Justin du Coeur (jducoeur) wrote,
Justin du Coeur

Yes, yes -- lovely plans, but what about the hard problem?

[I've ranted a bit about this in comments in other peoples' journals. But let's actually explore the problem in some detail. Mind, I'm an armchair economist, and I am *certainly* over-simplifying. But not, I believe, as much as the politicians are doing.]

So I was just reading an overview of Clinton's proposal for reforming the health-care system. Moderately sensible stuff, and a plausible approach to getting universal health care without totally shaking up the system. It seems like this is where all of the candidates are going, with models that involve some mandates each for individuals and companies, and maybe some buy-in to the federal system. Which is great, and will bring health care costs for individuals down a bit (since it gets the healthy-but-uninsured on the rolls). Temporarily. Problem is, they don't deal with the heart of the problem -- at least, not explicitly. But I'm getting ahead of myself.

I mean, we're dealing with constant double-digit price increases at this point, and it's not all *that* hard to understand why. It's simple economics, and the fact that health insurance these days is qualitatively different from most other kinds of insurance, because of how it interacts with research. Walk with me a minute, and let's look at the lifecycle of a price increase.

It starts with you, the consuming public. Some of you have a problem. It's probably not instantaneously life-threatening, but it worsens your quality of life, and might be deadly in the long run. It might affect many of you (like, say, diabetes) or just a few (like the numerous rare but horrible genetic disorders).

Okay, sayeth the biotech industry, maybe we can do something about that. They do some research, and come up with a drug or treatment that can help. In most cases it isn't a *cure*, mind you, but it helps with the symptoms. It might increase your lifespan, at least statistically. That's a wonderful thing -- except that it's really quite expensive. They've spent a substantial amount of money on the research, and far more on the trials, in order to prove to the FDA that the drug is safe. And of course, they have colossal overhead of development for all the drugs that didn't work out. So they patent the thing and release it, but they release it for a price that is hundreds or thousands of times the cost of production, in order to make their money back.

So you come back into the picture. Look, it's a helpful drug! You want this thing. Of course, you can't afford to buy it yourself, but that's where insurance comes in, and where the economics break down.

The thing is, if you had to buy the drug yourself, you'd think about it carefully. Is this drug *worth* that much money to you? I mean, yeah, it helps quality of life, but there are lots of things that help quality of life, and you don't do all of them. Heaven knows, if you exercised more and ate right, it might do more for you than the drug does. Normally, you're considering the tradeoffs of cost vs. benefit, and that limits how high the costs can get -- if the pharma industry charges too outrageous an amount, not enough people will buy it, and they'll lose money -- that's economics 101.

But say you have health insurance. *You're* not paying for the drug, the insurance company is. And they've already been paid, so you damned well want them to pay for it -- isn't that why you have insurance? Of course, normally economics would come into play here as well, just at a remove. Some insurers would be generous about paying for such things, and they'd be conspicuously expensive; some would be more penny-pinching, and they'd be somewhat cheaper to buy from. And indeed, that does happen to some degree. But even *that* simple economic relationship gets broken down, because of the employers in the middle.

Because of course, most of you aren't even buying your own insurance. Yes, you're paying a bit of it, but mostly you're getting insurance as a side-benefit of employment. You expect that insurance -- it affects which jobs you'll accept -- and your employer is paying most of the bill. The insurer keeps raising their rates (to pay for the ever-increasing number of high-tech solutions), and the employer has basically no choice but to pay, in order to keep their employees. And for any company that's at least mid-market, they have to pay for a pretty gold-plated insurance policy, because that's what the employees demand.

So the prices keep going up and up, because really -- who has any motivation and means to stop it? The pharma and biotech industries are thriving on this cycle: it's their lifeblood. The insurance industry cries crocodile tears about their need to keep charging you more and more, but their profits are roughly a percentage of their premiums, so they're doing pretty nicely out of it. *You* are benefiting from all these new cures -- there are enormous costs to you for them, but they're broadly hidden in the cost of goods and services, and spread among the entire populace. And the employers -- well, the employers are pretty much getting screwed, which is why they're the ones who are screaming loudest about the issue. And of course, anyone who is outside the system is getting *really* screwed, but they're just the little people, so who pays attention to them?

Well, there are now enough of "them" for the politicians to pay attention: when you have tens of millions of people in a category, that trumps most considerations of soccer moms, so the politicians eventually wake up to the opportunity. Hence the new plans, which are mostly aimed at placating that category of outsiders, and trying to make sure that no one is outside the system. I'm kind of skeptical about the whole thing, but it's certainly plausible that everyone can be brought into this giant conspiracy, and that's good politics.

But note: it doesn't really deal with the fundamental problem -- the disconnect between your insatiable demand for new medicine and who is paying for it. It's a step in a more plausible direction, since more people are under the single giant umbrella of the federal employees policy, but it still leaves a vast number of separate payers (most of those individual employers), who don't have much power to control costs.

To be fair, some of these plans *might* manage to control costs, but only in a way that no politician dare talk about. Some of them allow individual employers to opt out of paying insurance themselves, and instead pay to be part of the federal system -- a stealth move towards single-payer. The federal employees system *can* control costs, simply because of scale: they have room to bargain down costs. Moreover, as an insurer of last resort, they have more power to tell *you* that you don't get everything: they can declare that this drug just isn't worth the cost, and you're not going to get it.

Because really: in this environment, I'm not sure that there is alternative to rationing. With the biotech firms on one side, constantly developing new stuff, and the consumers on the other side insatiably consuming that new stuff, *something* needs to be in the middle putting a brake on that. In a normal market, that brake comes in the form of price. If we paid for our own insurance, price would still come in, albeit as a muted and inefficient signal. But in the current system, with the price signals filtered through the insurance company *and* the employer before getting to you, they just don't work very well. But a giant common insurer, sitting between the drug makers and the consumers, has the power to say "no".

I confess, I don't love this -- the libertarian in me sees things drifting, over the course of 10-15 years, towards a single-payer system that doesn't leave much room for individual choice, and that's not to my taste. But at least it makes some economic *sense*, unlike the insane current system. I wish I knew whether the politicians are actually expecting this, or if they're actually naive about the economics. If Clinton is still trying to move towards a single-payer system, and is simply proposing things in this way because it's a subtle approach to get what she wants, then I can at least respect the political savvy implicit in that, if not the honesty with the populace...
Tags: politics
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