The Economics of Being Kinder and Gentler in Health Care

By Uwe E. Reinhardt
The New York Times, December 20, 2013

In the late 1980s, about 35 million respondents to large nationwide surveys declared that they lacked health insurance of any kind. The comparable number now is close to 50 million.

Then, as now, the endless “national conversation” went on and on, pondering ways to achieve truly universal health insurance coverage, a feat most other developed nations accomplished long ago.

Then, as now, news organizations and the health services research community reported on the financial and physical hardship that many low-income, uninsured Americans face when they fall ill.

And then, as now, the prices for identical health care goods and services were more than twice as high in the United States as they were – and still are – in the member nations of the Organization for Economic Cooperation and Development.

For all the wonderful things the United States health system has done for the American people, then, as now, it has also helped price some degree of kindness out of our souls, a side effect of their treatments that the leaders of American health care at some point must begin to contemplate.

My interpretation is that opposition to the Affordable Care Act largely reflects the age-old reluctance among many of the nation’s haves and the healthy to help purchase for America’s lower-income families and the chronically ill the super-expensive health care that the haves enjoy themselves. That attitude is all the more striking because of the generous federal indirect subsidies enjoyed by many of the haves, especially high-income Americans. (I am thinking specifically of the generous tax preference accorded employment-based health insurance, the largest tax expenditure in the federal budget.)

Some people on both the extreme left and right seem to believe that the current travails of implementing the Affordable Care Act and the possibility of a so-called “death spiral” in the market for individual health insurance may usher in single-payer health insurance in the United States – say, Medicare for all.

I do not find that a likely prospect. Rather than embracing a single-payer system, the United States is more likely to stumble, in fits and starts, toward something resembling officially sanctioned tiering of the American health care experience by income class, as follows:

FOR MEDICAID BENEFICIARIES AND THE UNINSURED, a budget-constrained system of public hospitals and public clinics. It would allow politicians to ration health care (through tight budgets) without ever having to acknowledge that they were doing so. In other words, it would reduce the price of being kind.

FOR THE EMPLOYED MIDDLE CLASS, a mixed system with defined contributions by employers, private health insurance exchanges and reference pricing by insurers. Under a restructured Medicare program also based on a defined contribution model, reference pricing would be likely to apply to Medicare beneficiaries as well. Depending on how it is operated – e.g., if it were solely based on cost, in abstraction of quality – reference pricing also permits tiering of the health care experience by income class, without anyone having to say so openly.

FOR THE UPPER-INCOME GROUPS, boutique medicine, which is already growing in the United States. Here the sky will be the limit.

And what do readers think?…

Uwe Reinhardt, an astute observer of the U.S. health care system, does not see single payer in our future, but rather sees an “officially sanctioned tiering of the American health care experience by income class.” We already have the three tiers that he describes, but the middle tier is rapidly evolving in a way that may provoke a renewed and more intense interest in single payer.

The lowest tier – Medicaid beneficiaries and the uninsured – have never had much of a political voice. Nevertheless, even the most heartless of politicians recognize that we must provide care for indigent pregnant women and children. Thus we have the chronically underfunded Medicaid program plus safety net hospitals and community health centers. Some states also have included other low-income adults, though they still make up the largest percentage of the uninsured. Except for the most basic of primary care services and care for events that threaten life or limb, access to health care for this sector is limited, especially for specialized services. As Professor Reinhardt indicates, politicians are able to ration health care for Medicaid beneficiaries and the uninsured without admitting that they are doing it, merely by placing restraints on the budget. Since it is unAmerican to ration health care, they would never do that, but rather they merely refuse to budget spending that we can’t afford. (Of course, inadequate funding of health care is rationing, and we actually can afford to pay for health care for all, though we do need more efficiency in our financing system.)

The highest tier – the upper-income groups – have never had problems with gaining access to the best care available. That is true now, and will be true no matter what health care financing system we will have. Some have expressed concerns that in a truly egalitarian system, such as a single payer system, the wealthy would have to give up some of the finer amenities of health care and stand in line with the rest of us, but that will never happen. The wealthy are not hampered by noblesse oblige when it comes to moving to the front of the line for health care. Besides, a well designed system should not have an excessive queue anyway.

The middle tier – the employed middle class – will see greater changes in health care access and affordability, changes that have already begun. Although the plans to be offered in the state exchanges will include many of these changes, employers are already following by modifying their plans to reduce their own exposure to costs. Higher deductibles and other forms of cost sharing are shifting more costs to the pockets of those who need health care. Although ten categories of benefits will be required under the plans, the insurers have considerable flexibility in the composition of benefits within each category and will leave out selected benefits that some individuals will need, especially some of the more expensive benefits. Insurers are reducing their networks of physicians and hospitals, further limiting patient choice of their health care providers, unlike the traditional Medicare program, which allows free choice. Patents may still face catastrophic losses since the maximum out-of-pocket expenditures apply only to covered benefits provided within the networks. Care unavoidably obtained out of network and health care services not included as a plan benefit can result in costs that threaten personal bankruptcy. Even the allowed maximums would create a hardship for many. Employers are beginning to switch to defined benefit contributions to health plans that would be selected from private (not state) health exchanges. This voucher approach allows employers to shift the future increases in health care costs disproportionately to the employees. Reference pricing is the process of setting a low price for given health care services and requiring the patient to pay the full difference in prices if the patient selects a more expensive provider. This is another method of shifting more costs to the patient, not to mention that it further limits choice of providers since these extra costs may be truly unaffordable. A shift in control of Congress and the White House to conservatives may well result in premium support of Medicare (vouchers – a defined contribution), thereby allowing Medicare to adopt some of these same policies that shift more costs to patients in need.

The obvious point is that the exchange plans and now even employer-sponsored plans will cause the employed middle class to become quite dissatisfied with our health care financing system. Once they or their families and friends have enough negative experiences with our health care financing, and once they understand single payer – an improved Medicare for all – it will be the middle class workers that will be the loudest in demanding change.

In the meantime, under our present three-tiered system, we will be able to obtain a basic level of care for Tiny Tim, just not the specialized services that he really needs. And Ebenezer Scrooge will be able to access his boutique providers, with the sky as the limit. But what about the people of the village? Once Scrooge gains control of the insurance industry, will he further advance the current agenda of making health care more expensive to increase profits, and less accessible to reduce costs? Will another visit from the Ghost Of Christmas Yet To Come be adequate? Or will he be hardened enough to carry on, as Reinhardt writes, “the age-old reluctance among many of the nation’s haves and the healthy to help purchase for America’s lower-income families and the chronically ill the super-expensive health care that the haves enjoy themselves.”

Though should we really expect a different outcome? We now have a society that when Bob Cratchit pulls himself up by his bootstraps and runs for mayor, we elect Ebenezer Scrooge instead.