Thursday, July 16, 2009

Parsing Counter-Arguments Against Health Reform

Talk of contrasts between two articles. There is a great one in July 15's New York Times (NYT), and the other is a hack job in an Op-Ed back from July 1st in the Wall Street Journal (WSJ).

The NYT article "Why We Must Ration Health Care" by Princeton professor Peter Singer makes a thoughtful and compelling case for wisely providing AND rationing publicly funded health care. The few who can afford to pay out of pocket can be left free to buy much less restricted coverage, but a sound rationing policy for utilizing available resources will vastly benefit the general populace. This piece, along with an earlier excellent one of June 17 about how a sub-optimal de facto rationing already exists, should insulate readers from slogans by reform opponents about "rationed care."

The WSJ Op-Ed titled "Parsing the Health Reform Arguments" by George Newman offers a pointwise counter to reforms. However, he goes about it like a hack - using mostly arguments that he should know are misleading. I liken it to Johnny Cochrane defending O.J. Simpson, trying to sway a jury even though he doesn't believe his own logic, or the cause of his client.

Newman's talking points are likely to be used by anti-reformists in TV short debates and sound bytes that can influence gullible viewers. His article is long, but here are my comments on his main contentions:
  • Newman dismisses the cost of health care rising 2-3 times as fast as inflation by saying health care now is so much better than that in the past. He says "That's like comparing the price of a hamburger 30 years ago to a filet mignon today and calling the difference inflation. Or the price of a 19 inch B&W TV 30 years ago with the price of a 50 inch HDTV today."

Actually the CPI compares prices irrespective of technological advances for all services and products, including items like computers or cars that have improved over time just as healthcare has. Incidentally the hamburger to filet mignon analogy is false as both products have existed over this period. As for the TVs, the color TV was invented over 60 years ago, and the cost ratio of a 19 inch B&W TV back then to a 50 inch HDTV today will be pretty much in proportion to the change in general CPI.

There is a valid argument that higher health care costs are also due to a greater quantity of health care being delivered per capita due to the rising needs of an aging populace. But that doesn't explain the egregious escalation in prices of health care (as in a day of stay in a hospital, or an hour of a doctor's time) as compared to a general increase in the CPI. The BLS CPI urban data (CPI-U) compiled by category shows that from 1982-84 to June 2009, the overall prices rose 116% while prices for professional (doctor) services rose 220% and for hospitals they rose 464%.

An international comparison of changes in health expenditures invalidates Newman's "normal health cost increase in the US" assertions in another way. The 2009 OECD health data shows that for all OECD ("developed) countries, the median health expense as a percent of GDP rose 30% from 7% in 1982-84 to 9.1% in 2007, while the increase was nearly double in the US from 10.1% to 16% of GDP over the same period.

  • Newman also explains away health care representing a rising proportion of our US income as "perfectly natural" by categorizing it as a "discretionary, income-elastic expense" that forms an increasing share of a prosperous economy.

Health care is part luxury good, with an inelastic ("necessity") component. Expenses rise with with resources going into increasing longevity of the population and also because older patients need more care. But again, there is no reason for such expenses to be rising faster in the US than elsewhere, and for their absolute level to be so much higher than in peer economies. Given the political and the right reforms we can actually expect US expenses to fall for a few years as US costs are brought closer in line with the rest of the first world.

  • About the problem of the 45 million uninsured, covering this 15% of the population risks destroying a system that works for the vast majority. Universal coverage will push up not only overall costs, but also health care prices as higher demand for services chases the same supply. A public payer option won't help since there is already enough competition among private insurers.

First, the current system is way too expensive, with prices twice those in Europe, so it isn't really "working." Simply extending insurance to those not covered will indeed exacerbate scarcities and tend to raise prices. That's why a public option is vital and is not just like another private plan. It concentrates buyer power that counters the pricing leverage of providers of scarce services. The savings should partly pay for covering the uninsured, though extra funds may be needed in the short term, at least till other reforms free up more resources over time.

Also on July 1 in the Washington Monthly, Steve Benen and several readers dissed Newman's contention about 1500 private plans offering enough competition.

  • A taxpayer funded universal healthcare will not ease competitive burdens of US businesses that no longer have to pay high healthcare costs for their employees. That's because the employees still pay for healthcare costs through higher taxes, as funds "do not fall from the sky."

This logic is false for two reasons. First, as the European experience shows, the single payer public system is much more efficient, so the overall health cost burden is less. Second, if taxpayers rather than businesses pay employee health expenses then for the businesses their employees don't directly cost them extra healthcare dollars in that country. Of course, the current US reform proposals (sadly) do not go all the way towards a purely taxpayer funded system. Instead in a half-measure they propose (all but the smallest) employers should pay for their employees' health insurance or contribute towards a public plan.

