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Lessons For American Health Care From Europe

Is this the future of health care in the United States? From an Economist report on health care in Spain:

Health spending makes up 30-40% of regional governments’ budgets. Long-lived Spaniards are rightly proud that they enjoy free health care from cradle to grave. But soaring drug bills, an ageing population, slack cost controls and reduced tax revenues are testing the system to breaking point. One estimate is that health costs will double in the decade to 2018…

In the past health budgets have overrun by up to 15%, according to one former regional health boss. When tax revenues were growing, that could be handled. Now much of the debt is passed on to drug companies and health-care technology suppliers. They are jointly owed €9.5 billion ($13 billion) and have to wait an average of 430 days to be paid for hospital drugs, says Humberto Arnés of Farmaindustria, a trade body. “Basically we are financing the system,” he says.

The American health care debate needs to focus on one inescapable fact: unless we make major, deep changes in the way health care is delivered in this country, there is no way we can pay for the health care we want and need as the population goes up, gets older — and as new, expensive treatments continue to appear.

Ultimately we must either ration health care (death panels and all) or restructure it top to bottom so that it is able to deliver the same or, preferably, much higher levels of care much less expensively.  Proponents of a single payer health care system (basically, the kind many European countries and Canada have where the government collects premiums for everyone, sets prices, and pays bills) argue that it is cheaper than our current hybrid (and grossly inefficient and excessively) pricey system.

I agree with the single payer crowd there, but a single payer system only really makes sense under two conditions.  The first, as the Spanish are discovering in a very unpleasant way, is that single payer only works if the single payer has plenty of money. If you count on the government to cover your health care, and the cost of health care bankrupts your government so that the health care system goes down as well, it’s hard to call that a success.

The second problem is related to it: single payer would be more feasible if the technology of health care has frozen.  That is, if we already knew the best way to treat all diseases, manage hospitals, divide up responsibilities between different types of health care professionals and so on, a single payer approach might make sense.

But in fact health care is not a frozen field.  New treatments and new technologies appear all the time, and I suspect that as new scientific breakthroughs appear that process will continue and even accelerate.  (I certainly hope so; there are plenty of conditions we don’t know how to treat, and plenty of treatments that are risky, or have grave side effects.)  The organization of health care is at a very primitive state, in the sense that most hospitals and medical practices in the country could benefit from serious reform — but it is far from obvious how an ideal system would work.  We are only in the earliest stages of seeing how collecting detailed information across the health care system and analyzing this data with powerful software could improve treatments and delivery.

Our health care system needs to experiment, try different things, compare the results of different strategies.  Sweeping, continuous and sometimes radical innovation is the only way that health care costs can be contained long term even as the quality and quantity of care demanded goes up.  No centrally run health care system works that way; too many lobbies and interest groups distort the priorities of a single payer system.

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  • jason

    Insurance works best when people use it less. Health care works best when people use it more. Therein lies the crux of the problem.

  • MW from Florida

    Until we change the incentives in our health care system we will never get costs under control (except through rationing). Our present system has patients spending someone else’s money, i.e., the insurance company or Medicare. They don’t really care how much they spend. We need to change the incentives so patients personally benefit from saving on medical expenses. The best idea I’ve seen so far is health savings accounts.

    If we reform the incentives, it will be amazing how quickly health care inflation will disappear!

  • Jim.

    One of my co-workers recently said, “Of course you want to provide insurance for everybody. What if your treatment cost like 11 million dollars?”

    My reply: “Well, what if everybody’s treatment cost 11 million dollars?” My co-worker was brighter than the average Leftist, so that stumped him.

    Human bodies are mortal, and they decay as time goes on. Eventually, each person in this country will find themselves dying of something. Medical science can be tremendously effective; chances are, if everyone who had what they’re dying of coughed up $11 million, researchers would be able to find a cure.

    As WRM points out, this flux is the root of the cost problem.

    The solution we have now is like China’s “some get rich first” strategy. People who are willing and able to spend money that they have earned, get first crack at the new stuff. As the new stuff gets older, it (usually) gets cheaper, as improvements are discovered and initial capital outlays are paid down.

    This ensures that, as Thomas Sowell likes to point out, if an American has a condition that doctors can actually cure, he has a better life expectancy here (on average) than anywhere with socialized medicine.

    We are the miracle factory. Under socialized medicine — single-payer, whatever — that will stop.

    The world is a better place because America is what it is. Incremental improvements are good, but *we should not radically change it*.

    Repeal ObamaCare.

  • bentunder

    The medical field desperately needs competition and freedom to innovate.

