Please turn on JavaScript

Brooks Wilson's Economics Blog: Samuelson and Health Care Reform

Thursday, June 18, 2009

Samuelson and Health Care Reform

Robert Samuelson does not like health care reform as proposed by the Obama administration.  In a Washington Post op-ed, "Wrong Way on Health 'Reform'," dated June 15, 2009, Samuelson opines,
It's hard to know whether President Obama's health care "reform" is naive, hypocritical or simply dishonest. Probably all three. The president keeps saying it's imperative to control runaway health spending. He's right. The trouble is that what's being promoted as health care "reform" almost certainly won't suppress spending and, quite probably, will do the opposite.
He agrees with the president's Council of Economic Advisers that controlling health costs is important, describes what he believes is the real problem and rebuffs the administration's proposal as cosmetic.
The central cause of runaway health spending is clear. Hospitals and doctors are paid mostly on a fee-for-service basis and reimbursed by insurance, either private or governmental. The open-ended payment system encourages doctors and hospitals to provide more services -- and patients to expect them. It also favors new medical technologies, which are made profitable by heavy use. Unfortunately, what pleases providers and patients individually hurts the nation as a whole.

That's the crux of the health care dilemma, and Obama hasn't confronted it. His emphasis on controlling costs is cosmetic. The main aim of health care "reform" now being fashioned in Congress is to provide insurance to most of the 46 million uncovered Americans. This is popular and seems the moral thing to do. After all, hardly anyone wants to be without insurance. But the extra coverage might actually worsen the spending problem.
Let me describe the problem through an example.  You have group insurance that has a fixed cost, say $500 per month, and a copayment of $20 per visit.  You think you have a cold, but know that there is some chance that it is a sinus infection.  The bill for a visit to the doctor is $100.  The visit is worth $75 to you, but will cost you $20.  The doctor will bill the insurance company for the difference of $80.  During the visit, your doctor checks your nose and says that there is a 95% chance that you have a cold, but that you can know with a 99% certainty that you do not have a sinus infection by taking an additional test costing $50.  Your insurance company picks up the tab, not you.  Your doctor informs you that the test indicates that you do not have a sinus infection, but you are still worried.  He suggests that you can take an antibiotic that will cost you $10 and your insurance company $50 to ease your fear.  You agree to this course of action.  Your bill is $30, well under the $75 value that you put on the visit.  Your doctor is happy because he gave you honest advice, letting you pick between alternatives.  Suppliers (the doctor and pharmaceutical company) billed your insurance company $180 for a visit that you value at $75.  Because there is not a direct connection between the cost of the insurance and the cost of a visit to the doctor, many insured will overuse medical services.  This puts upward pressure on the price of insurance, but because the insurance policy is based on the actions of a group, your actions have virtually no impact on the insurance price and you continue to overuse the service.

Many economists believe that the government can effectively reduce costs by rationing care.  As an example, suppose your doctor proposes a test that he will bill at $85 and that you value at $120, but the government values at $60.  The test will not be approved; your care has been rationed.  Suppose that your position and the government's is reversed.  You value the service at $60 and the government at $120.  You will purchase the test, creating the same type of inefficiency that exists within the current system. 

Dividing the country into two groups, those that were insured before reform and those who were not, who will have their care rationed?  The previously uninsured will get more services implying that rationing will reduce health care services to the previously insured.  The rationed care still does not place a link between your valuation of the medical service and its cost so it is not efficient economically. 

Samuelson does not believe rationing will occur, asserting that expanded coverage will increase costs, and that the cost reducing measures proposed by the administration will be ineffective as have been past "scattershot" reforms that have failed to address the real problem, and that the administration should begin reform with Medicare. 
The one certain consequence of expanding insurance coverage is that it would raise spending. When people have insurance, they use more health services. That's one reason why Obama's campaign proposal was estimated to cost $1.2 trillion over a decade (the other reason is that the federal government would pick up some costs now paid by others). Indeed, the higher demand for health care might raise costs across the board, increasing both government spending and private premiums.

No doubt the health program that Congress fashions will counter this reality by including some provisions intended to cut costs ("bundled payments" to hospitals, "evidence-based guidelines," electronic record keeping). In the past, scattershot measures have barely affected health spending. What's needed is a fundamental remaking of the health care sector -- a sweeping "restructuring"-- that would overhaul fee-for-service payment and reduce the fragmentation of care.

The place to start would be costly Medicare, the nation's largest insurance program serving 45 million elderly and disabled. Of course, this would be unpopular, because it would disrupt delivery patterns and reimbursement practices. It's easier to pretend to be curbing health spending while expanding coverage and spending. Presidents have done that for decades, and it's why most health industries see "reform" as a good deal.


  1. Universal healthcare would cause an upward shift in demand for healthcare. In the short term, 8 years or more, the supply of doctors woud be more inelastic than the demand for them since training to be a doctor is such a long time consuming process. This will result in physicians valuing their time more highly and increasing the cost of a doctor visit in accordance with what is demanded of them. Some thought needs to be given to building up the infrastructure of the healthcare system to accommodate the 45 million now uninsured who would be accessing healthcare if universal healthcare is enacted.

    Once the healthcare system is able to service everyone, a higher demand is not necessarily bad. It has been proven that it is often less costly to treat a disease in its early stages rather than when it full blown – e.g. breast cancer. So, preventative health checkups should be affordable to all. It is also a known fact that many uninsured people go to emergency rooms for minor ailments or injuries, which is far more expensive than going to a doctor’s office to seek treatment.

    Student - Candis Massingill

  2. Derrick Villa19/6/09 7:23 PM

    I believe providing coverage to the 46 million Americans without insurance is an ideal dream that will greatly benefit society’s impoverished citizens. I agree with Samuelson that what needs to be looked at first is the Medicare system. I mean that program already provides service to the same size of group that were talking about so a more approachable, realistic step would be to enhance the system with including uninsured citizens. While including the coverage to the uninsured the next thing would also include revamping Medicare to be as efficient as possible, starting with cutting out waste in the system. We all know any plan that is implemented is going to result in excessive spending, so why not use the planned costs into fixing what we already have in making it more productive. Restructuring our health care system will obvious take time and money but in the long run the costs saved will offset the losses.

  3. I agree that there needs to be some type of national health care system for all Americans. As learned in macroeconomics class, better health improves productivity, which helps our country as a whole. I also agree with Candis when noting that preventative health care is far less expensive than treatment after the fact. I have not been keeping up with all of the details of this new program being proposed, but if there is more of an emphasis on preventative care and not just trying to lower costs in general, I think it would be a great idea. I know far too many people, especially college students, who didn't go to the doctor for something simple which manifested itself into a larger problem which costs more for everyone involved.

    Jacinta Tatman