Sick and unfree in America

yellow_emperor

In ancient Taoist China, a well-off family would hire a doctor, pay him as long as everybody in the family was healthy, and stop paying him as soon as somebody got sick until that person was healthy again. This, as far as I know, was the last time that a society aligned the incentives in the healthcare industry properly.

By contrast, healthcare today is upside down: You don’t pay for the thing you want (health); you pay for service when the thing that you don’t want (sickness) comes around. Hypothetically, if you had two doctors, one Taoist and one modern, and if the Taoist were good enough at his job to keep you healthy, the modern doctor would not get paid at all!

I bring this up only as a little thought exercise to illustrate something important: Healthcare is not like other industries. If the product is muesli or ball bearings, it makes sense to talk about competitive markets and such. But if you’re dealing with an industry that is fundamentally upside down, you have to be careful about using trite concepts of economics.

Another way that healthcare is different: If there were large numbers of, for example, children in society that could not get muesli or ball bearings, we could live with it. After all, they can get corn flakes instead, and walk instead of using wheels. The “market failure” would not equate to a shameful indignity. By contrast, if children (and adults, for that matter) cannot get access to healthcare, it is a shameful indignity.

(Disclaimer: As with everything on The Hannibal Blog, the opinions in this post are mine and mine alone, and may or may not overlap with the views of my magazine, The Economist.)

Healthcare and freedom

I bring up healthcare only reluctantly in my ongoing ‘Freedom Lover’s Critique of America’. I’m not qualified to talk about it and it’s not my beat at The Economist. But I decided that it belongs into this series because America’s healthcare system is so different from those in all comparable countries, and because it has such a direct bearing on freedom.

That the system is dysfunctional is well known. I won’t rehearse the familiar list of failings (many uninsured; many underinsured, et cetera). Let me just point to a few features for the subsequent discussion:

  1. American healthcare is typically American in that is it bureaucratic and adversarial. The effect on patients is alienating and dehumanizing. At the precise moment when they are most vulnerable and dejected, they are expected to go to war against their insurance company on the 1-800 numbers and phone trees to contest pieces of paper they don’t understand. But they have to, because their insurance company will contest almost every single claim–for this is built into the system!
  2. American healthcare is also typically American in being uneccessarily complex, as America’s tax system is. I’m not talking about the medical side–that is complex everywhere, because our bodies are–but about the administrative side.

Does this limit the freedom of individual Americans? Yes, and let me just give one concrete example. A free society is one in which people feel free to move and to change jobs, among other things. But a great many Americans are afraid to change or quit jobs, because their healthcare coverage is tied to an employer. So healthcare can become yet another of the shackles that makes serfs out of many Americans.

More generally, the system’s dysfunction limits freedom because it robs so many Americans of dignity. And dignity is a prerequisite for freedom. Thomas Jefferson could write “life, liberty and the pursuit of happiness” only because he lived in a relatively innocent age, the Enlightenment. A more mature constitution of liberty, such as West Germany’s after the Holocaust, begins with

Die Würde des Menschen ist unantastbar–The dignity of each human being is untouchable.

So yes, healthcare belongs into any debate about whether a country can claim to be free or not. Now let’s figure out what sort of problem healthcare poses, in general and in America.

What kind of problem is healthcare?

When the ancient Chinese paid Taoist doctors to keep them healthy, healthcare was a cost of living, comparable to food and shelter. When we turned it around and paid doctors for managing our sickness, healthcare became an insurance problem.

And there are two traditions of modern insurance:

1) Lloyd’s of London

In 1688, rich toffs started hanging out in Edward Lloyd’s coffee house in London, near where the ships came in and maritime gossip spread. They began betting on which ships would make it to port with their cargo and which might sink. They called it ‘insurance’. It was really a higher form of gambling, with huge profits when the bets went well and huge losses when they went bad. This is the origin of the Anglo-Saxon view of insurance: as a profit-business.