    The information technology sector is able to produce a product and make it smaller, better, and cheaper at an astounding rate.

    There is no natural barrier to the medical technology sector doing this.

    Rich, interested people are needed to pay for initial iterations of technology that are clunky and buggy. If we insist that everyone have equal access to perfect solutions, we will all but guarantee that innovation fails and everyone has a worse outcome in the medium-long term.

  • Jordan

    A somewhat unrelated anecdote about the American health care system. I have a high deductable plan where I pay less in premiums than the low deductable 80/20 plan and get to put away pre-tax money in an HSA to pay for my deductable (that unlike other accounts, I don’t lose at the end of the year). But I pay 100% of the first $3000.

    There are some claims this year that have gone towards my deductable, meaning that although the provider put the claim into insurance, they pay nothing and I’m responsible for all of it. So the provider is supposed to bill me, but many of them haven’t.

    For one of the larger claims, I actually wrote a letter asking if they cared to send me a bill. They called me back saying I didn’t owe them money, my account had a zero balance, they accepted what insurance gave them. But insurance gave them nothing!

    Weird. Here I am willing to pay and at least some medical providers have come to expect (presumably) that they won’t get any money from patients so they don’t bother. Or perhaps these billers are totally clueless but I doubt that.

  • John Burke

    A big factor in the current “crisis” is the main solution adopted to meet the last crisis, namely, managed care.

    Think back to 1990 or even 1995 when most people with job-related health insurance had a plan that paid mosf hospital costs after a deductible and covered doctor and other medical costs after an initial deductible but only up to 80 percent (of the so-called prevailing rates). So the beneficiary was on the hook for 20 percent of a $200 doctor visit or 20 percent of a $20,000 surgeon bill. Low-income folks were protected from this hit by Medicaid but average folks had a bill to pay (a real goldplated plan might have covered 90 percent).

    What was wrong with that? Liberals contended that the ever-higher costs were saddling people with those 20 percent bills, which was an unfair burden.

    I for one would orefer the bills to rationing of care — and Medicare could be restructured to give beneficiaries more of a financial stake in what care they choose — while lower income elderly are protected by Medicaid.

  • Jacksonian Libertarian

    Monopolies cannot be fixed, and health care monopolies are no exception. They all lack the one thing which would bring improvements in Quality, Service, and Price, the feedback of competition.

  • Jane Hart Lewis

    Walter, I appreciated your comments about this. I think your grandfather and my father would be appalled by the state of health care to day.

  • Boldface

    My suggestion would be to OUTLAW third-party payments for any procedure costing less than a specified sum. I’m not a health care economist so I don’t know the sum, but it should be an amount big enough to remove normal care and treatment from insurance. Force people to spend their own money. That would quickly bring prices down for pretty much everything. Doctors would have to actually think about what things cost before prescribing or testing, and would need to discuss that with patients. Patients would have to make informed decisions about what they’re willing to pay for. Poor people could, I guess, still have Medicaid, but there would still have to be some market mechanism worked in so that there would be pricing discipline.

    With people spending their own money you’ll see costs come down very rapidly as providers need to compete for the business.

  • Corlyss

    Economist gives me a headache. Either there’s little editorial policy control over their reporters/columnists, or they are schizophrenic. On the one hand, their American reporters and the ever tiresome Lexington take the position that America borders on greedy carelessness and cruelty for not having the kinds of national heathcare systems that are bankrupting Europe. On the other hand, their European/Britain reporters and columnists Charlemagne and Bagehot repeatedly sound the alarm that the healthcare system, among other safety net programs, are going to bankrupt the EU nations. Both positions can’t be right.

  • Nissen

    Another anecdote of the perverse kind: Washington state requires Medigap providers to offer current “traditional” plans to any current customer with an existing traditional plan upon that customer’s request and not subject to rejection. There is a lot of incentive for customers to make such a request because the current plans are offered at competitive rates, not so those of previous issue.

    The hitch written into state law is that the reissue can drop from a higher plan (designated by various letters), but exclusive of plan A, the lowest. This exclusion is totally irrational, but those in the Medigap business would rather complain about the entire requirement being an intrusion, then get it straightened out so current customers angry about increasing premiums can decide to self-insure the 20% that Medicare does not cover thereby possibly moderating premiums enough to preclude the two sets of premiums—a competitive current offerings and a non-competitive set of all other existing policies.

    That much I have figured out. Not so the Advantage Plans, which are admittedly a federal expanse, the opposite of the savings anticipated. From what I can tell, these have a yearly open period that makes all of them inherently competitive. This looks to me to be a perverse incentive in the direction of increased federal expense.

