Healthcare and Scarcity

Let me begin with two illustrations.

Parking Spaces

Boston, like most major cities, has a central business district that swells with hordes of workers every morning. By one estimate nearly a quarter of a million people head there every day. I can assure you there are not that many parking spaces, not even close-- which is why they're pretty expensive. Parking at 101 Arch Street is $30/day, and monthly contracts are available for $400/month. As a result, every single commuter has to make a decision-- drop $400 each month to drive into work every day or find alternate transportation.

Parking spaces are a scarce resource. Somebody taking one means somebody else can't have it. It costs money to build more parking spaces. And space, another scarce resource, that is used for parking cannot be used for other things like restaurants or condominiums or dance clubs or public parks. If parking were free in downtown Boston, there were infinite spaces, and parking spaces didn't prevent other uses of space, everybody who could would probably drive to work (assuming there was enough roadway capacity, another scarce resource). But there isn't, it doesn't, and we don't. We take the T to save money even though it's slower; we park further away where it's more affordable; we ride our bicycles.

Bottom line, there simply isn't enough money to pay for everybody to have a parking space as close to their destinations as possible, and even if we tried, we'd be taking away a lot of money and space that we'd probably rather get used for other things we care about.

Southwest Airlines

Southwest Airlines is an extraordinary company, if you don't know the company's history you ought to read up on it.

When Southwest Airlines was born in Dallas, Texas, back in the 1970's, there were already a number of established airlines operating along the routes that Southwest offered-- including Dallas-based Braniff Airways and Houston-based Continental Airlines-- and those airlines immediately began trying to drown the upstart out of business. The industry leaders slashed their airfares from $26 to $13 along the routes that Southwest serviced, taking a loss on every flight. This forced Southwest to choose to lose money matching their fares or to sell fewer seats keeping their prices higher.

But Southwest knew its customers. It knew that along the Dallas, Houston, and San Antonio routes, there were very few tourists-- mostly business customers. At the time, most businesses told business travelers to purchase the ticket and submit for reimbursement. Southwest proclaimed, "Nobody's going to shoot Southwest Airlines out of the sky for a lousy $13" in their advertising and then offered to either match the half-price fare offer or to hand the passenger a fifth of premium liquor when they walked on the plane with a full-price fare. Cut fares in half, or give away a fifth.

The promotion was a wild success. 80% of their customers opted for the full fare. Southwest grew to become the leader along their Texas routes and to become the largest liquor distributor in the state of Texas for Chivas, Smirnoff, and Crown Royal.

At the time, of course, each bottle of liquor cost far less than the $13 extra that the passengers were paying for it, but from their perspective, it wasn't their money they were spending; it was their employer's. Their extra draw on the travel budget funds gave them a clear benefit (delicious whiskey) with no clear cost. And they had powerful incentive to arrange to fly as often as possible during this promotional period. However taken together, the unnecessary expense on travel meant that money was spent needlessly on airfare instead of things like pay raises. But that collective consequence is much harder for the business travelers to see. Any individual user of the system who took the bottle of whiskey felt like they got more benefit than their added use of the system cost them.

The Point

There's a lot that's wrong with the American healthcare system. You'd have a very healthy and busy career cataloging the problems with American healthcare. But nearly all of these problems stem from a single, underlying source.

Health insurance and Medicare are like the employers of Southwest passengers-- we patients receive benefit from medical services without there being any clear cost for additional usage, so we have no incentive to limit our usage or to seek out the best prices (nor do doctors and hospitals have an incentive to compete on price). But at the end of the day, healthcare is like parking spaces, and there simply aren't enough dollars to provide everybody with as much of the top-quality healthcare that they want. Even if we try, we'll end up having to spend a lot of money that we'd rather spend on other things.

Put more simply, healthcare is a scarce resource, and that we look to insurance to pay for all costs of treatment from physicals to regular medications to emergency surgery means that patients have no incentive to limit their usage and providers have no incentive to provide better customer service and pricing.

