to have added to life expectations a small fraction of the gain in the XX century, said a paper on smoking I read months ago (I don’t remember the reference). Most of the improvement in life expectancy seemed to be due to hygiene, running water, etc.

    If the effect to be estimated is much less relevant than confounding effects which are not considered in the model, omitted variable bias is strongest and you obtain the absurd result that the best healthcare system in the world is Italy, even better than Germany, Switzerland, Sweden, the US.

    Of course, you’ll never hear of anyone going to Italy to be cured. People go to the US.

  3. For what concerns the first claim of yours, everybody talks about adverse selection in healthcare, but without empirical evidence on a free system it’s difficult to assess the argument. I don’t know the literature about it, but the public debate is devoid of empirical content.

    That one of the three most regulated and hampered markets in present-day societies is dysfunctional, together with other dysfunctional markets such as finance and education, wouldn’t be a surprise even for the staunchest free market anarchist.

    Being the same theory which says that second-hand markets don’t exist, it’s easy to understand that the transaction costs involved in removing this source of market inefficiency shall not be very high in most of the cases. Are they so in healthcare? That’s what should be gauged.

    Considering that adverse selection arguments in healthcare are based on the assumption that clients know their health status better than their physicians, I guess the adverse selection problem is a myth. There exist tens of quick and cheap screening devices.

    There may be an equity problem with people with severe preexisting conditions, but it’s something you could easily fix spending a small fraction of what is actually spent on public healthcare (8% of GDP in the US if I remember), expenditures which benefit health firms, physicians and nurses thanks to the well known public choice mechanisms.

    More competition and less taxes may increase the efficiency of health markets as in any other market. There may be different problems, but this is an empirical claim to be checked. There are too many second hand markets around the world to take Akerlof 1970 at face value…

    PS I wouldn’t call te theory of interest politics “Austrian economics”. It’s baseline public choice.

  4. Greg Hill: There are general arguments against political allocation (or interference with the allocation) of resources, including the knowledge problem and the incentives problem (“Hayek” and “Public Choice”). I see no reason why these do not apply to medicine. Chidem Kurdas’ post refers specifically to the Public Choice aspect, where political decisions as to what must or needn’t be covered are probably heavily influenced by special interest lobbying, and surely don’t reflect the choices that many individuals and families might make, COULD make if not coerced by politicians.

    As for judging outcomes, Pietro M. is correct to point out that better medical care can be more than neutralized by poorer lifestyle and nutrition choices and other factors. This appears to be what is happening when one attempts to use longevity as a proxy, an argument approaching the level of crudity of those long-discredited claims about how the higher rate of murder in the US is caused by lack of gun control laws.

    There are many things pushing us down the road to serfdom. One of them is the increasing interference of government in the medical market. The individual mandate under Obamacare is a quantum jump: the federal government imposing itself into the most personal decisions of individuals and families about how they will allocate their own resources to meeting their own needs.

    At one time I was sympathetic to the idea of government supplying some minimum of goods and services, some floor as it were, for the indigent. Unfortunately, once government is footing any part of the bill, there is inexorable political pressure for its involvement to expand, and to expand in ways that are heavily influenced by special interests — to the detriment of economic productivity and thus to the particular detriment of future generations. Private charity is the correct answer.

  5. Greg Hill–
    Even if everything you write is perfectly correct, the question would still remain. Accepting all your points — for the purpose of this comment — do you really think politicians and centralized bureaucrats will do better than the market with its various shortcomings?

  6. Pietro M.–
    Re “There are too many confounding factors.”
    That’s an important but often forgotten point. My understanding is that the initial, large improvement in life expectancy came from better nutrition and living conditions.

    You can make a stronger case for the government provision of sewage systems than for government provision of healthcare–at least in crowded cities where contaminated water would cause major epidemics.