2) Swiss mountain valleys

In Switzerland, going back to I-don’t-know-when, villagers got together to share risk. You might say they “collectivized” it, but don’t think that they were socialists. They were freely volunteering to pool their individual risks because they noticed something that we now call

the Law of Large Numbers

Say that a Swiss village had 1,000 houses. The villagers knew from historical record that, on average, one house would burn down every year. That house’s family would be devastated. Let’s put their loss at SF1,000 to make the math simple. The other families would suffer no loss at all, but they could not tolerate the indignity of letting one family suffer and lived in fear that they might themselves be next.

So they agreed, in free assembly, to pony up SF1 each for a SF1,000 fund. The SF1,000 then went to the one family whose house burnt down to make it whole.

What had they done? They had exchanged a

large but uncertain loss

for a

small but certain one.

They were able to do this thanks to the Law of Large Numbers, which says that an unpredictable risk becomes highly predictable when it is pooled with large numbers of similar, but unrelated, risks.

Caveats

The Law does not work if the individual risks are correlated. The Great Fire of London in 1666 (below) happened because all of London’s thatched houses stood so close together that they were in fact one big house from the point of view of a flame.

350px-great_fire_london

The Law also does not work if adverse selection spoils the risk pool. For instance, say that some of the Swiss villagers had opted out of the pool because they had stone houses. Only those families with highly flammable houses would have entered the pool, but that would mean that the 1-in-a-1,000 ratio no longer applied (it would be much higher).

The Law also does not work if moral hazard changes the way people behave once they get insurance. If some villagers get the idea that, since they are now “covered”, they might as well set their houses afire, the system breaks down.

Finally, the Law works best for risks that are high in frequency, low in devastation. Fire is a good example. It does not work well for risks that are low in frequency, high in devastation. An extinction-causing meteor is a good example. (Who would charge whom what premium for what risk?)

Back to healthcare

And where does healthcare fit in?

  • First, it is very high in frequency (everybody gets injured or sick sooner or later) and low in devastation (usually only that one life is at risk). For most illnesses–diabetes, heart disease, etc–actuaries know exactly what percentage of the population as a whole will get sick in a given year.
  • Moral hazard is not a problem, because–loonies and rock stars excepted–people do not intentionally ruin their health just because they are insured.
  • Adverse selection is a problem, because risk, and the perception of it, changes over a lifetime. The young feel immortal and would opt out to save the buck (Swiss Franc) for a beer, leaving only the geezers to pay up.

Conclusions

Healthcare seems to be altogether unsuitable for a Lloyd’s of London (Anglo-Saxon, profit-driven) insurance culture, and perfectly suited for a Swiss-mountain-valley (risk sharing) insurance culture.

The prerequisite is that everybody in the pool must participate to avoid adverse selection.This, however, would require a mandate for the majority to coerce a few unwilling individuals, and that is something that (real) liberals do not like. But many liberals (and the Swiss are freedom lovers!) make this sacrifice because they understand that it is necessary: Dignity mandates that we look after the sick even if they have opted out of participating, so some people would become free riders.

There are two simple ways to get everybody into one risk pool subject to the Law of Large Numbers:

  1. Tax everybody a little bit (the equivalent of the SF1 per village family) to cover the proportion of people being sick every year, or
  2. make people buy their own insurance, rather as we require car insurance for drivers.

The first leads to a British or Canadian-style single-payer system. (Important: Notice that the government need only manage the funding of the care, not the care itself.) Since everybody is covered, there need be no paperwork for patients. I still remember when I was visiting Britain as a teenager with a soccer team and woke up unable to move my neck one day. I dragged myself to the street, got a taxi to a hospital, and, although I was not British, got fantastic care without signing a single piece of paper.

The second leads to a system of competing insurance carriers. This is fine, although there is one problem: What if you pay premiums to one insurer while you’re young, but then you switch to another insurer when you’re old? That would be adverse selection again (for the second insurer). But in a competitive system, patients would move in both directions, and might cancel one another out. Even so, there is slightly more paperwork for patients, since the care provider needs to reclaim the money from any of several insurers.