  • Marke

    The government pays for about 45% of healthcare averaged across all sectors. This constitutes a subsidy worked out on a bipartisan basis over 50 years. This amount of subsidy probably stimulates close to the maximum amount of medical care a country will consume. If the subsidy were greater (the direction of Obama-care), the government would control the delivery system expenses through rationing. If the subsidy were less (the direction of high deductibles and medical savings accounts), patients would consume less health care because they would wouldn’t have as much subsidy.
    My guess is that after the legislative ferment is resolved the government subsidy will settle in at about 45% again for as long as we can afford it. If we must reduce expenditure on health care, the reduced subsidy approach is more likely to promote robust innovation in efficiency of delivery and new disease treatment.
    Regarding the development of new drugs and medical technology, a study showed that if the government kept the price of new drugs at the marginal cost of production $8 of quality life years would be lost for every $1 saved. This is because without that the return on capital pharmaceutical companies wouldn’t invest in new drug development. The only problem is that the US is about the only country that allows the drug companies to make an adequate profit so we are subsidizing new drug development for the rest of the world. Given the present financial crisis we may have to do less of this, but we wouldn’t want to stop entirely.

  • Mark Michael

    WRM’s column never once mentioned “free market” or “competition”. Only some kind of government-directed health care system was a possibility in his mind. I’ve become convinced over the years that the human mind (our DNA) is wired up to be monopolistic and communalist in its thinking. Top-down command and control is natural for us. Adam Smith’s “invisible hand” was so remarked upon because it goes against how we think, yet it’s so obviously true in practice. We learn to accept the free market, the invisible hand only thru “head knowledge”. It must be learned by rote repetition. Write it on the blackboard a thousand times, yet, we’ll still instinctively fall back on having the government organize a health care system – or all is lost.

    A previous commenter mentioned that HSAs are a good way to begin introducing more competition into the health care arena. Mitch Daniels in Indiana introduced HSAs for state government workers some years ago and it’s worked very well. YET, how many policy makers cite that example and say, “That’s the way to go! It works! We’re practical, let’s go with what works!” None that I can see. HSAs violate that natural monopolistic and communal instinct.

    I think competition, many suppliers, subconsciously for our minds is a form of a socially destructive thing. We want a community with everyone pulling together, using one common source. Many suppliers is like indulging in polygamy instead of being faithful to a single spouse. It’s not being faithful to the “tribe” – you’re flirting with other tribes.

    Well, that’s enough psychobabble trying to explain why we have, say, a Fidel Castro and a Stalinist Cuba – and thousands of American leftists celebrating Castro, Che Guevara despite the obvious total failure of their socialist system. Recall Michael Moore’s going to Cuba and celebrating their health care system. It’s in the DNA.

  • Lorenz Gude

    I’m a retired American who has lived half his life in Australia which has both a mandatory state run system and an optional private one. Together they cost Australia about 8.5% of GDP. In the US our system costs 16% of GDP. National Heath outcomes in both countries are very good and very similar. The US system costs twice as much. In Australia the two systems compete. If waiting lists grow, more people buy private insurance. If private insurance premiums rise much people drop their insurance. Single payer is a monopoly but you can have government run health and structure it so the private system can compete with and complement it.

  • Walter Sobchak

    It really doesn’t matter what system we have, if cost control is our goal, so long as the person making the decisions about treatment is the same person who has to pay for the treatment.

    In a single payer system, the single payer can only control costs if it makes the treatment decisions. Cue the death panels. The single payer is able to set the pay scales for doctors and hospitals. Patients will get what the single payer decides to give them when and where it decides to give it to them. A single payer could probably knock down costs pretty well.

    If we don’t want single payer, we need to make sure that patients are able to make decisions. Insurance should only pay on a reimbursement basis after substantial deductibles and co-pays. Much greater transparency is required from hospitals and doctors.

  • lhf

    I think what is happening in Spain is already happening here with Medicare. We (67 and 74 and healthy) had our “free” annual physicals this year with a couple of minor surgeries to follow. This occurred months ago and we have had NO bills. Medicare has apparently paid for some things at a remarkably reduced rate and our backup Blue Cross has paid almost nothing. Blue Cross’ attitude is that if Medicare establishes a rate for a given medical procedure then the recipient is not liable for anything charged above that rate. Since we are not legally liable (their term), neither are they. So the provider ends up eating the costs. We receive lengthy documents every week or so explaining all this from Medicare and Blue Cross and the providers subsidize the care provided. And all anyone is talking about in terms of reform is further reducing payments to providers.

  • bob sykes

    There is no way to reduce medical costs other than denial of care.

