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A Better Choice: Healthcare Solutions for America

John C. Goodman, the “Father of Health Savings Accounts,” joins us for a discussion on the American health care system.

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Where did the health insurance system as we know it come from? Why are so many people these days getting insurance through their jobs? Why are prices so particularly high in American health care? Is Obamacare working?

John C. Goodman notes that what’s critical to understanding the American health care system is that the identity of the party that ends up paying the bill has a huge effect on pricing in the medical marketplace.

Show Notes and Further Reading

John C. Goodman’s books A Better Choice: Healthcare Solutions for America (2015), Priceless: Curing the Healthcare Crisis (2012), and Patient Power: The Free-Enterprise Alternative to Clinton’s Health Plan (1993).

Transcript

Trevor Burrus: Welcome to Free Thoughts, a podcast project of Libertarianism.org and The Cato Institute. I’m Trevor Burrus.

Aaron Ross Powell: And I’m Aaron Powell.

Trevor Burrus: Joining us today is John C. Goodman, Senior Fellow at the Independent Institute and President and Founder of the Goodman Institute for Public Policy Research. He is the author of Priceless: Curing the Healthcare Crisis and the new book A Better Choice: Healthcare Solutions for America. He is also the co-author of 1992’s Patient Power from The Cato Institute. He has been called the “Father of Health Savings Accounts”. Welcome to Free Thoughts, John.

John Goodman: Glad to be with you.

Trevor Burrus: So I would like to start with the title of your last book. You mentioned in your newest book which is a – sort of summation of parts of your last book. But the title of your last book Priceless is an intentional double entendre.

John Goodman: It is.

Trevor Burrus: So in what way is the American healthcare system priceless?

John Goodman: Well, on one sense, there are no real prices in the medical marketplace and it’s priceless in that sense. But at the same time, your healthcare is priceless and I wanted to get both of those ideas across.

Trevor Burrus: So how did we get to a priceless – it’s a very big question. But – and it’s almost the entire question of this podcast. But how did we get to a priceless American healthcare system?

John Goodman: Well, how we got there was over a 100-year period. We have completely suppressed normal market forces and we’ve done it year after year, decade after decade until we reached a point where no one sees a real price for anything. No doctor, no patient, no employer, no employee.

Aaron Ross Powell: What does that mean to not see real price though? Because if I go to the doctor, I get a bill and it has got cost on it, so there is a price I’m looking at.

John Goodman: Well, when you walk in the doctor’s office and you ask what this is going to cost, they probably don’t know and there is no real price there. They have different payment rates from different insurers, so depending on whether you have BlueCross or Aetna or Medicare. The reimbursement or the payment would be different. Those aren’t real prices. That’s not what happens in a normal market. You don’t go to a restaurant and you pay one fee and the table next to you pays a different fee for the same food.

Trevor Burrus: So what happened – in 1935, just playing it random here, there was health insurance I assume. Did it exist before then or …

John Goodman: Well, there was very little then but over the period of the 20th century, principally because of the American Medical Association, people did get pushed into health insurance schemes that – and we encouraged through the tax law for people to use insurance rather than out-of-pocket payment, third party insurance rather than self-insurance through a health savings account.

We encourage, through the tax law, people to get in group insurance through an employer rather than have it on their own because the tax advantages were there and we – because there’s an open-ended tax subsidy, we encourage people to over-insure. So at the end of the day, we have insurance companies paying almost all the bills and when third party insurers – by that, I mean insurance companies and government and employers. When they’re paying all the bills instead of the patient, the providers no longer are competing for us on the basis of price and quality and access to care.

Trevor Burrus: So out of pocket was probably most of the way that medical costs were paid for in the 30s and insurance starts to come around in the 50s and the first big US program was Medicare and Medicaid, correct? I mean like big top-down programs.

John Goodman: Those were the first big government programs and they’re huge and we have almost 50 million people in Medicare and maybe 70 million people or so in Medicaid. So these are huge programs and all run by government and all the bills are paid by government.

