Mangled Care?

I was surprised by the editorial "Medical Meddling" in the December REASON. I am shocked that Virginia Postrel would even suggest that managed (rationed) care has anything to do with the market. Indeed, were it not for a discriminatory tax code favoring employers rather than employees, managed care would not exist. Managed (rationed) care is therefore a creation of the federal government, not a market phenomenon.

When an employer, rather than an employee, makes the decision regarding a health plan, the veterinary ethic of medical care replaces the Hippocratic ethic. In fact the only difference between managed (rationed) care and veterinary medicine is that the owner of the poodle loves the animal.

Organizations such as the American Medical Association are guilty, as Postrel charges, of lobbying for non-market-based health care funding schemes. The Association of American Physicians and Surgeons favors medical savings accounts (not mentioned in Postrel's editorial) as a way to put the purchasing power in the hands of the person to receive the medical product/service.

I do not blame the managed-care companies for seizing the day and profiting from a discriminatory tax code–the feds deserve all the blame. I do not, however, pity those same companies for suffering from the regulation, litigation, and red tape that comes with any deal made with Leviathan.

G. Keith Smith, M.D.
Edmond, OK

It is distressing to see how little understanding REASON has for free markets in medicine. Virginia Postrel states that managed-care plans have to find ways to encourage quality lest they lose their customers. Wrong. The customer for managed-care plans are employer benefits managers, whose first and only concern is price. To restore a free market in medicine, the consumer and customer need once again to become one and the same–the patient–and the patient needs the right to fire his insurer, without incurring a huge tax penalty.

Fee for service is not necessarily a "system with strong incentives to overtreat and overtest." The incentives come from third-party payment. Patients spending their own money have the incentive to be prudent consumers. When medical care was mostly paid for by patients, the hospital bill for an appendectomy was the equivalent of 10 days' wages for a common laborer ($149 in 1960). Now it's at least a couple months of take-home pay for a middle-income person (about $3,000). They still do the procedure the same way, and the patient is generally home faster.

The opposite of communism is not fascism. What we need is patient-purchased, patient-owned, catastrophic insurance, with most bills paid directly by the patient, possibly via a medical savings account. The answer to the question about who should be favored, the insurer or the doctor and the hospital, is none of the above. Medicine is for the benefit of the sick.

Jane M. Orient, M.D.
Executive Director
Association of American
Physicians and Surgeons Inc.
Tucson, AZ

In her defense of managed care Virginia Postrel makes an unfortunately common error–she mistakes the ostensibly private nature of an industry as proof of its free market nature.

Managed care was only a minuscule part of the health care system prior to World War II and would likely be so now if not for the tremendous distortions in the medical market brought about by the actions of government. Most important, the tax code promotes employer-provided, first-dollar coverage. Employees believe that they are spending somebody else's health care dollar, which leads to health care inflation through poor consumer discipline and lack of consumer pressure on providers. The government's provision of similar first-dollar coverage through Medicare and Medicaid leads to the same end.

The result is that employers or the government are the real consumers of health care, not patients. The resulting health care inflation has generated a move to ration care through managed care and various public sector rationing mechanisms. Managed care is further favored by a variety of governmental policies such as an only recently expired law mandating an HMO option for employees in businesses offering health care coverage, relaxed antitrust provisions for managed care, and direct government subsidization of private managed care companies through lucrative contracts with Medicare and Medicaid. Would managed care survive in a true free market? Perhaps. I would have no qualms with it if it did. However, we'll never know the answer until we repeal government's unfortunate control over our medical system.

Mark Schiller, M.D.
San Francisco, CA

Virginia Postrel replies: It's interesting that none of the physicians accusing me of heresy criticize the trend that prompted my editorial: the passage of state and federal laws interfering with the rights of managed care organizations to freely contract with physicians, patients, and insurance buyers. Too often, support for freedom of contract goes right out the window when the contracts in question affect one's own profession.

