Friday I took a step back from the legislative debate to look at two examples of hard choices in medical care. Unlike the examples being discussed by some elected leaders, these hard choices are ones in which one option is both medically superior and more expensive than the other. Someone then has to make a decision about whether the additional medical benefit is worth the additional cost. I believe that much of the complexity in our American health policy debate boils down to the question of who should make these cost-benefit decisions.

Today I will present your options to answer that question.

You have three options for who gets to choose whether the marginal benefit of a given medical treatment or health insurance benefit is worth the marginal cost. I think of them as “levels”:

  1. government;
  2. insurers & employers; and
  3. you (with advice from your doctor).

They key analytic point is that whoever controls the money makes the decision. To oversimplify, the higher you push the decision, the more you can redistribute among people. The lower you push the decision, the more efficient you are. I think that certain political realities also will affect the total amount of resources dedicated to health care, depending on at which level the decisions are made.

Equity

Let’s look at how we make similar cost-benefit decisions for other critical goods:

  • food – decisions are made in level (3), with subsidies for the poor;
  • housing – decisions are made in level (3), with subsidies for the poor;
  • elementary and secondary education – decisions are made in level (1). It’s generally through local governments, allowing some but not complete redistribution.
  • college education – decisions are made in level (3), with subsidies for all but the rich.

For most Americans under age 65, most health care resources are distributed through decisions made in level (2). Our employer negotiates with health insurers and produces a limited set of options among which we as employees can choose. Once our expenditures exceed our copayments, our insurer decides whether a particular medical treatment is worth the cost and covered by our insurance. If we disagree, we fight with our insurer.

Employer-provided health insurance creates some redistribution. The expected medical costs of a 55-year old employee are higher than those of a 25-year old employee. If each were buying health insurance as an individual, you would expect the 55-year old would face a higher premium. Most employers, however, equalize the premiums charged to their employees, allowing only for differences in single vs. family policies. By getting his health insurance through his job, the 25-year old is therefore implicitly cross-subsidizing the health insurance premium of the 55-year old. (It’s difficult to figure out whether wages adjust to account for these subsidies.)

If we push control of the money, and therefore the cost-benefit decisions, up to the government level, then there is more opportunity for policymakers to redistribute and cross-subsidize. Whether you think that’s good or bad, it is a primary argument made for moving decisions up to the government level. That redistribution could be based on income (rich >> poor) or health status (generally healthy >> predictably high cost). It could be geographic (rural >> urban) or based on gender, age, or any other criteria that Congress defines.

If we push cost-benefit decisions down to the individual, then we must keep the money at that level. This is what we do for food and housing: people buy their own food and housing with their own money. We then subsidize the poor through government programs and charity – food stamps and soup kitchens, low-income housing vouchers and shelters. To the extent we take health cost-benefit decisions out of the hands of employers and insurers and leave them in the hands of individuals and families, health insurance and health care will be distributed largely based on ability-to-pay. Those who cannot afford it will rely, as many do now, on emergency care, clinics, and charity care.

We rely on ability-to-pay to allocate most goods in our (American) society. You work and save, you earn income, you buy what you can afford with that income. This is as true for “essential” goods as for things that are clearly discretionary. We layer on top of this a progressive tax-and-transfer system that redistributes income downward.

I know of three common arguments in favor of greater redistribution for health care compared to other goods:

  1. There is a significantly skewed initial distribution at birth. Some of us are dealt a poor medical hand at birth and will face high medical costs throughout our lives.
  2. If the housing safety net fails a poor person, he has to sleep on the street. If the food safety net fails a poor person, he has to go hungry. In the extreme if the health care safety net fails a poor person, he can die.
  3. Since the end of World War II Americans have been largely insulated from and ignorant of the costs of the medical care that we use. This has created a cultural difference in the way we think about health care compared to other goods. We think more about the price of milk than we do about the price of an MRI.

Whatever your view on whether there should be more redistribution and cross-subsidization of health care, it is indisputable that moving health care cost-benefit decisions from insurers and employers up to government would mean more redistribution and cross-subsidization. We see examples of this in pending legislation. I imagine that the regulations to implement such a law would go further.

