Health Care: A Question of Distributive Ethics?

A debate over the direction of healthcare reform is roiling the Democratic Party as it weighs whom to nominate for President in 2020. But the party does appear to have coalesced around a basic idea. “We believe that health care is a human right, and we are going to fight for a system that is based on human needs,” said progressive champion Senator Bernie Sanders at a recent campaign stop. Joe Biden’s campaign offers a similar line: “We all believe that health care is a right.”

Uwe E. Reinhardt’s Priced Out: The Economic and Ethical Costs of American Health Care, espouses the same theme. The German-born Princeton economics professor, whose book was published posthumously by Princeton University Press, maintains that the conversation about health care should be one of “distributive social ethics.”

Reinhardt asks at the outset, “To what extent should the better-off members of society be made to be their poorer and sick brothers’ and sisters’ keepers in health care?” Throughout the rest of the book, he tiptoes around an answer that was succinctly stated nearly 150 years ago: “From each according to his ability, to each according to his needs.”

Americans Pay More

The first half of his book is devoted to explaining the American healthcare system in all its complexity. Reinhardt’s synthesis of data on health costs, spending, and outcomes is useful to anyone with an interest in this area of public policy.

For example, it’s common knowledge that the United States spends more on health care as a share of its economy than any other developed country. Reinhardt builds on that knowledge with graphs comparing the prices of certain medical services across nations. Take the average price of an appendectomy: about $2,000 in Spain, $6,000 in Switzerland, $8,000 in the United Kingdom, and almost $16,000 in the United States.

These data illustrate Professor Reinhardt’s famous explanation from years ago for why health spending is so high here: “It’s the Prices, Stupid.”

The author largely blames these high prices on administrative overhead, the proliferation of everything from billing clerks and insurance staffers to pharmacy-benefit managers and coding consultants. Some 95 percent of the growth of the healthcare workforce between 1990 and 2012 was in administration, according to a Harvard Business Review article Reinhardt cites.

He has a point. He highlights a McKinsey study from 1990 showing that Americans used $390 less in health services per capita than did Germans, but spent $737 more in higher prices. The Americans’ overhead tab was $360 per capita higher. It would be interesting to see what the corresponding numbers would be today, 30 years later.

Reinhardt also notes that America’s convoluted prescription-drug marketplace drives up the price of health care. All the various middlemen in the drug supply chain eat up about $41 of every $100 in consumer spending on drugs. Pharmacy-benefit managers are at the center of this web of middlemen, negotiating secret “discounts” from manufacturers that they in theory share with insurers to reduce overall premiums. But the bigger the discount, the bigger their cut. Reinhardt sums up the broken incentives well: “Given this secret rebate flow, one wonders what incentives the PBMs actually have to help keep drug prices low for consumers.”

He goes on to express consternation at the wide variation in prices for various medical services. The average published charge for a knee replacement at a hospital between 2008 and 2011 was nearly $42,000. The negotiated private insurance average was $23,000, and the price Medicare paid was just under $12,000. “Total chaos reigns,” says Reinhardt.

The Reflexive Call for Greater Government Control

The author uses this discrepancy to argue, not for more price transparency (which could allow market forces to bring those prices to some sort of equilibrium), but for “uniform fee schedules applying to all providers and all insurers within a state.”

One state, Maryland, has just such an “all payer” system. According to new research from the Manhattan Institute’s Chris Pope, Maryland’s price controls haven’t reduced health costs, nor have they led to more efficient care, or care that’s better in quality. What they have done is allow incumbent providers to keep competing providers from entering the market. And they prevent private insurers from negotiating potentially lower rates with hospitals. The system has allowed the state’s hospitals to charge Medicare 40 percent to 60 percent more than hospitals in other states charge—hence, its staying power.

Reinhardt also posits that uniform fee schedules and rules furnish “ideal platforms for the smart application of health information technology, which can lower administrative costs.” Britons subject to the UK’s government-run, single-payer National Health Service would take issue with that statement. As an investigative report of Britain’s health IT published by Politico in late July concluded:

For nearly 20 years, the British government has launched one initiative after another to build a digital records system that will improve care at its famed National Health Service. But its clinicians still struggle with a dearth of communication among care team members, leading to prolonged wait times for appointments, confused patients and needlessly repeated tests and procedures.

In the ensuing chapter, on who pays for health care, Reinhardt needles those who substantiate their view that Americans are instinctively opposed to socialized medicine by pointing to the Veterans Health Administration—the “system for Americans we claim to thank and adore.” Absent from his brief allusion to the VA is any mention of the litany of recent scandals plaguing the agency: long wait times for care, doctors hired despite histories of malpractice, and the like.

