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American health care can be free market or cheap. It can’t be both

March 2017 vox; Paul Krugman has a column Monday offering Republicans some advice for how to improve Obamacare. This paragraph is worth calling out:

One important answer would be to spend a bit more money. Obamacare has turned out to be remarkably cheap; the Congressional Budget Office now projects its cost to be about a third lower than it originally expected, around 0.7 percent of G.D.P. In fact, it’s probably too cheap. A report from the nonpartisan Urban Institute argues that the A.C.A. is “essentially underfunded,” and would work much better — in particular, it could offer policies with much lower deductibles — if it provided somewhat more generous subsidies. The report’s recommendations would cost around 0.2 percent of G.D.P.; or to put it another way, would be around half as expensive as the tax cuts for the wealthy Republicans just tried and failed to ram through as part of Trumpcare.

Let’s state the obvious: Republicans will not hear “spend a bit more money” as friendly advice when it comes to Obamacare. But to an extent I don’t think they appreciate, “spend a bit more money” is necessary for their health care goals, too.

Republicans in particular, but Americans in general, are confounded by an unusual dynamic in health policy: The health care systems that spend the least rely on government the most. This is difficult for Americans to grok because anti-government rhetoric takes as a given that government services cost more — we’ve all heard the stories of Pentagon procurement gone awry, or some agency somewhere spending absurd sums on pencil trays.

But in health care, the cheapest, highest-performing systems all do the same thing — they let government set prices centrally. That’s true in the UK’s absurdly inexpensive, and fully socialized, health care system; but it’s also true in the Singaporean system, which conservatives often hold up as a model.

Hell, it’s even true in the American system! Medicare and Medicaid pay much less for health services than private insurers. That’s one reason Obamacare relied so heavily on the Medicaid expansion — Democrats couldn’t afford to subsidize private insurance for everyone who needed it, and so they turned to the cheaper insurance Medicaid offered. Even now, the part of Obamacare that needs more money is the part based on conservative ideas — the regulated marketplaces where people buy private insurance.

The downside: price regulation can cut innovation, freedom

If you ask conservative health care experts about America’s sky-high health care spending, they tend to treat it as a necessary cost of the health system we want. Yes, other countries spend much less than we do on health care, but that’s because they’re freeloading on the innovation our high spending produces.

 As long as America is paying through the nose for new pharmaceuticals, there’s good reason for pharmaceutical companies to pump billions and billions of dollars into developing new drugs. If America moved to UK-style regulated pricing, then sure, we’d spend less money, but pharmaceutical companies would stop investing so much in discovering new drugs, and we’d lose so much innovation that the cure would be worse than the disease.

I don’t fully buy this argument — if innovation is our goal, we can incentivize it in more targeted ways than paying any price for anything drug companies develop — but there’s definitely power to it. However, if conservatives are going to be the last best hope for unregulated prices in the health care sector, they need to accept that the health care system they’re building will actually be pretty expensive. It might be better, and it might be freer, and it might be more patient-centered, but it’s not going to be cheaper.

The other argument you hear is that setting prices means rationing care. In the most stringent systems, like the UK’s, there are worthwhile treatments the government simply refuses to cover, and so patients have to pay for them out-of-pocket. This is an unacceptable abrogation of freedom — we don’t need government telling us what treatments we can and can’t but.

This is true, but it’s less of a difference with our system than people realize. We ration care, too — we just do so by letting individuals who can’t afford it go without it. This rationing by price is a particularly brutal form of rationing, and it’s one reason there’s such persistent political pressure to have the US government ensure access to medical care. It turns out that being free to not be able to afford lifesaving treatments is not a freedom Americans value very highly.

The question Republicans need to grapple with: is a free market system worth the cost?

Republicans have failed to resolve these tensions in their own health care ideas. They say they want to build a generous health care system around private insurance — the most expensive form of insurance — but they also don’t want to spend much money on it. So far, they have tended to try to resolve that dispute by cutting back on the “generous” and “insurance” parts.

This is more or less what the American Health Care Act attempted. But as Republicans learned, Americans don’t want a health care system where 50 million people go uninsured and the remainder struggle with higher deductibles and sparer coverage. This rules out the AHCA, but I think it also rules out the catastrophic care–only systems that are popular with conservative health thinkers. If Republicans want a more free market system, they are going to have to make peace with the public’s desire for health care that actually is useful when they get sick.

I assume Republican health care wonks are doing some soul searching in the aftermath of the AHCA’s complete and total collapse. This, I think, is where they should start. A health care system that aligns with conservative principles and actually provides decent, affordable coverage to Americans will be a very expensive system. They need to decide if that’s worth it.

If it isn’t, then Republicans should focus on tax reform, and make peace with the idea that America, like every other country, is going to move toward a system that saves money by turning more and more of the health care system over to the government. If it is, then they need to accept they’re going to have to spend more money, whether through Obamacare or something else.

The truth is the AHCA’s problems were fundamentally problems of money. There’s no reason that age-based tax credits, health savings accounts, and a more flexible Medicaid system have to lead to massive coverage losses. You could easily have imagined a version of the AHCA with subsidies sufficient to cover everyone — including Medicaid enrollees — with usable private insurance. That would’ve led to a much more free market system than we have now. But that legislation would have cost even more than Obamacare.

This is the problem Republicans face. America can build a free market health system, or it can build a cheap health system, but it can’t build both.

 

 

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