Trevor Burrus: How do those affect the price of healthcare in general? They have effects on the price.

John Goodman: You mean the cost.

Trevor Burrus: Yes, on the cost. Yeah.

John Goodman: Well, we didn’t have a serious healthcare inflation problem until 1965 when we got Medicare and Medicaid. Interestingly, there’s not a lot of evidence that the introduction of Medicare made much difference for the healthcare of the elderly. But we definitely spent a lot of money, our taxpayer money, and that additional spending, billions and billions of dollars forced up prices. It has been going on ever since.

Aaron Ross Powell: But how much of that is policy forcing up prices and how much of that is simply medical care becoming more sophisticated? Because I mean medical are and prior to the 20th century, for all intents and purposes didn’t really exist. I mean there wasn’t much they could do and what they could do was pretty cheap. But then we had radical explosion in what we’re capable of, which brought a whole lot of technology and that stuff is expensive.

John Goodman: Well, it’s expensive because we reward the kind of technology that increases cost and therefore increases payments by third party payers. If you contrast this with, if you like, cosmetic surgery or LASIK surgery where there are no third party payers, we’ve had in those two fields tremendous innovation, tremendous innovation and technological advance, and yet the real price keeps coming down. So in a normal market, technological improvement tends to lower cost. Only in healthcare does it continue to raise cost.

Aaron Ross Powell: But aren’t those – I mean those things are elective surgeries. They’re not necessary care. You can choose not to get LASIK and you can get glasses, which are good enough, and you can choose not to get cosmetic surgery. So to some extent, we’re very price-sensitive on that. They have to keep costs down, right? Or people will just opt out. But cancer treatments, you can’t opt out of.

Trevor Burrus: Dialysis, heart attacks.

Aaron Ross Powell: And those also have a huge technological component.

John Goodman: Yes, but you’re not focusing on the right variable here. People can choose not to do a lot of things in healthcare. A lot of people who could use a knee replacement don’t choose to get their knee replaced. So there’s – a lot of choices are being made. But that’s not what’s critical here. What’s critical is who pays the bill and when we pay the bill ourselves, there’s never a question about price. We know – when you’re going for a cosmetic surgery procedure, you know in advance what the price is going to be, same for LASIK surgery, same for the walk-in clinics.

Wherever the third parties are, you know what the prices are and you also know that the providers are competing for your business based on the price quality and access.

Aaron Ross Powell: How much of this though is – do we want prices in there in the sense that – do we want people facing these bills and making those decisions when they’re in a highly vulnerable state? You’ve just found out that you have pancreatic cancer. You’re not necessarily thinking straight. You’re in stages of grief and now you have to make these decisions about whether you want to bankrupt your family in order to support yourself. 

It seems like – I mean if we analogize that to – there are other areas where people are in highly emotional states, right? When they buy stuff, where there are markets, and yet the prices are extraordinary, something in like the wedding and funeral industry. There’s competition in the wedding and funeral industry, but it doesn’t seem to be doing much. The prices are extraordinary, certainly way above what they would need to be to have even enormous profits in these things. But people just can’t think straight when a loved one had just died or when they’re about to have the most important day of their life.

Trevor Burrus: Or when they have pancreatic cancer.

Aaron Ross Powell: Right. So do we want – you can make the argument that like, look, we want to protect them from that. We want them to not have to think about that and just be able to get the healthcare that they need.

John Goodman: What we want is what Adam Smith wrote about 200 years ago and that is we want people on the producer/supplier side to find it in their self-interest to meet our needs. That’s what’s critical here. It makes it more difficult if it’s an emotional situation. But people are going to have advisers. They have doctor advisers and that works quite well.

But if on the supply side of the market, people are not trying to meet our needs, if they’re not competing on price and quality and access, then they’re not going to meet our needs very well.

Trevor Burrus: How do you react when someone says – which I’m sure you’ve had many times and maybe you’ve already answered this question, that healthcare is a right?