Efficiency

By efficiency I don’t mean “least expensive.” If we have two possible decision-makers who can decide whether the marginal cost of a particular treatment exceeds the marginal benefit, then the efficient decision-maker is the one who gets it right more often.

If you’re controlling your own money, then you know how to weigh costs. With health care the hard part is understanding the benefits. Most of us are neither medical professionals nor probability experts, so we have a difficult time understanding the actual medical benefit of a particular treatment and whether it’s worth a financial cost that we do understand. I constructed two examples in Friday’s post to highlight these kinds of choices, but I intentionally made them easy to understand, and I was precise about the medical benefits of each. In practice it’s much more difficult.

On the other hand, I argue that having someone else make that decision for you is far worse. Employers, insurers, and the government can all hire technical expertise – medical professionals who know, on average, the benefits of a particular treatment. This must then be counterbalanced with other factors that push third parties to make decisions that are less than ideal for you:

  • Governments/insurers/employers have to set up rules that apply to everyone. People are different, and sometimes those rules don’t fit your particular case.
  • People have different attitudes toward medical care. Third parties can’t know those preferences or account for them in their decisions.
  • The cost-benefit decision depends on the cost and the resources available. Using Friday’s example 1, you might choose the Skele-Gro if it were $500, but reject it at a cost of $5,000.
  • In addition to whatever resource constraint exists, third parties have other pressures on their decisions, and other incentives. A government bureaucrat has rules and laws he has to follow, deadlines, and time and workload pressures. He also faces political pressure from Congress and medical treatment interest groups (hospitals, nursing homes, doctors, nurses, drug and device manufacturers, …) These pressures make his cost-benefit decision on your behalf different from your own.
  • Government bureaucracies are slow to adapt to changes in medical practices and markets.

Neither decision-making model is perfect. If most health care decisions were made by individuals, some of us would make poor decisions and screw up our own health care. Most of us would rely on medical professionals for advice, but we are all flawed beings who make mistakes.

I think that our current system of insurers and employers making these decisions for us is worse, and that moving more of these decisions up to the government level would make it even more so. I believe that more bad cost-benefit decisions would be made if those calls were made by someone in government than if you made them yourself.

Total resources

Many on the right argue that if we push these cost-benefit decisions to the government, a binding resource constraint will mean government rationing. Government will have control over the resources and will make cost-benefit decisions for us, en masse. Government will deny us care that we think we need, whether that’s through death panels or, as Megan McArdle aptly puts it, second-knee-replacement panels.

I think it’s equally likely that instead government would just blow through the resource constraint and keep spending more and more of society’s resources on health care, financed by higher taxes or even bigger budget deficits. We see this in Medicare – there’s no rationing, and the program is unaffordable. Because government has control of Medicare resources and elected officials are unwilling to impose a resource constraint, we’re on track to bankrupt our country.

I believe that moving more health care decisions, and more control over health care resources, into government hands will exacerbate this trend. I am afraid of rationing. I am just as afraid of destroying our economy even more rapidly than we are because Washington politicians promise everyone all the health care they think they want, need, and deserve, with no regard for cost.

A deceptive agreement between Left and Right

In the past few months I have twice debated on TV former Vermont Governor and DNC Chairman Howard Dean. Some viewers may have been surprised to see us both arguing against the employer-based insurance system that dominates the American health policy landscape. I believe that Governor Dean and I agree that our current health care system needs to be changed.

Don’t be deceived by this agreement, however. We agree that we dislike the status quo, but would move in opposite directions.

He argues that we should move decisions away from employers and insurers, and into government. I argue that we should move decisions away from employers and insurers, and into the hands of individuals and families (with advice from their doctors). This difference leads us to quite different policy proposals.

Pending legislation would move policy in Governor Dean’s direction. It wouldn’t go as far as a full single-payer system might, but it would move enormous amounts of money into government hands. The health care decision-making authority accompanies the money.

I think the status quo is unacceptable, but I want to move in the opposite direction – taking that money and leaving it in the hands of individuals. I would give you the authority and responsibility for making more of those difficult and painful cost-benefit decisions about health care than you have today, and far more than you would have if this legislation is enacted.

(photo credit: Shelly T.)