Tuesday, January 26, 2010

The Growth of Medical Markets: Why the Rich Should Get Better Healthcare than the Poor

In the afterglow of the recent lightning strike in the Massachusetts special Senate election it appears as though the Republicans are working to take the initiative in proactively formulating policy alternatives, specifically on health care, to those of the Obama administration and its allies on Capitol Hill. With Bob McDonnell preparing to give possibly the most closely-watched response to a State of the Union Address in history, the minority party has an unparalleled opportunity to formulate the structure of the policy outcome. It is therefore crucial that the debate within the party be as clear as possible and that Republicans, as free marketers, know what it is they are fighting for. With this in mind, here are two principles, one empirical and the other normative, that I believe will bring clarity to the health care debate.

The principles are simple and simply stated, but I believe that taken together they incarnate the core of the conservative perspective. The empirical principle is the following:
A. People want to live longer, healthier lives.
And the normative one is:
B. More money should buy more health care.
These ideas are deceptively simple. But I believe they can serve as a guide to what the Republican counter-proposal to Obamacare should be and what McDonnell should say in proposing it.

That people want to live longer and be healthier is a statement of human aspiration that is about as close to bedrock as it’s possible to get. It is so universal and devoid of controversy that it seems at first to be almost devoid of meaning. Medicine, and the demand for it, has existed for millennia. But medical research has transformed the world in the last hundred years; and it is accelerating. Now when we get sick we know what is happening to us. And we suspect that no matter how dire our case may be, if we can hold on long enough science will find a cure. Needless to say, nothing of the kind was true in, say, the Middle Ages. You got sick and you prayed and God either healed you or he didn’t. Interestingly, liberals of the baby boomer age in particular, for many of whom the comforts of an afterlife have no appeal, are especially fixated on mortality. It can help to stay aware of this when actually arguing the merits of different approaches to healthcare with liberals.

The second principle is a rejection of the idea of healthcare egalitarianism. You won’t hear anyone on the campaign trail (other than the odd libertarian) making principle B into a rallying cry (“More wealth, more health!”). According to principle B, at some time and some place life-saving techniques and medicines will be available to some, who have money, and not to others, who have not. But the free market ideology says that healthcare is like any other good, it is bought and sold for a price. Furthermore, the cost of a good is something that government can hide, but not simply cancel. That cost represents information about how much effort went into producing that good. (We are all Hayekians now). The point of principle B is then that government should not attempt to conceal the cost of healthcare and its constituent parts from its consumers. Particularly insofar as healthcare represents new technologies coming to market, the argument for principle B is that it most efficiently facilitates principle A.

Analyses of the economics of medical research became commonplace in the popular press as a result of the AIDS epidemic. Most people understand that drug companies pour a great deal of money into new medicines and that they pay for that research and development with the substantial profits they are able to make with a relatively small number of successful products. In addition, medical technology goes far beyond drug research and includes everything from in situ sugar monitors for diabetics, to laboratory equipment for cheap, accurate blood tests, to materials science of stent implantation, not to mention the explosion in genomics-related research. The list goes on and on. The complexity, bordering on (constructive) chaos, in the medical research community is critical, because placing the government between consumers and producers of healthcare is only the first step in an inevitable chain of top-down control. When government becomes the only customer, it begins to dictate the allocation of industry R&D dollars based on its imperfect understanding of what its citizens want. This model works acceptably well for things like military equipment. But for the heterogeneous demands of the consumer economy, short-circuiting the cost mechanism leads to inefficiency at best and catastrophe at worst. The results of the state control ideology in Europe are already in. A 2007 analysis in Nature Reviews Drug Discovery revealed the deleterious effect of price controls in the European drug market saying that “pharmaceutical innovation is not only occurring faster in the United States than in Europe, but the gap is getting wider.” This is no surprise for anyone who remembers what was uncovered during the 90’s inside the carcass of the former Soviet Union. As Daniel Yergin and Joseph Stanislaw pointed out, by the time of its dissolution the economy had nearly collapsed. The entire U.S.S.R. had a real GDP somewhere in the range of that of South Korea or Denmark (and ten to thirty times the population). The lesson for healthcare and for any other sub-portion of the economy is the same: if you treat it like a lifeboat, that’s what it’s going to turn into.