John Goodman: Well, I react by saying that no country in the world has made healthcare right. It’s just rhetoric. If you live in Canada, you don’t have a right to any particular medical procedure. You don’t have a right to an MRI scan. You don’t even have a right to a place in line if you’re the 50th heart patient waiting for surgery. You’re not entitled for the 50th surgery. Other people can get in front of you. In fact, Americans can go up and pay the hospital and get ahead of you.

Trevor Burrus: So this is a matter of both legal – they don’t have a right to it legally and they don’t have a right to it functionally.

John Goodman: Yes, and yet they continue to use the language of rights because it somehow makes everybody feel good. So the right to healthcare has no content as far as I’m concerned. It’s meaningless. What is meaningful is designing a healthcare system that meets people’s needs efficiently and does so at minimum cost and produces high quality results and doesn’t make us wait for months or years to get it.

Trevor Burrus: And that’s something you’ve written about a lot in the – in all of your books. But the time price versus the money price, can you explain a little bit how that works?

John Goodman: Well, people on the left tend to ignore the time price of care and that’s because they believe in healthcare systems where money plays no real role, money from the patient. So instead of [Indiscernible] we ration by waiting. By the way, we’ve also done that in our country. We wait for care everywhere. We just don’t wait as long as the Canadians wait but waiting is costly. Time is valuable. The walk-in clinics and the CVS pharmacies are called “mini clinics” and the reason for that term is they’re suggesting to you they know your time is valuable [0:10:00]  as well as your money and that’s what we would expect to happen in a real market for healthcare.

Aaron Ross Powell: But don’t those – I mean those emergency – those clinics, urgent care, they take our insurance. I mean how are they different from the hospitals and wherever else? They also don’t tell me – I mean I take my kids for urgent care and they don’t tell us the prices upfront. But we also don’t wait very long.

John Goodman: Well, at the walk-in clinics, they came into existence to cater to people who were paying out of pocket with their own money. Now through time, the insurers begin to pay for their services because they realize that this is much cheaper than having the patient go to the doctor’s office or the emergency room. 

But essentially it was a market formed to deal with people paying with their own money and generally when people pay with their own money, they’re not asked to guess what the prices are going to be. So at the mini clinic, you actually have a price list and if you have ear ache or sore throat, you know in advance what you’re going to pay. So this is what happens in a normal market.

Trevor Burrus: Some people, I can hear – my left wing friends in my ear and I understand their arguments. Some people say that, well, this is entirely unfair that we – you shouldn’t have to think about how much healthcare you need. You shouldn’t have to think about whether or not you have enough money to fix your knee or fix anything, where the rich people can have a knee and you can’t have a knee. It’s fundamentally unfair. We need to fix that in some way. It’s a matter of simple justice. It needs to be fixed by paying for it from above or subsidizing or doing price controls or anything like this. Just the basic premise of people paying for healthcare is unfair.

John Goodman: I’m moving in the opposite direction. I think a lot of evidence is out there that people can manage their own healthcare with a little bit of training instructions from providers and if people are going to manage their care, they will do a better job if they manage the money that pays for that care. So I believe in health savings accounts. I would make it easier for employers and insurance companies to put money into health savings accounts for people who are willing to manage their own care and people need to always be conscious that healthcare costs money and if they know what the real cost is, then they can make trade-offs.

Imagine a mother who wakes up in the middle of the night and her daughter is sick, that she takes that daughter to the emergency room or not. Who’s the best person to make that decision? The mother is. So the mother should know what the cost is and she is in the best position to evaluate the need.

Aaron Ross Powell: How much of a difference does it make where that money they’re spending comes from? So if they are spending their own money out of their pocket – they’re seeing the prices and they’re choosing between them versus we have given them say a voucher that then they can spend, but they’re still seeing prices and choosing between providers.

John Goodman: Well, I think people need to understand it’s their money and a voucher doesn’t quite sound like money. But if there’s an account and they can see how much is in the account when they spend from it, just like any other account, that’s important. People will be better managers of healthcare dollars than employers or insurance companies or government. There’s no substitute for the patient managing the money.

