#269: A Letter to Paul Krugman

#269: A Letter to Paul Krugman
April 25, 2011

Benjamin Domenech

Benjamin Domenech (bdomenech@heartland.org) is a senior fellow at The Heartland Institute. Domenech... (read full bio)

Dear Mr. Krugman: In regards to your column and blog post this week maintaining that “patients are not consumers,” and what’s more that such a depiction of a relationship is “sickening” – your romantic image of health care, apparently garnered from too many viewings of ER, House M.D., or perhaps General Hospital, apparently consists of handsome wisecracking surgeons facing a barrage of patients bleeding out or dealing with obscure, life-threatening conditions.

Medical care is an area in which crucial decisions – life and death decisions – must be made; yet making those decisions intelligently requires a vast amount of specialized knowledge; and often those decisions must also be made under conditions in which the patient is incapacitated, under severe stress, or needs action immediately, with no time for discussion, let alone comparison shopping. ... There’s a reason we have TV series about heroic doctors, while we don’t have TV series about heroic middle managers or heroic economists.

And:

Here’s my question: How did it become normal, or for that matter even acceptable, to refer to medical patients as “consumers”? The relationship between patient and doctor used to be considered something special, almost sacred. Now politicians and supposed reformers talk about the act of receiving care as if it were no different from a commercial transaction, like buying a car – and their only complaint is that it isn’t commercial enough.

What has gone wrong with us?

Your column and blog contain a ludicrous and incorrect depiction of health care needs in America, painting a picture where visits with a medical professional are always preceded by a call to 911 and a trip on a blaring ambulance – which is the experience for approximately zero Americans, anywhere. I would be eager to learn of any of your research showing otherwise.

A simple glance at a cost breakdown of the American health care system eradicates your fanciful depiction. According to the U.S. Department of Health and Human Services and the Agency for Healthcare Research and Quality, as much as 75 percent of health care costs in the United States are due to chronic conditions. Administrative costs alone take up nearly 10 percent of the national pie chart. As the U.S. population ages, the management of these long-term conditions takes up the overwhelming portion of responsibility for the rising costs of care – according to the Kaiser Family Foundation’s research, the average American over the age of 64 spends vastly more on health care services than any other age group, nearly $9,000 per year – and despite the massive increase in taxpayer subsidies, private health insurance remains the largest source of health spending.

Your incorrect view of the nation’s health care reality is, in fact, one of the chief reasons for problems with the current system, which was originally designed in the 1930s to cover catastrophic events, not chronic conditions, predictable treatments, and long-term care. As a 2009 report in McKinsey Quarterly notes, “The fundamental nature of medical risk in the United States has changed over the past 20 to 30 years – shifting away from random, infrequent, and catastrophic events driven by accidents, genetic predisposition, or contagious disease, and toward behavior- and lifestyle-induced chronic conditions. Treating them, and the serious medical events they commonly induce, now costs more than treating the more random, catastrophic events that health insurance was originally designed to cover.”

Employer-based insurance, which made sense when people had one or two employers in a lifetime, now separates consumers from price signals and eliminates transparency in the marketplace, and results in a situation where people are overinsured for some risks and underinsured for others. America today is burdened with a nonsensical health care system where government-driven incentives warp the decision-making process of individuals, and doctors are expected to work essentially for free.

The small steps taken toward market approaches that allow for expanded individual choices have shown positive results, and progress toward cost-reduction without sacrificing coverage, as individuals make decisions based not on artificial systems constructed by agencies, but on their own priorities and needs. Yet these positive examples were completely ignored under President Barack Obama’s new nationalized health care regime.

There is some irony in your mistake and in his, in that the government-managed coverage systems you favor are perhaps at their worst in providing responses to the life-threatening illnesses you apparently think all of us are faced with on a daily basis. In fact, in the absence of on-demand treatment of consumers, they turn serious yet treatable illnesses into death sentences. The United Kingdom, under CMS director Donald Berwick’s beloved National Health Service (he openly confesses “I am a romantic about the NHS”) in which consumer power is extremely limited by law, has created a cancer mortality rate more than 38 percent higher than America’s. For example, according to Lancet Oncology’s CONCORD study, in the U.K., women with breast cancer have a 46 percent mortality rate, compared with only 25 percent in the U.S., and while only 19 percent of men in the U.S. who get prostate cancer die of it, in the U.K. it kills 57 percent.