  7. Allan Walstad–
    You’re right, of course there is also a knowledge problem. Because of the explanatory power of public choice in this instance, I did not focus on knowledge issues. Public choice provides the obvious explanation for what otherwise looks like a random selection of diverse benefits specified by Congress as mandates, while many other potential benefits are left to possible rationing.

  8. M. Pietro,
    You write, “To consider a healthcare system without removing the confounding factors is bad practice from a statistical point of view.”  Yes, of course it is, but I didn’t cite any statistics.  I merely suggested that we compare health outcomes across countries with different health care systems.

    Granted, life expectancy is not the ideal measure of the effectiveness of national health care systems. But if you’ll just do a little Googling, you’ll find lots international comparisons based on such measures as the availability of patient prescription data to patients’ doctors who aren’t the patients’ primary care physician, the likelihood of getting sick during a hospital stay, etc. Although per capita medical expenditures in the U.S. are roughly twice the OECD average, the U.S. scores lower than most of the other OECD countries on many measures like those above.
    Regarding adverse selection, you write, “I don’t know the literature about it . . .” and you probably should have left it at that.

    Allan Walstad,

    “There are general arguments against political allocation (or interference with the allocation) of resources, including the knowledge problem and the incentives problem (‘Hayek’ and ‘Public Choice’). I see no reason why these do not apply to medicine.”

    There’s a lot to learn from Hayek’s argument about knowledge and markets, but why not augment it with Arrow’s analysis? If markets work well because the actors involved have more information about their circumstances and alternatives than anyone else, then it would seem to follow that markets work less well when the actors involved don’t have this information than when they do. And, given the superior health care provided by many other countries, one might ask whether “special interest politics” and rent-seeking have had a greater influence on the U.S. health care system than on, say, health care in the Netherlands.

  9. Greg, iI just don’t see why it is not the case in medicine as in other arenas of human action, that the market can access and utilize knowledge more effectively than the political process. I’m not an expert on cars any more than I am on medicine, but I wouldn’t have the politicians controlling the market for car repair any more (or as much as) they do.

  10. Allan, let me give it another try by first enumerating some of the special characteristics of health insurance and medical care:

    1. Each of us knows more about our own health, our exercise regimen, our diet, our alcohol consumption, etc., than an insurance company (asymmetric information);

    2. If you’re relatively healthy, you’re less likely to buy health insurance than if you’ve got some health problems (adverse selection);

    3. If healthy people don’t buy health insurance, the average cost of health care rises, premiums rise, and then a new round of relatively healthy people opt out, which further increases the average cost, etc (the consequence of adverse selection);

    4. When people don’t buy health insurance, and can’t afford care when they get hurt or sick, we still treat them, whereas someone without car insurance doesn’t get the same treatment;

    5. We believe that some information related to future medical costs should remain private, e.g., HIV status, etc.; and

    6. Many people believe it’s not fair that people with serious hereditary health problems should pay more than people with better hereditary luck, all else being equal.

    In sum, there’s a lot of information, or knowledge, that’s either unavailable, or should be unavailable, to private or public insurers. And, as a consequence, the market for health care and insurance is quite different than, say, the market for potatoes.

    With national health insurance, you get the following advantages among others:

    1. No adverse selection; everyone’s covered;

    2. No costs incurred in evaluating preexisting conditions;

    3. No costs incurred in reviewing, often with the aim (let’s be frank) of rejecting, insurance claims;

    4. Reduced medical costs because people with health insurance are less likely to defer necessary exams, treatments, medications, etc.;

    5. As a result of #4, reduced costs due to less extensive communicable disease and fewer days of sick leave from work; and

    6. Economies of scale and scope, e.g., uniform paperwork and centralized record-keeping.

    Now, you might be inclined to reply, “that’s great in theory, but governments always make a mess of things.” And it’s at this point that I suggest you consider the comparative health care stats because it looks like countries with national health insurance enjoy better outcomes than we do in the U.S. and at significantly lower cost.