Any proposed solution to the American healthcare quagmire that doesn't address those two realities will not work. That's simply the way it is. Anybody who tells you that they've found a way to give you all of the healthcare you want without degrading quality and while controlling costs is at best mistaken or at worst deceitful. Look at it this way. You can have all of the services you want, you can have the best quality available, and you can have it be cost-effective, but you can only pick two out of three.

So let's look at the choices.

We could sacrifice quality by refusing to pay doctors, nurses, hospitals, and pharmaceutical companies as much money, which would ensure that we have mediocre medical personnel, insufficient research, and poorly maintained facilities. But that doesn't seem like what we want. Paying our medical and pharmaceutical professionals well means that smart, hard-working people have greater incentive to become doctors and nurses rather than lawyers or accountants. It hardly sounds like a solution to healthcare to lower our accepted standards of care.

We could let people have unlimited access to that top quality health care, but that too is problematic. When the demand for services goes up, economics states the price will go up too. If you've ever been to an all-you-can-eat buffet and seen people try to stack their plates as high as they can, it's not hard to understand that everybody doing that will raise prices and expand costs. The same way, unlimited access to healthcare means that we'll lose any ability as a society to control our collective healthcare costs. Without that ability, it would quickly mean that we don't have money for basic things we need like food, education, and roads or the things we enjoy like iPods, new cars, vacations, and weekend-nights out.

Really the only one that seems remotely palatable is to decide that we cannot have all of the services we want, but when we have them they're top quality and cost-effective.

... which brings in the dreaded word "rationing". Rationing happens when the government determines how much of the limited supply particular good or service you can consume in a given time period. Government rationing of healthcare invites moral hazard for a number of reasons. First, rationing is a blunt instrument that is insensitive to individual circumstance. Some people have greater healthcare needs than others, and blunt instruments are really bad at adjusting for variance in individual need. Second, it's a remarkably heavy handed intrusion into our personal purchasing decisions. We just don't like the idea of the government being able to tell us "No, you can't see the doctor this month. You saw the doctor last month. You'll just have to tough this cold out." I don't think anybody in the present debate is seriously suggesting government rationing as the way forward, and anybody talking about rationing is probably simply trying to scare you away from a plan they don't like.

The alternative is for each of us to individually measure out our consumption of healthcare. This isn't a foreign concept to us; it's how markets work. I have a grocery budget, and every week I know what I can afford to spend on groceries, and I can prioritize when and how I spend that money based on my priorities. Do I spend $5 for a dozen eggs from Pete and Gerry's knowing my eggs will result in no inhumane treatment for animals versus $1.50 for a dozen eggs raised without regard to animal welfare? If I save the $3.50 I can buy a pint of ice cream, but I won't sleep as well at night. You could argue either way, but in the end with my budget it's for me to decide. And the producers respond to my decision. If more people choose Pete and Gerry's eggs, either the price for the limited supply will go up, or more egg farmers will adopt Certified Humane standards of farming. This delicate balance of millions of actors and billions of actions results in there always being both eggs and ice cream every time you go to the store.

There's certainly good reason to believe that a healthcare market in which patients control the dollars and doctors compete for patients would result in better care, better customer service, and better price efficiency. Lasik procedures are paid for nearly exclusively by patients; from 1999 to 2005 the price of Lasik surgery dropped 20%. Prescription drugs, where patients either foot the whole bill or a much larger share of the costs, drew Wal-Mart into the market offering $4 prescription generics; 18 months into the program, consumers had saved $1 billion versus previously prevailing prices. Medical services that receive payment primarily from government or private insurance have no such price competition; in a very well written essay featured in The Atlantic, David Goldhill, uninsured and shopping around for the best deal on an MRI for his wife, "was surprised to discover that prices quoted, for an identical service, varied widely, and that the lowest price was $1,200. But what was truly astonishing was that several providers refused to quote any price. Only if I came in and actually ordered the MRI could we discuss price." Patients controlling the dollars may very well bring transparency and price efficiency to the medical system.

But again, we invite moral hazard. If everybody has to pay for the healthcare they use, then not everybody can afford the minimum healthcare they need to live. What about poor people? What about really, really sick people? As was widely circulated on Facebook status messages (my generation's favorite protest medium) this week, "No one should die because they cannot afford health care, and no one should go broke because they get sick."

