"It is not that rulers have been unaware of poor performance. Rather the difficulty of turning economies around is a function of the nature of political markets and, underlying that, the belief systems of the actors."
-- Douglass C. North, Economic Performance Through Time, the 1993 Economics Nobel Prize lecture
Douglass North points out that economic outcomes are shaped by institutions, which in turn are shaped by beliefs. Because beliefs change only slowly, outcomes are much more difficult to change than textbook economics suggests. Building on my previous essays on North's economics, this essay will look at health care reform from the perspective that beliefs are the core issue. Our beliefs about health care, including a belief that health care "ought" to be free for the patient, are what shape our health care system and make reform difficult.
Belief Systems and Economic Development
As an economic historian, Douglass North has focused on the changes in belief systems that are necessary in order to produce a modern economy. For example, he writes,
--Understanding the Process of Economic Change, p. 101
Today, we can still see tribal societies, in which economics, politics, and religion are dominated by clan relationships. For such societies, it is difficult for people to trust outsiders, and therefore the transition to a modern economy based on trade with strangers has been stunted.
I have argued, in North-like fashion, that prosperity depends on three ethics. I describe these as a work ethic, a public service ethic, and a learning ethic.
Each of these ethics tends to be reinforcing. That is, if most people believe that the way to get ahead is to work hard, then most people will work hard, and more wealth will be created. On the other hand, if people believe that wealthy people should not have to work, then people will attempt to gain wealth without working, leading to a zero-sum economy. If most people expect public officials to be honest, then dishonest officials will be identified and punished. On the other hand, if people expect corruption, then corrupt officials will survive, and only a simple fool will be honest. Finally, if people value learning in all of its aspects, then everyone will be encouraged to learn. If people believe that learning threatens tradition, then learning will be suppressed.
Health Care and Collectivism
In the passage just quoted, North describes collectivist ethics as suited to societies that are struggling with uncertainties in the physical environment. Individualistic ethics -- the rational, calculating, man of economic textbooks -- are suited to an environment in which we are confident of safety in the physical environment and have moved on to satisfying higher economic needs. (Of course, North argues strenuously that for modern societies to function we need to have ethics that lead us to act according to social norms, not merely on the basis of short-term self-interest.)
Illness deprives us of the sense of physical safety. Disease and injury are a throwback to the circumstances in which our physical environment is threatening and overwhelming. Thus, health problems tend to trigger our collectivist instincts.
We seem to recoil from the idea that health care choices should be made on an economic basis, by comparing costs and benefits. Instead, we treat health care as if it is a black-and-white issue: when you need it, you must have it; when you do not need it, you do not want it.
As I studied health care spending in the United States while doing background research for my book, Crisis of Abundance, I found that many common, expensive medical procedures are not black-and-white. Instead, they fall into a gray area, where benefits are highly uncertain. Other economists have noticed this, also. For example, in recent testimony, Peter Orszag, Director of the Congressional Budget Office wrote,
hard evidence is often unavailable about which treatments work best for which patients or whether the added benefits of more-effective but more-expensive services are sufficient to warrant their added costs. In many cases, the extent of the variation in treatments is greatest for those types of care for which evidence about relative effectiveness is lacking. Together, those findings suggest that better information about the costs and benefits of different treatment options, combined with new incentive structures reflecting the information, could eventually yield lower health care spending without having adverse effects on health—and that the potential reduction in spending below projected levels could be substantial. Moving the nation toward that possibility—which will inevitably be an iterative process in which policy steps are tried, evaluated, and reconsidered—is essential to putting the country on a sounder long-term fiscal path. But even if it did not bring about significant reductions in spending, more information about comparative effectiveness could yield better health outcomes from the resources devoted to health care.
As it stands today, our health care system is designed to ensure that cost-benefit analysis is not taken into account. Instead, the collectivist instinct is that individuals should be insulated from having to pay for medical procedures. This belief that medical care ought to be free to the consumer is what underlies our peculiar institution of health insurance that is more like a prepaid health plan than real insurance. Because consumers are insulated from cost, neither they nor doctors are in the habit of comparing costs and benefits when it comes to medical procedures.
Doctors Should be Wealthy
Even though we believe that medical care should be free for those who receive it, we realize that health care providers need to be paid for their services. In fact, another one of our bedrock beliefs about health care is that doctors deserve high status and wealth. I sometimes think of our health care system as a suction device for drawing money into the pockets of physicians. That is, many of our institutions and practices seem designed more to guarantee an affluent lifestyle for doctors than a high-quality outcome for patients.
There is nothing wrong with someone earning a living based on their skills. However, the regulatory environment tends to give doctors more than a market rate of return. Licensing laws serve to restrict supply, yet it is highly unusual for a doctor to lose his license on the basis of incompetence. Pay for performance is rare--doctors are compensated on the basis of procedures, regardless of whether the procedure was appropriate or successful. And with consumers insulated by insurance, the necessity or price of a procedure is rarely questioned.
Another belief that we have about health care is that effort is rewarded. If someone is not yet cured, then we think that the doctor needs to try harder. We have a "can-do" attitude about diagnosis and treatment. Doctors, for their part, hold themselves to very high standards and set high expectations.
We also expect immediate action when we are sick. The idea that one person's illness might be low priority and that he or she should accept delay in treatment is unthinkable in this country.
Beliefs vs. Reform
Our beliefs about health care are an obstacle to reform. The collectivist instinct that we have about health care makes it difficult to introduce cost-benefit analysis into medical decision-making. Our belief that doctors should enjoy wealth and prestige makes it difficult to enact cost-containment measures or to reform the way in which physicians are compensated. Any attempt by government or managed-care systems to restrict access to health care services would run afoul of our can-do spirit.
My preference would be for Americans to become more receptive to cost-benefit analysis of health care decisions. Ideally, we would shed the collectivist instinct for health care. We would approach the issue of health insurance as a problem of insurance, not insulation. That is, we would shift from a goal of insulating consumers from the cost of all medical expenses to a goal of protecting consumers from the financial burdens of unusually expensive illnesses.
My reading of Douglass North is that real health care reform in the United States will not happen because of some wonk's clever plan. It will not happen as a result of an election. It will only happen when we change some of our beliefs about health care.
Arnold Kling is author of Learning Economics.