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					P O L I C Y              F O R U M




Crucial Issues in Health Care Reform
T
         he calls for immediate and ill-considered health care                                 and pay-for-performance. These are all
                                                                                               things that open competition between pay-
         legislation resound in Washington with hardly a pause                                 ment systems will promote, but when the
                                                                                               government tries to promote them, those
         for breath. On June 17, the Cato Institute, in an effort                              efforts are either blocked by incumbent
to provide reasoned perspective on this complex issue, held a                                  providers or made more expensive than
                                                                                               they need to be.
Conference on Health Care Reform. Among numerous experts,                                         The key to reforming the delivery sys-
Michael F. Cannon, Cato’s director of health policy studies,                                   tem is to let consumers’ choices and com-
                                                                                               petition do the reforming. Let consumers
spoke about the need for competition in payment methods.                                       control their health care dollars. Let them
David A. Hyman, adjunct scholar at the Cato Institute, cri-                                    choose their own health plan. Let them buy
                                                                                               insurance across state lines and let clini-
tiqued the arguments for a public plan. Aaron Yelowitz, Cato                                   cians take their licenses across state lines, so
                                                                                               that even pre-paid plans can compete on a
adjunct scholar, explored the hidden costs of an employer man-                                 level playing field and consumers can
date. And Michael D. Tanner, senior fellow at the Cato Insti-                                  choose a Kaiser or Group Health Coopera-
                                                                                               tive or a fee-for-service plan. It takes
tute, examined the repercussions of an individual mandate.                                     Medicare decades to make even minor
                                                                                               changes to its payment systems. Con-
MICHAEL CANNON: The problems with              any sort of blended payment system. The         sumers who control their health care dol-
America’s health care delivery system,         problem is that we don’t have open compe-       lars can change payment systems in a
rather than being the result of market fail-   tition between all payment systems so that      heartbeat. You get what you pay for, and
ure, arise because government protects         we can realize the quality gains that each      there isn’t any better way to ensure that
low-quality providers by stifling competi-     can provide.                                    we’re going to be paying for quality than if
tion between different ways of paying              In the face of these government failures,   we let consumers control the money.
health care providers. Rather than allow a     the response from Congress is to keep dig-
level playing field between different pay-     ging. The reforms currently making their        DAVID HYMAN: I’m going to focus my re-
ment systems, government tips the scale        way through Congress would further stifle       marks on the “three Ms” of a public plan:
toward fee-for-service payment. The federal    quality-enhancing competition between           monopoly, monopsony, and maverick.
Medicare program is the largest purchaser      different payment systems. For example,             First, monopoly. Proponents of a public
of medical services in the world, and it       the Senate is considering a bill by Sen. Ted    plan argue that the market for health
operates largely on a fee-for-service basis.   Kennedy that would create a new govern-         insurance is monopolistic and that a pub-
The federal tax code encourages fee-for-       ment program with a payment system              lic plan will make it more competitive.
service payment and discourages pre-pay-       modeled on Medicare’s. It would lock even       Both of those claims are deeply problemat-
ment. State level clinician and insurance      more of the marketplace into fee-for-serv-      ic as a matter of competition law. The as-
licensing laws also discourage or place dis-   ice payment, resulting in more of the same      sertion that the health insurance market
proportionate burdens on pre-paid health       rather than the sorts of reforms that would     is monopolistic is usually based on mar-
plans. With all of these interventions, gov-   improve the way we deliver care.                ket concentration statistics computed by
ernment creates a steady stream of revenue         Improving the delivery system cannot        the American Medical Association on a
for low-quality providers and penalizes        be done by government dictate because the       state-by-state basis along with some claims
innovations, including electronic medical      government’s decisions are going to be          about the number of mergers of health
records, bar code scanners for prescription    unduly influenced by those who want to          insurers.
drugs that help prevent medical errors, and    protect the status quo. For example, the            There are a few problems with this ap-
surgery checklists that would have the         government is currently trying to improve       proach. The first is that counting up the
effect of preventing unnecessary services.     health care delivery with rifle-shot reforms,   number of mergers doesn’t tell you any-
    The problem is not fee-for-service. Fee-   like subsidizing health information tech-       thing useful. Even if you assume you’re
for-service is as legitimate a way of paying   nologies, comparative effectiveness re-         dealing with the same product market,
doctors and hospitals as pre-payment or        search, coordinated care, error reduction,      mergers across geographic markets don’t

