Healthcare

Healthcare in America is a controversial and complex topic. One thing Americans can all agree upon is that the system does not work as well as it should. Most agree that lack of universal access, ultimately due to cost, is the key issue. It is upon the proposed solutions to this lack of access for so many Americans that our national debate centers. In simple terms, the fundamental question we must answer is this: How do we expand access without sacrificing quality? After all, if one does have access to the healthcare system through insurance, one has access to some of the best and highest quality healthcare in the world. Unfortunately, though, America’s system does restrict regular access to care for many of its people (outside of catastrophic care) through price rationing. This disturbing fact was the impetus for the Affordable Care Act (ACA). But, how did America get to this point?

In brief, American healthcare insurance coverage started as a fringe benefit offered by employers. Private, for-profit insurance grew in the stead of government as the avenue through which most Americans obtained healthcare coverage. However, as prices for health services increased more and more over time, so did the burden for employers. Insurance premiums rose (often faster than inflation), and could not be contained. Soon, new innovations developed to manage the the ever increasing costs, such as Health Management Organizations (HMOs). Their affect was positive in some ways, and negative in others. HMOs, for instance, spread costs across larger networks, diminishing their negative affects, while restricting choice of doctors and facilities to patients and their families.

Thankfully, many employers today still offer health coverage for some or all of their employees, and some 170 million Americans are covered in this way. But, a good many employers do not offer coverage due to the cost, and there has not been any legal requirement or outside economic incentive for employers to do so until recently. This uneven market of private employer-based insurance coverage left wide swaths of the American population out of the healthcare system altogether; most of these people could not afford to purchase insurance on their own, priced out of the market.

In the mid-1960s, the Federal Government acted to protect those largest and most conspicuous groups who could not participate in the market for healthcare coverage—the elderly and the very poor. Medicare and Medicaid were created to address this problem (after much political wrangling; a form of Medicare had been brought forward in the Congress each term from 1948 until serious consideration of the plan came about during the Kennedy Administration). Neither is a perfect system, but both are nonetheless indispensable for the elderly and poor in American society, and both function remarkably well for the populations they serve.

But, even those two solutions have not been enough to provide anything near universal access for Americans. The segment of the population that is most affected by the remaining lacuna in coverage is the lower middle class—too young, and too gainfully employed, to qualify for Medicare or Medicaid, and with employers unwilling or unable to provide a healthcare package. They were essentially priced out of the market. The result has been that, up until very recently, almost no middle income individual or family could reasonably afford insurance, absent an employer that offered insurance coverage as part of its compensation package. Individual prices for insurance were too high; individual prices for treatments for any sort of illness, absent insurance, remain today out of reach for most middle class families.

This left our nation with a hybrid system where the elderly and poorest citizens could obtain governmentally furnished coverage through Medicare and Medicaid, while those with the right kinds of jobs obtained healthcare as part of their employment package. Those who did not have the right kind of job or were not old enough or poor enough—about 45 million people—had to do without healthcare.  

The Affordable Care Act (ACA) has, to some degree, helped to fill THIS gap, as Medicare and Medicaid filled the prior gaps. But, though it sets up marketplaces for people to purchase (sometimes subsidized) insurance packages, many have objected to the ACA as a "government takeover of healthcare" that would "kill jobs" and "erode the quality of care for those who have access to coverage," while in turn "forcing people into the system." None of these arguments against the ACA should be taken lightly, of course. It is undoubtedly imperfect. However, the ACA is in its infancy. Its efficacy will depend upon its acceptability as much as by the results it can provide.

That said, one fundamental issue that remains undeniably true is that the ACA does not expand the number of practitioners operating in the American healthcare system; more doctors cannot, after all, be legislated into existence. The ACA increases the number of those who can reasonably visit those practitioners. The present system was frankly not built to serve everyone, because it never had to serve everyone. The increase in patients per doctor can indeed disturb quality of care. Thus, while the ACA increases access overall, it does not have a mechanism to maintain or improve quality in the short term.