Space limitations preclude a rehearsal of the enormous and often complex economic literature on health care markets. But a few points are worth noting. First, contrary to Dr. Smith's assertion, health care markets, while distorted by the tax code, are in fact markets. What matters most is competition, and there is plenty of that. Doctors compete for patients. Insurance providers, including managed care organizations, compete for customers and physicians. And, believe it or not, employers compete for employees. Anyone who actually hires people knows that one of the first questions a prospective employee asks after a salary offer is, "What sort of health insurance do you offer?" It is not the case, as Dr. Orient suggests, that employers can just stick employees with lousy health care benefits and never pay the consequences. Her class-warfare story of evil managers and downtrodden workers doesn't wash. Even Dr. Schiller's thoughtful letter, with which I largely agree, ignores the very important effects of competition. It is not exactly accurate that "employers…are the real consumers of health care, not patients." Employers who want to keep their employees- -and most do–have strong incentives to act as reliable agents for their interests, and company benefits specialists may actually have better information about health care plans than workers could gather individually.

Second, in a competitive context, "rationing" is another word for trade-offs. We make them every day in every kind of market. Physicians may wish they could have a blank check to get paid for every possibly beneficial procedure, but as long as someone is paying the bill, that someone will impose limits. Medical savings accounts, if they work as advertised, would encourage patients to consume less in medical services–to self-ration. Dr. Orient argues that this check would prevent the extremely well-documented overtesting and unnecessary surgeries associated with fee-for-service medicine. Certainly, direct payment would have some effect. But who pays is not the only issue. Patients don't have as much medical knowledge as physicians, on whom they must rely to recommend treatments, and physicians are not immune from economic incentives. This doesn't mean that they deliberately overprescribe, only that they do not scrutinize costs as carefully as they might otherwise. Back in Dr. Orient's good old days, to take a famous example, there were an awful lot of unnecessary hysterectomies.

Third, there is considerable evidence that patients want both first-dollar coverage (hence, for instance, the large market for "Medi-Gap" insurance) and someone else's expertise in helping them buy health coverage. The model that says that in an undistorted "free market" everyone must buy his or her own personal insurance and only in large-dollar "catastrophic" form is dictatorial. It ignores the advantages of specialization–I might very well want my employer, or some other group I trust, to act as my agent in dealing with health insurance–and it pretends that everyone has the same risk preferences. Why exactly is catastrophic coverage the only acceptable kind? The life insurance market is diverse, as is the mutual fund market or, for that matter, the haircut market. The notion that health care must be delivered in only one form may suit the tastes of some physicians, but it ignores their patients.

Trying to redistort the health care market, through new tax gimmicks or regulations on managed care practice and contracts, is tempting for physicians who would prefer to practice fee-for-service medicine. It is not, however, good policy. Dr. Schiller's prescription is correct: Our policy goal should be to remove distortions, not to dictate the shape of health care delivery. As he suggests, we don't know what medicine would look like in an undistorted market. But it might very well include managed care.

Smog Test

While it is true, as Lynn Scarlett writes in "Smogged Down" (December), that California's new state smog law says nothing about crushing cars, it does refuse to license cars that don't pass the new test, and local government ordinances mandate towing and crushing cars that are not licensed. Ignoring this fact is hardly telling the whole story.

The real problem with California's smog law is that it is not aimed primarily at cutting pollution. Two points: Older cars that add a catalytic converter in order to meet clean air standards fail the smog inspection because the converter is not "original equipment." This makes no sense if reducing air pollution is the real goal. Further, the pollution credits from older cars taken off the road are sold to fixed-point sources like oil refineries or generating plants. But the car owner does not get the money, variously estimated at $5,000 to $14,000. The state says they may pay car owners $500 or so for confiscated cars, but if owners were allowed to sell credits directly, they could buy a newer and non-polluting car. This would solve the problem of poor folks losing their cars, but it wouldn't force anyone onto public transit, and many Californians are coming to believe that this is the real purpose of Smog Check II. Tell your reporter to dig a little deeper.