Notice that, either way, the economic burden is the same: Every citizen pays, whether through taxes or premiums, the same amount to participate in the risk pool.

America

And now, the American way: A bit of everything, mixed together and stirred. If you’re a veteran, you participate in huge risk pool. If you’re old (Medicaid) or poor (Medicaid), you participate in other risk pools. If you buy your own insurance, you can carry your coverage around, but you are paying much higher premiums because the insurer assumes adverse selection. If you’re employed, your company arranges coverage, but only as long as you work for it. If you are none of the above, you have no coverage and go to the emergency room when you’re sick, thus leaving the provider to hike everybody else’s costs to compensate for you.

Paper, paper, paper. No law of large numbers for society as a whole. Fragmentation. Confrontation between patient and insurer. Nightmare.

And if Obama goes on to do just the “politically feasible” thing–which, in America, is to add more “options” and complexity–it will get worse.

The way to bring freedom and dignity to America is to get rid of employer-sponsored insurance and to have either  one single government-run insurance pool or mandatory individual insurance for one privately-run insurance pool. Nothing else works.

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8 thoughts on “Sick and unfree in America

  1. Back to Switzerland

    The model in place – somewhat simplified – is the “second” system you illustrated: Mandatory private insurance required for all residents. Your analogy of auto insurance is a good one. Rates are based on your age, gender and postal code. Competing insurance companies operate like phone companies to get your business adding caveats making comparison at one level complex, but for the “basic” offering very simple to select (and switch). Changes between providers can only be done once a year during a “buyers season”. You can even choose your own doctor (no questions asked) – or choose for lower premiums with an HMO model (we pick the doctor at our center, you pay less).

    Now here is where the similarities to the British system come into play. Those who can afford it, buy a supplementary hospital insurance for better care. Specifically this amounts to either guaranteeing either sharing a hospital room with only one other patient (halb-privat) or none at all (voll-privat). If you have read Atul Gawande’s book “Complications: A Surgeon’s Notes on an Imperfect Science”, you will know that more experienced doctors treat better. This is the true difference in the supplemental hospital insurance policies, in that you are assured that the top-doctor (Oberarzt) will to be the one treating you.

    Another caveat is that you can define your premium based on a maximum you are willing to dish out per year. So for example, if you offer to pay max. SFr 2,500 per year for any medical services rendered, then you will have a lower premium than if you are only willing to pay SFr 1,000/year. The best part is that this is a cap defined by the patient and anything above this amount will be covered by the insurance company. Those too poor to pay, get their local community to support them.

    This system is not without flaws. Many books have been written on this topic and the Swiss press covers the rising costs of premiums despite lower growth (in 2008, negative) income rates etc. etc.

    For more details, here is a listing of benefits covered by mandatory insurance for all residents in Switzerland: http://en.comparis.ch/krankenkassen/info/glossar.aspx?id=KK_Info_leistungen_kgv

  2. I would challenge the moral hazard bit (regardless of insurance). If what you say is true, then all those parents I saw at Disneyland this spring are rock stars, right? Many people jeopardize their health by overeating, smoking and sitting at a computer. Lazy, depressed and hopeless people trade immediate gratification for just about anything. Moreover, I have known smart people with treatable illnesses who would skip treatment (meds, whatever) to feel more normal. Many sane people balance the here-and-now with the prospect of a life sentence on earth.

    You’ve created another nice piece of work. (Does one say children that that, or children who ? This sort of grammar confuses me.)

  3. While most people in Canada (where I live) like the single-payer system, a drawback is a long waiting time for an operation. Some Canadians will, consequently, choose to have an operation done in the US (although they will pay a lot for it), where waiting times are so much shorter. This aspect is where the US system is superior (although only for those with money).

    But Canadian pet owners can get operations on their pets (by vets) in next to no time. The reason, I think, is that Canada doesn’t restrict the numbers of vets, but does, (by limiting doctors allowed government billing numbers, and making it difficult for foreign-trained doctors to get Canadian accreditation) restrict the numbers of doctors. Therefore there are less animals per vet, than humans per doctor.

