Anyway, here's the offending article:
Followed a Tapped link to this Ted Barlow piece on single-payer health care.
I'm not going to wax sarcastic about it, because it's a serious piece that deserves a serious rejoinder. But I will point out that the primary thrust of his argument is that single-payer is less expensive in Europe than our system, and therefore it will be here, too. This is a common logical fallacy -- but I must point out that several posts later he (correctly) slams the National Review for making exactly the same logical mistake in equating Russia's tax environment to ours.
But Russia's much different than we are! I hear my rosacious readers cry. Europe's practically the same!
Umm. . . European health care takes place in the context of a broad social welfare system that we haven't got, and which imposes serious costs on its society, like an ENORMOUS tax burden and a stagnant entrepreneurial environment, that we aren't willing to bear.
We can sit around and argue for weeks about what those differences are and which are relevant. The point is that it is not valid to make an a priori assumption that our experience will be like Europe's.
For one thing, there's the empirical evidence that turning anything over to the government makes it cost more, and suck more, than leaving it private. Exhibit 1, the Post Office, which provides worse service than UPS or FedEx, charges almost as much, and is still hemorraghing money despite its special tax status and the implied government funding guarantee that lowers capital costs. Exhibit 2, municipal swimming pools. Exhibit 3, public education versus Catholic schools. Etc. . . . You need some powerful model of how health care will be different to overcome that.
And how will it be different? Why, administrative costs, of course! Not so fast. Those administrative costs don't come from the outrageous price of paper; they come either from competing technological/administrative systems inefficiencies (and if you think that the government will fix these in a snap, note that some agencies are still finishing up their Y2K work), or labor. The idea that the government would arrange to fire a large group of potential voters is of dubious merit, and not borne out by historical experience, here or in Europe. Which applies to all labor costs: if you nationalize 15% of GNP, that means an additional 15% of our labor force in a civil service union. Prosperity is not just around the corner. There are certainly savings from having one set of billing procedures -- but absent competitive cost pressures, not as many as you'd think.
Please note that the wastefulness of competition was the almost plausible argument for every socialist system ever proposed. Which is true; it is wasteful. Just not as wasteful as a centralized bureacracy that only knows how to do things the same way it always has. Anyone who wants to convince me that centralizing billing is going to provide all the costs savings we'll ever need is going to need a passel o' proof.
Other costs might be lowered, but not to good effect. Medical and pharmaceutical research, and medical technology entrepreneurship, are vastly more innovative here than in Europe. Because here it pays. But after we've realized those vast administrative savings, and taken out the incredibly modest savings to be had from better preventative medicine (sure it saves money on more expensive emergency room treatments. Two problems: it also loses money to people who run to the doctor every time they have a sniffle. And the infrastructure for all that non-emergency care for the uninsured doesn't exist anywhere near where they live. Maybe we should build it, as a moral issue. But it isn't going to be cheap.
Third problem: much preventative medicine is dependant on the patients. Demonstrating that they will follow preventative regimes as well as the hyper-attended people in the expensive studies that showed reduced disease incidence will be a challenge.) -- after we've done those things, there's only one place the money is coming from: price controls on inputs.
So who's it gonna be? The doctors? They don't get paid all that much now, given their workload and education level, and the years they currently sacrifice being paid 32K a year with 100K of debt hanging over their heads while they finish their residency. Oh, you could make their education free, but that's an added cost you have to take into account -- and no matter how free you make it, they aren't going to go to grad school for 4 years to make 32K for working 100 hour weeks when they get out -- not when you cap their ultimate salary at, say, $75K. Sure, social workers do it, but forgive me, my English major friends -- social workers don't have many lucrative alternatives in the private sector. Smart people with a flair for science do. No one will work the hours residents do no matter what you do, for that kind of money. In other words, your costs for doctors are going up, or your quality is going down.
