Blame It On The Profits
Steven Pearlstein has a column on the American health care system based on a recent study by the McKinsey Global Institute. As Mr. Pearlstein reads it, the problem with the American medical system is all about the profit - it's all about the doctor profit stacked on the drug profit stacked on the insurance profit. If the government would just take over and get rid of all that profit, the system would run smoothly and be much cheaper. I am flabbergasted that anyone at Cato would remark on such an article with approval.
First, while I worked at McKinsey & Co, I never worked for the global institute. However, though I have not yet read the study, it would be unusual to the point of uniqueness if their recommendation for the industry was more government control and less profit motive, but I guess it is possible. More likely, Mr. Pearlstein is reading the study through his own progressive lens. Anyway, let me deal with a few parts of the article:
Even after adjusting for wealth, population mix and higher levels of
some diseases, McKinsey calculated that we spend $477 billion a year
more on health care than would be expected if the United States fit the
spending pattern of 13 other advanced countries. That staggering waste
of money works out to 3.6 percent of the nation's entire economic
output, or $1,645 per person, every year.
I will agree that for a variety of reasons, there is a lot of waste in the medical system. We will get to "why" in a minute. However, note that the author is taking a leap from "we spend more per capita than Europeans" to "staggering waste." The US spends more per capita on a lot of things than the Europeans, in large part because we are wealthier (by a lot, and more every day). One man's waste is another man's preference. However, I would agree that health care is unique, in that it is the one industry where the decision maker(s) on whether to purchase a service is not the same person who is paying the bills. I think we will find, though, that I and Mr. Pearlstein differ on who the person should be who should do both simultaneously (I say each person for himself, he says Nancy Pelosi and George Bush for everyone).
But let's get into all that money-grubbing. Mr. Pearlstein reads the study as saying the problem is all that profit. Because we have layers of profit in the distribution channel, our health care costs more than it does in Europe, where you have the efficiency [sic!] of government management. Before we get into detail, I would observe that this fails a pretty basic smell test right off: Nearly every single product and service we Americans buy, all of which are rife with layers of nasty profits in the supply chain, are cheaper than their counterpart services and products in Europe. If this layering of profit without government management is a problem, why is it only a problem in health care but not a problem in thousands of other industries. But anyway, to details:
Let's start with one the American Medical Association hopes no one
will notice, which is that American doctors make a lot more money than
doctors elsewhere -- roughly twice as much. The average incomes of
$274,000 for specialists and $173,000 for general practitioners are,
respectively, 6.6 and 4.2 times those of the average patient. The rate
in the other countries is 4 and 3.2.According to McKinsey, the
difference works out to $58 billion a year. What drives it is not how
much doctors charge per procedure, but how many procedures they perform
and how many patients they see -- a volume of business 60 percent
higher here than elsewhere.
Ooh, those greedy doctors. They are the problem! But read carefully, especially the last sentence. He makes clear doctors in the US are not making more because they charge more, they make more because they see more patients --- ie, they work harder than their European counterparts. Where have I heard this before? Again, in every other industry you can name, the fact that our workers work harder than their European counterparts is a good thing, leading to lower costs and higher productivity. So why is it suddenly bad in medicine? For this I would instead draw the conclusion that their are perhaps too many procedures (an expected outcome of the screwy incentives in the system) and thus too many doctors. Doctors, whom Mr. Pearlstein paints as enemy number one in the health care system, are actually its greatest asset, being 60% more productive than their European counterparts, certainly something to build on.
Don't be distracted by arguments that American doctors need to make
more because they have to pay $20 billion a year in malpractice
insurance premiums forced on them by a hostile legal system, or an
equal amount for all the paperwork required by our private insurance
system. The $58 billion in what the study defines as excess physician
income is calculated after those expenses are paid.
Walter Olson, are you listening? Since Walter is not here, I will say it for him. Malpractice insurance premiums themselves are only a part of the cost of runaway malpractice. Defensive medicine, including the overuse of tests, is another big cost. Malpractice is one big reason doctors prescribe so many more tests and procedures than their European peers.
Proponents of a government-run "single-payer" system will certainly
home in on the $84 billion a year that McKinsey found that Americans
spend to administer the private sector portion of its health system --
a cost that national health plans largely avoid. But as long as
Americans continue to reject a government-run health system, a private
system will require something close to the $30 billion a year in
after-tax profits earned by health insurance companies. What may not be
necessary, McKinsey suggests, is the $32 billion that the industry
spends each year on marketing and figuring out the premium for each
individual or group customer in each state. Insurance-market reform
could eliminate much of that expense.
What freaking planet does this guy live on? Does he really think administrative costs are going to go down in a single payer system? That's insane. I am willing to believe that the number of procedures will go way down, as Congress starts to ration care in favor of building bridges for their constituents (a savings likely offset as America's world-leading doctor productivity discussed above takes a nosedive). Does he really think that administrative costs will go down? Most administrative costs today are for satisfying government paperwork requirements - how is having the government run everything going to reduce these? I would argue exactly the opposite -- that eliminating government from the equation would reduce private administrative costs substantially.
I won't bore you with any more, but he doesn't miss the chance to blame health care costs on drug and hospital company profits as well. Just for entertainment value, I urge the reader to look up a few P&L's of some of these companies. The profit as a percent of sales for Humana is 2.3% of sales. So if you wiped out all that egregious profit at Humana, you would save all its customers a whopping 2.3% (before, of course, the incentives problems take over and costs bloat for the lack of a profit incentive to manage them). Insurer CIGNA's profit is a bit under 10%. Merck's profit is a more comfortable 19% of sales, which means that by cutting their profit to zero we could get nearly a 20% discount on drugs. Of course, new drug development would cease, but the AARP doesn't care about drugs that won't be on the market after their current constituency is dead.
Isn't it more reasonable, as I am sure the McKinsey study actually concludes, that the problem is not in companies making profits or doctors working hard, it is in having a health care system, built the way it is through distortive tax law, that gives neither patient nor doctor any reason to consider costs when deciding on care? Can you imagine such a screwed up system in any other industry? How inefficient would retail be in the US, for example, if we all had a "shopping policy" that paid for all our purchases. Would you give a crap about the price of anything? Would you hesitate one second buying something you may not need but is covered by your "policy"?
Mr. Pearlstein sortof agrees, but its hard to find this incentives point in the middle of all his blame-it-on-the-profits progressive rhetoric. Here is our one hint that Mr. Pearlstein understands that the true problem is this mismatch between payer and decision-maker. Unfortunately (emphasis added) he has a really destructive perspective on the issue:
What we have here is pretty good circumstantial evidence of
Pearlstein's First Law of Health Economics, which holds that if you pay
doctors on the basis of how many procedures they do, and you leave it
to doctors and their insured patients to decide how much health care
they get, consumption of health services will rise to whatever level is
necessary for doctors to earn as much as the lawyers who sue them.
Mr. medico-fascist Pearlstein thinks the big system problem is leaving it to you, the patient, to decide what health care you get. The solution for him is to have the person spending the money, preferably the US Congress, decide how much health care you get. I think a much saner solution, and the only one consistent with a free society, is to get back to a system where the same person who gets the care, pays for the care. If its a good enough system for 9,999 things we purchase each year, its good enough for health care too.
