health care costs

The last couple of days I have tried to focus on aspects of the debate over heath care reform that make no sense or, at least, muddy the waters. In particular I have been trying to defend the case that there can be no pure market solution since such a solution implies unacceptable social ramifications. Yesterday in particular I tried to explain why a for profit insurance system drains resources away from care towards the exact opposite: the denial of care. This perverse behavior is entirely explained, and supported by, the profit motive.

By way of pressing this argument further I want to draw your attention to Timothy Noah’s excellent summary, in Slate, of the activity known as ‘rescission’. This is the effort that insurance companies make to deny claims based upon a thorough examination, not of a consumer’s health, but of the veracity of their application form.

You can read his article to get the details, but essentially the idea behind rescission is to deny a claim based upon an error or deliberate misstatement in a person’s original application for insurance. I pointed out already that the screening of forms is very expensive, so it is typical for insurance companies to perform a thorough screening only when they are confronted with a potentially large payout. When a consumer falls ill and then submits a claim that has the potential for such a large payout, say for long term cancer treatment, it pays for the insurer to try to find reasons to deny the claim. Remember that the entire premiss of an insurance company is to avoid minimize payouts where they can in order to boost profits. This attempt to deny service even after accepting premiums and providing coverage is called ‘rescission’.

So a considerable amount of administrative cost is incurred by a private insurance system to deny claims on the basis of rescission.

There is of course a solid motive for this: any system that pays out large sums of money has to be on the alert for cheating. We would expect a government system to audit its payouts in order to avoid fraudulent activity, so we should also expect a private company to do the same.

But there is s difference: in a government system the motivation is to eliminate only fraud. It is not to deny legitimate claims as well. In a private for profit system there is an incentive to go much further and to deny perfectly legitimate claims on the basis of the flimsiest of reasons. Indeed, as Noah points out, at least one insurer bases the bonuses of its workers on the dollars of claims they can find a way to prevent being paid.

Let me repeat: this is all perfectly acceptable free market activity. Maximizing profits is the motive, not providing care in a free market system. Hence the behavior that appears bizarre: it isn’t when viewed through the right lens.

The outcome can be very odd though: the two stories in Noah’s articles have become legendary in the blogosphere because of their infuriating stupidity. Turning a woman down for breast cancer surgery because she neglected to report her acne treatment on her original application form is perverse beyond words. It defies any interpretation of reasonable. But it would have been profitable had the insurer managed to pull the denial off.

The point to take away from stories like these is not the stupidity of the examples, they are beyond the pale, but to keep focusing relentlessly on the structure of the incentives in the systems itself.

My argument against a private health care system is built upon the inherent contradiction between private profit motives and maximal social outcomes. There is no way to build a private health care system so as to align the incentives within in it so as to accomplish a maximal coverage. Markets always ration. Rationing is an unavoidable consequence of scarcity. Let’s all get over that. As a consequence of this feature of a free market there will always be a large portion of the population without coverage: the price system will settle in at a cost that many people are either unable or unwilling to meet.

The free market counter argument goes as follows:

That those without coverage have all chosen to be so. For a variety of technical and quirky theoretical reasons it is not possible in a free market system for people to end up in a condition that they did not choose. So, for instance, in the neo-classical theory that provides the backbone for the free market argument there is no such thing as involuntary unemployment. To a standardly trained economist a person is only ever unemployed because they want to be. [The reasoning runs like this: if a person is unemployed and really wants a job they would find one even if it meant taking a massive pay cut. Ergo: if a person is unemployed that can only be because they value leisure more than the pay cut. This all excludes people who are ‘between jobs’ which the neo-classical folks also regard as voluntary.]

Similarly: to a free market theorist someone who lacks health care insurance has decided to be that way. It has nothing to do with cost or some abstract [ in their view] ability to pay. This is why the defenders of the market system point to the number of uninsured and try to reduce it by excluding chunks of the population. They exclude young people – they know they are healthy and so ‘choose’ not to get insurance because its unnecessary. They exclude rich people on the basis that those folks can pay for health care out of pocket. And so on.

It is very important to remember that to a free market purist everything you see around you, everything, is the result of choice. So, to them preserving choice is paramount. And they have constructed their theory of a market to demonstrate that markets are a better way to allocate scarce goods like health care whilst still preserving choice.

It is crucial to their argument that we view preserving choice as a neutral concept. By this I mean that their theory does not account for limitations placed upon choice by things such as income levels. The distribution of income is swept aside as irrelevant by the free market folks. Why? Because their theory argues that you get paid only as far as you contribute. So, in order to preserve a neutral and yet optimal social outcome, incomes are regarded as a function of your contribution, and so your ability to consume is similarly constrained only by your contribution. Which, naturally, is a function of your free choice. And a society that is constructed around both freedom of choice and ‘you only get out what you put in’ manages to create a wonderfully powerful illusion of ‘fairness’.

You will notice that the theory includes absolutely no reference to inherited wealth, income distribution, social, racial, or sexual discrimination, or any other possible cause of involuntary distortion of wage earning capacity. It is entirely ‘what you see is what you get’.