Having established the shortcomings of the American healthcare system, Reinhardt returns to his framing of the provision of health care as a question of “distributive ethics.” He expects his readers to adopt his premise that health care is a “social good,” and says his ideological foes wish for a system where “health care is rationed by income class.”

As his widow, Princeton health-policy scholar Tsung-Mei Cheng, writes in her Epilogue to this volume, “Uwe passionately believed in universal health coverage, that is, health insurance that provides affordable and timely access to needed health care for all regardless of the individual’s ability to pay, as a moral imperative.” (Emphasis in original.)

In other words, health care is special. It shouldn’t be subject to the laws of supply and demand, or the basic economic problem of scarcity. But willing something to be does not make it so. Every other good and service in our market economy is “rationed” according to price and ability to pay, even necessities like food and shelter.

When prices have been allowed to connect willing buyers to willing sellers in a competitive marketplace, long-term costs have gone down while quality has gone up. Look at the markets for air travel, or phone service, or computers, or televisions.

And where have prices risen inexorably? In areas where government interference and subsidies are most prevalent: health care and education.

Reinhardt’s Three Fixes

Over the last 30 pages of his book, the author explicates the Affordable Care Act of 2010, (widely referred to as Obamacare by supporters and detractors alike) as well as the Republicans’ failed legislative bids to replace the law in 2017. This will be familiar ground to anyone who has followed the healthcare wars over the past decade. Reinhardt’s three potential fixes for Obamacare, though, are of interest.

The first would expand insurance subsidies to those who make up to 500 percent or 600 percent of the federal poverty level. That’s nearly $129,000 or almost $155,000 for a family of four. California has taken that suggestion to heart and has decided to subsidize exchange coverage for those making up to 600 percent of poverty.

The second would increase the financial penalty for going without coverage. Congress has gone in the opposite direction; in late 2017 it zeroed out the penalty, a change that became effective early this year.

His third suggestion (“in my view . . . the best approach,” he writes) is to repeal the individual mandate but forbid people who decide to go without insurance from purchasing coverage at Obamacare’s regulated rates for a certain number of years.

This is not far from the “continuous coverage requirement” the GOP included in its 2017 replacement proposals, which Reinhardt panned. The Republican health-reform plans would’ve allowed people who stayed current with their premiums to keep their coverage from year to year without undergoing medical underwriting, even if they developed a chronic condition or other expensive health issue. If they let their coverage lapse for more than 63 days, then insurers would essentially be free to charge them whatever the insurers wanted for one year. After that, they would be allowed to again purchase coverage at regulated rates, where the insurers could charge the old and sick no more than five times what they charged the young and healthy. (Obamacare set that ratio at three to one.)

Reinhardt, by contrast, proposes locking people out of the community-rated market for years, or even for life, if they failed to maintain continuous coverage.

Beyond Obamacare

At this point, amid the Democratic effort to unseat a Republican President, the health-policy conversation has largely moved beyond the Affordable Care Act. Few Democrats are extolling the virtues of Obamacare. Progressives on both the campaign trail and in Congress are agitating for a complete government takeover of the health-insurance system in the form of what they call “Medicare-for-all.” More moderate Democrats—including the self-appointed guardian of President Obama’s legacy, former Vice President Joe Biden— are calling for a public option, a new government-chartered insurer that would compete against private health plans and eventually drive them out of business.

Republicans, meanwhile, haven’t coalesced around a healthcare plan. They’ve more or less abandoned their quest to repeal Obamacare. President Trump has promised to release a “really fantastic” health-reform plan before Americans vote on whether or not to rehire him. Republicans on Capitol Hill seem to want to ignore the issue altogether.

Reinhardt, for his part, didn’t believe that Medicare for All would be possible in the United States. The Epilogue of Priced Out quotes from a 2007 article he wrote: “In the end, each nation must decide which style of rationing—by the queue or by price and ability to pay—is most compatible with its culture.”

Market economies apportion goods and services by using price signals. Over time, quality and value improve.

Command economies apportion goods and services by the queue. Over time, shortages materialize, and quality dissipates. That’s been the experience of other countries with government-run, single-payer health care.

America’s healthcare system isn’t perfect. But its relative reliance on market forces, and the existence of the potential for earning a profit, are big reasons why Americans have access to more cutting-edge treatments, procedures, and drugs than their counterparts in the government-run Canadian and British healthcare systems. Market forces and the profit motive also give providers an incentive to aggressively treat Americans when they get sick. That aggressive approach is among the reasons that Americans post better cancer survival rates than Canadians or Britons.

Uwe Reinhardt offers plenty of useful insights into what’s wrong with the U.S. healthcare system. But adopting Priced Out’s proposed remedies would destroy much of what’s right about that system.