The case for rationing health care

Peter Singer, a Princeton bioethicist, argues in The New York Times for rationing health care in the United States. He says we’re paying too much now, and the cost could be cut by imposing limits:

In the public sector, primarily Medicare, Medicaid and hospital emergency rooms, health care is rationed by long waits, high patient copayment requirements, low payments to doctors that discourage some from serving public patients and limits on payments to hospitals.

The case for explicit health care rationing in the United States starts with the difficulty of thinking of any other way in which we can continue to provide adequate health care to people on Medicaid and Medicare, let alone extend coverage to those who do not now have it. Health-insurance premiums have more than doubled in a decade, rising four times faster than wages.

Blank checks. Singer is right to point out that our health-care cost burden is growing frighteningly fast. But he’s on softer ground when he says rationing won’t affect quality, at least not much:

It is hard to see how the nation as a whole can remain competitive if in 25 years we are spending nearly a third of what we earn on health care, while other industrialized nations are spending far less but achieving health outcomes as good as, or better than, ours.

Rationing health care means getting value for the billions we are spending by setting limits on which treatments should be paid for from the public purse. If we ration we won’t be writing blank checks to pharmaceutical companies for their patented drugs, nor paying for whatever procedures doctors choose to recommend. When public funds subsidize health care or provide it directly, it is crazy not to try to get value for money.

Other industrialized nations are spending far less than the United States, and seeing similar results, sure. But that’s in part because those countries are more homogeneous (diversity is good, but we know its challenges) and in part because the United States has been paying the bill for their medical research. If the U.S. slashes its R&D budget, who will pick up the slack? China?

Economic mechanisms. As for rationing that “gets value for money,” it’s hard to see the economic mechanism that will produce such value. Insurance companies already draw lines on medications and procedures. How would a government-run system, influenced by the same people who ruined Fannie Mae and bought General Motors, come up with something more efficient?

I’m not completely opposed to the idea of rationing health care, at least for a few years. Costs are out of control. But then again, if we can’t afford the health care we’ve been getting, won’t that fact cut prices anyway? It’s the old demand/price relationship. In economics it’s called a law, not because it’s imposed, but because it’s unavoidable.

Just don’t tell me that rationing won’t affect quality or innovation. Of course it will.

Frank Warner

Comments

[Neo]

You don't need a R&D budget for medical research when you're not going to use it.

Any new innovation will extend the life of users of the health care system, which in turn will raise not just the continued cost of the surviving patient, but additional costs of other like patients.

As a simple matter of economics, there would be no need for a R&D budget that would lead to the extension human life.

[Frank Warner]

Neo, you seem to be assuming these added years of life would be nonproductive. If the breakthroughs give us more productive years, the economy would be stronger.

People represent more than costs. And the freer they are, the more benefits they bring to everyone.

[jj mollo]

The big economic mistake in this country was restricting wage increases during WWII, and during inflationary periods in the past. Companies responded by offering employees more benefits, which seems OK except that it became ingrained in the culture. They even get a tax break for doing it.

Today, nobody in America wants a job without healthcare benefits. This result has two unfortunate side effects. First, employees whose families have health issues cannot afford to change jobs. This causes reduced "liquidity" in the job market and makes for an underutilized talent resource. Employees are locked into a healthcare prison. Secondly, American companies are at a relative disadvantage, vis a vis the benefits package, as compared to foreign companies who are essentially subsidized. American competitiveness would be enhanced if the healthcare issue could be extracted from the employment environment. One way to encourage that would be to drop the tax protection accorded to companies for healthcare benefits. Make it more expensive than cash. Another way would be to subsidize health care which is individually obtained, to make it more attractive. Individual policies can be ported from job to job, even into retirement.

This strange entanglement between employment and health insurance is not enough, however, to explain the relative inefficiency of the American system. I think there's an analogy with the failed market in the housing sector. There's a huge information imbalance. Just as with ninja loans, customers lie, lie, lie on their application forms. None of the insurance companies wants to get stuck with the expensive diseases, nor do they really want to pay the full freight, so they lie, lie, lie about their coverage. Everybody wants the very best and the very latest treatment, and, for public relations reasons, insurance companies are not able to skimp on glamor diseases. Instead they nickel and dime people with chronic diseases, like refusing medicated bandages for diabetics. These companies do not really want their patients to die, but it should be noted that such an outcome does not cost them a cent, and could save them a lot of money. (Which is why life insurance should be part of every healthcare policy.)

[jj mollo]

I should also point out that healthcare in America is already rationed. It is rationed by demographics, social standing, mental capacity and income level. There are in fact, no economic goods which are not rationed in one way or another. The choice of how we ration such things is a collective effort to construct rational allocation algorithms. The free market is, in most cases, the most elegant and effective choice but it fails in certain well-known situations, including inequality of information and massive externalities, both of which apply to healthcare decisions.

[Frank Warner]

Insurance companies have the greatest competitive incentive to control health-care costs, and they probably are doing a fairly good job at it. But there does seem to be a lack of competition at many levels of health care.

That said, naked rationing also removes competition. Bureaucrats would decide what health care to cut and when to cut it. However well-intentioned, their interference would shut down the free market forces that are most likely to serve more people most economically.

Rationing is useful in an emergency. We may be in an emergency. But if we get rationing, it should be replaced rapidly by a more competitive health-care system.