Ultimately it can be reduced to a tautology: the outcome must represent our desired outcome because we chose it; and since we desired such an outcome we must have chosen it.

So the outcomes we observe are the outcomes we desired. And the outcomes we desired are the outcomes we observe.

Wonderful logic and impeccable math.

But silly.

Still that line of reasoning lurks behind every defense of a free market. And provides a perfectly logical defense of rescission.

To those of us who believe there are outcomes we desire that a market cannot provide, all that money spent on rescission is money diverted from providing care. To a free market purists it is simply a cost of ensuring the preservation of choice and the subsequent maximization of the insurer’s desires.

Expect much more rescission if the reform efforts fail.

The silliness associated with health care can be extraordinary at times. Paul Krugman today comments on the apparently common notion that government health care cannot work – it does in many countries; and that a private system can work anywhere – it cannot, as I tried to explain yesterday.

Plus as he points out: America doesn’t have a totally private system anyway. Quite the contrary of all the health care dollars spent here 47% are accounted for by the government through Medicare and Medicaid; while private insurers foot the bill for 35%.

These numbers put a different gloss on the discussion.

They highlight, for instance, that controlling costs in the health care system has to include reform of the government provided side as well as the private side. This is where the so-called ‘moderate Republicans’ and ‘Blue Dogs Democrats’ find themselves trapped: they mostly voted for the Bush extension and modification of the Medicare system that specifically prevented the government from enacting cost control measures. For instance they made sure that there could be no hardball negotiation of drug prices. Their actions demonstrate that they are focused on protecting the profits of their campaign donors and are not concerned about deficits or cost control at all.

So whenever they warble about the cost of Obama’s health care reforms they are simply trying to divert our attention away from their true objective: keep the profit stream alive.

I am continually amazed at the hysteria whipped up about the word ‘socialized’ when it comes to medicine. With almost half our health care already delivered that way getting the rest reformed should be easy. But as the Krugman post illustrates there are some consumers who are blissfully unaware of the sources of their care.

Speaking personally: I have family members who rant endlessly about the inefficiency and waste of Medicare yet who relied totally on it for care when private insurance was either too expensive or refused to pay for certain kinds of care. It is this ability to receive help yet criticize the source of it simultaneously that muddies any rational debate over getting the system cleaned up.

These anecdotes highlights a few things:

• Just how pernicious the ‘market magic’ ideology has become. Average Americans have been systematically misled into believing that free market can solve all economic problems. I don’t think there is a single respectable economist, no matter what their political convictions are, who believes that. On the contrary, the study of so-called ‘market failures’ has burgeoned in recent decades. The delivery of many services is best done either through a government system or through a private system heavily conditioned and regulated by government. Health care is manifestly one of those services.
• You had better be careful with your lobbying. One of the strongest blocs of opposition to reform through the years has been the American Medical Association – and why not doctors and hospitals in America extract a huge rent from the system – yet even they are now facing the inevitable crush of the market: as the insurers push back to preserve profits the doctors find their own profits under attack. Similarly big companies like GM who wanted to scupper a government system and use health care as a ‘worker benefit’ now want to bail out because the cost of that benefit makes them uncompetitive in a global economy. Self-interested groups like these ignored the economics for as long as they could extract extra rents from the system. Once the cost of the fragmented system they advocated impinged on their profits they started to switch sides.
• The American political system is infested with so much money getting legislation that actually helps voters is well nigh impossible. The flood of money from health care companies into Congress can only distort the process. Were this a foreign country we would all be sniggering at the utter corruption of such a process. Here we defend the same thing as ‘freedom of speech’. It takes a ridiculous amount of energy to overcome the corrupt bulwark that lobbyist money builds to defend a vested interest’s ability to game the system: doctors and insurance companies have succeeded for years in preventing health care reform so as to keep the gravy train alive. [I won’t mention bankers here, but they are even worse]. Now they complain … tough!

Finally I read a letter in today’s Financial Times advocating the old free market argument: the correspondent was defending the level of spending on health care along the lines of freedom of choice. If consumers want to spend 20% of GDP on health care we should let them … it’s their choice.

That is, of course, a red herring and should be ignored. Reform is necessary because even though we are consuming almost that much of GDP in health care, we are not getting a good return on our money. The outcomes do not justify the expenditure. Let me give you a simple concrete example that defeats the ‘freedom of choice’ argument: our system consumes millions of dollars a year on insurance company administration, some of which is designed – sensibly and properly because of the profit motive – to prevent the consumption of health care dollars by willing consumers by denying payment for service. In other words our system deliberately defeats freedom of choice and actually diverts money into that negative activity. Are freedom of choice advocates willing to strip insurance companies of that ability to protect their profits by forcing them to pay for all and any claims? If they are, then they have to advocate a non-free market solution. But to them only a free market can deliver ‘freedom of choice’ – their whole argument against reform rests on the potential ‘rationing’ represented by government intervention in the market. They want the market to ration via a price system. But that price system includes processes to limit choice! They are logically defeated. Their argument fails.

Meanwhile the ‘debate’ rumbles on, and we still sped too much on health care.