Controlling Healthcare Costs The American Way: Not Doing It

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In the comments to an earlier post, KennyBoy asks:

And Megan, no one on your side of the argument seems willing to answer two simple questions. If every other country (don't split hairs, you know what I mean) can cover ALL of their citizens for LESS than the US does, with better outcomes, why can't we do that?

This is a favorite question of would-be reformers.  There are two answers, one theoretical, and one empirical.  We'll start with the theory, which won't be new to regular readers; I've gone over the that I think we aren't the same as Europe a bunch of times:

  • More wage inequality means doctors need to make more
  • The American political system is especially easy to lobby
  • American public services culture is, in general, less effective than the Nordic countries, and no, this is not simply an artifact of Republicans criticizing government bureaucrats; the government bureaucrats do a great deal that is worthy of criticism
  • Path dependence:  it's a lot easier not to give people a new drug or treatment than to take one away. 
  • Intolerance of tradeoffs:  we do not even do the very obvious things to control costs in the system, like rethinking extraordinary measures at the end of life.  The harder tradeoffs are simply non-starters.
  • 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.
  • Conservatism:  the American public is considerably to the right of any European electorate, and no, this isn't just an artifact of Republicans lying to them.  They have different attitudes about how much they want the government to do, and how much they are willing to pay to do it.  Many of the reforms that hold costs down in Europe are simply non-starters because they smack too much of socialism.

Now, the empirical part: everyone asking this question is looking longingly abroad while ignoring the evidence much closer to home.  Exhibit A:  we've got a single payer system, called Medicare.  It negotiates huge cost discounts with providers.  It has low administrative costs.  It has a gigantic apparatus to evaluate reimbursements for various treatments.  It has . . . a faster rate of per-capita cost growth than the rest of the health care system, according to a CBO report issued by one Peter Orszag.

Anything you could do to a putative new system, you could do to Medicare.  And the reason we haven't is not that we just thought of comparative effectiveness research, healthcare IT, or strong-arming provider payments last week.  These ideas have all been kicking around for a long time, and in the case of the provider payments, have already been tried more than once.  Providers learn to game the new payment rules, and if they don't, they get Congress to undo them.

But maybe the new system will be different.  So let's look at the closest model we have for this system in the United States:  the state of Massachusetts.  Massachusetts has all the goodies in the Baucus bill:  subsidies, guaranteed issue, community rating, an individual mandate, and employer penalties.  Indeed, the Massachusetts program is probably to the left of where we're going to end up, on things like empowering the exchanges to negotiate with insurance companies and the size of the penalties for failing to procure insurance, two measures which are supposed to be critical for holding costs down.

Instead, costs have exploded.  This excellent powerpoint from the State of Massachusetts has some compelling graphics. 
percapitahealthspending-MA.jpg

Unfortunately, my PowerPoint-Fu being a little rusty, it's slightly hard to read, but if you click on it you'll get a full size pop-up.  Here's what you'll see:  between 1991 and 2004, Massachusetts had a rate of healthcare inflation that was just slightly above the US average, though the gap widened somewhat towards the end of that period.  But from 2004 on, the rate of US healthcare inflation drops, while Massachusetts stays steady, until it is more than a full percentage point higher than the rate of US healthcare spending growth.
Individual premia-MA.jpgThe cost of individual premiums also jumped sharply in 2007, as you can see, when insurance companies began to rate their experience under the new health care regime. And the Boston Globe says insurers are predicting another bumper year for premium increases, with an average expected increase of 10%.  Meanwhile, the Commonwealth of Massachusetts is spending substantially more than it was expected to.

The Official Asymmetrical Information Fiance has a more complete guide to how the various combinations of mandates, guaranteed issue, community rating, and subsidy have performed at the state level.  Answer:  not well.  Here's the nut graph on Massachusetts:

And health-care costs have continued to grow rapidly. According to a Rand Corporation study this year, the growth now exceeds state GDP by 8%. The Boston Globe recently reported that state health-insurance commissioners are now worried that medical spending could push both employers and patients into bankruptcy, and may even threaten the system's continued existence.

So I'll turn it around on reformers:  why 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?

It's no good saying that well, we should try to be more like the Netherlands--you can't build a system on the assumption that you will, suddenly and for no apparent reason, be able to import someone else's political culture.  Progressives are watching the whole health care legislative process with utter dismay as it produces a monster of a bill that not even its mother could love--and trying to love it anyway, on the grounds that it's a start.  But this ridiculous hodgepodge, this hypertrophied Rube Goldberg apparatus, is not some startling aberration of the political process, induced by some Republican dark magic.  This is the kind of thing the American political system produces.  This is why all of our programs have a substantial element of the inexplicable and bizarre.
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Megan McArdle is a columnist at Bloomberg View and a former senior editor at The Atlantic. Her new book is The Up Side of Down.

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