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Socialize medical care?

| Tuesday, June 30, 2009

An alleged culprit behind the high and rising cost of medical care in the U.S. is fee-for-service. A typical explanation of how this method of supplying medical care causes problems appears in a letter published in The New York Times on June 9:

"The Obama administration ... needs to cut the cost dramatically. This can be done only by abandoning the fee-for-service payment model. The problem with fee-for-service is not merely that it pays providers to provide service; it pays them to create service as well. It is this almost limitless ability of doctors to create service that makes our per capita health care costs twice that of any other developed country."

This analysis is bad economics.

If the high and rising costs for medical care were caused by fee-for-service, then this method of provision should also cause high and rising costs for almost everything else in our economy. The reason is that the vast bulk of the private sector operates according to fee-for-service.

If fee-for-service were so dysfunctional, the inflation-adjusted prices of consumer electronics, groceries, clothing, and most other goods and services should be rising out of control. After all, companies such as Panasonic and Safeway all have incentives to try to get larger payments from consumers by offering consumers more and better products. All other things equal, a laptop computer with more bells and whistles will fetch a higher price than will one with fewer bells and whistles.

In fact, of course, the long-run trend of the real prices of these items (and of many others) is steadily downward - and the trend in the quality of these items is steadily upward. So it cannot be true that the upward trend in the real price of medical care is explained solely by fee-for-service. Something else must be at work.

That "something else" is Americans' increasing reliance upon taxpayer-subsidized third-party payments for medical care.

Medicaid and Medicare are outright promises by Uncle Sam to pay for most of the medical care received by large groups of people - namely, poor Americans and the growing number of Americans 65 years and older. The tax-deductibility of employer-provided health-insurance premiums further promotes payment by third parties (health insurers) and, thus, discourages direct payments by patients. The result was explained recently in The Washington Post by economist Arnold Kling: "In 1960, 50 percent of personal health-care spending was paid for by patients out of pocket. Today, that figure is about 10 percent."

As I've argued before in this space, one result of this unduly heavy reliance upon third-party payers is that almost everyone who consumes medical care does so irresponsibly. That is, the typical American is unresponsive to the burdens that his or her medical-care choices impose on others. This unresponsiveness -- this irresponsibility -- exists because we've socialized too much of the costs of medical care. Why should I give close attention to the price of some recommended medical procedure if I, personally, am paying out of pocket none (or only a tiny fraction) of the price of that procedure or drug?

With everyone irresponsible, resources are wasted. And with massive waste comes unnecessarily higher costs.

It's a mystery why medical care cannot be supplied in the same way that, say, accounting services and food are supplied. Like medical care, these things are valuable. (Indeed, food is even more essential to life than is medical care!) Also like medical care, some types of accounting and some types of food are more crucial than are other types -- and accounting services and food are supplied on a fee-for-service basis.

And yet, America suffers no "accounting services" crisis or "food supply" crisis.

Some proponents of the idea that medical care differs so much from other products that it cannot be compared to things like accounting or food say that "in matters of life and death, people aren't willing to make the trade-offs that they make when deciding how much of other things to buy." The idea is that a person on his or her deathbed will not care about the price of the costly medical procedure required to prolong life.

This "deathbed" tale is likely true. But it's difficult to see how it counsels that we socialize medical-care payments. Does anyone seriously suppose that decisions by government bureaucrats over who will get, and who will be denied, some expensive lifesaving procedure would be better than having such decisions made according to each patient's willingness and ability to pay?

In either case, some people will be denied care. I'd prefer that the impersonal forces of the market direct such decisions than to have them made by bureaucrats. Each of us, at the end of the day, has more control over the size of our bank accounts than we have over politically influenced bureaucrats.

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