Controlling Costs in a Universal Health Care System

Matt Yglesias of Think Progress is a strong proponent of a universal health care system. In this blog post, he examines what portions of current U.S. health care spending is attributable to different segments like administration, research and development, and drugs. Contrary to prevailing wisdom, he finds that insurance-related waste stemming from administrative costs in private insurance schemes comprises about 14% of overall waste, a much smaller figure than previously reported.

According to Yglesias, the biggest portion of waste in our system, what is called "excess spending," is devoted to “outpatient care.” A snippet:

We pay doctors more than other people do, our doctors order more tests than other doctors do, our tests are more expensive than other people’s tests, and we have many more relatively expensive specialists and relatively few relatively cheap GPs. And we have nothing to show for it.

The prospects for changing this, however, don’t look great to me. People don’t like insurance companies. Taking them on is popular. And nevertheless we see how difficult it is to really hurt their interests. Now imagine taking on the doctor lobby.

So how does a universal health care system cut up to 21% excess spending in outpatient care? Moreover, can this system reduce excess spending generally, like on administrative costs? Proponents of a universal health care system often point to Europe for the answers, which has found a way to increase coverage while minimizing costs.

On Megan McArdle’s blog, Asymmetrical Information, she tells us that the debate surrounding the important particulars of a U.S. universal health care system -- increasing coverage while minimizing costs -- runs afoul of both theory and experience. She says that cross-country comparisons are inappropriate and do little good in figuring how to curb costs here in this country. There is an ineluctable chasm between the U.S. and Europe; political structures and cultural mores are worlds apart. In a word, we’re just so much different than Europe. And here are a few reasons she says why:

· More wage inequality means doctors need to make more
· The American political system is especially easy to lobby

…

· American attitudes toward government: when told they can't have something they want, Americans do not say, oh, okay. They go on the news and call their congressman.
· Federalist and non-parliamentary democracy: in most other systems, the head of the government tells the government what to do. In our system, you need 220 congressmen and 50-60 senators. There's no way to implement the sort of technocratic change that reformers envision; the politicians will keep sticking their fingers in the pie.

Cross-country experiences may not be that informative. So what about theory? Can a national universal health care model draw important inferences from experiments done here in the U.S., at the state level, in what The Economist calls “fifty laboratories, one magic formula.” Are there state-level models proponents can look to? Is there a magic formula the federal government can adopt in order to increase coverage while also curbing costs?

Luckily, there's a lot that can be learned from Massachusetts' state-level universal health care model, which tries to insure all its citizens. Their experiment may be the best model we have to inform the theory that a universal health care system can both increase coverage and reduce costs. The question then becomes, does their mini-experiment include that magic formula?

Sadly, no.

Wendy Button, a former health care speech writer for Hillary Clinton, John Edwards and Barack Obama, now lives in Massachusetts, and tells us that she cannot afford health insurance there. When moving from Washington, D.C. to Massachusetts, Button quickly realized that since adopting universal health care coverage, insurance premiums in Massachusetts have outpaced U.S. national averages. She is a self-employed writer who earns enough money to make her ineligible for Massachusetts care but not enough to afford to buy her own insurance.

The Commonwealth’s model of universal health care promised to do much of what the current federal universal health care bills being debated also promise. Massachusetts' mini-experiment has failed in at least one important respect: for self-employed people like Button, private insurance premiums have risen so fast that health care is simply unaffordable.

Here are some excerpts describing her distressing predicament:

While the state has the lowest rate of uninsured, a report by the Commonwealth Fund states that Massachusetts has the highest premiums in the country. ... The mandate means that some people who can't afford insurance are now being slapped with a fine they also can't afford. There is no “public option” in the way the president describes it, no inter-state competition, no pool for small businesses and self-employed individuals like me to buy into groups that negotiate cheaper rates.

...

What makes this a double blow is that my experience contradicts so much of what I wrote for political leaders over the last decade. That's a terrible feeling, too. I typed line after line that said everything Massachusetts did would make health insurance more affordable. If I had a dollar for every time I typed, “universal coverage will lower premiums,” I could pay for my own health care at Massachusetts's rates.

Both theory and evidence suggest that a government-run health insurance plan cannot increase coverage while curbing costs. Yglesias tells us that much of excess spending -- the much-maligned "waste" we often hear of -- stems mostly from choices American doctors and patients make in the delivery of health care. Whether it's a private insurance scheme or a state-level universal scheme, Americans simply demand much more health care, both in quantity and in price. McArdle says that looking toward Europe is a fool's errand, since the political and cultural structures are vastly different. And Button's story serves as a warning that in fact, the U.S. has a mini-model of universal health care that has failed to do what it set out to do.

So in what has to be the most important question posed in our health care debate, McArdle asks universal health care proponents:

[W]hy do you think that we can control costs, given that we couldn't at the state level? Massachusetts is a very liberal state, a very rich state, and it started out with a relatively low proportion of its citizenry uninsured. Proponents of reform often say it has to be done at a national level because states can't borrow money in downturns, but this doesn't explain why the spending side is headed through the roof. Why are you gazing past the cost control problems at home towards people who don't even speak the same language we do, much less share a political culture?