Trevor Burrus: Two of your total books, Patient Power and then Priceless and then the kind of addendum or summation of Priceless in the new book, but you mentioned in the introduction of Priceless that you could have called it Doctor Power which is an interesting element of Patient Power and Doctor Power, which seems to connect these two parts of your thinking that you have to be looking at both the demand and the supply side, if you want to do any serious healthcare policy, whatsoever.

John Goodman: I want to liberate the market. There are two sides to the market, people getting served and people doing the service. Doctors are horribly constrained by the third party payer system and by that again, I mean by employers, insurance companies and government. So I want to liberate the doctor and liberate the patient and let them interact with each other as they would in a normal marketplace.

Trevor Burrus: So on the third party payer system, with a little bit more I guess history involved, why do we get insurance through our jobs? Why do so many of us do that?

John Goodman: Well, it was an accident. In World War Two, we had price controls. But for some reason, the federal government decided that if the employer provided insurance, that that didn’t count or wasn’t covered by the price control. So instead of paying –

Aaron Ross Powell: With price controls on wages?

John Goodman: Price controls on wages.

Aaron Ross Powell: What’s the – what was the motive behind that? What would – it’s in war time and we’re saying as part of what we’re doing during war time, employers can’t compete with each other on how high of wages they’re willing to pay?

John Goodman: It’s in war time and a lot of resources are going into the war and that means people with the same income now are chasing fewer goods and services. So the government mistakenly decided that it would control prices and wages. In any event, they decided that money spent by an employer on healthcare didn’t count as part of the wage although it surely is part of the total compensation.

Trevor Burrus: To the business at least, to the employer.

John Goodman: So that decision was made and then the IRS followed up and decided, well, OK, we won’t tax contributions for health insurance the way we tax wages and from then on, health insurance provided at work was a tax-favored benefit and if you’re in the 50 percent tax bracket, that means that the subsidy you get from having an employer pay your premium is 50 percent. So that’s quite large. I mean even if you’ve in the 25 or 35 percent bracket, the subsidy is large.

Trevor Burrus: Can you break that down just a little bit more, exactly how that – so you basically are faced with the choice where your total compensation package includes – let’s say you make $50,000 a year. You have $9000 that your employer spends on your healthcare plan, that has a tax break behind it. But you could decline the healthcare plan and then get money in return, but that money is now taxed, correct? At your wage rate. That’s basically what you’re saying.

John Goodman: Well, we don’t generally give employees the right to choose between health insurance and wages. In fact, the federal law makes it difficult to do that. But it is definitely true that in the aggregate, health insurance is a substitute for wages. So all employers know this and employees know that and in your example, the total compensation package is $59,000. The $50,000 is wages and $9000 is health insurance. The $50,000 wages gets taxed. Let’s say it’s 30 percent taxed. The $9000 is not being taxed. So the implicit subsidy there is 30 percent of $9000, so that’s $3000. So the government in that example is paying for a third of the cost of the health insurance.

Aaron Ross Powell: So if the health insurance employer started offering this during World War Two but you had mentioned – when Trevor asked about 1935 and whether people had health insurance is not – there wasn’t a lot of it. So did – was health insurance something prior to – the employers started providing it. That people had been buying most – like lots of people have been buying from themselves and then they’re like, “Oh, great. Now my employer is giving to me,” or did the – this route around the price control create the market for insurance?

John Goodman: Well, prior to World War Two, there was very little health insurance. After World War Two, it became more common for reasons we’ve discussed. Employers saw an advantage to providing it, but also remember one of you remarked earlier that in an earlier age, there wasn’t much doctors could do. 

I just watched a movie the other night, The Last Hurrah, and the politician has got a heart condition and the doctor says, “You would be best to go home and be in your bed.” Well, we wouldn’t do that today, right? We would have him in a hospital. We would have him hooked up to all kinds of monitors.

So healthcare becomes more expensive and therefore the desire to have health insurance increases. So those two things tended to go together.