  • A public option will drive out private plans. So contrary to reformer's claims, people won't be able to keep the private insurance that they have. Congress will inevitably favor the public plan and harass private plans into extinction.

It is true that a public plan with its concentrated buyer's power has a huge advantage over fragmented private plans. Most people will want to switch to the public plan because it will be a better deal, and will lower costs. That's the whole point. And yes, private plans will shrink dramatically as a result. But they will still be around for the, say, 10% - 15% of the Americans who still want them. Why should Newman expect Congress to unjustly favor the public plan that cannot even give lawmakers anything in return? The danger is exactly the opposite. It is private funded lobbies and groups that can typically buy over or influence lawmakers with favors. In sum I expect a public plan to win out because of inherent efficiencies, and not because of tampering by Congress.

This WSJ article has some other counterclaims as well. To me they are weaker and devoid of merit, but I leave it to you to find the flaws, or enquire in "comments" if you're very interested.

Wednesday, July 1, 2009

The Vast Left-Wing Courtspiracy

Almost all the good ideas on health reforms so far have come from Democrats. Republican have mainly launched hack attacks against such Democratic initiatives. "Hack" here means trying to sway opinions by using any means necessary, including misleading and irrelevant arguments that even the author doesn't believe to be valid.

For example, partisan hacks use phrases like "socialised medicine" or "a bureaucrat coming between a patient and his doctor" to denounce the public insurance option. Never mind that our socialized armed services, socialized police force, socialized public school system and socialized Medicare program seem widely preferred to purely privately run alternatives. Or why should a private insurer whose payouts directly decrease profits be better at serving patients and paying doctors, compared to an automatic Medicare style system of public billing?

But the June 30 Op-Ed by law professor Richard Epstein of the University of Chicago is different. He spells out several reasons why the dysfunctional US malpractice system is much worse than that in other developed countries. This is an issue that Democrats and even their most effective spokesmen for reforms like Paul Krugman completely ignore. While malpractice payouts are less than 1% of total healthcare costs, they cause much larger damage by inducing the practice of defensive medicine.

In that sense health industry groups traditionally aligned with Republicans are more "efficient" in enriching themselves. The annual US health care tab is inflated by hundreds of millions of dollars due to overpricing, including by doctors benefiting from managed scarcities, and by hospitals and insurers facing inadequate competition. But at least this money flows more directly to the recipient interest group.

In contrast, defensive medicine and "excess" malpractice insurance costs as much as 10% of the total health bill or over $200 billion annually if we believe some studies. Yet trial lawyers get at most half of the total malpractice payout of about $6 billion annually, or under 1.5 % of the cost imposed on the system. To misquote Winston Churchill, never have so many paid so much to benefit so few. Even as they push for other changes, Democrats have no excuse to block malpractice reforms.

Epstein says the main reasons the US system (as different from others as in Europe) drives up malpractice costs are:
  • Jury trials that can veer out of control and introduce significant uncertainty, coupled with a contingency fee system and each side bearing its own costs. This encourages trial lawyers to litigate excessively, as they have a good chance to win big with little downside if they lose.
  • American judges frequently allow juries to decide whether honest mistakes are negligent, and to infer medical negligence from the mere occurrence of a serious injury. American plaintiffs sometimes aren't required to identify any particular acts of negligence, or showing the connection between the negligent act and the injury.
  • Damage awards in the US tend to dwarf those made elsewhere.

As a result, Americans file claims about 3.5 times more often than Canadians. Yet the frequency of medical malpractice in Canada is about the same as in the US (so much for the deterrence of the costly US system) - for about a tenth of the total cost.

I agree with Epstein's recommendation to (a) replace juries with specialized commissions like those in France that reduce litigation expenses and promote uniformity in case outcomes across regions, and (b) have a national cap on damages for pain and suffering, such as those already enacted in over 30 states that are set between $250K and $500K.

Two concluding caveats to Epstein's article, though. First, not everyone agrees that malpractice coupled with defensive medicine imposes such heavy costs. A 2004 report titled "Limiting Tort Liability for Medical Malpractice" by the Congressional Budget Office uses terms like "weak", "inconclusive" and "ambiguous" to describe a lot of the evidence. Second, Epstein couldn't leave well enough alone, and took a pot shot at the vitally needed (in my opinion) public option in his concluding sentence: "Market-based solutions that make the private sector more responsive should in turn undermine the case for moving head-first into a government-run health-care system with vast, unintended inefficiencies of its own."