Saturday, November 03, 2007

How’s Your Health Care Plan?

These days it's fashionable for candidates hoping to become the Democratic and Republican nominees for U.S. President to have a health care plan, a grand scheme for overhauling an entire sector of the U.S. economy. They cite all sorts of problems with the current state of affairs, and say that they are in favor of having more and better health care for all, at lower prices. But they rarely if ever say why they believe government can or should be attempting this. I'd have thought that that given the demonstrable failures of central planning, they'd at least feel some small obligation to address this issue at the outset. Why would anyone suppose government is capable of restructuring an industry or a sector and making it run better? Regardless of real and imagined problems with the current system, why won’t government interference make things worse, rather than better? Why won’t the new central plan result in less health care, worse health care, and higher costs? The question is entirely sidestepped, and it is not difficult to see why.

I have been studying Hillary Clinton's "American Choices Health Plan," (ACHP) and intend to do the same with those of the other presidential candidates. The plan of Ms. Clinton (I guess it's OK to call her Hillary, she seems to prefer it) is a nice starting point. Rather than dissect it in its entirety, I'll make just a few observations.

First, the plan is entirely disingenuous: it's built on lies and promises the impossible. For example, point 1 on page 5 insists, in one sentence, that no one will be charged excessive premiums, and also that no one will be charged premiums based on risk factors. In other words, a high risk person and a low risk person will be charged the same premiums for the same coverage. Since Hillary also insists the program will be financially sound, the premiums will have to reflect the average risk factor; hence the low risk person will be charged a premium that is excessive for his level of risk, i.e. actuarially unfair. The ACHP is quite clear that individuals will not pay premiums based on identifiable risk; this is the reason for the pooling. With such pooling, a low risk person gets a bad deal and faces excessive premiums. Given the choice, low risk people would tend to refuse to participate, leaving only the high risk people in the pool. The actuarial unfairness is why the insurance must be mandatory. All the talk about "making individuals take personal responsibility" is simply a lie. It's necessary to prevent adverse selection. (Mitt is the champion at telling this lie; he proclaims it as a "conservative" principle.)

OK, Hillary now has everyone insured, but what about expenditures? Doesn't more "insurance" mean more medical spending? (It's impossible for me to avoid quotation marks here; if a perfectly healthy person and a person diagnosed with cancer walk into an "insurance" office, the "insurer" will be required to sell them the same coverage at the same rates. This is not insurance.) Well, expenditures can be controlled in several ways. First, risks can be lowered by preventive measures such as proper testing and screening, and changing lifestyle (eating, exercise, smoking, etc.) Hillary suggests these will be emphasized under her plan, but as her plan points out these are already available, yet people don’t use them. For them to work, they'll have to be mandatory. This is not stated in the ACHP, but John Edwards has stated it in his plan. The Hillary plan identifies obesity related diseases (hypertension, diabetes, etc.) as the most serious health problems, but obesity is primarily a behavioral issue. There's no discussion of how far mandatory screening and behavior modification will be taken, but if preventive measures are to work at all they must be used, and currently the primary reason they aren't is that people choose to not use them.

Expenses can also be controlled by reducing technological innovation. Hillary proposes a Best Practices Institute with a vaguely defined role in funding medical research and deciding what treatments work best. While she doesn't say so, the only way this can control costs is by limiting innovation, either outright or via control of funding. This well recognized, and it certainly would work. But it also means that less research and lower quality.

Also, expenses can be controlled by reducing the individual's consumption of health care. While Hillary doesn't directly mention this, access to health care will have to be strictly limited. Hillary coverage will not be based on risk factors, will not include deductibles, and will not be based on ability to pay. So what constraints will individuals have to keep them from greatly increasing their consumption of health care? The most likely answer is some sort of rationing scheme, such as Canadian and U.K. style waiting lists.

Finally, Hillary claims that a major source of savings will be a government administered insurance program, allegedly less expensive because of "greater administrative savings" (point 3 page 4). This is simply nonsense; it is well documented that the federal government does not have any advantage over private industry or state and local governments in streamlining administration. Every comparative study I have seen finds that the federal administration is extremely costly and unwieldy, compared to any real world alternative. There are systematic reasons for this: federal agencies face a soft budget constraint, and administrators who fail to exhaust their budgets find their appropriations cut. Raising administrative costs is one of the easiest ways they have of building budgets and power. On the other hand, private firms and state and local government agencies face harder budget constraints; firms, and even some state and local agencies, must make profits. This creates incentives to reduce, not maximize, administrative costs. But profits are highlighted by Hillary as a problem to be combated, not a solution

It’s really a dreadful "plan." It clearly is not supposed to work as presented. If it’s understood, it is the sort of thing that appeals to those who believe on principle that government should direct society, ordering it from top down. It really has nothing else to recommend it.

Unfortunately, it appears that Mitt, Sen. Obama, and Rudy are on similar pages. So far as I can tell, the Obama plan is identical to Hillary's, and Mitt's is quite similar, except for the "conservative" posturing (although Hillary does some of that, too). The best hope is Ron Paul, but he has no more chance of getting the nomination than I do. The Republican Party will never allow him, or anyone like him, to run, because they are at least as wedded to big and growing government as the Democrats. Hence... trouble ahead.

Footnote: All of the plans I've looked at seem largely plagiarised, er, borrowed w/o attribution from, the New America Foundation. The NAF proposal at least addresses adverse selection, moral hazard, and the like, and is upfront about the need to limit technology and new pharmaceuticals. Unlike Hillary, NAF favors lengthening and strengthening patent protection for drugs, since the new tougher standards for getting a drug approved will mean it will be even more costly to develop new drugs. And the NAF plan permits some use of risk factors in pricing, as a means to help enforce behavior modification.

The NAF proposal is a bad one, but at least the authors understand some economics.

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