The Right Opinion

Obama's Health Care Problem

By John C. Goodman · Jan. 20, 2013

President Obama made a remarkable statement to John Boehner in the middle of their negotiations leading up to the fiscal cliff. “We don't have a spending problem,” the president said. We have “a health care problem.”

To put this in perspective, almost every economist familiar with the federal government finances views our national health care problem as a spending problem. In fact, it is THE spending problem. If the federal government were not buying health care, we wouldn't have a long term deficit.

The reason is not hard to understand. For the past four decades health care spending per person in this country has been growing in real terms at twice the rate of growth of our income. Over time, tax revenues at every level of government will tend to grow at the same rate as the economy grows. But if health care spending is growing at twice that rate, the public sector will be running ever larger deficits or raising taxes or cutting spending on every other program or all three.

So what is the president talking about and why is this distinction important? Well, if you view our health care problem as a spending problem, then the follow up questions are fairly obvious. Why are we overspending on health care? What would it take to get people to spend less and keep health care within our means?

The answers to those questions are also fairly straightforward.

We are overspending on health care because when we enter the medical marketplace most of the time we are spending someone else's money rather than our own. On the average, every time we spend a dollar on health care only 13 cents comes out of our own pockets. The remainder is paid by a third party insurance company, an employer or government. If we can buy medical care for 13 cents on the dollar, our incentive as consumers is to buy every test and procedure in sight as long as it's worth at least 13 cents to us.

But if society is spending a dollar and getting 13 cents of value in return, we're wasting a great deal of money.

On the provider side, incentives are also perverse. When third-party payers, rather than patients, are paying the bills providers perversely begin to treat the payers as their customers, rather than the patients. Instead of competing for patients based on price and quality – the way other professionals do the incentive in health care is to maximize against payment formulas doing whatever reaps the most revenue.

What's more and this is important our worst offenders in this regard are Medicare and Medicaid. Low-income patients on Medicaid make almost no out-of- pocket payment when they get medical care and most seniors once they combine Medicare with Medigap and drug coverage insurance face no out-of-pocket-expense either. In our government health programs, people are encouraged to treat heath care as though it were a completely free good.

Loyal readers of my columns already know what needs to be done. Both in the private sector and in the public sector, people need to manage more of their own health care dollars in Health Savings Accounts (HSAs). We need special HSAs tailored for the needs of the chronically ill. And for the big ticket items, health insurance needs to become like casualty insurance which people have for their homes and automobiles.

Changing Medicare and Medicaid, however, would be entitlement reform. And the new mantra on the left is: we don't need entitlement reform. That's basically what Barack Obama was saying to John Boehner. It's the same thing New York Times columnist Paul Krugman routinely says when he writes about health care. Ditto for former Labor Secretary Robert Reich. For example, writing at The Heath Care Blog the other day, Reich called entitlement reform a “hoax,” and he went on to say:

We're already spending nearly 18 percent of our entire economy on health care, compared to an average of 9.6 percent in all other rich countries.

So how do we become more like them?

An estimated 30 percent of all health care spending in the United States is pure waste, according to the Institute of Medicine.

What he is really saying without ever coming clean about it is that all we really need to do is to tell doctors how to practice medicine. If they practiced medicine the way Canadian doctors do, for example, we wouldn't have a problem at all!

But in fact, all this is liberal myth. When the accounting is done correctly, we are not spending more than other countries and the idea that other countries have found a way to make socialized medicine efficient is ludicrous. We may indeed be wasting one of every three dollars in health care, but so are the Canadians and so are the British. In fact, the systems of other countries are very probably more wasteful than ours.

There are two fundamentally different ways of thinking about complex social systems: the economic approach and the engineering approach.

The social engineer sees society as disorganized, unplanned and inefficient. Wherever he looks, he sees underperforming people in flawed organizations producing imperfect goods and services. The solution? Let experts study the problem, discover what should be produced and how to produce it, and then follow their advice. This is the approach implicit in the writings of Reich, Krugman and President Obama.

Social engineers invariably believe that a plan devised by people at the top can work, even though everyone at the bottom has a self interest in defeating it. Implicitly, they assume that incentives don't matter. Or, if they do matter, they don't matter very much.

To the economist, by contrast, incentives are everything. Complex social systems display unpredictable spontaneous order, with all kinds of unintended consequences of purposeful action. To have the best chance of good social outcomes, people at the bottom must find that when they pursue their own interests they are meeting the needs of others. Perverse incentives almost always lead to perverse outcomes.

In the 20th century, country after country and regime after regime tried to impose an engineering model on society as a whole. Most of those experiments have thankfully come to a close. By the century's end, the vast majority of the world understood that the economic model, not the engineering model, is where our hopes should lie. Yet health care is still completely dominated by people who steadfastly resist the economic way of thinking.

The Affordable Care Act (ObamaCare) was heavily influenced by the engineering model. Who but a social engineer would think you can control health care costs by running “pilot programs”? What's the purpose of a pilot program if not to find something that appears to work so that you can then order everybody else go copy it? Pilot programs are a prime example of the social engineer's fool's errand.

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9 Comments

G. Daylan in Peoria, IL said:

Another reason why our health care is so expensive is because it is so good. Nowhere else are diagnosis, treatment and availability nearly as terrific. It has always been the case that going first class costs more and our doctors and hospitals are certainly the finest. I have never heard of a person with a serious malady going to a socialist country for medical care but I have read of several coming here from socialism if they could afford it. As we wander down the president's socialistic path I expect that our health care will lose its excelence.