Trevor Burrus: It seems to me too that after that, we get this increasing expense, but now you have a problem where you’re not – you’re insured. So I assume that more and more people are getting insured starting with the tax break through their employer. It kind of just goes up over time, I imagine. The amount of people – after the tax break comes in, the amount of people getting insurance through their employer continues to increase. Now you have a different kind of market because the employers are shopping for insurance for their employees. So there’s another intermediary between the patients and their insurance. That creates maybe distortions of some sort.

John Goodman: Well, absolutely because you have a – not necessarily long term relationship with the employer and not a long term relationship with the insurance company and you’re out there paying all the bills. When they’re paying the bills, the doctor tends to view the insurance company or the employer as his customer and not the patient. It’s the bill payer that influences what the doctor does a lot more than what would be good for the patient 

So third party payment automatically distorts the incentives of the doctor but it also distorts the incentives of the patient. If I know that I’m not going to pay anything out of pocket for an MRI scan, I’m more likely to get the scan even if it’s unnecessary.

Aaron Ross Powell: This is one of the weird things about calling health insurance insurance and so I’m curious I guess if it has always been this way from that World War Two on that I have house insurance, but if I decide – my curtains get ruined or something and I need to replace them. My house insurance doesn’t cover that and it’s for if the place burns down or something. I have auto insurance but that’s if my car gets really wrecked. But otherwise, there’s this extremely high deductible, right? But health insurance works basically – I mean I just …

Trevor Burrus: The opposite of that pretty much.

Aaron Ross Powell: Yeah, I never pay – it’s not really insurance. It’s [0:20:00] like an alternate way of paying for healthcare. Was that how insurance worked when the employers were first providing it during World War Two or is that something that has come about over time?

John Goodman: Well, you’re correct that the insurance today is pre-payment for the consumption of medical care. It’s not real insurance. Early insurance was real insurance. Now the American Medical Association has had a political agenda that goes all the way back to the middle of the 19th century and one of their goals was to change how health insurance worked.

The hospitals created BlueShield and – or BlueCross and the doctors created BlueShield. In both cases, they created these entities because they wanted their bills paid. So they didn’t want insurance to act like auto insurance or homeowner’s insurance. They wanted insurance plans that they’ve gotten all the bills paid. In fact, in the early days of BlueCross, not so long ago, the way BlueCross would pay hospitals is based on how many bed days their patients were there. So let’s say that BlueCross had half the bed days over a year. Then BlueCross would pay the hospital half of its cost for a year. So it’s cost plus reimbursement. All the other insurers were forced to pay the same way.

So we literally suppress the market in health insurance. The hospitals and doctors did not want it to work like normal insurance. So we get what you described. It’s not like real insurance.

Aaron Ross Powell: Why did the doctors get that cushy system and the hospitals get that? I mean I can imagine that auto mechanics would love – that if car insurance worked the same sort of way.

Trevor Burrus: And auto detailers and – who clean your car and they could all get together and make it all be …

Aaron Ross Powell: So is there something special about healthcare that allowed it to become that kind of insurance?

John Goodman: The doctors have been the – historically the most powerful of the lobbying groups. They didn’t want for-profit medical schools and so they used their lobbying power to wipe out that. So, all medical schools became non-profit. They didn’t want for-profit hospitals. They wanted – so they used their lobbying power to greatly reduce the number of for-profit hospitals. They really didn’t want for-profit health insurance companies and BlueCross originally was not for-profit at all. 

So they used their political power and then they set up BlueCross. They set up BlueShield and they went to legislature and BlueCross BlueShield got certain privileges that other insurers didn’t have. That allowed them to become dominant in the market and once they were dominant, a company say like Aetna would come to the hospital and the hospital would say, “We’re not going to deal with you at all unless you pay us the way BlueCross pays.” So that’s how the market evolved. I describe this as the complete suppression of normal market forces.

Trevor Burrus: By let’s say – well, actually let’s say the early 90s when you first get Hillarycare, as I guess what it was called, but had some features that were common to the Affordable Care Act. But the crisis of the uninsured, how much was that an unemployment problem or a – an underemployment problem or some sort of between-jobs problem?

