Arnold Kling

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The Myths Surrounding Health Care Policy

Over a decade ago, I wrote Crisis of Abundance: Re-thinking how we Pay for Health Care. Recently, I revisited the health care issue in a 6000-word essay, which I am not sure where to place. What I believe today is that while my earlier prescription for health care policy is unlikely to work, my diagnosis of the problems holds up well and is worth repeating.

My main observation is that medical treatment in the United States has changed since the 1970s. We have introduced many new diagnostic procedures and cures, carried out by specialized doctors using expensive equipment. We appreciate these advances in medical services, but we face a challenge in paying for them.

Unfortunately, most participants in the health care policy debate try to evade the fundamental reality that forms the basis for my diagnosis of the problem. Instead, they cling to various myths about health care policy. This essay will briefly outline these myths.

Myth 1: We can satisfy household demand for medical services while holding down the share of the economy devoted to health care.

As individuals, what we want is unlimited access to medical services without having to pay for them. We prefer collective payment mechanisms, in the form of private health insurance or government programs.

American households pay out of their own pockets for a lower share of their medical treatment than households in just about every other country, including Canada. As a result, we have no incentive to forego procedures that are merely precautionary or which are more expensive than reasonable alternatives. We have no incentive to shop for providers on the basis of price, and providers have no incentive even to quote prices.

With collective payment, the limits on spending must come from rationing decisions made by the institutions that pay the bills. But Americans are culturally very resistant to rationing medical services, and we protest whenever insurance companies or government agencies try to limit coverage of procedures.

Myth 2: High prices are responsible for America’s large health care bill.

This myth has been spread by some prominent health care economists, including Uwe Reinhardt and Austin Frakt. It is based on flimsy evidence, and more careful analysis suggests that it is wrong.

Reinhardt and others point out that the U.S. spends more per person on health care than other countries. Yet outcomes, as measured by average longevity, are no better. Indirectly, one might infer that we must be paying more for essentially the same medical services.

But the direct evidence says otherwise. The share of American workers in the health care system is much higher than that in other countries. We are spending more on health care because we are in fact utilizing more resources in that sector.

Myth 3. We could make health care more efficient by changing the way that we pay doctors.

This is another myth spread by some prominent health care economists, notably David Cutler. Its plausibility is derived from the fact that many studies find that similar patients in different locations receive much more treatment with no better outcomes. The idea is to change the compensation system to reward doctors who choose the treatment protocols that can be shown statistically to be more cost-effective.

But in practice, it is not so easy for statisticians and economists to over-ride the judgment of doctors. As anyone who has ever tried to set up a bonus system for salespeople can tell you, all compensation systems can be “gamed.” It is easy for doctors to change how they report what they do, without having much effect on their actual decisions. In fact, this was what happened in the largest experiment with “pay for quality” to date, which was conducted in the UK.

Even if we could over-ride doctors’ decisions, it is not so clear which decisions to over-ride. It is true that in the aggregate, there is evidence that a lot of our health care spending has no benefit, and indeed some of it may cause harm. But we have much less specific knowledge of which protocols are clearly problematic.

Myth 4. The best form of health insurance is comprehensive coverage.

People who work for large firms or government agencies that provide health coverage that pays for every minor medical service will tell you that they have “great health insurance.” In fact, what they have is insulation, not insurance.

Real insurance, such as fire insurance, has low premiums, is used rarely to make claims, and protects against catastrophic losses. Comprehensive coverage requires high premiums (which the individual does not see when the employer pays for a large share of the cost) and leads to households filing many claims for low dollar amounts.

Myth 5. The United States could easily adopt a health care system that has worked in Canada, Singapore, or Switzerland.

Our cultural expectations differ from those in other countries. We would have a hard time with the limits that Canada imposes on the availability of services. For example, Americans have been told that at the age of 50, they should start getting colonoscopies to screen for colon cancer. Canada’s government has not funded the equipment or specialists to carry out such a protocol.

Singapore’s health care system serves as a model for policies favored by conservative economists. (My book proposed a somewhat different system, but it was based on similar principles.) Everyone is required to obtain catastrophic health insurance, for which the indigent receive subsidies. Otherwise, Singaporeans rely heavily on medical savings accounts, both to pay for catastrophic coverage and to pay for other health care expenses. This works in Singapore because the middle class there is willing to save rather than spend.

Switzerland has a system of competing health insurance providers, with every citizen required to purchase health insurance. It is like the model envisioned in the Affordable Care Act, except that in the case of Switzerland, the mandate to purchase health insurance is strictly enforced and achieves essentially 100 percent compliance. We could have the Swiss system if we had the discipline of the Swiss.

Conclusion

The problems with America’s health care system are easier to diagnose than to cure. Because we do not like to place any barriers between patients and treatment, we end up using a lot of medical services that have high costs and low benefits.

How could we achieve better health outcomes with less health care spending? By far, the most effective ways to improve health care outcomes in this country would be to reduce homicides, accidents, obesity, and substance abuse. If we could find programs that effectively address those problems, then we should take funds away from medical care and spend it instead on those programs.

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