Healthcare Reform: Rationing

The Objectivist
Rationing Healthcare
Dunkirk-Fredonia Observer
July 27, 2009

President Obama and Democrats in Congress are trying to reform health care. They claim doing so will drive down costs and increase quality.

Their concern over costs is a powerful one. They note that the United States spends more on health care than any other nation ($7,439 in 2007). Using 2004 figures, this is 92.7% more than any other G7 country (France, Germany, Italy, Britain, Japan, and Canada). The U.S. also spends a higher percentage of the economy (Gross Domestic Product or GDP) than all but one other member of the United Nations (in 2007 this was $2.26 trillion or 16% of GDP).

These costs wreck havoc on personal finances. One study by David Himmelstein of Harvard University found that medical expenditures caused 60% of all personal bankruptcies in the U.S. Prescription drugs are also more expensive than in almost any other country. Professor Peter Singer of Princeton University notes that there are still other troubles. He notes that the cost of health insurance is skyrocketing. It has doubled in the past decade, rising more than four times faster than wages. He also notes that in eight years Medicare will be in the red.

Despite all this spending, on some accounts, the U.S. healthcare gets bad grades. A 2008 report by the Commonwealth Fund found that despite all this money, the quality of health care in the U.S. was worse than 19 other developed industrial countries with which it was compared. The World Health Organization also ranked the U.S. 37th in overall performance and 72nd in overall health level in comparison to the 191 member organizations it included in its study. The U.S. does worse than other wealthy nations when it comes to life expectancy and infant mortality, although it is not clear whether this is the result of differences in the health-care systems.

The President and Congress have proposed a number of reforms. They propose to expand Medicaid (medical services for the poor), a credit to subsidize the purchase of medical insurance, a public health-insurance option to compete against the private ones, a new tax on individuals who don’t purchase insurance (2.5%) and on employers who don’t provide it (8%), a cap on out-of-pocket spending, and increased use of the collection and use of health-information technology. These reforms (specifically the Affordable Health Choices Act and companion measures) are estimated to cost anywhere from $600 billion to $1.6 trillion. For a government that already faces a staggering $1.85 trillion deficit (13% of the GDP), massive deficit next year (10% of GDP), and reeling economy, the new spending and taxes pose a real threat.

One interesting argument for these proposals is by Peter Singer. He argues that these reforms will involve intelligent rationing rather than the haphazard rationing that occurs today. Singer argues that health care is a scarce resource and like all resources it is rationed. In the U.S., he argues this is done by price. That is, you get what you or your employer can afford to pay for. He argues that in the public sector, specifically Medicare, Medicaid, and hospital emergency rooms, rationing is done by long waits, high copayment requirements, and low payments to doctors and hospitals, which discourage some of them from serving public patients. Singer argues that this haphazard way of rationing is too expensive and lowers the overall quality of health care by concentrating too much spending on less important cases.

Government rationing involves the government refusing to pay for inefficient treatments. Singer notes that last year in Great Britain for example, the National Institute for Health and Clinical Excellence (NICE) set a limit of $49,000 on the cost of extending life for a year. This prevents it from spending money on drugs that cost too much. He uses the example of Sutent, a drug that extends life for those with advanced kidney cancer for six months and costs $54,000.

Singer argues that the government already is engaged in trading off lives for other values and that this is no different. For example, he notes, in the U.S. the Department of Transportation does not recommend safety measures that cost more than $5.8 million per life. Similarly, the Consumer Product Safety Commission uses a $5 million per life figure in deciding what consumer protections to require. Others argue that because there a multiple good things in life and we can’t escape the need to make trade-offs. Life is one of those good things. For example, lowering the speed limit to 50 mph or keeping the blood-alcohol content level to the (current) 0.08% might save lives, but it does so at the expense of pleasure, liberty, and wealth. For example, the speed limit would increase driving time and decrease the efficient movement of goods. The alcohol-content law increases incarceration and police intrusion.

Singer argues that rationing need not prevent someone from spending their own money on inefficient treatment. Some countries (for example, Australia) permit people to purchase private insurance to supplement public plans.

One problem with government rationing is that some countries do not allow for private options. A single-payer system requires all healthcare to be paid for by the government and does not allow a private option. Under such a system, for most people, government rationing would be the final word on who lives, dies, or gets what treatment. Thus, the system could deny lifesaving surgery to the elderly or surgery to those who suffer from an array of health problems. The idea of government bureaucrats or our crass Congress making these life-and-death decisions is troubling. Singer would likely respond that such rationing occurs anyway and at least this way it would be done in a rational manner.

A second problem with government rationing is that in general the government tends to make things worse. It seems clear that if the government produced and distributed food, computers, and cars, prices would go up and quality would go down. It is not clear why we should think that healthcare is different. Singer might respond here by citing the international comparisons mentioned above.

He might also argue that healthcare is a different sort of good and hence less appropriate for market forces. Following Princeton economist Paul Krugman, he might note two differences between healthcare and consumer goods. First, unlike consumer goods, healthcare involves extreme costs (for example, bypass surgery is very expensive) and must be done via insurance. Second, unlike consumer goods, healthcare purchases do not allow for experience or comparison shopping (for example, it is not clear how one compares doctors). I find the Krugman responses unconvincing, but many would disagree.

A third problem with government rationing is that there is a strong concern about liberty. The government already pays just less than half of all healthcare costs. Once it begins to pay a much larger figure, the costs can be used to justify a wide range of restrictions. The government might restrict what people eat, drink, and smoke, how often they drive, what recreational activities they engage in, etc. It might also involve the government collecting sensitive information on all of us in order to drive down costs. Singer would likely respond that if we are worried about liberty, then we should act to protect it rather than letting concerns about liberty bleed over into other areas.

I’m skeptical of government healthcare. Still, it is an interesting issue how government rationing stacks up against market rationing and whether the current hybrid system (roughly 50% government and 50% private) is serving us well.