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By Arnold Kling : BIO| 10 May 2020
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I have eagerly awaited the publication of Crisis of Abundance: Re-thinking How We Pay for Health Care, which is the subject of this essay. However, since I am the author, this does not count as a book review. Call it a commercial.

I should start by saying that the book does not contain a single major policy recommendation that is politically palatable today. That fact will greatly limit its appeal to most Washington wonks. To gauge their reaction to Crisis of Abundance, imagine how you would react if, while waiting in the checkout line at a supermarket, you pulled a paperback novel off the sales rack, thumbed through it, and didn't find any sex scenes. What was the publisher thinking? Who would buy this?

I can't speak for what the Cato Institute was thinking when they asked me to write a book on health care policy. What I was thinking was that I would do a straightforward, fact-based economic analysis. My approach was to get on the economic trail and follow it to wherever it leads. Where it leads turns out to be a political wilderness, as I will explain below.

Pain in Every Direction

In March, I gave a talk sponsored by the Mercatus Center, in which I said that the main take-away from my book is that any direction that we take in health care policy involves pain:

  • If we go straight ahead (making no changes to health care policy), then the problems that we face now will get worse. Health care spending will continue to rise, so that our health care finance systems will continue to unravel. Employer-based health insurance will continue to struggle. The price of health insurance for individuals will rise, and more individuals will choose to remain uninsured. Medicaid's burden on state budgets will continue to increase. The trillions of dollars of unfunded liabilities of Medicare will continue to pile up.

  • If we turn left (increasing government's role through a single-payer health care system), then we will have to use a national health care budget to ration care. Other countries find it acceptable, for example, that not everyone who is recommended for heart bypass surgery can get it within three months. Our culture is not ready for that. If you thought that many Americans reacted badly to managed care, imagine how they will react to managed care with government in charge.

  • Turning right (a market-oriented solution) also would produce culture shock. We are used to obtaining health care services without having to worry about what they cost. Over 85 percent of health care spending is paid for by third parties -- about 45 percent comes from government and about 40 percent comes from private health insurance. A market-oriented solution, as I propose in Crisis of Abundance, would limit government support to the poor and limit health insurance to covering catastrophically large expenditures. Most consumers clearly prefer -- or at least are used to -- health plans that insulate them from a much larger share of the costs than would be the case with true health insurance.

Why Spending is High

The United States is an outlier in terms of health care spending. In my book, I point out that in 2002, 14.6 percent of our GDP went for health care (more recently, this figure probably has reached 16 percent), while for most other countries the percent of GDP devoted to health care is closer to 10 percent or less.

I believe it would be unwise to claim that our high level of spending on health care is a good thing. That would be true if spending were not distorted by perverse incentives and/or it could be shown to yield noticeable benefits. However, the incentives are distortionary. Moreover, while most statistics used to measure overall quality (such as international longevity comparisons) are too flawed to enable one to draw definitive conclusions, based on the information that I found while working on the book, I believe that it is likely that we are not getting good value for all of the money that we spend on health care.

One explanation of high health care spending is that it reflects the inefficiency and greed of our capitalist system, compared with the more socialized systems of other industrial countries. This viewpoint is popular on the left, but it does not stand up to close scrutiny. In the United States, it is the intensity with which we utilize health care services -- particularly specialists and high-tech equipment -- that is responsible for our soaring health care expenditures.

We are getting real health care services for our money. Although there certainly are ways to improve efficiency in health care, efficiency measures cannot provide enough savings to enable us to consume the same services we consume today at drastically lower cost. The only way to rein in health care spending is to change the way that we consume services.

Real Solutions

My TCS readers know that I see our current notion of health insurance as fundamentally flawed. In the book, I describe what we call health insurance as "insulation," and I contrast it with what I call real health insurance. I spell out how a long-term, catastrophic health insurance plan might work.

I also show how a combination of long-term catastrophic health insurance and savings could substitute for Medicare. That makes my book the only health care policy discussion that offers an effective way to prevent the fiscal train wreck that Medicare threatens to become.

I also propose that government charter a commission to study the benefits of different medical procedures. American consumers undergo many health care procedures that have very little expected benefit. Cost-benefit analysis would help consumers make better decisions, particularly if some of their insulation from health care costs is removed, which would give them an incentive to compare benefits and costs in making their decisions.

The Policy Establishment

The health care policy establishment in Washington, including the Heritage Foundation, the American Enterprise Institute, and every think tank to their left, dismisses real solutions to health care financing as politically irrelevant. Instead, the wonks are looking for gimmicks that will "contain costs," which means that they are looking for clever ways that government can cut prices charged by health care suppliers or "improve" markets to make them more efficient.

Where I claim that any direction we take in health care involves pain, the establishment is circling its wagons around the Massachusetts health care plan, which promises a free lunch. Where I say that we need to make realistic promises in our entitlement programs, the establishment says that such talk is politically absurd.

The health care policy establishment today reminds me of the macroeconomic policy establishment in 1967. At that time, inflation was a growing menace, and the establishment blamed the "wage-price spiral." The wonks of that era focused on designing "incomes policies," which were ways for government to intervene in wage bargaining and price-setting. That same year, Milton Friedman was President of the American Economic Association, and he gave an address which laid out the basic economic theory behind what is now enshrined in textbooks as the vertical long-run aggregate supply curve. His back-to-basics economic analysis showed that the way to curb inflation was to control the money supply, rather than use "incomes policies."

The policy establishment did not listen to Milton Friedman in 1967. The next dozen years saw incomes policies tried, failed, and finally abandoned. Only when they had unsuccessfully attempted everything else did the establishment give Friedman's policies a chance, in the 1980's. They worked.

What I try to do in my book is provide that same sort of back-to-basics economic analysis for health care policy. Maybe some years down the road, after the public is fed up with health care gimmick policies that don't work, the policy establishment will discover the ideas in Crisis of Abundance.

Arnold Kling is a TCS contributing editor and adjunct scholar with the Cato Institute.

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