Certainly. Who could disagree? A dedicated nurse anesthetist I know asked, "I have to say that while it may be true it is cheaper... is it the right thing to do? Is it what should be done in such a highly industrialized country? And perhaps is there not an immeasurable cost to the human suffering both for that [sick person] and the family she leaves behind?"

When it comes to talking about healthcare there are really two parts to the argument: a moral argument and an efficiency argument. The moral argument is a "descriptive" argument; it talks about the results we want based on what's right and wrong. The efficiency argument is a "prescriptive" argument; it talks about the best way to bring about the results we want. Really in any sort of public policy decision, you have to have conclusive and compatible moral and efficiency arguments. Good intentions are not enough without good results. For a good discussion of this distinction as it relates to healthcare, Megan McArdle delivers.

So far I've only talked about the efficiency argument. It will result in the most efficient delivery of extremely high quality healthcare at the best price efficiency if everybody has to pay for exactly the healthcare they choose. But it doesn't satisfy the requirements of the moral argument. So what we really need to do is figure out a way to achieve our moral goals within the reality prescribed by our efficiency argument.

Pause a Moment

As controversial as the healthcare debate in the United States is, the above isn't terribly controversial. I'd like to take a moment to summarize the moral and efficiency arguments.

1. There is not enough money or manpower for everybody to consume as much of the top quality healthcare we would want at zero or near-zero out-of-pocket cost. Given a choice of two out of three, we'd prefer to have top quality healthcare provided with maximal cost efficiency, limiting our consumption when necessary.
2. Free markets where producers of good and services compete for consumer business on the basis of quality, availability, and price generally tend to produce those outcomes extremely efficiently. Nearly any instance where they don't is due to some externality that distorts the market. There isn't any real reason to believe that healthcare would not behave as other markets would.
3. As the United States is the land of opportunity where everybody has the chance to make a better life for themselves, nobody should ever find themselves in a position where they are counted out by the system. We have bankruptcy for this reason. We guarantee access to education for this reason. And in the same vein, we'd like that nobody should suffer or die because they cannot afford needed medical care.

Applying our Metric

It's one thing to enumerate our goals and our restrictions as I've done. It's quite another thing to apply them. But what they certainly do very well is provide a litmus test for a particular solution. If it finds a way to limit consumption and deliver price efficiency while maintaining high quality and meeting our moral requirements of providing for the poor, it may be a good way forward. If it fails any of these criteria, it probably won't work.

So let's finally get to the elephant in the room.

I've tried pretty hard to leave insurance out of this so far. Private insurance companies tend to evoke all sorts of emotional reactions in one corner of the political spectrum, and government insurance tends to evoke equally impassioned reactions in another corner. I'm going to cautiously tread forward without any sort of inclinations one way or another on who is providing the insurance and just try to deal with insurance as a concept. Within the metric we've established, what effect does health insurance have on healthcare?

An experiment: next time you fill your car up with gas, get your 3,000 mile maintenance done, get a new set of tires, change your oil, or replace your transmission, file a claim with your auto insurance carrier. Of course they'd reject it. Your automobile insurance covers damage and injury due to collisions, theft, or natural disasters. When you own a car, there are known, reasonably predictable costs. You have an idea of how much your gasoline budget is every month. You (hopefully) have a budget for periodic maintenance and oil changes. And even to a certain extent you accept a certain degree of risk when it comes to mechanical breakage. But you have an insurance policy for those things you can't see coming and for those things that would cause massive hardship were they to befall you. That's what insurance does. As comedian Chris Rock so blithely put it, "They shouldn't even call it insurance. They just should call it 'in case shit.' l give a company some money in case shit happens."

What would happen if automobile insurance did cover every single expense associated with automobile ownership? Two things would certainly happen. First, we would regulate our consumption far less. We'd fill up with premium instead of regular. We'd use our cars more often, even for more trivial trips. Instead of trying to assess whether or not a noise emanating from our car was serious enough to warrant a trip to the mechanic, we would hesitate far less. Second, the cost of automobile insurance would go way, way up, and the more people consumed knowing their insurance policy would pick up the bill, the more the premiums would go up across the board.