Of course, the U.K. was recently touted by the Economist Intelligence Unit for ranking at the top in one category, thanks in large part to the abundant provision of painkillers as opposed to extended treatment: quality of death. That’s what the beau ideal of government-run health care gets you, Mr. Krugman – a system in which patients have no ability to act as consumers, where providers do not have to compete for their business, where individuals are treated too late and all that the system will allow is to give them some painkillers to make them comfortable before they die.

Such approaches might make for dramatic television, but they make for terrible policy.

Best Regards,

-- Benjamin Domenech


IN THIS ISSUE:


STATE INSURANCE EXCHANGES: THE CASE AGAINST IMPLEMENTATION

I’ve collected several arguments against states implementing insurance exchanges in a new Heartland Policy Brief. I hope you’ll read it and consider it as it applies to the debates currently going on in your state. In contrast to the report released this week by the Manhattan Institute’s Paul Howard, which you can read as an alternative view, I contend it is impossible to establish under Obama’s health care law an exchange that can properly be described as market-based.

The permanent subsidization and top-down regulatory force from Washington, DC removes any possibility that these artificially created marketplaces will function properly. In fact, the cost burden of administration of the exchanges will almost certainly be larger than currently estimated, and the creations – absent a sunset clause – will become even more burdensome should Obama’s law be struck down by the courts, repealed by legislation, or significantly reformed in the future.

This past week, Idaho added itself to the list of states taking the right course with an executive order from Gov. Butch Otter that prohibits the state government from proceeding along the implementation road. Michael Tanner of the Cato Institute gave an excellent presentation in Kansas that I hope will be heeded by legislative leaders. Exchanges might well provide a solution for future states, but there should be no expectation of flexibility on the part of the federal government, flexibility that is a must to create anything approaching a market and consumer-empowering approach.

SOURCE: The Heartland Institute


HOW HEALTH REFORM PUNISHES WORK

In The Wall Street Journal today, Daniel Kessler touches on an issue I’ve been writing about for two years. It’s a tough piece to read simply because of how illogical the new subsidy regime is upon even a marginal amount of inspection.

The health law establishes insurance exchanges – regulated marketplaces in which individuals and small businesses can shop for coverage – and minimum standards for the insurance policies that can be offered. Because the policies will be so costly, there’s a subsidy for buyers that phases out as family income rises. This sounds reasonable – but the subsidies required to make a “qualifying” insurance policy affordable are so large that their phaseout creates chaos.

Starting in 2014, subsidies will be available to families with incomes between 134% and 400% of the federal poverty line. (Families earning less than 134% of poverty are eligible for Medicaid.) For example, a family of four headed by a 55-year-old earning $31,389 in 2014 dollars (134% of the federal poverty line) in a high-cost area will get a subsidy of $22,740. This will cover 96% of an insurance policy that the Kaiser Family Foundation predicts will cost $23,700. A similar family earning $93,699 (400% of poverty) gets a subsidy of $14,799. But a family earning $1 more--$93,700--gets no subsidy.

Economists call large, discontinuous changes in program benefits like this “notches.” Although notches might be administratively convenient, they have terrible incentive effects. As Prof. Raj Chetty of Harvard points out in a recent National Bureau of Economic Research working paper, prior research on notches shows that they induce sharp reductions in labor supply.

Consider a wife in a family with $90,000 in income. If she were to earn an additional $3,700, her family would lose the insurance subsidy and be more than $10,000 poorer. In addition, she would also pay more in income and Social Security taxes. Taken together, these policies impose a substantial punishment on work effort.

The unfairness of this situation is obvious to everyone, or will be soon enough.

SOURCE: Wall Street Journal


VERMONT VS. DATA COLLECTORS AT THE SUPREME COURT

USA Today reports on the case of Sorrell v. IMS Health, which touches on a number of key privacy and patient-doctor relationship issues.

When a doctor writes a prescription and the patient has a pharmacist fill it, the transaction generates information companies have increasingly sought out, compiled and sold to drug manufacturers.

What often happens next, say Vermont officials trying to block disclosure of prescription records, is that “doctors’ names and prescribing habits travel from pharmacy records to the laptop computers of pharmaceutical sales representatives.”

Those sales reps, Vermont Attorney General William Sorrell tells the Supreme Court in a case to be argued Tuesday, show up at doctors’ offices armed with a marketing strategy, samples and gifts, intended to persuade doctors to switch patients to new and expensive drugs.