                                                                                                   September/October 2009 Cato Policy Report • 9
P O L I C Y                 F O R U M


really raise antitrust issues. Mergers within        chips, web browsers, and search engines. If       monopsony purchaser of healthcare servic-
geographic markets may raise antitrust               you want more competition in the market           es is just as bad as having a monopoly sell-
issues, depending on the particulars, but            for health insurance, identify barriers to        er. You don’t want to do that if you can
the particulars are important.                       entry and get rid of them. Don’t assume           avoid it. Proponents seem to view monop-
    Second, although states are a natural            that creating a situation where the govern-       sony purchasing power as a feature when
unit to look at, because they’re the basis on        ment is both a competitor and regulator           it’s actually a bug.
which we regulate health insurance, the                                                                    Third is maverick. The claim is that a
marketplace for insurance doesn’t usually                                                              public plan will discipline the behavior of
track state borders very well. Market con-                                                             private plans, although it’s not quite clear
centration ratios for something that isn’t                                                             how that will happen. The difficulty here
a market are just meaningless. They don’t                                                              is that if the public plan is subject to the
help you understand what’s going on in                                                                 same set of rules and taxes as a private plan
the market. Third, concentration ratios or                                                             and it can’t access government subsidies,
percentages of markets are just a screening                                                            it’s kind of hard to see why it is going
tool to tell you “Gee, we shouldn’t worry                                                              to behave any differently than any other
about this market,” or, “Gee, maybe we                                                                 private plan. It’s important that we have
should look closer at this market to try                                                               the same sets of rules, not because we have
and figure out whether there’s in fact an                                                              any particular love for the private insurance
antitrust problem.” For the past three                                                                 market, but because the logic of competi-
decades, among antitrust enforcers from                                                                tion is that the outcome reflects people’s
administrations in both parties, nobody’s                                                              actual preferences.
thought that de-concentrating a market in                                                                  For example, if we subsidized hybrids
                                                                                      David Hyman
the absence of an actual antitrust violation                                                           and tax SUVs, or did the opposite, nobody
was a strategy that would go anywhere in
court or that had much to recommend
itself as a general policy.
    None of that is to suggest that there
                                                     “   In the entire history
                                                       of antitrust, no one has
                                                      ever thought a plausible
                                                                                                       would think that the resulting purchasing
                                                                                                       patterns would tell us anything useful
                                                                                                       about the actual demand for hybrids and
                                                                                                       SUVs. You need to treat them the same
aren’t problems with health insurance
markets. Nor that some markets might
                                                      response to a monopoly                           and then look at the outcome and say, “Oh,
                                                                                                       people really do want a fill-in-the-blank,” as
not, in fact, be oligopolistic. But you can’t
                                                      was for the government                           opposed to, “I’ve given you a huge sum of
answer these kinds of questions in the               to go into the business of                        money to buy this and I’m going to tax you
abstract. You actually have to go look and            providing monopolized                            heavily for buying that. Which one do you
try to figure out what’s happening. If we                      services.                               prefer?” Either we have equal treatment on
conclude that there’s actually a monopoly
problem in certain markets, we have a way of
dealing with it—called the antitrust laws. We
file an antitrust suit, we go in to court, we
prove our case—or not, if you look at the
                                                     objectives.
                                                                                   ”
                                                     is going to accomplish your intended

                                                         The second M is monopsony. If a pub-
                                                                                                       a level playing field or we need to stop pre-
                                                                                                       tending this is about competition.
                                                                                                           Would a public plan have lower admin-
                                                                                                       istrative costs? Medicare appears to have
                                                                                                       lower overhead for a couple of reasons,
hospital merger record—and then we use the           lic plan can rely on Medicare’s purchasing        most of which won’t apply to the public
remedies provided, the principal one of              power and pricing—and the Common-                 plan we’re talking about. Medicare has a
which is structural. You break up the mon-           wealth Fund, as one of its three options for      monopoly on the over-65 population. It
opoly and restore competition to the market.         designing a public plan proposes explicitly       doesn’t incur marketing or advertising
    As far as I can tell, in the entire history of   that—it can probably underprice private           costs. Medicare doesn’t form networks and
antitrust, no one has ever thought a plausi-         insurance. Two observations. If propo-            doesn’t do much to control utilization. It
ble response to a monopoly was for the               nents of a public plan are right that it can      does not do as much as it should to control
government to go into the business of                do that, then private insurers don’t have         fraud. Presumably none of these will be
providing monopolized services. The gov-             the degree of monopoly power in the mar-          true for the public plan. Medicare also
ernment is currently investigating Intel             ket that proponents thought they did.             relies on Social Security and the IRS to do
and Google, and it previously prosecuted             And, the degree of monopoly power was             some of its bookkeeping and to collect its
Microsoft for antitrust violations, but I            the premise for wanting the public plan in        premiums, which won’t be the case with a
don’t know anyone who thought the cor-               the first place. Leaving all that aside, let me   public plan. So it’s hard to see that the kind
rect remedy was for the government to go             just remind people that monopoly and              of magnitude of difference in a public plan
into the business of developing computer             monopsony are bad things. Setting up a            will look nearly as big as it does when com-

