Thursday, February 25, 2010

Health Care Summit

I just spent the better part of Thursday watching the health care "summit" that President Obama held in Washington.

The first thing to say is that Obama's performance was very impressive. Not only did he display his usual calm, reasoned demeanor and his impressive command of the relevant policy details, but he also exhibited tremendous patience in searching for the truly bipartisan issues that his Republican opponents desire to be included in any health reform bill that he would sign into law. Despite this patience, though, Obama never let Republicans get away with pre-packaged comments, designed to scare Americans away from the bill that has already passed the House and the Senate. He also refused to rule out the use of "reconciliation" if his efforts do not attract any Republican votes. Overall, as a display of political theater, it was impressive. The summit displayed, to his advantage, Obama's talents and desire to get some kind of health reform passed into law this session of Congress. In my view, it put the Republicans on the spot to either put-up or to shut-up. Overall, the Republicans were effectively cast as petulant school-children to Obama's reasoned professor.

The second thing to say is that there might be some proposals, from among those suggested by Republicans at the summit, that might be incorporated into the Democrat's final bill that Obama indicated at the end he might want to be included, as offerings to the other side, to gain some Republican votes. I wouldn't want to hold my breath until those votes materialize. But the President's concluding remark's highlighted this possibility.

Let's examine the evidence surrounding two of the most discussed issues at the summit, and ask what scholarly research has to say about those issues, and what role economics or health policy research has had to play in their political discussion?

The first such issue, one discussed at length today by Senator McCain and other Republicans, is whether or not controlling medical malpractice costs would "bend the cost curve" in medical care? The claim that it would has been made for years by conservative politicians and is now part of the accepted faith of the Republican approach to health care reform. Unfortunately economists and health policy researchers have looked in vain for years for evidence that this would substantially change health care costs. There have been many studies that have compared years, states, regions and counties that were the site of above average malpractice suits (in numbers or in dollar amounts)with areas characterized by the opposite. No scientifically accepted correlation has ever been found between these suits, settlements, or jury awards and higher rates of health care cost increases in those same years, states, regions or counties.

Yet this evidence has had seemingly had no effect on the idea that health care cost increases "must" be driven by rising malpractice insurance premiums or by more frequent, frivolous, or increasingly expensive malpractice suits. Therefore, the research emphasis, and the political discussion, has shifted to a search for the rise of "defensive medicine" costs that are due to practicing physicians ordering diagnostic and therapeutic measures that they know have small or non-existent clinical value. but that are ordered anyway, in defense against a possible malpractice law suit.

Notice that by this very definition of "defensive" medical practice, any empirical evidence of a formal variety is ruled out from the start. Thus, this conception of malpractice driving cost increases in the medical field is what scientists call a non-falsifiable hypothesis. No evidence, short of a doctor admitting he or she has practiced in this way at some verifiable time in the past (and that seems highly unlikely), can ever be found to prove this proposition is right or wrong.

That is frustrating to empirical health policy types, if it is true. It is also, whether it it is right or wrong, suspiciously convenient if you want to believe that malpractice suits are the source of all evil in medical costs.

Even if it is true, though (and there is no evidence that this is so), health care analysts are united in saying that the removal of all costs that can be directly traced to medical malpractice suits would not save very much of the health care expenditures spent in the U.S every year, or of the amount annually spent on health care by the Federal government. For this reason, what one "believes" about medical malpractice litigation and health care costs depends disproportionately on one's experience and ideology. We saw this today if the respective contributions of Sen. John Barasso (R-Wyoming, and a former orthopedic surgeon) and Senator Richard Durbin (D-Illinois, and a former malpractice litigator). Basically, the Republicans see the Democrats as defending their big donors in the trial lawyer community. Democrats see Republicans' focus on this issue as wrong-headed from a cost-saving standpoint, and driven mostly by their large donor-base among well-heeled physicians.

For what it is worth, economists, and many other health analysts from other disciplines, see the main driver of health care costs in the ever-growing spiral of health care technology (new drugs, new tests and new treatments) and the rapid adoption of this technology by the health care sector. Some economists (like David Cutler, at Harvard) even go so far as to say this may be a good thing, overall, because it means we can now treat and extend the lives of Americans in ways we could not before these innovations in medical technology. Others, (like Uwe E. Reinhardt of Princeton and the Health Disparities researchers at Dartmouth), point out that the "average" American in this system gets treated very differently depending on his or her location (and not by what the latest technological innovation is), and that those that cost more are not always those that have better health outcomes. This is their explanation for why Americans on average spend so much more than other countries to get so much less in measurable health outcomes. I think maybe a better way to put it is that you are better off in getting treated in the United States if you have a relatively high income. If you are poor or average in income, you would probably spend less and get better outcomes from the health systems of many of our fellow members of the O.E.C.D. Not much attention has been paid to this issue by any participants in the health care debate.

A second issue that was also much discussed at today's health "summit" is not one that I think there is much hope of ever seeing in a Democratic health-reform bill. But is is an issue on which there has been much health economics discussion, and on which there is some scholarly evidence that can be brought to bear. That is the issue of health insurance regulation. It is not the case that there is definitive "data" evidence to support either side of the political discussion of this crucial question. But I think there is enough other evidence, that when this is combined with one's faith in "market" solutions, that one can form an solid opinion on the topic.

