McCain on the economics of health care

From Paul Krugman's Conscience of a Liberal blog (September 19, 2008):

OK, a correspondent directs me to John McCain’s article, Better Health Care at Lower Cost for Every American, in the Sept./Oct. issue of Contingencies, the magazine of the American Academy of Actuaries. You might want to be seated before reading this.

Here’s what McCain has to say about the wonders of market-based health reform: "Opening up the health insurance market to more vigorous nationwide competition, as we have done over the last decade in banking, would provide more choices of innovative products less burdened by the worst excesses of state-based regulation."

Given that failure to regulate the financial services industry has resulted in a cascading crisis that is generally agreed to be the worst since the 1930's, and is leading the Republican administration to socialize major segments of the industry, Senator McCain seems very hard to convince of the dangers of unregulated markets.

Actually, his article is even worse than that quote would suggest. He diagnoses the problem of American health services is that they cost too much. He proposes as the major element of his health policy:

I propose to spread the tax subsidy for health insurance more equitably. I would change it to a refundable credit amounting to $5,000 for all families and $2,500 for individuals purchasing health insurance—regardless of the source of that coverage, regardless of how one purchases it, and regardless of one’s income.

He seems to think that that will allow the tens of millions of people who do now not have health insurance to obtain the insurance. That is doubtful, but if it were to be true it would increase the demand for health services. He has no plan to increase the supply of health services. If you increase demand more than you increase supply of any service, the price charged for that service goes up. That is not a way to reduce the cost of health service.

There are two fundamental facts about health services:

• people are willing to pay a lot more to treat their illness than they are to prevent an illness that may never eventuate;
• because of the knowledge differential between doctors and patients, the providers of medical services prescribe them and the patient recipients of the services don't have the knowledge to substitute their own economic choices.

Senator McCain writes:

We can build a health care system that is more responsive to our needs and is delivered to more people at lower cost. The “solution,” my friends, isn’t a one-size-fits-all big-government takeover of health care. It resides where every important social advance has always resided—with the American people themselves, with well informed American families making practical decisions to address their imperatives for better health and more secure prosperity.

Senator McCain apparently assumes that the public will choose the most cost-effective health insurance providers and the insurers will contain the costs of the service providers. Good luck getting an industry that depends for its growth on the growth of health care costs to contain those costs.

Finally, Senator McCain gets to an area of health planning in which I worked for a number of years. He writes:

Genuine and effective health care reform requires accountability from everyone. Drug companies, insurance companies, doctors, hospitals, medical technology producers, the government, and patients must operate in a more transparent environment that reveals what particular elements of health care cost and the outcomes they produce. Protecting the ability of Americans to have access to quality health care through affordable insurance products will involve expanded use of such policy tools as comparative effectiveness research to guide decision-making by medical practitioners; greater transparency and coding of health outcomes; and all-in costs for episodes of treatment so that people can actually make more effective and meaningful decisions about their care.

Far be it from me to argue against accountability, transparency, or learning more about the costs and benefits of alternative health care treatments. On the other hand, medicine is both an art and a science. The efficacy of treatment depends not only on the patient's conditions but also on patient compliance, diagnostic categories are uncertain and often diagnoses are not made at all (most consultations in primary care don't result in a specific diagnosis), and physicians are not machines. Moreover, an error at the laboratory, the doctors office, the surgical suite, the nursing station, the pharmacy, or the follow-up service may result in a failure of the whole chain. The communist nations found how difficult it is to control a system by central government planning to set quotas and quality standards.

Source: Ezra Klein, "Health Care Costs Will Eat Us," The American Prospect.
Source: "The Future of Medicare: Demographics vs the Cost of Health Care"
National Committee to Preserve Social Security and Medicare