John Goodman: Well, it’s all of that. People between jobs are unemployed. Anyone on his own who buys health insurance doesn’t get the same tax break that employers get unless he’s qualified as an independent business and so yes, we subsidize employer-provided insurance and we penalize people who obtain it on their own.

Trevor Burrus: And then we have a “crisis” for the uninsured. But that also seems to create a problem of not having a dynamic market of insurance raises the question about how the “real” insurance market would operate because people are going to always say, well, in any free market of insurance, the insurer is going to try and kick off all the sick people. Make sure it has no sick people on there and that’s what a free market insurance is going to look like. But some of that appearance of insurance seems to be – how insurance appears seems to have been created by this employer system and this other kind of distortions.

John Goodman: Well, actually it’s the other way around. Under ObamaCare, the insurers were running away from sick people and they only want healthy people and that’s very evident in the way they’re competing. They have very narrow networks. In Dallas for example, BlueCross in exchange pays doctors 10 percent less than Medicaid pays. 

So they have really low fees. The best doctors don’t join their networks. But since they’re paying low fees, they can get their premium down. They’re convincing only healthy people, that healthy people only pay attention to price and so they will be attracted by the low premiums. They won’t look at the network. The only people who look at networks are people who are sick. So that’s the way the insurers are acting. What I would regard as a real market for insurance would be one in which insurers get real premiums. They reflect expected costs and in a real market, you would find people specializing in cancer care and care for AIDS patients and care for heart patients and they would try to attract patients with problems because in a normal market, when people have problems, they’re opportunities of making profit.

Trevor Burrus: I guess there are roofers and people out there to fix your teeth and – I mean there’s dental insurance but that’s very different than other types of – there are all these things out there in the market that try to fix your problems. But isn’t it just sort of unseemly that they’re trying to get a profit off of sick people?

John Goodman: No, no, no. Again, back to Adam Smith, we wanted – we want people to find it in their self-interest to meet your needs. One way to think about health insurance as compared to other kinds of insurance, we all see these ads for casualty insurance on TV and one of the ads – the actor is standing in front of the town. He says it took 20 seconds for this town to be destroyed and that’s the Allstate ad and then all the Aflac ads are communicating the same message.

The message is that we know you don’t think about health insurance until you have a real problem. If you have a real problem, then we will be there. Health insurance doesn’t advertise that way. The health insurers don’t – never say if you have cancer, you have AIDS, boy, are we the plan for you. It’s just the opposite. They tend to show pictures of young, healthy people because that’s who they want to join their plan. They do not want to attract people with problems.

Aaron Ross Powell: I mean a lot of medical problems show up when you least expect it. So what’s to stop free market for healthcare? Yeah, they attract me when I’m young and healthy and then I get cancer and they dump me. I mean that seems like a big concern as well is that we just – you get sick and you suddenly become the very expensive person and now either your premium shoots so high up that you might as well not have insurance, because you can’t afford them, or they just kick you out entirely and we don’t have a legal regime to protect you from that.

John Goodman: Well, in most states, that has been illegal for decades. Insurers cannot kick people out of a plan simply because they get sick and that has been federal law for – since 1996. It should be the law. Part of the insurance contract should be that you can continue to renew and then when your health status changes, they don’t get to jack up your rates or kick you out of the plan.

It’s the law now. It has been federal law for quite a long time. It was law in most states for a long, long time and that’s the way the law should read.

Trevor Burrus: But the ObamaCare situation is – in your newest book, it seems to be – as you’ve mentioned already with how they’re running away from sick people, it’s producing a lot of the exact opposite of what it was intended to produce.

John Goodman: Well, ObamaCare is bait and switch. President Obama said if you’re sick, you’ve got a preexisting condition, insurers aren’t going to be able to discriminate against you. Well, true enough, they can’t deny you enrollment in their plan, but they’re discriminating in a different way. They’re getting very, very narrow on networks. They leave out the best heart doctors, the best cancer doctors and they hope you won’t join their plan. If you do, they hope you won’t like it and you will go join some other plan. So we just substituted one kind of discrimination for another.