10 • Cato Policy Report September/October 2009
paring Medicare to private plans.                 ance. Among those with 50 to 150 workers,         California debate at least, there has often
    The public plan may have some compar-         94 percent do.” That leaves the impression        been a focus on how much it would cost to
ative advantage in overhead, but the advan-       that there is maybe one percent or five per-      cover the uninsured. The mandates do not
tage is not going to be that large. If we want-   cent “bad, scoundrel firms” out there that        simply say “You must only cover the unin-
ed to know how large that advantage might         are not doing what they are supposed to do,       sured,” but rather, “You must provide
be, we ought to look at the overhead in self-     but that the overwhelming majority of             ‘Cadillac coverage.’” Imagine that the Uni-
funded state plans, which public plan pro-                                                          versity of Kentucky, which pays 50 percent
ponents offered as their model. Then we                                                             of my premiums each month, was forced to
can actually compare apples to apples.                                                              pay 80 percent of the monthly premiums
    Of course the government plan might                                                             for my family plan. That is a new, signifi-
not work as hard to avoid high-cost indi-                                                           cant cost to the university. There are lots of
viduals, which means it will probably                                                               employees like that in California, lots of
attract a sicker population, eliminating                                                            people who already have employer-spon-
some of the purported cost advantages—                                                              sored insurance but whose expenses are
unless you risk-adjust. The problem with                                                            now being raised. In fact, almost half of the
risk-adjustment is that it is hard to do right.                                                     cost of the legislation is for people who
The challenge is in differentiating whether                                                         already have health insurance and who pre-
costs are lower because of favorable risk-                                                          sumably have come to some kind of agree-
selection or because you’re delivering                                                              ment with their employer on the right com-
higher-quality care to a chronically ill popu-                                                      pensation package for them, in terms of
lation. f you get that wrong you mess up                                                            wages and health insurance.
the incentives. And there’s no reason for                                                               It takes some work to try to break out of
                                                                                 Aaron Yelowitz
thinking regulators will favor the “home                                                            those sound bites that are easy to say, such
team,” is there?

AARON YELOWITZ: Several arguments are used
to convince people to support employer
                                                       “ Even in firms
                                                        that are already
                                                        offering health
                                                                                                    as, “All large employers are already offering
                                                                                                    health insurance to their employees and
                                                                                                    paying for a good share of it.” But when you
                                                                                                    look at the numbers carefully, a lot of the
mandates. Let’s do a little bit of digging
into each of them and try to see whether
                                                     insurance, a mandate                           claims don’t stand up.

they hold water.
                                                      would increase their                          MICHAEL D. TANNER: An individual mandate
   The first is that very few firms are affect-        costs for that final                         is a unique and unprecedented violation of
ed. A quote from the California Medical                   one third of                              individual liberty and choice. But despite its
Association in support of California’s “pay-               employees.                               intrusiveness, it is likely to be unenforceable
or-play” mandate back in 2003 said that
“Senate Bill 2 was actually a moderate and
reasonable step that would affect less than
5 percent of California employers.” But
there is a key difference between employers
                                                  firms wouldn’t be affected.      ”
                                                      The problem is that offering health in-
                                                  surance to your employees and your em-
                                                                                                    in the long run. The idea that you are going
                                                                                                    to track down every undocumented alien,
                                                                                                    every homeless person, every mentally ill
                                                                                                    person, people who change jobs, people
                                                                                                    who move in and out of a state, and find out
and the number of workers. There are very         ployees taking up the health insurance are        if they have insurance and then penalize
few large employers, but they employ a lot        two different things. Most large firms are        them for failing to get it is unrealistic.
of people. In California, the top 5 percent       offering health insurance, but they don’t             An individual mandate is also the first in
of firms employ 61 percent of workers.            necessarily offer it to all their employees. If   a series of dominos that would almost in-
There are very few Microsofts and Wal-            you’re part-time or seasonal, the odds of         evitably lead to greater government control
marts, which have tons of employees. So,          getting insurance are much lower. Offering        of health care. If you are going to have a
even though it doesn’t affect many firms, a       it to full-time, full-year employees is dif-      mandate for insurance, it will have to be
mandate certainly affects a lot of workers,       ferent from offering it to part-time employ-      heavily regulated and heavily subsidized.
and that will impact costs.                       ees. For most firm sizes, around two-thirds       You have to define, for example, what in-
   A second argument is that large firms          of employees are taking insurance. Even in        surance meets the mandate. Once you start
already offer health insurance. Eric Schlos-      firms that are already offering health insur-     down this road to mandating what this
ser, author of Fast Food Nation, in support       ance, a mandate would increase their costs        product that everyone has to buy will be,
of the pay-or-play mandate, said “Among           for that final one third of employees.            you create a special interest bonanza, as
employers with two hundred or more work-              The final point that I want to make           every interest group, provider, and disease
ers, 99 percent already provide health insur-     about employer mandates is that, in the                                          Continued on page 17