The nurses? There's a shortage now; you have no leverage to lower their pay. You can't change the total cost equation, though you can certainly shift where those costs lie. If you reduce their pay, you'll have to reduce their working hours, up their benefits or vacation pay, or something else to compensate them -- or soon you'll have only the dregs of the nursing community left.
The assistants? Maybe. But unlikely. The shortage of skilled PA's and lab technicians is forcing hospitals to raise their pay as well.
The adjunct staff, such as orderlies and janitors and cooks and receptionists and administrative staff and nutritionists? Brother, you do not grok civil service. These are the last people who will ever have their salaries reduced. Plus their benefits package just got much more generous when they joined the good old AFSCME.
Oh, you weren't going to let them join the civil service? I'm flat broke and I'll bet anyone who likes $1,000 that if we nationalize our health care system, all employees at nurse level or below, and possibly physicians, are unionized. But I'd check with the airline screeners before you make that bet.
The executives? 'Kay -- though I'd be uncomfortable trying to run a hospital without some administrators. And if you think that the guys you're working with now are bad, just wait until you meet Big John, who's been toiling at a back desk in Health and Human Services for 20 years and just wants to get out in five with a higher pension.
Plus their salaries may seem outsized, but are not the major component of most organizations' budgets.
Plus, I think we already cut them as part of our vast administrative savings.
So not much there.
Labor, in America, and unlike in most European nations, is subject to the call of more lucrative positions from the private sector. That's why it's the fastest growing element of our health care costs, after prescription drugs.
Oh, those prescription drugs. How are we going to save money? Cap prices on drugs and medical technology. And where are those savings going to come from? Well, the angry health-care investors you just bankrupted, of course (wouldn't try that in an election year!) That's not what we want, the advocates say, but c'mon -- if health care gets nationalized, you can kiss the biotech and pharmaceutical industries good-bye.
I'm being alarmist, you say. No I'm not; I'm being totally realistic. Where's the money going to come from? The profits that cover a) financing and b) R&D.
But that's not what you want, you say. You're willing to let 'em make a reasonable return, say 5%. It's those outsized profits you want to recapture.
Oh? Going to subsidize their losses, then, in bad years?
Ahem -- anyone home? Oh, hear that hollow echo.
The outsized profit argument is based on a misunderstanding of the way capital markets work. Those profit margins are what is necessary, more or less, to get investors to subsidize the risk inherent in an industry where profits are completely dependant on luck. If it were not, we'd have more me-too drugs than we do already, until profits were competed down the to point where new entrants couldn't raise capital. Bio-tech firms, which are even riskier, make even bigger profits -- the ones that survive. The other 9 out of 10 don't make any money at all. Kill the profit margins, and you kill their access to capital.
We'll arrange loans, you say.
Which worked so well in Japan and Indonesia.
Oh, you're just being ridiculous, I hear. We'll get the money back from advertising. Okay, in 1999 the Pharmaceutical industry spent $1.6 billion on consumer advertising. (Many people are confused because the SG&A -- selling, general and administrative expenses -- item on the Income Statement includes pretty much all non-factory overhead, which is a much larger number than marketing expenses. And even then, 85% of pharmaceutical marketing consists of providing fact sheets and samples -- and, to be fair, dinners -- to physicians. But that doesn't change when you do business with the government). Now, the revenues of Pfizer -- which was hurting, pre-Viagra -- were $14 billion. That's one company that wasn't doing much business. How much did you say we were going to save on advertising?
Not to mention that if we really thought this could work, we could accomplish it much more cheaply by banning consumer advertising again.
No, the money's coming out of profits. And that means investment and R&D. And that goes double for pricey new medical technology.
Which means we aren't getting any new pricey medical technology, or drugs either. The day we nationalize health care is the day we say bye-bye to medical innovation. Think I'm being alarmist? Almost 50% of the world's pharma companies now reside here, many of which moved in the last ten years, as we became their primary market. The reason pharmaceutical prices are increasing so fast is that we're subsidizing R&D for the rest of the world. Don't tell me we're not, feisty person: the rest of the world buys close to marginal cost -- the cost of producing one extra pill. Yet R&D is close to 20% of worldwide revenues. Someone's paying for that R&D, and I don't think it's the health care fairy. Now, do you think that the politicians who will set prices will, when push comes to shove, consider the long term consequences of cutting pharma profits below the level required to sustain R&D, or the short-term consequences of making the AARP pay more for their drugs? If you think a) is the answer, justify this in the light of Europe's unwillingness to do so.
