By John Cochrane
The Grumpy Economist, July 29, 2018
A July 30 2018 Op-Ed in the Wall Street Journal, titled “The tax and spend health care solution”:
Why is paying for health care such a mess in America? Why is it so hard to fix? Cross-subsidies are the original sin. The government wants to subsidize health care for poor people, chronically sick people, and people who have money but choose to spend less of it on health care than officials find sufficient. These are worthy goals, easily achieved in a completely free-market system by raising taxes and then subsidizing health care or insurance, at market prices, for people the government wishes to help.
But lawmakers do not want to be seen taxing and spending, so they hide transfers in cross-subsidies. They require emergency rooms to treat everyone who comes along, and then hospitals must overcharge everybody else. Medicare and Medicaid do not pay the full amount their services cost. Hospitals then overcharge private insurance and the few remaining cash customers.
Overcharging paying customers and providing free care in an emergency room is economically equivalent to a tax on emergency-room services that funds subsidies for others. But the effective tax and expenditure of a forced cross-subsidy do not show up on the federal budget.
Over the long term, cross-subsidies are far more inefficient than forthright taxing and spending. If the hospital is going to overcharge private insurance and paying customers to cross-subsidize the poor, the uninsured, Medicare, Medicaid and, increasingly, victims of limited exchange policies, then the hospital must be protected from competition. If competitors can come in and offer services to the paying customers, the scheme unravels.
No competition means no pressure to innovate for better service and lower costs.
As usual, I (John Cochrane) have to wait 30 days to post the whole thing. It synthesizes some of my earlier blog posts on how cross subsidies are worse than straightforward, on budget, taxing and spending.
Let me here admit to one of the implications of this view. Single payer might not be so bad — it might not be as bad as the current Medicare, Medicaid, Obamacare, VA, etc. mess.
But before you quote that, let’s be careful to define what we mean by “single payer,” which has become a mantra and litmus test on the left. There is a huge difference between “there is a single payer that everyone can use,” and “there is a single payer that everyone must use.”
Most on the left promise the former and mean the latter. Not only is there some sort of single easy to access health care and insurance scheme for poor or unfortunate people, but you and I are forbidden to escape it, to have private doctors, private hospitals, or private insurance outside the scheme. Doctors are forbidden to have private cash paying customers. That truly is a nightmare, and it will mean the allocation of good medical care by connections and bribes.
But a single provider or payer that anyone in trouble can use, supported by taxes, not cross-subsidized by restrictions on your and my health care — not underpaying in a private system and forcing that system to overcharge others — while allowing a vibrant completely competitive free market in private health care on top of that, is not such a terrible idea, and follows from my Op-Ed. A single bureaucracy that hands out vouchers, pays full market costs, or pays partially but allows doctors to charge whatever they want on top of that would work. A VA like system of public hospitals and clinics would work too. Like public schools, or public restrooms, you can use them, but you don’t have to; you’re free to spend your money on better options if you like, and people are free to start businesses to serve you. And no cross-subisides.
Whether we restrict provision with income and other tests, and thus introduce another marginal disincentive to work, or give everyone access and count on most working people to choose a better product, I leave for another day. It would always be an inefficient bureaucratic problem, but it might not be the nightmare of anti-competitive inefficiency of the current system.
The free market describes well how your and my health care and insurance should work. It does not offer nearly so clear advice on how the government should manage the finances and bureaucracy that provide subsidies (if we want to provide them). There are always tradeoffs, generosity vs. moral hazard and disincentives. Economics is crucial to understanding those tradeoffs, of course, but the answer will always be a muddy middle of tradeoffs. I have offered that taxing and spending — on budget and appropriated — to provide those subsidies may be better than the current mandated cross subsidies. We already have a “single payer” — the federal government. The argument that a single point of entry, a single payer, or a single provider, may be more rational and cost effective than the current system for the purpose of providing subsidized care is not as crazy as it sounds — if it allows a free market for the majority of Americans who own cars, houses, TVs and cell phones and can pay for better services in that free market.
“Single payer” also usually means “single price-setter.” It means a gargantuan Federal bureaucracy that will somehow produce health care cost savings by simply decreeing that doctors and hospitals be paid less. Good luck with that.
Both left and right forget that “negotiation” means only you pay less and somebody else pays more. We can’t all pay less by negotiation. Price controls mean rationing. Period. This is the heart of current “single payer” proposals, and they are doomed.
My “single payer” is just that, a “payer,” operating in a completely free market.
Still, when a politician endorses “single payer,” ask “does that mean we all can use a single payer? Or does that mean we all must use a single payer?”
