Economic Irrationality and Health Care Reform -- the Amazing Atlantic Article

HAS SOMEBODY REALLY FIGURED OUT HEALTH CARE?  READ ON!

I was shocked,along with NY Times columnist David Brooks, to discover that the best and most persuasive article on health care reform would be published this late in the game. What's equally peculiar, it seems to come from a non-specialist who has leaned heavily on the theories of a particular Harvard professor.

The article, published in the September Atlantic Monthly magazine, was written by David Goldhill, who is credited as a "media and communications executive."  You can find the article here.

Though I've read dozens of articles on health care by Nobel-prize winning economist Paul Krugman, I never found the magnificent Krugman anywhere close to being as clear and persuasive as Goldhill the generalist.  Now I want Krugman to explain why and will be looking for his analysis.

Basically, here's how I understand Goldhill's argument:

1.  You can never expect to find a virtuous circle of increasing quality at lower prices in any sector unless that sector is subjected to market forces.  When you distort a market by subjecting it to perverse, anti-economic incentives, then you have a chance to create a market which features that unfortunate combination of high prices and low quality which bedevils our health care system.

2.  One source of market distortion is that consumers have been conditioned to confuse "health care" with "health care insurance."  Goldhill points out that this is truly bizarre, because there is no other area of our lives where we expect our insurance to take care of routine expenses.  Our homeowners insurance won't get our houses re-painted just for esthetic reasons, and our car insurance won't pay for new tires or gasoline.

3.  By confusing health care with health care insurance, we develop the perverse notion that health care is "free" for people with insurance.  It sure feels that way when you walk out of a doctor's with a tiny co-pay.  However, Goldhill points out that we get it exactly backward -- the apparently "free" care is actually hugely expensive.  It's kind of like paying a large fee to go to Club Med and then thinking that the all-you-can-eat buffet is "free".  It's not free, it's extremely expensive, but that specific cost has been buried amidst larger costs where you won't notice it.

4.  Every month most workers see a significant portion of their salary disappear in taxes, much of which will be used to fund systems like Medicare, from which we expect to benefit someday.  What workers don't perceive is that their own salary is much lower because the employer is also forced to make huge health care contributions, that might otherwise have been used to boost salaries.  So our "free" health care actually has the direct effect of significantly decreasing our salaries and our corporation's profits.  Thus, "free" health care is actually about the most expensive care you can get.  

5.  Goldhill estimates that over a lifetime today the average American will contribute about 1.8 MILLION dollars toward our society's health care.  Now, how many of us are going to fully tap that 1.8 million health nest egg?  Very, very few.  Where does all the money go?  Our country now has one insurance executive for every two doctors.  Does that sound efficient?

6. Our systems creates perverse incentives because people will often decide to get every diagnostic test in the book, just because they're hypochondriacs or because their doctor is a part-owner of the MRI clinic.  Both doctors and patients routinely request unessential services because of the false perception that such services are "free."  They don't realize they're just pick-pocketing themselves.

7.  Goldhill's proposed solution is to re-insert economic constraints by making us really pay for our own medical care.  The way this would be accomplished would be by forcing everyone to have something like a "Health IRA" -- a tax-subsidized account that encourages you to save for medical emergencies.  When you get sick, you just draw on your health account.  If you have a catastrophic medical problem, that will be taken care of by government-mandated catastrophic care insurance, which will kick only when bills go over $50,000.  Beneath that, you take care of your expenses yourself.  If you don't have enough, you will be allowed to borrow against your own likely future earnings and deposits to your health care account.

8.  We won't need a huge health-insurance complex to oversee this system, so we can fire all those useless insurance executives.

9.  And there is a huge incentive now to stay healthy -- when you get to a certain age, you can tap into your own health savings account, just like you can into your IRA. It provides an additional savings account for all Americans, and a tremendous incentive to follow ideal health practices.  If you stay healthy, by the time you reach retirement age you will have a huge fund that you can use for personal reasons.  If you get hit with catastrophic medical failure later, don't worry, that's covered by the high-deductible government reimbursement principle.  That insurance only kicks in when the expenses go into the 50,000-200,000 range.

End result -- we stop wasting money on low-value medical procedures that aren't going to help us. Doctors and hospitals have to reduce their ridiculous inflated prices, because now it is not the insurance company reimbursing, the citizens themselves will have to pay out of pocket, and presumably will be vigilant to make sure that unnecessary procedures and tests aren't ordered.  All Americans will gradually realize the enormous financial value of staying healthy -- you can save up your health care IRA and use it for whatever you want, visits to Hawaii, a new Porsche, etc, whatever you want, so long as you've avoided cupcakes, cigarettes and tequila for breakfast for the past 20 years.

THIS IS A BRAND NEW ARTICLE BUT I CAN'T FIND THE FLAW IN HIS REASONING. SOMEBODY HELP ME OUT PLEASE, I DON'T WANT TO LOSE MY FAITH IN SAINT KRUGMAN.

Comments

[mark kolodny]

How dare you condone and suggest people take responsibility for things like their own health!

[Mark Stewart]

Yes, Guillermo, there is a flaw in Goldhill's argument, and it is surprising that you, as a proponent of the influence of the irrational, did not see it. Goldhill presumes that people, seeing the economic and physical consequences of their own poor health decisions, will correct course and make better decisions in order to improve their economic and physical health.

It is a charming thought, but I would like to see some evidence for the likelihood of that occurring. I would imagine much the opposite taking hold: many people, either with poor health habits or having the bad luck to have chronic illnesses from no fault of their own, becoming increasingly desperate as they watch their health savings accounts continually depleted, and in that desperation actually worsening their bad health habits and making other poor decisions based on desperation. Smoking and over-indulgence in food and drink are some of the most available and reliable pleasures in life, and are regularly resorted to ease stress, particularly by those with less education and economic opportunity. Similarly, desperation would drive people to making other bad economic decisions, including more spending on the lottery and other low-return activities.

Thus, I believe the program Goldhill proposes would work well for a relatively small minority of the population, i.e., those already decently positioned economically, with relatively good health and good health habits, and with a generally hopeful attitude towards the future. Those requirements eliminate quite a lot of our fellow citizens. So, Goldhill's program, by playing into pre-existing lifestyles, would end up widening the class divides in our country.

By the way, I imagine some readers of my comments might find them elitist and offensive. I would suggest to those so offended to look at some of the research on class and health and note how strikingly they are correlated and look at the other variables associated with those correlations.

[emp]

This is irrationality indeed; talking of a financial incentive to get people to bother to maintain their health. Has it occurred to you that if a person doesn't care about managing to stay alive, avoid pain, etc, they're probably not going to care too much about the money they'll be saving instead of being dead or stuck in hospital dying?

I suggest you try reading Irrationality by Stuart Sutherland. Chapter 8. Misuse of Rewards and Punishments.

Also you might want to try simply looking at the health care systems of other industrialized nations; all those other nations which have a higher life expectancy than the US, lower per capita costs and all of whom have universal health care.