But what about all that needless duplication? You cry. Again, that was the rational for central planning. "We do not need all these wasteful 'me-too' shoes! We will produce one best shoe for all workers and save much money!" Zoloft and Prozac do basically the same thing (or so I'm told) but sometimes one works where the other doesn't. And in cases where that isn't true, having two drugs on the market that do almost exactly the same thing pushes down prices for consumers.
The point is that the much vaunted potential savings in health care come almost always from people who've either never worked for the government, or never worked for a business. They assume that they can cut here and there without much thought for the systemic changes that such cutting would make. This is not to say that you couldn't cut some costs; you could. But I'm sorry -- the government is not going to squeeze major new efficiencies out of the system; if you think that insurance billing is byzantine, go check out some government procedures for reference. It's going to cut costs by cutting back on some of the stuff that the health care system currently does. Pharma and medical research. Training. Service provision. The reason that Canada can do things on the cheap is first, that they have a different population from ours whose health care needs are probably not the same, and second, that they free ride on our research establishment. I'm sure it's possible to cut some of the profits out of that establishment without destroying it -- but do you trust the government to surgically detect that amount? Because the companies can be destroyed quickly -- their R&D burn rates are huge. But once you've pulverized them, it will take a decade or more to rebuild. More, actually, because the organic chemistry students and medical technology engineers will drop out of the pipeline. And investors will be a little gun-shy about handing money over to a firm after you nationalized it once -- better make that profit margin 40%.
An industrial economy is like a complicated engine. You can't pull a big chunk out of it and expect it to keep working -- nor imagine that once you've disassembled it, you'll be able to put it back together the way it was.
Advocates of single payer claim that the problem is the free market -- when health care hasn't functioned like a free market since WWII. Oh, it's freer than elsewhere -- but Medicare spending is 17% of the total market; Medicaid another 5% or so, and almost all of the rest comes from employer subsidized health insurance -- which is not a free market item, thank you very much; it's a product of the deductibility of medical insurance, which is an otherwise ludicrously inefficient item for employers to buy. And what does that mean? It means that the consumer of the health care -- you -- is not the one paying for it. The free market doesn't work? An economist could predict exactly what is happening in the health care market. The consumers want to consume as much as possible. The payers want to pay as little as possible. And the companies providing the insurance pretty much don't care, because they're screwed either way -- either they get unhappy employees, or higher insurance prices.
And the government will do so much better? No. Remember, the government isn't incented to see that you get good health care; it's incented to see that you don't get mad enough to vote the politicians out of office.
But you've just created another, immensely powerful interest group who will vote on the issue, every single time: the employees 15% of the economy you just nationalized. Focused interest groups, unless they are very small, and the costs are very high, almost always win over the national interest, because for you and me our crappy health care is just one of many issues that we vote on, while for that fifteen percent, if their interest is harmed by, say, budget cuts, it's the only one -- and 15% is enough to swing a lot of districts. Imagine our health care system as the school system with IV's and blinking lights.
All right, feisty person: explain to me how health care is different from education, politically speaking. It's vital and we all use it at one time or another, and most of us who use it lack the background to determine whether we're getting good care. That's exactly the place where special interest groups with a lot of votes, like the one we just created, exert the most leverage.
We'd do a lot better to try a free market mechanism: let the people consuming the health care pay for it. End the tax deduction, or transfer it to the individuals in the form of Medical Savings Accounts. They're the only people, ever, who will be incented to make sure that they get the best possible deal for their money.
And that's what we call a free market.
posted by Jane Galt at 12:56 PM | Comments [12]