                                                                                                       September/October 2009 Cato Policy Report • 11
C AT O          P U B L I C AT I O N S

Johan Norberg tells the story of the financial crisis
Setting the Record Straight
                   hat exactly happened?”          ment’s mismanagement of the crisis and


“W                 Johan Norberg, author of In
                   Defense of Global Capitalism,
                   asks in his new book on the
recent financial crisis. “How could overen-
thusiastic home buyers in the United States
                                                   how we are repeating some of the very mis-
                                                   takes that caused it. Norberg calls his book a
                                                   detective story and, as he carefully traces the
                                                   clues, the causes of the crisis become clear.
                                                   Understanding those causes is crucial for
sink the global economy?” Banks collapsed          every American who has felt the recession’s
and thousands of Americans lost their              effects—and an understanding is exactly
homes. Two of the “big three” auto makers          what Financial Fiasco provides.
are reduced to beggars and wards of the                It was government intervention, not
federal government. Pundits and politicians        laissez-faire capitalism, that created the re-
attach blame to myriad actors, from the            cession. But that’s not what the folks in
Federal Reserve to greed on Wall Street, from      Washington would have us believe. From
a Congress desperate to increase home              the earliest days of the recession, “politicians   misrepresented risk and, eventually, lead to
ownership to reckless financial innovations.       who had never hesitated to claim credit for        the crisis. And it was the poor management
Understanding how we arrived at this reces-        each one-tenth of one percentage point of          of this crisis by federal regulators that exac-
sion means walking through a maze of regu-         growth or for each new job created . . . imme-     erbated the recession.
lation and deregulation, capitalism and cor-       diately went to great pains to pin the blame          Norberg ends the book with a warning.
poratism. The task is daunting.                    for the downturn on their lack of influence.”      “After government authorities had helped
    But with Financial Fiasco: How America’s           How does reality differ from the fantasies     create the worst financial crisis in genera-
Infatuation with Home Ownership and Easy           of politicians and pundits? “The story of          tions,” he writes, “the climate of ideas has
Money Created the Economic Crisis, Norberg         this storm in the global markets is the story      now shifted dramatically in the direction of
acts as an articulate and insightful guide. In     of how government intervention to solve            bigger and more active government.”
six short chapters, he tells the story of the      previous crises laid the foundation for a new      Financial Fiasco sets those ideas on their
crisis. The first three address monetary poli-     one,” Norberg argues. He shows how hous-           proper course and shows how liberty, not
cy, housing policy, and financial innova-          ing policy—a desire by politicians to help         greater government control, is the true path
tions—the key components that combine, a           more of us realize the American dream of           to recovery.
chapter later, to create financial catastrophe.    home ownership—encouraged private sec-             Visit www.catostore.org or dial 800-767-1241 to get
The final two chapters describe the govern-        tor financial innovations, innovations that        your copy of Financial Fiasco today; $21.95 hardcover.


Continued from page 11                             position of mandates does not necessarily          people into the pool, reducing the cost
constituency demands to be included in             eliminate uncompensated care. We haven’t           of health insurance by eliminating things
the product. As they are included, the costs       seen an elimination of uncompensated               like community rating—which drives up
rise both in terms of premiums and the             care in Massachusetts. In fact, the hospi-         the cost of insurance—might help. You
subsidies necessary to keep this affordable        tals there say that they still need their sub-     would think that if you want people to
for people. As the premiums and subsidies          sidies for uncompensated care.                     buy a product, creating legislation that
rise, the public demands cost controls, and            We are also told that we need to have          drives up the cost of that product isn’t
you begin to put in premium caps or other          an individual mandate in order to bring            a good way to do it. Yet we do things
forms of cost control containment.                 more young and healthy people into the             that make insurance more expensive for
    The primary reason we’re told we need          pool, which will lower premiums for every-         young, healthy people to buy, and then
to have an individual mandate is to get            one. That’s true only in so far as you pro-        we’re surprised when young, healthy peo-
people insured to deal with the problem            hibit actuarial underwriting of insurance.         ple don’t buy insurance. New York State
of uncompensated care. But let’s keep it           If people are underwritten on the basis of         was a classic example. When they intro-
in perspective. The cost of uncompensated          their health, it doesn’t matter whether you        duced community rating, some 500,000
care is actually about 2.5 percent of total        have young and healthy people or old and           people, mostly young and healthy, drop-
health care spending. It is a much more            sick people in the pool. Everybody’s premi-        ped their insurance because of the in-
manageable problem than is commonly                um is based on their own health.                   crease in premiums. There are ways we can
believed. We should also note that the im-             If we want to bring young and healthy          do this better.



                                                                                                          September/October 2009 Cato Policy Report • 17

				
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