People are, as I said, intensely interested in longer, healthier lives. Consequently they have great wisdom when it comes to government messing around with their healthcare. Witness Massachusetts. Most Americans don’t feel we are at a crisis where medical insurance costs are going to bankrupt them. Most Americans don’t view the treatment of the poor in America who lack health coverage as a humanitarian disaster. Indeed, most Americans realize that the intensity of attention that the Obama administration has chosen to bestow upon healthcare suggests that a European-style, government-controlled system was always a goal in and of itself, irrespective of the legitimate complaints against the current system. The psychological motivation of the educated classes here is the same as the motivation that ultimately leads to socialized anything, it is the primal urge to control. If you’ve ever played, or seen your kids play the computer game SIMS II, you’ll recognize that it is the perfect pastime for the educated liberal class. In the game you have a village and its inhabitants whose appearance, home and lives you control in exquisite detail. Of course they only blather nonsense to each other, but what do you expect from two-dimensional cyber-bots? It makes you wonder if the game’s creators are planning an extension pack entitled “Tea Party SIMS.”

But I digress.

Since the Obama administration along with their brethren congressional ideologues have intellectually approached healthcare as a solution seeking a problem, Republicans and moderate Democrats have an advantage because they are actually looking at the problems. They are not looking beyond them to the Promised Land. And therein lies the opportunity for Republicans to steal a march on their opponents. So what are these problems and how should conservatives and moderates address them?

Everyone agrees that the emergency room is no place to treat the everyday medical problems of poor people. Some form of expansion of Medicaid, that provides means-tested, basic health insurance for those with insufficient means might be devised in such a way that there is no mad rush for everyone else to abandon their health plans and get in line for government health stamps. This type of government insurance might be supplemented with free or minimal cost clinics that treat arbitrary walk-ins, including illegal aliens, with no questions asked. Doctors and hospital administrators are by now accustomed to not asking (non-medical) questions.
As for controlling costs and improving service, this is an area where the free market solutions of deregulate and foster competition have been beating the statists to a pulp since the demise of Bell Telephone. The most obvious cost-control proposals are already out: 1. allow interstate competition between insurance companies; 2. promote plans which connect consumer cost more directly to usage of medical care, especially where catastrophic illness is not involved; 3. pass tort reform. With regard to this latter idea, why has no one until now suggested that we nationalize the class action lawsuit industry? We have state prosecutors for criminal cases, why not establish a system of state-appointed prosecutors for malpractice and/or class action claims - some kind of single payer system? That would throw a chill into the trial lawyers lobby.

Finally, no conservative should be caught dead suggesting that insurance companies should be regulated so that they are not allowed to take account of prior conditions. It should be clear that this will only produce a race to the bottom with respect to how little the insurance companies can get away with providing to these individuals and how much they can be made to pay. And if the system is blind then the costs will just get passed on to everyone. Insurance company executives won’t have to cancel their Tahiti vacations in order to cover those with diagnosed prior conditions. People in these conditions could have some form of government option available to them alone. If we are going to protect people from their own stupidity (or, to be fair, from the vagaries of lady fortune), then we should at least keep the costs in front of us.

In a week and a month and a year that has been chock full of good news, here is more good news still. In spite of Hayek’s warnings about the slide into serfdom, the fight against statism has a powerful ally: gravity. Interposing government restrictions into a complex economy in times of explosive access to information is ultimately like trying to keep water from running downhill. People want longer, healthier lives and they will, somehow or another, figure out a way to use their money to acquire them. Our job is just to rely on the people’s wisdom, poke a few holes in the dike and try to minimize the unintended consequences.

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