The Economics of Being Kinder and Gentler in Health Care

Uwe E. Reinhardt is an economics professor at Princeton. He has some financial interests in the health care field.

In his speech accepting his party’s nomination as presidential candidate on Aug. 18, 1988, George H.W. Bush proclaimed that he wanted a “kinder and gentler nation” - kinder and gentler, I suppose, than he thought it was in 1988.

In those days, my wife and I sent out our own customized holiday cards, commenting in some way on current issues in health policy. Thus, a year after Mr. Bush was elected president, we sent out the following card:

In the late 1980s, about 35 million respondents to large nationwide surveys declared that they lacked health insurance of any kind. The comparable number now is close to 50 million.

Then, as now, the endless “national conversation” went on and on, pondering ways to achieve truly universal health insurance coverage, a feat most other developed nations accomplished long ago.

Then, as now, news organizations and the health services research community reported on the financial and physical hardship that many low-income, uninsured Americans face when they fall ill.

And then, as now, the prices for identical health care goods and services were more than twice as high in the United States as they were - and still are - in the member nations of the Organization for Economic Cooperation and Development. It is why the supply curve of kind acts in the United States shown in the holiday card is far above the comparable curve in other countries.

The point I sought to make with that holiday card was this: Even if the desire to take care of one’s poorer or sicker fellow citizens were the same in the United States as elsewhere, a Martian might observe that fewer kind acts are bestowed on the (uninsured) poor in the United States because of the much higher price of American health care.

For all the wonderful things the United States health system has done for the American people, then, as now, it has also helped price some degree of kindness out of our souls, a side effect of their treatments that the leaders of American health care at some point must begin to contemplate (in this regard, see Table 3-1 on Page 102 in this report).

Does anyone sincerely believe that things have improved in that regard since the late 1980s?

As I showed in a recent post, “The Central Challenge in U.S. Health Policy,” the Milliman Medical Index of total health spending for a typical family of four covered by an employment-based preferred-provider health insurance policy, including the total insurance premium and the family’s out-of-pocket spending, now stands at $22,000.

Median family income in 2010 was about $60,000 and median household income about $50,000. (A “household” is defined in these statistics as a housing unit with one or more members. A “family” is defined as a household with two or more members.)

These numbers suggest that millions of American households or families have annual incomes of less than $30,000. Without help from other Americans - now typically through the community-rated premiums under employment-based health insurance - they cannot possibly afford the kind of health care the rest of the country enjoys.

(The harsh current critics of community rating rarely complain that the premium contributions by individuals under employment-based health insurance - usually even under the critics’ own employment-based insurance - are fully community rated.)

Given the now-staggering cost of buying kind acts in health care for America’s low-income families, it is something of a miracle that the Affordable Care Act, with its built-in redistribution of income toward low-income and sicker Americans, passed into law at all.

Nor is it a surprise that it took extraordinarily deft legislative maneuvering to get the law enacted, and that it just squeaked by on a purely partisan vote.

Finally, I am not surprised at the way the federal subsidies to low-income families that the law calls for, and the largely federally financed expansion of Medicaid, had to be scraped together â€" by an economically unseemly mélange of nuisance taxes here and there and sundry federal spending cuts of projected spending â€" for the bill to survive both Congress and the scoring process of the Congressional Budget Office.

A simple, earmarked value-added tax, for example, would have been better from an economic perspective, but it would have made the cost of buying kind acts in health care for other Americans more visible.

Now, it may be argued that opposition to the Affordable Care Act is not primarily driven by reluctance to share the blessings of our pricey health care system with low-income Americans who cannot afford it, but rather by misgivings over particular features of the law â€" for example, community rating and the mandate on individuals to be insured.

I am not persuaded by that thesis, because â€" as has been pointed out time and again in news coverage â€" the law largely embodies ideas and features that were quite popular during the 1990s among today’s most vocal critics of the law, including Mitt Romney, President Obama’s opponent in the 2012 presidential elections.

My interpretation is that opposition to the Affordable Care Act largely reflects the age-old reluctance among many of the nation’s haves and the healthy to help purchase for America’s lower-income families and the chronically ill the super-expensive health care that the haves enjoy themselves. That attitude is all the more striking because of the generous federal indirect subsidies enjoyed by many of the haves, especially high-income Americans. (I am thinking specifically of the generous tax preference accorded employment-based health insurance, the largest tax expenditure in the federal budget.)

Some people on both the extreme left and right seem to believe that the current travails of implementing the Affordable Care Act and the possibility of a so-called “death spiral” in the market for individual health insurance may usher in single-payer health insurance in the United States - say, Medicare for all. (But on the likelihood of the death spiral, see this commentary from the Kaiser Family Foundation.)

I do not find that a likely prospect. Rather than embracing a single-payer system, the United States is more likely to stumble, in fits and starts, toward something resembling officially sanctioned tiering of the American health care experience by income class, as follows:

For Medicaid beneficiaries and the uninsured, a budget-constrained system of public hospitals and public clinics. It would allow politicians to ration health care (through tight budgets) without ever having to acknowledge that they were doing so. In other words, it would reduce the price of being kind.

For the employed middle class, a mixed system with defined contributions by employers, private health insurance exchanges and reference pricing by insurers. Under a restructured Medicare program also based on a defined contribution model, reference pricing would be likely to apply to Medicare beneficiaries as well. Depending on how it is operated - e.g., if it were solely based on cost, in abstraction of quality - reference pricing also permits tiering of the health care experience by income class, without anyone having to say so openly.

For the upper-income groups, boutique medicine, which is already growing in the United States. Here the sky will be the limit.

And what do readers think?