    Are the numbers of doctors similarly limited in the US? If so, it would contribute to the huge costs of medical care.

    A solution for both Canada and the US would be to freely allow any foreign-trained doctor to practice, as long as prospective patients could view the doctor’s qualifications and where he got them. Also, allow para-medics (like nurses) to do much of the work which only doctors are allowed to do (I believe this is the practice in China).

    This would be a market-based solution. The supply of human medical services would match demand, as is the case with animal medical services.

    Of course the CMA (Canadian Medical Association) and AMA (American Medical Association) will have none of this. A pity.

  4. great comments all around. I must disagree however with the notion that strict vetting of physicians through licensure and specialty boards should be relaxed to allow physicians to cross state and national lines to deliver care to a greater number of people. Crappy medical care is a risk that we must minimize and the parents if a brain damaged child resulting from a mismanagement of labor know too well what I am talking about. Nurses can be highly trained. But without regulation they can be as incompetent as my Navy Corpman.

    But other than that, you all have well-framed the issues and challenges.

    SB

  5. Siddhartha, that’s a fantastically clear and concise summary of the Swiss system. All in all, it seems quite good (the “perfect being the enemy of the good”) and vastly preferable to America’s.

    Mr Crotchety, I think it’s “children who…”. Re moral hazard: I know the types you’re talking about, and they represent a cultural phenomenon that explains why America is less healthy than other rich countries. But I don’t think it’s a moral hazard problem: These people are not gluttonous, smoking sloths because they have have health insurance; they are gluttonous, smoking sloths whether they have insurance or not. In fact, I am quite sure that if you put Americans on a chart, you would find that those with insurance lead healthier lives than those without.

    Phillip Phogg, I’ve heard a lot about those Canadian waiting lists. I wonder: Is the provision (as opposed to funding) of healthcare also government-run?

    Regarding foreign doctors and regulation: You need standards, of course, but mutual recognition of standards among similar countries (as in the EU) should be a no-brainer, no?

  6. “……I’ve heard a lot about those Canadian waiting lists. I wonder: Is the provision (as opposed to funding) of healthcare also government-run…….?”

    I not quite sure what you mean by “provision”. But, here in BC, the numbers of doctors who can get government billing numbers is restricted. So a doctor without a billing number can’t make a living because he can’t invoice the government for the treatment he gives a patient. So the patient would have to pay the doctor directly, and why would a patient do that if he can go to another doctor for free?

    However, in BC, you can now go to a private clinic and have an operation if you wish not to wait (a quite recent development, and controversial). But you would pay for it, for this by-passes the government-run system.

    “……Regarding foreign doctors and regulation: You need standards, of course, but mutual recognition of standards among similar countries (as in the EU) should be a no-brainer, no………?”

    In BC, for instance, there are fair number of Chinese-qualified doctors, whose lack of English-language skills prevents them doing the quite arduous courses to get Canadian accreditation. So they make a living by privately doing alternative medicine (acupuncture and such) for which they charge as little as $50 (and maybe less) a visit.

    They aren’t allowed to cut you open and such (ie do an operation). But why shouldn’t they be? as long as you, the prospective patient, can examine the doctor’s credentials and decide.

    Isn’t this what a free society is all about?

    Given that we are animals, and so have bodies which run on the same principles as furry animals, why can’t you, above-board, have a vet treat you if you think he can do the job cheaper (or better) than a doctor? (this would be particularly appropriate to you in the the USA, given your lack of universal health-care).

    Again, the freedom to choose is what a free society is all about, no?

    I don’t doubt that you, and others of your esteemed readers, are now chortling into your beers. But I’m thinking the unthinkable – always the pre-condition for revolutionary change (aka paradigm shifts).

  7. Chuck Yeager fell off his horse and broke several ribs the day before he broke the speed of sound. He didn’t want to get bumped from the test, so he went to a vet for treatment-the rest is history.

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