We can't even technically call it "insurance" at that point. You can't really say "in case I need to fill my car with gas" because you know you're going to. You can't really say "in case I need to change my oil" because it's predictable that after 3,000 miles you will.

Insurance paying for everything, even regular predictable expenses, makes us the passengers on Southwest Airlines-- we enjoy the benefit while they absorb the cost which eventually gets spread around to us all. In economics, we call this the "third party payer" problem. Our efficiency argument says that the maximally efficient system involves patients bearing all costs for the services they receive. Insurance paying for all expenses, including regular predictable ones, is the antithesis of our efficiency argument.

Whatever the solution, it can't involve expanding insurance, private or public, because it would provide no incentive to limit consumption of high quality healthcare. And since we can only pick two out of the three, if we fail to limit consumption, we'd be choosing to accept that we can't control prices or expenditures.

This is why a introducing a public option won't solve our problems. This is why introducing an insurance mandate won't solve our problems. This is why single-payer universal coverage won't solve our problems. So long as we're relying on systems that don't limit consumption and so long as we're insisting on maintaining high quality care, we cannot possibly control costs. And so long as somebody else pays the expenses, providers have zero incentive to compete on price. This is inevitable no matter how efficient of an insurance provider you run (public or private) and no matter how tough you negotiate for better prices (without compromising quality presumably?). Consumption will continue to increase. Prices will continue to rise.

Maintaining or expanding a system reliant upon insurance that covers even predictable and routine expenses is entirely inconsistent with the efficiency argument. It does however have the benefit of coming closer to our moral target of ensuring that the sick and poor do not needlessly die and suffer for lack of access to healthcare.

We've now applied our metric twice. Our metric suggests that everybody paying for exactly all of the healthcare that they consume meets our effectiveness/efficiency goal but at the cost of our moral goal. These are results we cannot accept and still call ourselves a moral society. Our metric also suggests that a third party insurance provider paying for the majority of healthcare expenses including routine and predictable expenses meets our moral goal but at the cost of our effectiveness/efficiency goal. These are results we cannot accept and still be a healthy, successful society.

Some Ways Forward

I'd love to be able to present a complete packaged solution for maximally achieving our moral goal and our efficiency goal. But I'm not a healthcare researcher, a public policy expert, or a politician. Divining the ideal balance of moral and efficienct effectiveness requires research, study, and analysis by people in think tanks, the CBO, the GAO, and policy centers by dedicated people who have more letters after their name than I have in my name. I've been watching various solutions proposed for some time and trying to apply my metric to them, and I think there are some effective ideas out there. So here are some of my thoughts; you need not agree with my analysis even if you agree with my metric.

I think the best balance of efficiency and security for the majority of us lies in accepting higher deductibles in our insurance plans and shouldering the costs for regular, predictable expenses. Insurance exists to cover the individually unmanageable costs of unlikely, unpredictable disaster. I've worn corrective lenses for my near-sightedness for 21 years; by now I should be planning for my regular disposable contact lens expenses. I've had migraine headaches for about as long; by now I should be planning to maintain a regular supply of Excedrin and Imitrex. About four years ago I had my appendix taken out at the cost of about $14,000. That's what insurance is for, and I was happy to have it. I like Health Savings Accounts as a financial vehicle for planning for forseeable medical expenses. Basically you put money into an interest-bearing account tax free to use for healthcare expenses, and any money you don't end up using can be rolled into your retirement account.

There's good reason to believe that higher deductible insurance and health savings accounts are effective. A recent study concluded greater patient satisfaction, reduced healthcare consumption, and better health outcomes compared with present full-coverage plans. Since there are immediate and tangible costs for added consumption of healthcare, it meets our efficiency metric, and the presence of insurance mitigates the risk of unexpected health disaster causing personal financial ruin. Clearly though, high deductible insurance plus health savings accounts does not fully independently address our moral concerns.

