Gold Dome, Health Care, Linda Gorman, Obamacare, Politics, Uncategorized

Gorman: Incentives matter; a primer on evaluating health care proposals

The political landscape teems with people anxious to remake US health care by creating “new health infrastructures.” Given the many, many, types of health care arrangements already in existence around the world, genuinely new policies are rare. Examining the incentives and outcomes in existing programs provides a good guide to understanding how new proposals are likely to work, and whether or not they will produce beneficial outcomes.

A new paper from the Independence Institute, Evaluating Health Care Reform Proposals: A Primer, provides easily understandable guidelines for evaluating how a reform might operate in practice. It examines how existing health payment and incentive structures have worked; explains why blithely assuming that expenditures are the same as costs leads to large errors; and details how weaknesses in existing data on health care prices, expenditures, and outcomes skews comparative estimates of health system costs.

Along the way, the study highlights the sloppiness of activist claims. Those who claim the US spends too much on health care generally do little more than compare reported US health care spending to reported spending in other countries. They do not adjust for different national accounting systems, disease burdens, health outcomes, geography, or attitudes towards risk taking. Far too many analysts mistakenly assume that tax-financed reimbursements in government run health programs are equal to market determined prices, which mirror true health system costs. They neglect the costs that low government reimbursements impose on patients and the deadweight productive losses caused by tax-financed systems.

Many proposed reforms simply seek to paper over problems caused by earlier reforms. Before the Affordable Care Act (ACA), Colorado had some of the lowest individual health insurance premiums in the nation. After the Act, it had some of the highest premiums in the nation. In 2019, the state legislature opted to paper over the ACA damage by giving tax money to individual insurers. It created the state reinsurance pool, which officials claimed would lower the cost of individual health insurance premiums by 15 to 30 percent. In fact, the reinsurance program simply shifted ACA reform costs from buyers of individual coverage to buyers of hospital services and group health insurance, raising overall health costs.

Expecting insurers to lower premiums when the state gives them money is like expecting tuition to fall when universities get more taxpayer dollars. Between 1998 and 2013, federal spending on higher education tuition subsidies (in 2012 dollars) rose from less than $5 billion to more than $30 billion. Over roughly the same time period, inflation-adjusted tuition more than tripled for US state-supported 4-year schools. Rather than reducing tuition, universities hired more administrators, built more buildings, boosted professor salaries, and reduced teaching workloads.

Claims that simply controlling high US prices for hospitals, drugs, and other health services will lower costs are exceptionally misguided. When the Organization for Economic Cooperation and Development (OECD) compared hospital costs for a standard basket of hospital services, US costs were 30 percent above average, but Americans used less hospital care than people in other countries. US cost for a basket of general health services was just 14 percent above average even though the US has shorter waits for care, more cancer screening, falling rates of severe disability and better survival rates for cancer, heart attack, and stroke.

Spending controls that ignore incentives can kill. In the 1990s, the Netherlands put its hospitals on fixed budgets. Waiting lists were so long they became a political issue, and fixed budgets were abolished in 1999. Between 1999 and 2003, Dutch health spending rose by 40 percent per person while mortality declined among people over 65, along with rates of euthanasia, assisted suicide, and the withholding of life-prolonging treatment.

Replacing private spending with government spending removes peoples’ immediate anxieties about how to pay for health care. In the US, people who prefer certainty about spending to certainty about access can already purchase coverage that costs less but limits access to high quality care. But when governments impose budgetary certainty on everyone, they change incentives in ways that shift large costs to patients and produce expensive, inefficient, threadbare health care.

Medicaid and Medicare control expenditures by reimbursing hospitals and doctors for less than their cost of care. Without private payers, payments would be too small to support existing staff, physical plant, and equipment.

The incentives created by Medicare for All would kill the sickest patients, increase disability, drive talented people away from health care, limit innovation, and make it difficult or impossible for Americans to access the care they need.

Linda Gorman is a health care economist and director of the Health Care Policy Center at the Independence Institute, a free market think tank in Denver.


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