That scenario, counters Randy Frankel, a vice president at IMS Health, challenging Vermont’s law restricting this data, is “an attempt to show a darker side to the process.” Frankel stresses that patients would suffer if pharmaceutical companies could not track and market to physicians whose patients most need new medications. Information in the hands of those sales reps, Frankel says, can get new drugs for Alzheimer’s and other diseases to the doctors who treat those diseases.

Vermont’s law, similar to measures in Maine and New Hampshire, prohibits pharmacies from selling prescription information for drug marketing without a physician’s consent. The U.S. Court of Appeals for the 2nd Circuit declared the law an unconstitutional restriction on commercial speech. (A separate U.S. appeals court upheld the similar New Hampshire law. )

SOURCE: USA Today


THE ACO RUMPELSTILTSKIN MOMENT

Michael Millenson critiques the ACO draft regulations at Kaiser Health News, and does so with gusto.

The ACO fairy tale is drawing perilously close to an unhappy ending.

The government’s long-awaited draft regulations on Accountable Care Organizations have brought a dose of ugly reality to a concept that’s always seemed coated with a patina of pixie dust. Unless those regs are substantially changed before the clock strikes Jan. 1, 2012 – the statutory date for ACO implementation – Cinderella’s going to turn back into a scullery maid and the horse-drawn carriage transporting her to the Health System Transformation Ball will be revealed as nothing more than four mice and a pumpkin.

The essence of the ACO concept is using financial incentives to reward doctors and hospitals for redesigning care processes to provide “high quality and efficient service delivery,” in the words of the Patient Protection and Affordable Care Act. As I wrote last fall, ACOs have been the one reform beloved by Republicans and Democrats; doctor groups and insurance companies; policy wonks and profit-seeking capitalists. This unusual unanimity was due in part to a lack of specifics that enabled every stakeholder to gaze upon the ACO and see reflected their very own version of Prince Charming. …

The central problem with the draft regs, however, is that the risk-reward ratio is highly skewed. The Centers for Medicare & Medicaid Services painstakingly delineates a dizzying litany of hurdles to surmount, from documenting progress on 65 different quality measures to Medicare editing your marketing materials and to government monitors descending upon your offices. Meanwhile, the promised rewards are wrapped in a fuzzy package of impenetrable risk-adjustment algorithms and wait-till-next year financial commitments that sound like a cross between a cell-phone contract and a time-share vacation offer.

SOURCE: Kaiser Health News


MAINE COURT APPROVES RATE CONTROLS

Anthem Health Plans of Maine lost its appeal of a state decision that allowed for no--yes, that’s ZERO--profits in setting the company’s rates.

Maine’s highest court has dismissed Anthem insurance company’s appeal of how the state insurance superintendent allowed for no profits in setting the company’s rates.

Anthem Health Plans of Maine appealed a lower court decision that affirmed the superintendent’s decision to reduce Anthem’s proposed 2009-2010 rate increase for individual health plans from 18.1 percent to 10.9 percent – a rate that contained a zero percent projected profit margin.

In a 5-2 ruling Thursday, the Maine Supreme Judicial Court dismissed the appeal as moot because the year in which the challenged rates were effective has passed and new rates have gone into effect.

The next increase is already subject to “scorn” from local political activists. Presumably, insurance ought to be paid for with a smile and the power of double rainbows.

SOURCE: Bangor Daily News


PAUL JACOB ON KRUGMAN AND CONSUMERS

Paul Jacob has a well-written critique of Krugman’s consumer comments.

Krugman calls a free market in medical insurance “fantasy.” Yet the illusions involved in buying insurance also apply to non-market medical coverage.

Consider: Most people with low-price insurance like their coverage at least so long as they don’t have to make many claims against it. That’s because insurance is one of those things you buy hoping not to have an occasion to require it.

Something similar happens in single-payer medicine. Some Europeans (especially the young and healthy) praise their state systems that cost them next to nothing out of pocket, patching up their scrapes, mending their bones “for free.”

But wait till they are old and really sick, and on a multiple-month waiting list for an MRI or cancer treatment. Rationing-by-waiting can be a killer.

SOURCE: Common Sense

Benjamin Domenech

Benjamin Domenech (bdomenech@heartland.org) is a senior fellow at The Heartland Institute. Domenech... (read full bio)