TCS Daily

Our Coming Ideological Battles

By Arnold Kling - July 20, 2004 12:00 AM

"What then is the virtue of increasing spending on retirement and health rather than on goods? It is the virtue of providing consumers in rich countries with what they want the most...The point is that leisure-time activities (including lifelong learning) - volwork - and health care are the growth industries of the twenty-first century."
-- Robert Fogel, The Escape from Hunger and Premature Death, 1700-2100, p. 73

Economic historian and Nobel Laureate Robert Fogel foresees a 21st-century economy in which consumers will be focused primarily on leisure, lifelong learning, and health care. To me, this suggests that there will be major ideological battles over the size of government.

While most of the Left has conceded that the goods-producing sector is better governed by free markets than by central planning, that sector's relative importance in the economy is on the decline. It is precisely those sectors where Fogel sees growth -- education, health care, and longer retirement -- where the Left insists that the government must remain in charge. But if we "limit" government control to just education, health care, and Social Security, then in fact we will have brought socialism in through the back door. In this essay, I want to focus on how to avoid such an outcome for health care.

The Canadian Model

Government-controlled medicine takes decisions away from doctors and patients, and instead puts it in the hands of bureaucrats. Bureaucracies retard innovation and force people to wait in line to obtain care. Imagine being diagnosed with cancer and told that you cannot begin treatment for several weeks. Imagine having an orthopedic injury and not being able to obtain an MRI exam, because there are hardly any machines. That is what you will find in Canada, which has the most socialized medical care of any industrial country.

The Fraser Institute recently published a Report on Canadian health care. Adjusting for age of population, the authors find that "Canada spends more on health care than any other industrialized OECD country except Iceland." On the other hand, indicators of quality show Canada to be trailing other countries. For example, it is 16th out of 23 countries studied in number of doctors per capita. In 1970, prior to the nationalization of the health care industry, Canada ranked second in doctors per capita.

The Canadian system is technologically laggard. The report finds that "While ranking number one as a health care spender, Canada ranks fifteenth of 24 in access to MRIs, seventeenth of 23 in access to CT scanners, eighth of 22 in access to radiation machines, and is tied for last in access to lithotriptors. Lack of access to machines has also meant longer waiting times for diagnostic assessment, and mirrors the longer waiting times for access to specialists and to treatment."

How does this affect health care outcomes? The report finds that "Canada, while spending more on health care than any other industrialized country in the OECD, ranks fourteenth in the percentage of total life expectancy that will be lived disability free, ranks sixteenth in infant mortality and twelfth in perinatal mortality, ranks eighth in mortality amenable to health care, ranks ninth in potential years of life lost to disease, and ranks sixth in the incidence of breast cancer mortality."

There are Canadians who will tell you that the Canadian health care system is really a triage operation. Once someone is diagnosed with an acute need, they come to America for treatment. In that sense, America is Canada's safety valve.

The American Model

The American health care system also has many defects.

  • Many people lack health insurance. This includes Do-Nots as well as have-nots.
  • Poor people, although covered by government programs, are not able to access health care providers in a timely fashion. They obtain too little preventive care and consequently make too much use of hospitalization. In order to improve on certain key health care indicators, such as infant mortality, the United States has to find a way to bring poor people under the umbrella of our health care system.
  • The system of employer-provided health insurance distorts choices. It makes it costly for people to change jobs, especially to become "free agents." It puts ordinary firms in the health insurance business, penalizing small firms, for which this is more of a burden. It injects ordinary corporations into the decision-making process of consumers with regard to choice of insurance and even (through "preferred-provider" systems) with regard to choice of doctor.
  • Our system tends to subsidize "first-dollar" coverage rather than catastrophic coverage. Catastrophic coverage is like auto insurance that pays in the case of an accident. First-dollar coverage is like auto insurance that pays for gas and tolls. First-dollar coverage results in more paperwork and reduced incentives to control costs.
  • People with break-the-bank illnesses, such as diabetes or cancer, cannot switch insurance companies.
  • Consumers have little incentive to take responsibility for their health. Smoking and obesity make little or no difference to insurance premiums.
  • Consumers have little incentive to take financial responsibility for health insurance. Instead of encouraging consumers to save to pay for the high cost of insurance when they are older, we tell them that they can count on Medicare.

Limited Paternalism

America's health care system has many flaws. However, the solution is not to enlarge government's role. What I would like to see is a role for government in health care that is streamlined, rationalized, and bounded. I call this approach "limited paternalism."

My belief is that most consumers are capable of making the best decisions about health care most of the time. The buzzword for this is consumer-driven health care. (See also here.) However, some of the policy approaches for implementing consumer-driven health care are too wonkish for my taste.

Limited paternalism has the following components:

  • Direct provision of health care services to the poor. For example, government-subsidized clinics in poor neighborhoods with nominal charges (say, $10 per visit).
  • Aim to switch from a system of employer-provided health insurance to consumer-purchased health insurance, by ending the tax deductibility of insurance for corporations and eliminating requirements that companies provide health insurance.
  • Mandatory catastrophic health insurance for all families not eligible for Medicaid. Rather than expand Medicaid and other government programs upward to the middle class, as some Democrats propose, tighten eligibility for these programs and require co-payments for all but the poorest participants. Eventually, phase out Medicaid and replace it with health care vouchers.
  • Phase Out Medicare, and instead mandate health care savings accounts. This would change the medical portion of retirement security from a defined-benefit plan, which Congress will tend to pack with benefits that it cannot pay for, to a defined-contribution plan, which is much sounder financially and much fairer generationally.
  • Institute government-provided "catastrophic reinsurance" for very high medical expenses. The Kerry campaign has proposed this for expenses of over $50,000 per year. The purpose of catastrophic re-insurance is to enable private insurance companies to compete for business without having to screen out high-cost individuals. Of all the mechanisms for spreading the cost of break-the-bank illnesses among the general public, catastrophic reinsurance would involve the government in the least number of individuals and the least number of medical decisions. While the rest of the Kerry health care plan tends to be the opposite of what I would like to see, this proposal strikes me as a good plank in any health care reform platform.

"Limited paternalism" may not be everyone's ideal. However, the most likely alternative will be creeping socialism -- or perhaps galloping socialism. As more and more medical care comes under the auspices of government, the American system will start to acquire the flaws of Canadian health care. Without a safety valve.


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