Earl Aagaard

Lynn Scarlett's interesting report "Smogged Down" inadvertently highlights the impossibility of wedding the environmental movement's ideals with a commitment to individual liberty. Scarlett says that California's new smog check program is "what happens when the public gets what it wants," citing as evidence a Gallup poll that showed 62 percent of respondents willing to risk economic growth to achieve greater environmental protection. This led me to wonder who "the public" is. Is not the other 38 percent part of the public? Did they get what they wanted? Asking this question focuses attention on what is missing in Scarlett's article. There is no presumption in favor of individual liberty and rights, and thus no discussion of the fundamental issue regarding air pollution: Do current levels of air pollution constitute a public health crisis so grave that the state (federal, state, or local) is sanctioned in using its police power against each and every one of its citizens, in what amounts to a search and seizure of private property?

A number of remarks in this article, e.g., that automobiles are "the last targets from which significant additional reductions…can be wrung," clearly indicate that the answer to that question is no. It is arguable whether air pollution was ever a serious enough problem for such police action; the burden of argument long ago shifted to those who claim that it is. What the Reason Foundation ought to bring to this issue is a principled insistence that all recommendations for further improvements in air quality meet one simple test: They do not violate individual rights.

James G. Lennox
Department of History and Philosophy of Science
University of Pittsburgh

Lynn Scarlett replies: The tension Mr. Lennox perceives in "Smogged Down" between individual liberty and air quality is not inadvertent: That tension is at the heart of the dilemma facing those concerned about individual freedom and air pollution. Individual liberty includes freedom to travel, but use of automobiles carries with it personal responsibility not to harm others, and that includes a responsibility not to pollute.

Regrettably, unlike so many things we value as individuals, it is not possible for Mr. Lennox to enjoy his preferred clean air standard, while his neighbor enjoys a different air quality. The nature of outdoor air quality is such that some sort of "collective" goal needs to be tolerated by individuals who may have very different personal values.

In an ideal world, individuals could choose their own personal air-quality standard and then make decisions about how much clean air they would choose to buy. Unfortunately, nature does not cooperate with this ideal world. Individuals must share one air quality in individual air basins. This, of course, raises a fundamental dilemma: Who should decide what that shared level of air quality will be? Who should decide how clean is clean enough? Even pushing air-quality decisions to the local level does not obviate the need for developing some way of determining what the shared air quality will be. Under such a situation, some people will always feel that the ultimate choice results in air that is too clean; others will feel the resulting air is still too dirty. Mr. Lennox argues that no air quality program should violate individual rights. Yet holding individuals responsible for the pollution they cause seems not only compatible with but an essential component of a society of free and responsible individuals. With respect to automobiles, the real challenge is how to maintain that responsibility without encroaching on people's automobility and freedom to make choices about where they live and travel. Given the "collective" nature of air quality, this is no simple task.

Beyond these fundamental challenges, the Smog Check II debate mostly involves either implementation details that are largely remediable or misconceptions about the program. For example, the program does not allow for confiscation and involuntary scrapping of vehicles, which would be reprehensible. Moreover, in contrast to what Mr. Aargaard asserts, the program is designed to avoid situations in which people are unable to register their vehicles because of failure to pass the test. The program includes a one-year repair extension, so that motorists can make some initial repairs that bring their cars below the gross-polluter category and then take up to a year to make additional repairs that bring the car into the "passing" category. Other provisions allow for two-year waivers from the program under certain circumstances. To date, few motorists have indicated an inability to pay for vehicle repairs so that their cars will not be gross polluters.

The tradeable permit program that Mr. Aargaard mentions is not part of Smog Check II. It is an entirely separate program, one that I was not addressing. The idea that motorists might sell pollution reduction credits directly to manufacturers is an interesting one. However, I might add that in the experimental scrappage programs conducted in Southern California, the participating motorists generally view the opportunity to sell their vehicles for $400 or $500 as a benefit; these cars were typically not worth that sum on the open market.