This brings us back to the original question: How do we expand access without sacrificing quality? To this, there is no easy answer. The controversy has been over whether we can enhance access to the system without damaging the quality of this system by adding more government-based solutions, or whether these ends can be better met by reducing government involvement and enhancing market-based options for healthcare consumers. The fact of the matter is that the ACA is an effort to straddle the middle. It is a good first step, but for our system to get better, it must evolve into either a primarily government-based system that incorporates markets, or a private, market-based system that largely excludes government. Whichever we evolve toward, there is no rapid way to get there. There is no instantaneous panacea.

Below I outline why I believe a government-based system that incorporates markets where sensible is the more effective way to go. As a believer in capitalism and markets as good mechanisms for solving societal problems, I ground my arguments in economic thought (most of which is not original to me).

My Policy Prescription: The ACA is a good, but imperfect, first step in enhancing access to healthcare. An ideal system would be a single payer system that incorporates market principles, because the single payer—the government—has far better leverage and bargaining power to control costs and wring out inefficiencies in the system (such as inconsistent patient records or changing insurance coverages from year to year). But, such a switch is impossible to do quickly, and may be impossible to do completely. A rapid switch to single payer would likely damage quality of care because the system will have no time to adjust to the new demand. We have traveled too far down this present road to simply turn on a dime. Instead, we must incrementally, but steadily, increase access while offering both time and incentives to maintain, and even improve, quality. There is no perfect solution here; we must take the most sensible path toward universal access.

Rationale: In 1963, Stanford Economist Kenneth Arrow wrote a powerfully incisive work on healthcare. His basic premise? The market-based system, which is usually the very best way to solve most distribution problems in the world (I, too, believe that capitalism is by far the best economic system in the world—warts and all), is an ill fit for healthcare. He based this on five fundamental problems that compound to make healthcare unique (I have below reorganized and simplified a much larger set of issues from his paper, and have also expanded just a bit on some to update them for today):

  1. The Unpredictable Nature of Demand: Arrow argues that demand (the ability and willingness to consume) is uneven and unpredictable. While one might schedule regular consultations with her/his general practitioner, one can rarely predict the need for care as the result of an accident or sudden illness, or for that matter the most catastrophic of care. Such services are by nature expensive, not to mention highly disruptive to one’s life. Yet, the service is consumed. And, often, the very nature of demand is violated: One may not have the means to pay for this service, but she/he will not deny the service because one wishes to survive (if one is unconscious, practitioners humanely provide care without consent). Worrying about payment comes later.
  2. The “Uneconomic” Behavior of Doctors: Doctors provide these services in the moment with no expectation of advance payment and no assurance of receiving payment. Most doctors provide advice and services designed to avoid more costly aspects of their own services. This is atypical to most market environments.
  3. The “Asymmetry” of Knowledge between Doctors and their Patients: One’s guarantee of good service is less about the doctor’s track record (though not always), but more about the doctor’s expertise which in turn is guaranteed through her/his credentials, which must be earned and maintained. Ultimately, the patient is at a severe disadvantage because her/his choices cannot be grounded in the same knowledge as the doctor. Here, a level of trust in the physician credentials is important when choosing a doctor, and a level of faith is necessary when receiving care in an emergency. Either way, the patient is at a knowledge disadvantage. In the former condition, there is some choice (though, tell that to your insurer who provides your “in-network” list); in the latter condition, there is rarely any choice.
  4. The Invisibility and Non-negotiability of Price: Medical services in many cases can fall into three (perhaps oversimplified) categories: optional/discretionary, preventive, and necessary. Of this list, the first is often something that a person does of her or his own volition; the second is strongly advised by a doctor and is often covered by insurance; the third is usually urgently needed with or without consultation of the patient. In the last two cases, price is obscured by insurance for those who are fortunate enough to have insurance. To those who don’t have insurance, the price becomes an obstacle to undertaking preventive care properly and makes necessary care more frequent. In the case of such necessary care, the price becomes almost irrelevant, as the immediate emergency means life or death. Ironically, it is the impending bill for the service that can be a source of unhealthy stress.
  5. The Paradox of Insurance: Health insurance has become indispensable for healthcare. Since costs, and thus prices are so high, a market absent insurance would price ration almost all of society out of the healthcare market, save for catastrophic care. This would make for a completely insolvent and unsustainable market. Thus, insurance becomes necessary to pool resources among the healthy and the sick to pay for today’s sick with the assurance that the system will pay for tomorrow’s sick (today’s healthy). The problem is that today’s sick are expensive, which makes insurance premiums expensive, and acts as a disincentive to take on a sick individual in the first place, since an insurance company has the separate responsibility of profiting. Further, until the ACA, private health insurance was cost-prohibitive to purchase. Our system is still largely employer-based.

