Jeff Harris' Blog at MIT

American Health Reform from the Eye of the Storm

As my colleague Manuel Garcia Goñi has correctly observed, Americans are now more prepared than ever for fundamental change in their health care "non-system."

Horrifying Statistics

Every day, both the number of uninsured individuals and health-care expenditures break new records. Around 47 million Americans lacked medical coverage in 2007. Given that the vast majority of the population under 65 years of age obtains coverage through employment and that the unemployment rate has recently increased, the current number of uninsured individuals is unquestionably higher. In 1960, American firms spent 1.2 percent of their payroll on health insurance. By 2006, the proportion had increased to 9.9 percent. Starbucks contributes more in health insurance for its employees than it spends on raw coffee beans imported from all over the world. According to some actuarial projections, the trust fund for Medicare, the public program for the elderly, will be bankrupt by 2012. While the health care sector comprises 18 percent of GDP, it is projected that, without health care reform to control the explosion of expenditures, the percentage will reach 28 percent by 2030. Similarly, the average annual insurance premium for a family with employer-sponsored coverage is expected to rise from $12,300 in 2008 to $23,800 by 2020.

On top of these horrifying figures, for the first time in years we are riding the crest of a new wave of reformism. The Democratic Party has assumed control of both houses of Congress. President Obama himself is touring the nation, promoting his proposals to control runaway costs and insure the uninsured.

Collective Anxiety

Despite these favorable conditions, Americans seem curiously anxious about the possibility of bringing about radical change, as if the entire population suffered from a severe collective case of risk aversion. In town hall meetings throughout the country, ordinary people stand up and ask out loud, Is it possible that health care reform -- so-called ObamaCare -- will be worse than what we have now?

According to many commentators, the American population is succumbing to flagrantly false accusations from the right. At the end of the day, however, Americans have come to understand that their health care system suffers from so many interconnected distortions that additional measures at the margin wouldn't work at all.

Monopolization of Private Markets

In the United States, 54 percent of health care spending is accounted for by the private sector, which consists of a number of insurance companies that for the most part do business in multiple states. This sector does not operate in accordance with the competitive model. The past decade has witnessed a massive wave of corporate mergers. In addition, each of the 50 states regulates its health insurance market. For example, when my wife and I bought a house in Rhode Island in 2005, the insurer Blue Cross Blue Shield had a 65-percent share of the private market, while the national chain United Health Care had a 16-percent share, essentially forming a duopoly within the state. We would not have been able to buy health insurance in the neighboring State of Massachusetts except for the fact that we worked for companies that offered us health insurance as a benefit of employment.

How can we remedy the monopolization of the private market? One well-known proposal is to reverse all state laws and regulations in order to establish a genuine nationwide market. Politically speaking, such a proposal would have to overcome the protests of the champions of states' rights. What's more, as a consequence of a long history of state regulation, there is considerable variability in the terms of coverage and, accordingly, insurance premiums. The government of Rhode Island, for example, mandates that every health insurance plan cover assisted reproduction for the treatment of infertility, while 35 states do not impose the same requirement. Rhode Island likewise mandates the coverage of therapy for eating disorders, while 26 states do not. It is not obvious how one would rationalize this enormous heterogeneity of coverage. If all barriers to purchase between states were eliminated without the establishment of minimal federal standards, how would patients with bulimia or hypospermia obtain coverage?

The Public Option Enters the Stage

At this juncture the notorious "public option," promoted by the Obama administration, enters the stage. The basic idea is that a new government-sponsored firm competes with private insurers within each state. Unfortunately, it is not obvious how such competition would function. If the government insurer took advantage of large subsidies conferred by taxpayers, it would have such a competitive advantage that it could drive the other firms from the market. Even if the other competitors survive, the major concern is that their customers will transfer to the government plan, taking the place of those who remain uninsured, a phenomenon referred to here as "crowd out." On the other hand, if the government plan sets premiums according to an individual's income, then it is possible that we might end up with a "Chilean equilibrium," where the public sector insures the poor and the sick, while the private sector insures the rich and the well. As we economists well know, legal regulations that private firms insure everyone regardless of their clinical history would not prevent them from practicing risk selection.

The Tax Subsidy and the Expansion of Coverage

Since the post-war period, the American tax code has contained an exemption for health insurance premiums that the employer pays the employee as a job benefit. There is much evidence that this subsidy has created an incentive for unions to demand and negotiate more comprehensive plans. However, notwithstanding the recommendations of many economists, it is not evident that the elimination of this subsidy will increase the availability of new insurance policies with more exclusions, copayments and deductibles. In fact, if we do not confront the growing distortions in the health insurance market, it is entirely possible that even the gradual elimination of the subsidy will simply function as a punitive tax increase rather than as an incentive to economize. For now, any proposal to impose taxes on benefits achieved through collective bargaining is off the political table.

The Shortage of Primary Care Doctors. Where Goes Massachusetts?

As Professor Garcia Goñi has mentioned, in 2006 the State of Massachusetts initiated a vast expansion of coverage, requiring each resident to be insured and establishing a new public health insurer similar to the current Obama proposal. Three years later, the experiment has resulted in an extraordinary growth of public spending and, according to some sources, total spending on health care services. What apparently happened is that the expansion of coverage enhanced the population's incentive to seek medical care, especially primary care. Unfortunately, there was not an adequate supply of primary care doctors, so that hordes of people ended up in the emergency room, spending hundreds -- more likely, thousands -- of dollars for every headache, sprained ankle and sore throat. In economic terms, the great Massachusetts experiment shifted the demand curve for health-care services to the right without confronting the inelastic supply of basic services.

This country suffers from a grave shortage of primary care providers. The principal cause is the difference in remuneration between family doctors and specialists. In 2006, a general internist earned a median of $167,400, while a urologist made $361,800 and a general orthopedic surgeon made $454,000. As a result, the percentage of American medical school graduates who intended to become primary care doctors dropped from 40 percent in 1997 to 17 percent in 2007. Although legislators as well as the White House acknowledge the growing shortage, current proposals accomplish no more than toss a few molecules of iron at an anemia that is profoundly debilitating our system. Unless we see a significant increase in the number of medical school graduates who elect internal medicine, pediatrics, obstetrics and gynecology, any legislated expansion of coverage is going to increase health-care spending beyond Congress' official predictions.

Expert Committees. Withdrawing Life Support from Grandma

Nearly all experts agree that our system is replete with inefficiency. There is no doubt that we spend a lot on tests, procedures, and medications with minimal benefit. The challenge is to eliminate the inefficient while preserving the efficient. The consensus of economists here is that a drastic revision in the way that physicians are remunerated is essential. Unfortunately, the bills drafted by legislative subcommittees still speak of these changes in vague terms.

President Obama and his advisors apparently favor the establishment of a new panel of experts to guide the practice of medicine in the direction of cost-efficiency. If both the new governmental enterprise and the Medicare program empower the panel to control physician remuneration, it would have a significant influence over the practice of medicine. Such a proposal is not all that innovative. Private insurers have already adopted the practice on a small scale. But it has become a political trap. Critics have put Obama on the defensive with images of experts withdrawing life support from grandma simply to save money.

What will emerge from the storm of interviews, debates, press conferences, editorials and telepropaganda that inundated our media this summer? Will we see fundamental reform, or political stagnation?

Jeffrey E. Harris is Professor of Economics at the Massachusetts Institute of Technology in Cambridge, Massachusetts, and a primary care physician at Blackstone Valley Community Health Care in Pawtucket, Rhode Island.