  11. Greg Hill:

    “Regarding adverse selection, you write, “I don’t know the literature about it . . .” and you probably should have left it at that.”

    Agreed, that’s why I highlighted it. But considering that your arguments are even less based on data than mine, and your economic arguments are even more simplistic than mine, either you are not trying hard to argue or you know no more than me on this issue. In both cases, “you should have left if on that”, but in the former you can still do better.

    You are arguing on a Econ 101 adverse selection model which nobody fails to acknowledge, I’m arguing on a new-institutional economics foundation which acknowledge competing theories and tries to settle the incompatible claims empirically.

    But you haven’t cited a single empirical study capable of distinguishing among the different competing theories, so your contribution to providing relevant information in this thread is as limited as mine.

    PS And as it seems you failed to notice, I acknowledged that US healthcare is actually dysfunctional on an economic point of view. The question is how much of the problem is caused by asymmetric information and how much by rent seeking by part of the industry and medical associations. I assume you know that both problems lead to inefficiencies similar to those observed in the US healthcare: high costs, low competition, rationing etc. A comparative analysis of the two explanations would be a great contribution to the debate. Simply summarizing Econ 101 is not: most of the readers are economists, we don’t need to understand Akerlof 1970.

  12. Greg, to start at the end: What outcomes are you talking about? General health or longevity is affected by a lot more than the medical care system, but is it the case when you actually get sick with a serious, difficult-to-cure disease, requiring advanced medicines and technology, that you’re better off in the socialized medicine countries? I don’t think so. Thomas Sowell is among those who have stressed the point that when you look at the things medical care can actually affect, the outcomes are better in the US (although this is likely to go away with increasing socialization here).

    I note that #1 on your first list applies at least as well to the government as to an insurance company. (So does #5 — I’m at least as concerned about my privacy from snooping by government as by private businesses.) And again, I don’t see anything particularly special here, from an economic standpoint about information in medicine versus information in many other realms of human action. Furthermore, the knowledge that the market coordinates is not only that of consumers, but of providers and entrepreneurs.

    On 2 and 3, relatively healthy people still have an incentive to purchase health insurance. (I do, despite general good health knock on wood.) But if some choose not to, I don’t see where that’s any of your or the government’s business. And again, there’s nothing special about medicine in that regard: surely there are any number of things that would come down in price (or would reduce other costs) if more people bought them, so what you have is simply a general argument for government imposing political choices on individuals as to how to allocate their resources. And that general argument is a bust. On #4, people benefit or suffer from the consequences of their choices — so what? On #6, I don’t see anything remotely unfair (in the sense of some humans acting unfairly toward others) about different individuals being responsible for their own problems and/or their own goals and purposes, and having the freedom to allocate their own time, energy, and property thereto. If you wish to help people who have more health problems, do so charitably. Please don’t presume to use the police to rob some of your neighbors to subsidize others of your neighbors. This applies to #4 as well, and to #1 on your second list.

    On your second list, with regard to #4, people are properly responsible for their own costs and for making choices in that regard. “Overall cost” is the sum of all the individual costs, and as such is of limited significance. What matters is that people are free to make their own choices. #6 would presumably apply across the board economically and argue in favor of socialism simpliciter — which doesn’t work. #4 and 5 simply assume that socialized medical insurance has these beneficial effects. On #2, I doubt that checking for preexisting conditions piles on all that much expense in the grand scheme of things. In a socialized system, your problem #3 becomes the problem of limiting benefits because resources are ultimately limited, and if this doesn’t occur through the market price mechanism it must occur overtly by bureaucratic rationing. The end game here is that whatever some people can afford, all are entitled to. That is a long-term disaster for productivity.

  13. It should be added to the above discussion that around half of medical spending in the US comes from some government source, whether federal or state. Moreover, Medicare has been a model for private insurance in certain ways. So in comparing healthcare in the US vs. another country, one is comparing one government-dominated system to another.

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