Aaron Ross Powell: How do those arrowed networks work? Because if these doctors are opting out of them, that you’re the best heart surgeon and you opt out because they’re not paying you enough, but now how are you earning anything? Because how many people are going to buy heart surgery without insurance?

John Goodman: Well, now I’m talking about what happens in the Obamacare exchanges and there are only about six to eight million people in those exchanges. So we got 150 million people getting insurance from the employer and they’re not having those same perverse incentives. But it could expand to the rest of us. So we need to worry about it.

Trevor Burrus: Let’s go back a little bit and just sort of set the scene because ObamaCare, the Affordable Care Act, passed in 2010. First of all, the question is a lot of people said it was a conservative plan originally or it was very much like the conservative plan. So the first question is, “What was it? How was it like, the conservative plans for healthcare?”

John Goodman: Well, it’s a managed competition plan in which people pay the same premium, community-rated premium, regardless of their health condition. This has been the way –

Trevor Burrus: That’s a price control essentially, correct?

John Goodman: Yes, it is. Now this has been the way the federal employees’ plan has worked for many, many years and Hilary Clinton tried to design her reform based on the federal employees’ system and [0:30:00] so did Mitt Romney and so did Barack Obama.

Along the way, the Heritage Foundation, some other conservative think tanks thought this was a good idea. But you got to remember in a community-rated system, no one is paying the right price. So it means that some people are being undercharged and they will over-insure and other people are being overcharged and they will under-insure.

So no one is paying the right price. No one has got the right kind of insurance and for the federal employees, you had the office and personnel management sort of ride herd on the system and the insurers have kind of a gentlemanly competition. So the problems weren’t that bad.

What’s happening in the ObamaCare exchanges is we’re getting dog-eat-dog competitions. This is real fierce competition and when people compete in the face of perverse incentives, you get real perverse outcomes.

Trevor Burrus: Now, if I can set up the scene because some of these things I think are still inscrutable to people about what the Affordable Care Act is. It’s a command that you can’t deny a preexisting – a coverage based on preexisting conditions. It’s price controls, community rating based on that. It’s a mandate that you have to buy health insurance or have an – get it through an employer and then for those who aren’t part of that, it creates these exchanges, which is what you’ve mentioned. But for those who understand these, what are these exchanges you’re talking about?

John Goodman: Well, this is the individual market, people who buy insurance on their own and the exchanges have basically taken over their market and you go electronically online and buy insurance and you probably read horror stories about how difficult this is.

But if you’re sick enough, you will bear with it and what we’re finding out is that the people are sicker than we really imagined they would be and if they’re sicker, that means costs are higher and that’s why we’re now for next year getting really high premium increases. With some BlueCross plans for example, asking for 50 percent increases around the country. So that’s the exchange and that’s what’s happening.

Trevor Burrus: This was expected would you say or is this worse than what was expected? What were the predictions? Now on the other side too, I want to push back and say that you do hear – if you were reading – if you read the Huffington Post or you listen to President Obama, you hear tons and tons of data about how it’s working, how people are covered. The price curve is steady. It’s going down for the first time in 10 years. Coverage is higher. People are satisfied. They have as many stats on the other side about how it’s working as this side – as your side is about how it’s not working.

John Goodman: OK.

Trevor Burrus: So …

John Goodman: I don’t play that game.

Trevor Burrus: But I mean – or some other – are more people covered?

John Goodman: Well, may I put it in slightly different …

Trevor Burrus: OK.

John Goodman: For me it’s not an issue – I mean here are some good points. Here are some bad points. That’s maybe [Indiscernible]. What we need to think about is what’s the worst thing that can happen. What’s the worst thing that can happen is a death spiral and a death spiral occurs when you get higher costs than expected and the insurers raise their premiums to cover those costs and as they do so, health people tend to drop out. The only people who remain are sick and so you have to have another round of price increases and that keeps on going until in the end the premium you’re charging is about equal to the cost of medical care and no one can afford it.