First, let's define the poles of the political argument. One one side are Republicans who seem to believe that all markets work better than any other social arrangement, and in almost all areas, health insurance and health care included. For this reason, as we saw often today, the Republican prescription for health care is that it should utilize market-based reforms and should avoid "interference' in markets, if at all possible. This attitude, if it is not just a knee-jerk reaction, is premised on the idea that market forces work best in many other situations, so they should work as well in health care and health insurance? More technical economics would analyze "insurance" as an industry that sells people the certainty of stable, known deductions from their income, today, in exchange for an actuarially correct prices of consumers' individual risks of becoming ill, tomorrow. Since you can't know your own individual risk, but since insurers can predict the "average" risk of a large pool of insured individuals, customers gain from trading their individual risk for an insurance premium. Note that it is a crucial ingredient to this story that consumers belong to large risk-pools. Employees of large firms do, by virtue of where they work. Those who work for small firms, or alone, do not. Also, according to this account, as long as firms can make a profit from insuring such premium-paying pools, competition should drive down premiums to the lowest price compatible with actuarially "fair" premiums, as long as these prices are compatible with the costs and profits from running such firms.

This is a compelling story, and it is one that derives a large amount of its credibility from the analogy it makes possible between health insurance and other competitive markets. A competitive insurance market should produce "optimal" amounts of insurance (compatible with individual's needs, incomes, desires and health characteristics) and sell insurance at the optimal "price" (compatible with the cost of medical care, the nature of risk pools and the degree of competition in the health insurance industry).

It is a big leap from this ideal insurance market to the one faced by many Americans. But, first, before getting into that, we should describe the opposite pole of the current health care debate with regard to health insurance regulation. That is the pole occupied by the furthest left-wing of the Democratic party. It is equally wrong and unrealistic, I will claim, when it comes to health care. This pole sees heath insurers as inherently evil. It imputes to them a malicious desire to arbitrarily deny or rescind health coverage to Americans. This denial of coverage is purely motivated by base motives and sees the operation of the insurance market as fundamentally anti-social in outcome. Customers of insurance companies on this view, derive little security from insurance by private firms, even those in competitive markets. Thus legislation should be passed to "protect" innocent citizens from greedy insurers by "regulating" how they can legally operate.

Both of these visions are mere caricatures of actual insurance markets. But they are powerful visions. Ones which have allowed a large dose of ideology to enter the debate on health reform.

The one just detailed, the "evil" view of insurers as the villains in the health care debate, would elicit a standard response from an economist. "We ascribe "greed" to every other private firm in economics, why not ascribe it private insurers," economist would automatically say? Maybe it really is true that no private firm, at least not one that is properly responsible to its shareholders'interests in seeing that firm seeking the highest return possible on shareholders' investment in that firm, cannot afford to not try to seek to compete by a management style that attempts to control costs and produce a desired product." I think this would be a largely correct response. One based on a realistic view of private business. Insurers do not seem to me to be the asocial enemies that bedevil the health care system. Nor are they remarkably evil or greedy when compared to other private firms.

But that does not mean the other pole of the debate is any less unrealistic. The economic view of how a stable insurance market would work by competing to offload risk from risk-averse customers is far from the reality in the United States today. Most crucially, private firms tend to be driven, no matter what their original goal, to compete like their fellow firms do - especially if those fellow firms are making high rates of profit. Unfortunately, the experience of the health industry for at least the last twenty years, is that health insurance firms compete and earn above average profits mostly by managing their risk pools to ensure that enrollees are not predictably going to get so sick that they will run-up excessive treatment costs and make to whole pool unprofitable. When information is available to these firms, and worth the expense of collecting, then, insurers will go to great lengths to gather information that might give them a bit of evidence of the future likelihood of an individual being at high risk for medical expenses. And they cannot be legitimately blamed for that. They are just trying to make a profit, like any other private firm.

The big difference is that this gives them an incentive to act in all of the ant-social manners that Americans have come to associate with private health insurers. Perversely, and with the opposite effect on society of Adam Smith famous "invisible hand," this gives insurers an incentive to deny coverage, to rescind policies, to avoid high-risk individuals (like those with pre-existing conditions), and to raise premiums.

Thus not surprisingly, the proportion of Americans with private health insurance coverage has been declining for twenty years. Some analysts project it to enter a "death spiral" in the near future, as the industry sheds customers and raises premiums. Then, only the sickest, most "high-risk" beneficiaries, would find private health insurance a deal worth paying for. But even if this is wrong, and the private insurance industry continues to operates as it is operating now, it has shown itself to be unwilling to insure certain classes of people. These have included Americans that are poor, children of poor parents, old or already sick. Without some other option, typically some non-profit, government guaranteed and regulated alternatives to private insurance, many more than 30 or 40 million Americans would today be uninsured.

But, society has already decided that it is unacceptable for a rich country to not provide some of these groups with basic health coverage. The bill in the Congress would extend that coverage to many of today's uninsured and risky Americans that cannot otherwise get or afford private health care coverage. None of the issues raised by the Republicans would accomplish this fundamental task. That was the real division on display at today's health care reform summit.

If this view of the private insurance market is correct, then maybe the deeper issue is whether private health insurance could ever provide anything like universal coverage. Most other rich countries have decided they cannot. But this issue was not on the table at today's health reform summit.