As a society, we have tried to mitigate the aspects of our system that tend to price ration. However, we have largely failed when it comes to excluding the lower strata of America’s middle class from the healthcare system. Such people earn too much in income for government assistance, yet not enough to purchase insurance on their own. In their cases, many employers to not subsidize healthcare. Thus, our system already rations—it price rations.

The ACA has attempted to add a government-managed, but market-based, layer to counter this reality by pooling these consumers into exchanges and in many cases subsidizing a portion of their healthcare costs. This has succeeded to an extent, but the calculation relies upon a large contingent of young, healthy consumers to participate in the market to offset the costs of those who are ill (in other words, those who cost insurance companies the most to serve). To try to fulfill this part of the equation, the ACA presents a disincentive for the young and healthy not to join. The so-called mandate, a monetary penalty (which is indeed a tax), is levied upon those uninsured who are eligible to participate, but choose not to do so. To this point in time, the mandate has worked only to a certain extent.

The ACA is still in its inchoate stages. It will take time to see how effective it really is.

Conclusion: Proponents of a more “pure” market-based system for healthcare must answer two extremely important questions: The first is why have all other major economies in the world eschewed pure market systems? Leaving that aside, the second question is this: Why are non-market programs such as Medicare and Medicaid necessary if a market-based approach is the real solution? The answer is simple. Markets price-ration. In most markets, that is desirable. Such an outcome is not desirable for healthcare, however.

Medicare was created because the elderly could not financially participate in the market system, and additionally are the most expensive group to service for insurers. Economic demand is skewed when it comes to the elderly: they need healthcare services the most, and they are thus precisely the people healthcare service providers wish to serve least.

Medicaid was created for those in the lower economic strata of society because they cannot otherwise participate in a market for healthcare insurance and services—even when, in an aggregate sense, it costs the system MORE when they do not participate directly and wait for catastrophic care.

That is a strange market, indeed.

In actuality, this is called market failure. And, market failures necessitate intervention from outside the market by the government. Hence, the necessity for government programs such as Medicare and Medicaid. The ACA is an additional intervention into the realm of healthcare because the remaining “consumer market” for healthcare itself price rations to the point where a large part of the population remained without care. The ACA is yet another attempt to resolve market failure.

Thus, we return to the original problem: How to expand access while preserving quality? It would be nice if the answer were to simply open up the system to all tomorrow. The problem with such a solution is that even if it were so simple, it would still create its own challenges. The fact of the matter is that the system would have great difficulties, perhaps insurmountable difficulties, if such a rapid change were undertaken. We cannot make the perfect the enemy of the good. Change must come, and government must have a strong hand in implementing it. Certain aspects of market principles can and should be included in the market where they make sense. But, the fact of the matter is, we must use the ACA as either the method (if it succeeds on its own) or a springboard (if it falls short) to finally complete our national responsibility of including all Americans in the American healthcare system.

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