Sunday, January 20, 2013 at 1:54 AM

Joe L in Toms River, NJ said:

The timing of this column is remarkable. Just yesterday I said to my wife that the costs of medical care is increasing at a rate much higher than average inflation b/c it is subsidized -- by government and the existence of insurance and the mindset that someone ELSE is paying for it. I maintain that if ROOT CANALS were performed free of charge, that even the demand for them would increase to silly levels.

If I snapped my fingers and medical insurance ceased to exist, doctors wouldn't stop seeing patients; they'd lower their prices to compete for patients. Cost-effective medical procedures and modalities would flourish while inefficient ones would fall by the wayside.

Sunday, January 20, 2013 at 12:09 PM

Kevin from Arkansas in USA replied:

Much the same with college costs. Tons more scholarship money is now available to students to help and the cost to attend colleges rises much faster than inflation.

http://inflationdata.com/Inflation/Inflation_Articles/Education_Inflation.asp

"Yet, the main reason tuition continues to rise is a dramatic change that took place regarding the Federal Stafford Loan more than a decade ago. When Uncle Sam opened the floodgates to government-backed student loans without parent income restrictions in 1992, colleges welcomed the news with open arms. The sudden injection of millions of additional aid dollars only furthered tuition increases. Add to that the government’s continued promotion of the Stafford Loan as a low-cost program, and you have the formula for hyperinflationary costs."

Sunday, January 20, 2013 at 1:27 PM

JDB Esq in CA/VA replied:

I call it 'America's Education Industrial Complex.' The kids get easy college loans, and then the colleges increase the tuition to take advantage of the free-flowing money.

Then there are the college professors who love democrat administrations because they know the democrat/progressives will dole out much more grant money for research, because, as we all know, there can't be enough studies about why the north wind blows from the north, or why dirt is dirty.

Sunday, January 20, 2013 at 3:47 PM

M Rick Timms MD in Georgia said:

Healtcare expenditures are increasing as the population ages, and the cost of health insurance is increasing as third party payors increase profit margins.

BUT -- The actual payments to doctors for procedure code specific items is decreasing!!

As a surgeon I am paid 50% less today for a given procedure code charge than I was 10 years ago. Most physicians have seen their actual re-reimbursements from private insurance and Medicare/Medicaid decrease for any given claim code.

I lose money on every Medicare- medicaid patient. I see them because I am required to in order to be on Hospital staff - and that is only because the hospital has to require participation in order for them to be paid.

The solution is competition. HSA's are the answer, but Obama is doing all he can to make them ineffective. Every doctor I know is willing to compete on the basis of quality, cost, access, availability, bedside manner, etc., and HSA's are the best way to do that. The folks spend their own tax favored money on the everyday stuff, with a high deductible plan to cover hospital visits, surgeries etc. It has been tested - it works, but it takes control away from corrupt, power hungry politicians like Obama and his socialist democrat accomplices.

Sunday, January 20, 2013 at 1:34 PM

Pastor Dan, RN in Vermont replied:

Great diagnoses. If only the sick leaders would accept them and the plans of care that necessarily follow. But the WH and the Congress seem more bent on acting AMA!

Sunday, January 20, 2013 at 8:53 PM

G Dub45 in Lee's Summit, MO replied:

Doctor Timms - You and I ought to team up.
I am a Health, Life and Long Term Care Insurance Broker and have encouraged prospective clients to look into MSAs and now HSAs forever.
They truly are very cost effective catastrophic plans. Great for those folks who rarely see their doctor or are not on maintenance scripts. It should be the program of choice for the under 30 crowd. Now, having free ( but, nothing really free is it? ) annual exams the HSAs ARE the go-to program.
Being PPO, they give the consumer the opportunity to SHOP for their care.
What a novel notion in the 'Free Market'.

But, yes, the Fascists in DC just can't allow them to compete with the Dear Leader's ACA.

Monday, January 21, 2013 at 9:40 AM

Eleanor in AK said:

Under the Affordable Care Act, based on "science", certain procedures will be denied for specific groups under certain conditions. This allows the average life expectancy to decline, saving all sorts of money on medicare and social security. For example, assume the average life expectancy for men is 75 and women is 78. After age 75, men would not be allowed to have prostate screening. After age 78, women would not receive pap smears or mamograms. Since it takes about 20 years to die of liver failure, screening for Hep A, B, or C would be prohibited after age 55 for men and 58 for women. Access to colonoscopy is currently restristed because the risk of punchure increases as the skin thins. A person discharged from the hospital may not be readmitted for two weeks, which is plenty of time to die from MRSA infections acquired during the hospital stay. This is just the beginning of limited access to care. Eventually, anyone not working wiill be denied routine health screenings. The annual physical will be a benefit of being rich, because only someone with cash will be able to afford it.
The push back will come from Big Pharma who have spent billions developing drugs to treat Alzheimer's, high cholestrol and high blood pressure medications. Although they colluded with Congress to pass this bill, they are going to be very surprised to find demand for their products declining. Today, many doctors are willing to see medicare and medicaid patients because the reimbursement rates are so low. Who will prescribe the pills if doctors won't?

Monday, January 21, 2013 at 3:31 PM

Tod the tool guy in brooklyn ny said:

Health Care in the private arena has done well, only increasing in cost by 3.9% over the last two years. The PPACA 2010 will be a Marx/engels TRAIN WRECK-completely off the rails! FOWARD KOMRADZ!!

Tuesday, January 22, 2013 at 6:48 AM