What Ails Health Care


Perennially troubled Chrysler Corp. is in financial difficulties again. And once again, it has turned to the federal government for help. But this time it isn't looking for anything as blatantly self-interested as a bailout.

This time, Chrysler wants national health insurance. To that end, the company has turned its employee benefits director, Walter B. Maher, into a fulltime, Washington-based lobbyist. His mission: to cut company costs by foisting a good chunk of the Chrysler payroll onto the taxpayers.

The powers that be at Chrysler may be mediocre at designing, manufacturing, and selling cars, but they are good at politics. They know that whoever it is who decides these things has officially designated health care a "major problem" requiring "fundamental reforms." Full- fledged, Canadian-style national health insurance is Chrysler's preferred option. Also popular is some sort of government-mandated, employer-paid insurance scheme. George Deukmejian, California's usually fiscally and temperamentally conservative governor, recently proposed such a plan for the nation's largest state.

The health care crisis is a funny phenomenon. Everyone agrees a problem exists, but no one agrees on just what the problem is. Typical is the Los Angeles Times poll that found more than 90 percent of respondents were satisfied with their own health care, yet more than half said the entire health care system needs "many improvements" or "fundamental overhauling." If everybody's happy, what's the problem?

It is, to some extent, a media phenomenon—the kind of "crisis" we get along with peace and prosperity. To some critics, the problem is that too many people—37 million is the number usually tossed around—lack health insurance.

To others, like Chrysler's Maher, it's that employers are paying more and more for health insurance; increases of 12 to 18 percent a year are common. "If we continue with health care increasing at a rate that is twice or more than that of the CPI," writes Maher, "it's obvious that health care will consume GNP in 70 or 80 years."

It is, of course, silly to think that any single kind of good or service will swallow up GNP. But, like the blind pig who occasionally stumbles over an acorn, Maher has discovered the problem without seeing it.

What's wrong with health care isn't that we spend a lot of money on it. That's what you'd expect in an affluent society. It isn't even that we spend an increasing amount of money on it. Assuming that people want more health care as they get richer, that's what you'd expect in a growing economy. What's wrong with health care is that its cost is growing much faster than the cost of other goods. Health-care productivity—the amount of care delivered per dollar spent—just hasn't kept up with productivity in the economy as a whole.

The reason lies in the unfortunate similarity between the U.S. medical system and the Soviet economy. The feedback mechanisms that ordinarily reward increased productivity with increased profits just don't exist. Corporate takeovers don't shake out inefficient operating procedures. Patients rarely march out of the emergency room to find a cheaper supplier.

Some of these conditions are intractable. When you're sick, especially if you're seriously ill or suffering from severe injury, you're not likely to quibble about price. You do pretty much what the doctor orders and figure you'll pay the bill somehow. This situation would exist, to a greater or lesser degree, regardless of the public-policy environment.

But American health care would undoubtedly benefit from some perestroika. The question, as with the Soviet economy, is where to start.

Two-fifths of all medical care is financed by the government. Most of the rest is distorted by an income-tax system that makes employer-provided health insurance—unlike cash—tax free. More than 800 state laws tell health insurance providers what care they must cover. Nearly everyone who does anything in the health care business has to have some kind of license. Drugs are heavily regulated, both before and after FDA approval. The deep-pockets tort system has divorced malpractice suits from actual malpractice.

We can't get what we truly want—infinite amounts of the best care at no cost. Nobody gets that, not the Soviets, not the British, not the Canadians, not even the Swedes. One way or another, health care gets rationed: by queues, by money, by political pull, by bureaucratic fiat. Our only hope is to allow some fluidity and innovation back into the system, to create some incentives for creativity and productivity.

To start, we might consider a series of reforms that—unlike most of the plans on the table—would move things toward innovation rather than bureaucratic planning:

  • Scrap Medicare and Medicaid. Give people vouchers and let them buy insurance in the private market. We can argue about whether the government ought to be guaranteeing health care but as long as it is, it should get out of the insurance business. Kaiser Permanente is much more likely to analyze its operations and adopt productivity-increasing reforms than are thousands of independent hospitals getting a limitless stream of government dollars. The government tries cost controls, but Medicare is essentially an open-ended entitlement. Vouchers would make the Medicare budget predictable. Plus, if voucher recipients could cash in whatever they didn't use for insurance, they'd have an incentive to shop wisely.
  • Make more drugs available over the counter. Economist Peter Temin of MIT estimates that making penicillin available over the counter would save more than $1 billion a year, mostly by reducing the number of visits to the doctor. (At the risk of giving women responsibility for their bodies, we might let them buy birth control pills without prescriptions.)
  • Divert at least some medical-research dollars, both public and private, from finding ever-more-nifty cures to figuring out more cost-effective ways to deliver care. This doesn't mean degrading patient care—noninvasive procedures are cheaper than surgery, efficient records management better than sloppy—and, as in the case of birthing centers, patients may actually prefer less expensive options.
  • Open up medicine to new providers. Make it easier for foreign-trained physicians to practice in the United States. Let nonphysicians legally perform more medical procedures. Don't grudgingly allow foreign nurses short-term, "crisis" visas; give them green cards.
  • Restore individual responsibility for health insurance. Dump the tax exemption and cut payroll taxes to offset it. This wouldn't have a huge effect on health—a conservative estimate is that it would reduce the overall demand for medical services by between 4 percent and 6 percent—but it would improve incentives.

Wherever we start, we ought to keep one thought in mind: No one is smart enough to figure everything out beforehand. We've got to stop thinking we can pick an outcome and require it by law. That approach got us into this mess. The way out may be an old medical prescription: First do no harm.