John H. Cochrane is a Senior Fellow of the Hoover Institution at Stanford, an adjunct scholar of the Cato Institute, and formerly a professor at the University of Chicago Booth School of Business.
By Don McCanne, M.D.
The single payer policy community certainly would dispute that there are two types of single payer – one that allows individuals to opt out and one that mandates participation. In a well designed single payer system there is only one payer for everyone. That does not mean that there are not other systems that allow individuals to opt out of the public program, but those multi-payer systems should not be labeled single payer.
Nevertheless, the comments of conservative economist John Cochrane are interesting. He recognizes that there are enough sound economic policies in a single payer system that it “might not be as bad as the current Medicare, Medicaid, Obamacare, VA, etc. mess.” On that we can agree. However our ideological differences leave us far apart. Cochrane’s insistence that the market must still play a prominent role calls for design features that prevent realization of the single payer goals of true universality, equity, affordability, and universal access.
Many of his comments warrant a response which we won’t bother with now, except one that stands out and that is his statement that a single payer system that does not allow other options is one in which, “you and I are forbidden to escape it, to have private doctors, private hospitals, or private insurance outside the scheme.” Of course, the single payer system supported by Physicians for a National Health Program does allow free choice of private doctors and hospitals. Following is the comment that I submitted in response to his blog:
Under a single payer that everyone must use you are forbidden to have private doctors and private hospitals? But look at the traditional Medicare program. Patients have free choice of their physicians and hospitals. They also can elect to enroll in the private Medicare Advantage (MA) plans, but then they lose their their health care choices by being restricted to provider networks. Not only that, but “MA insurer revenues are 30 percent higher than their healthcare spending,” demonstrating the surplus that the private insurers are receiving from the taxpayers (NBER No. 23090) – a cross subsidy of sorts, but benefiting the insurer rather than the patients.
Of course, single payer advocates also support tax and spend, but we want our tax funds to be used wisely. Providing excess public funding to private insurers while they take away health care choices from patients is not a wise use of our tax dollars. It would be far better to improve the traditional Medicare program and then cover everyone with it, and then let the health care delivery system compete on the basis of service, access, and quality.
A Libertarian’s Case Against Free Markets in Health Care
By Roman Zamishka
The Health Care Blog, August 2, 2018
This presumably arbitrary nature of prices should be the first thing about the US healthcare market that catches the attention of any student of economics. Prices for the same procedure vary greatly between hospitals on opposite sides of the street and even then appear to have no basis in reality. Further investigation reveals many other features of the healthcare market that economics teaches us will increase transaction costs and the misallocation of resources. The prices we discussed are generally not paid by the patient, but by a third party insurer. Often the patient isn’t even able to select the insurer but is assigned one by his or her employer. What the patient thinks of the insurer’s ability as a steward of his or her premiums is irrelevant. Further, contracts between providers or pharmacies and the insurer completely hide the true price from the patient’s view. In addition, anti-competitive certificate of need laws limit competition between providers and expensive regulations compel providers to merge to compete in a nuclear arms race with the insurers, although the real victim is the patient’s wallet over which the providers and insurers fight their proxy wars. The best way to explain the US healthcare system is if you took every economic best practice and then did the opposite.
Academics and physicians from places like Boston and San Francisco often argue that this situation is proof that free market healthcare has failed in America and that the only solution is to implement a nationalized single-payer model.
(Zamishka here provides a discussion of Kenneth Arrow’s “Uncertainty and the Welfare Economics of Medical Care,“ and then discusses how markets do not work in the various institutions and disciplines of medicine.)
The broader problem that I see is that much of the health insurance market is already nationalized through Medicaid, Medicare and the VA. The reality is that it is politically impossible to reverse from this position. If we then add to this list emergency medicine, perinatal healthcare, child healthcare, genetic diseases, mental health and chronic disease management, all of which I earnestly believe have a legitimate case to be nationalized, then what are we left with for free market shopping? Surgeries and generic drugs? At that point, you might as well nationalize the rest just to simplify things and remove any regulatory asymmetries. I hate to say it, but it’s not clear to me as a conservative that single payer (or at least universal coverage + optional private supplemental insurance) isn’t the right solution.
Roman Zamishka is a healthcare policy student at NYU focused on comparative analysis of healthcare systems.
By Don McCanne, M.D.
These articles express the views of two libertarians who recognize the benefits of the single payer model of health care financing, though both would maintain a role for private insurance.
The Cochrane article is reproduced in its entirety. The Zamishka article is quite long and so only brief excerpts are provided. However it might be worth wile to save the link for reading the full article this weekend. He presents a case that we should consider using when discussing single payer with libertarians or conservatives who truly do care and would like to see our health care financing system function better for all of us.
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