To better address those moral concerns, as a taxpayer, I'm completely comfortable with the idea of the people through the government picking up the tab for all healthcare expenses for children under the age of 18, regardless of their parents' wealth or poverty. I very firmly believe that every child in this country deserves a childhood and deserves a chance to make their own future. Part of that to me means that they should not have the slightest disadvantage due to healthcare concerns. Furthermore I'm completely comfortable with the idea of the people through the government writing a check to impoverished Americans 18 and older to purchase a health insurance plan of their choice and defray the costs of the deductible commensurate with their poverty. I firmly believe nobody in America should be counted out or find themselves in a situation of financial peril they cannot escape from. To a certain extent, I'm comfortable paying for the medical expenses for people born with lifelong disabling illness like Down's Syndrome. These Americans' lives are hard enough as it is, and I'm comfortable with doing what we can to make their lives more comfortable. All three of these suggestions fly in the face of the efficiency goal, but I believe the absolute achievement of the moral goal more than justifies it.

I think we need to shift from tax incentives for employers to provide insurance to tax incentives for individuals to purchase insurance. If insurance as a third party payer distorts incentives, employers as fourth party payers obliterates them. An insurance company currently only has enough motivation to keep its insured happy as is required to keep their employer from switching to another carrier. Which is to say not very much motivation at all. Employer-provided health insurance was born in an era where a worker more often than not remained in the employ of the same company for their entire career. My generation's workers are expected to change careers two or three times, let alone employers. And we're all aware of the moral hazard of trapping employees in poor working conditions for fear of losing their health insurance. Eventually we ought to shift away from any tax incentives at all -- if 90% of taxpayers individually purchase health insurance, a personal tax incentive for it just means we pay the same amount of taxes in other ways.

I think we ought to relax certain types of regulations restricting the health insurance market. Note I said "the market" and not "the providers". For example, in my state, any insurance plan I purchase must include coverage for mental health and substance abuse treatment and maternity/newborn care. In some states, it's required by law that chiropractic visits be covered by all insurance plans. I don't think I'm in sufficient danger of having a cocaine problem (not really my thing) or getting pregnant (men in their 20's are remarkably low risk for impregnation) that I want to pay more money to insure against those possibilities, and I don't really forsee any emergency spinal adjustments in my future. My insurance would be cheaper if, like car insurance in most states, I could choose what sort of coverage I want and to what extent.

Each of these ideas takes concrete steps toward empowering each of us to take control of our healthcare dollars. The more control we have, the more responsive our healthcare providers will be to our needs and the more competitive they will become for those dollars. With such measures, when coupled with sufficient attention to our moral goals, I believe health care costs will stabilize while enabling us to continue to be a society of compassion. Which is really our goal.

Parting Thoughts

The main reason why the healthcare debate spawns so much vitriol and passion is that when we discuss the federal government creating solutions for everybody, the monolithic nature of that result means that some very large contingent of the population will be saddled with a system they simply dislike. Fighting now with greater vigor and intensity will result in a final decision closer to one's own personal preferences. In this country, systems once put in place are rarely if ever stripped away.

I live in Massachusetts, and in my state there is both a health insurance mandate with fairly stringent requirements and an auto insurance mandate with far higher minimums than other states require. In other states I've lived in like Texas or Colorado, I was given much more leeway to determine whether I was willing to pay more for more extensive coverage or whether I was willing to assume greater risk. Massachusetts doesn't permit that, and as a citizen of Massachusetts, I have no real recourse except to move. Someday I'm sure I will. Moving states is much easier than moving countries. There's only one United States.

What I like tangentially about the ideas I've endorsed above is that they permit a wide degree of choice. A system where individuals select their own coverage levels isn't marred by debates as to whether tax dollars will be spent on abortions or Congressional death panels, whatever those are. Those who don't want their dollars to support abortion can select health care providers that don't pay for abortions. Those who want their healthcare dollars to support alternative medicine treatments can do so. There isn't really a monolithic plan, therefore there need not the same vitriolic debate about what needs to be included. Everybody can choose the solutions that work best for them.

Thank you to my friends in North Carolina, in the Kewlkidz Fellowship, and here in Boston who provided feedback, typos, and clarification suggestions.

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