    Increases in medical expenditures are driven by new technology and drugs and by increasing numbers of older people. To reduce costs, you must suppress new technologies and drugs and deny care to old people.

    In Europe, and especially in Canada and the UK both kinds of costs reductions are vigorously pursued.

    And they will happen here once Obamacare is fully implemented. And it will be fully implemented because it cannot be repealed.

  • Alec Rawls

    There is nothing particularly dysfunctional about the healthcare market that calls for govt. interference in the first place. If we got rid of the govt. interference, it would produce care much more cheaply, like at a quarter of the cost, for better care.

    The most obvious change is that most health care costs would not be covered by insurance. Nothing preventative or routine would ever be covered because such costs are predictable, and it is more expensive to the patient-buyer to pay for any predictable cost through insurance, so this won’t be the preferrecd consumer choice. As a result, ALL routine stuff will be paid for with REAL DOLLARS, leading to genuine price competition and cost control, just as in any other industry. Prices will fall dramatically over time, not rise, as has been happening for decades under regulation.

    Ditto for anything that can be effectively self-insured. If you have substantial savings, it makes more sense to pay for even semi-large unexpected medical costs out of savings, rather than pay insurance costs. In effect, anyone with substantial savings is already insured, so buying extra insurance is a costly redundancy. This would extend genuine price competition to most medical procedures. The only rational kind of health insurance for ANYONE to buy would be high deductible “major medical” health insurance.

    Why doesn’t this happen now? Because government regulations and tax incentives are all designed to force employers to provide comprehensive health insurance to employees, an absolutely insane system. Many people don’t make ANY health insurance choices for themselves. It is all company provided, with at most a couple of pre-set choices. Market efficiency depends on DE-linking different markets, like the job market and the healthcare market, so each can operate with as little friction as possible. Linking them together creates MASSIVE frictions in both markets.

    A purely private system also puts end-of-life decisions where the belong: on the people who are dying. A private system forces THEM to choose how much of the legacy they would otherwise pass onto their children will instead be spent on creating a longer and more miserable dying process for themselves. The simplest mechanism would be a medical-benefit-per-dollar-spent insurance policy where people would pay higher premiums for lower cut-offs. Pretty much no one would pay for benefits below zero (for procedures that just extend misery, as is perhaps the biggest problem with our present system of blindly insured and largely socialized medicine. People could sign a living will establishing that their medical-benefit-per-dollar policy is their wish for what medical services are and are not provided.

    When you are young and life saving procedures can provide lots of years of healthy life, most life saving procedures will have high medical-benefits-per-dollar spent. As people get old, benefits from any given procedure diminish, and when life itself becomes worthless, no life-saving measures have positive medical benefit, though misery reducing measures still would. Thus medical-benefit-per-dollar-spent policies would automatically adjust to one’s stage of life. The only reason to change such a policy over the course of one’s life would be in response to changed preferences or changed financial circumstances. If you get richer, it makes sense to lay out for procedures that yield less benefit per dollar, but the basic implications of aging won’t change. You’ll reach a point where all that life-saving procedures can do is extend misery, and that doesn’t make sense for anybody, no matter how rich.

    But government CANNOT make these decisions for people. It isn’t moral. People can have purposes in life that make physical hardship worth bearing, and government cannot get into the business of judging peoples’ purposes. With private insurance, an individual can specify how medical benefits are to be calculated. e.g. “I don’t care about pain. So long as I have my faculties, I consider continued life to be of full value.” And then that’s what you insure for.

    At present, these decisions simply aren’t being made, because government has injected itself and specified that employers (then Medicare) provide comprehensive coverage. In compensation, Obamacare will now institute death panels, which makes two wrongs. Well, more like a thousand, but the point is the same: it is going further in the wrong direction. Just get government out.

  • Toni

    I wonder about Rick Perry’s notion of the states as 50 laboratories. What if Medicaid became a block grant program, so that individual states could try different formulae? Surely some states would find successful new strategies for the efficient delivery of health care.

    Perhaps then Medicare could learn a thing or two from state successes. “One size fits all” isn’t working well.

    But the market needs to be part of the solution. Marketplace competition always delivers a better product at a lower price.

  • Jacksonian Libertarian

    Lasik eye surgery is an example of the feedback of competition in the medical field driving prices down, and quality and service up. We need health insurance that forces patients to shop. High Deductible health insurance and health savings accounts, where the patient has to spend their own money for the first $2,500 and 20% thereafter for medical treatments, would do this. Centralized medical files, and regulation forcing medical service providers to post charges, would allow for easy shopping and mobility between medical service providers.

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