Charles Wheelan, Ph.D. The Naked Economist

Why do we need to fix our health care system?

To answer that, let me first ask a more fundamental question: What is the point of a "health care system" in the first place?

After all, we don't have a "food system" or a "housing system," even though each of those things is just as essential to life, if not more so. The private sector takes care of those needs pretty well without a lot of guidance from Washington. 

So what makes health care different?  Why can't we solve the whole mess -- both the debate over how involved government ought to be in health care and our frustrations with the insurance industry -- by just letting people pay for their own care? 

If Aunt Edna is seriously ill, why ask either a government bureaucrat or a profit-inspired insurance executive what care she ought to get? Aunt Edna and her family should determine the course of treatment, just like they decide whether to buy sirloin or chicken at the grocery store, or whether to buy a three-bedroom house instead of a condominium. The doctor would explain all of the medical options, along with their likely effectiveness and cost. The family would decide how deep they want to dig into their pockets to keep Aunt Edna's respirator going.

Why get Congress (or Aetna) involved when individuals and families can make their own decisions like that?

Here's the first answer I usually get:  Because health care is too expensive to make people pay for it themselves.  But that's just illogical.  A health care system, either a single-payer government system or a private system built on health insurance, just spreads the costs around.  Sharing the health care costs of 20 people among 20 people doesn't make anything cheaper.  The same is true when 300 million people share the medical expenses for 300 million people.  At the end of the day, we still have to pay for all the health care that we all use.

So then I get a second answer:  If we treat health care like automobiles or televisions, then poor people won't be able to afford the care they need.  That answer doesn't make any sense either.  If we are worried about poor people having access to health care, then we should just give them more money rather than designing some elaborate system to provide the care itself.  After all, that's what we do with food.  We give out food stamps so that poor people can go to the supermarket and buy what they need.  Nobody is arguing that the government needs to build, operate, or fund grocery stores.

So here is the right answer: Health care is different from all other basic needs because the costs are so unpredictable. The bill for your health care next year could be $150 or it could be $3 million. That's true no matter how healthy you feel right now.  And that's not true with food or housing.

As a result, any reasonable person should appreciate that there is an economic benefit to "pooling" health care risk.  Most of us are willing to pay a significant but predictable amount every month or year in order to protect against a medical catastrophe that we cannot afford.  That's what a health care system does, either through private insurance (my employer or I pay premiums in exchange for coverage), a government program (I pay taxes in exchange for cheap or free care when I'm sick), or some combination of both. 

So with all that in mind, let's do a thought exercise that should help inform the current health care debate.  Suppose that you don't have access to insurance or government health care, and you opt instead to form your own "health care club."  Maybe it is the people on your block, or the members of your church, or your graduating college class.

Whatever the group, the point is that your group will share all of your medical expenses.  You do this because none of you can afford the $2 million it might take to keep your child alive next year.  But all of you can afford the average health care cost for your large group. In any given year, your many healthy members will subsidize the unlucky/unhealthy few -- by design.

Presumably the first thing your health insurance club would do is make some rules.  After all, you now have a stake in each other's good or bad health, and you will bear a share of all medical costs.  Here are some simple rules that any health care club would agree on and then some thoughts on whether our current health care system achieves them.

1. You would encourage good health.  That would mean annual physicals, immunizations and flu shots. Your group would promote exercise, discourage smoking, and attack obesity like the plague that it has become. Your group would happily make investments now if they deliver greater benefits later.

So does our current system do this?  No, and there is a perfectly rational reason for it.  You are likely to switch jobs over the next decade, and when that happens, you will likely switch insurance companies, too.  Your insurance company doesn't "own" you as a patient for life.  Aetna has less incentive to invest in your good health if there is a good chance that Blue Cross/Blue Shield will harvest the benefits five years later.

Even worse, once you turn 65, you'll go on Medicare, which means that private insurance has no incentive to invest in any preventive care that pays off in old age. Of course, that's exactly when most preventive care pays off.

So there you have the first no-brainer of health care reform:  Make us healthier by requiring things (physicals), subsidizing things (flu shots and immunizations), punishing things (obesity and smoking) and so on. 

2. You would only spend the group's money on cost-effective medical care.  Suppose a member of your health care club has allergies.  He insists that his treatment should involve a six-month trip to a Caribbean island, where the pollen counts are low.  His doctor, who stands to make a large commission for booking the trip, strongly recommends this course of treatment.

Your club should and will say no.  The treatment probably won't work, and even if it does, there are more cost-effective ways to control the allergies.  The members of your health care club would recognize at inception that they cannot pay for everything that a sick member might someday request. Once that member is spending the group's money, he or she will have no incentive to demand anything less than six months in the Caribbean. 

So you would make some tough decisions.  The more generous the group decides to be in terms of medical care, the bigger the bill each of you will have to pay every year. To save money, you will have to constrain medical spending in a sensible way. That's the iron tradeoff.

There are a range of reasonable options here. Your group might insist that it will pay only for treatments that are deemed to be medically effective.  You might discourage unnecessary tests (both because they are expensive, but also because when administered to healthy people they tend to generate "false positives" that breed expensive, unnecessary and potentially dangerous follow-up care).

You might not pay for non-essential care (knee replacements), predictable care (childbirth), or lifestyle issues (Viagra). You might even decline to pay for care that adds minimal value relative to its cost (such as spending a million dollars to prolong life by six weeks). 

These are not easy decisions, and there is no right answer in terms of striking a perfect balance between providing care and restraining costs.  But if your group doesn't have that conversation, you will be bankrupted by expensive treatments in the Caribbean.

How does our current system do in this regard?  Miserably. We are unable to have a conversation about spending health care dollars in a cost effective way before talk show hosts begin screaming about death panels. 

Instead, we say "yes" to just about everything medically possible for those lucky enough to have some kind of insurance. Then we sit around and complain about how much our health care system costs. 

So here is the second no-brainer for health care reform: If we want to restrain the current unsustainable growth in health care spending, then we will have to say "no" to those things that make the least medical sense.

We have a health care club in the United States, or more accurately, many of them.  For the most part, our rules are outdated.  Health care reform will require a thoughtful discussion of who gets into our club and how generous we want to be with our members, recognizing that each of us is both a bill payer and a prospective patient.

Until we resolve that, everything else is just noise.