A death spiral is the insurance industry equivalent of bankruptcy. So that could happen in the exchange and if it does, then I suspect that what would happen is the government would step in and run the entire exchange program like another Medicaid program. Government would just end up providing insurance and paying the bills.

Trevor Burrus: And this is the thing that strikes me as odd is because right now, I think the fine for a single person not buying insurance – the tax, sorry. It’s $95 and so that means I can either – and they can’t deny me from getting insurance if I get sick, so if I didn’t have insurance. So I can either pay let’s say $2500 in a year for insurance or I can wait until I get sick and then still get insurance and pay a $95 fine. 

How is it so clear to us – this is me trying to push back on myself. That seems so obvious. What do they do to try and keep that from happening? It can’t be as clear that this is just going to go spinning down the drain. They had to have seen that this was in the law, that the incentives weren’t there. Or am I giving them too much credit?

John Goodman: Well, we’re in uncharted waters and so nobody knew exactly what was going to happen. I can tell you that this last tax period, more than seven million people paid that tax because they didn’t have health insurance and there are millions more that didn’t pay the tax because they were exempted for one reason or another. So a lot of people aren’t paying the tax and you’re absolutely right. If they develop a serious illness, they’re going to find a way to get health insurance.

That contributes to death spirals. People stay out while they’re healthy. They only enter when they’re sick and that means cost for insurance really gets high.

Aaron Ross Powell: Couldn’t we solve it though by just jacking up that fine, just keep raising it until people start buying insurance?

John Goodman: We could indeed. We could indeed. But the problem with the Obama administration is although they are [Indiscernible] for a mandate, they exempted millions and millions of people. I mean if you got your electricity cut off for a month or two, you’re exempted from the fine. If you don’t owe income taxes, you’re exempted from the fine. They found dozens and dozens of reasons to exempt people and what you’re suggesting is now, let’s go in the other direction. Let’s make it even more onerous if they don’t insure.

Trevor Burrus: Well, interestingly as a legal point, it could be possible based on Chief Justice Roberts’ opinion in the first Affordable Care Act case that a too high – a fine that was too high would be unconstitutional. We have no idea what that is but it could be possible, if it’s almost punitive.

Aaron Ross Powell: But given his willingness to bend things around, it’s unlikely.

Trevor Burrus: Yeah, yeah. We will see what happens.

John Goodman: I think it’s worth pointing out that we never had to have a mandate in the first place despite the claims that it was needed. In our Medicare program, we have community-rated guaranteed issue which means they can’t turn you down for Medicare part B, for Medicare part D, which is the drug program and for Medigap insurance.

So, all the seniors pay community-rated. You can’t deny them care and yet there’s no mandate. How do we do that? Well, the way we do that is we tell the senior, “If you don’t join when you’re first eligible, your premium is going to go up.” In the Medigap insurance market, they can actually underwrite you if you don’t join when you’re eligible.

Aaron Ross Powell: You said that to some extent, we’re in uncharted waters here and don’t know exactly how everything will play out. But Massachusetts had a system at least somewhat similar to this for a while before ObamaCare. So how have things – first, how have things played out in Massachusetts? Then can we draw conclusions from that to what may happen nationwide?

John Goodman: Massachusetts had almost everybody insured before they started. So they had less than 10 percent uninsured. They insured about half of those. What’s happening with ObamaCare is a far larger pool of people, lots and lots of people who were sitting on the sidelines with medical problems and didn’t have insurance, and now all of a sudden these people got highly subsidized insurance. It may settle down and work in a reasonable way. But in the back of my mind, I think we should keep in mind that a death spiral is possible. If it does, the whole market collapses and the government is going to have to nationalize it.

Trevor Burrus: This seems to be a very big concern because there are a lot of problems [Indiscernible] employer incentives about trying to keep people at lower wages. There are a ton of things that are happening. We’ve predicted – our side has predicted that this is going to crash. Do you see, if a crash occurs, the basic call would be for a single payer system, that they had tried to work within the free market system of the past? And I’m putting “free market” on scare quotes here. The pre-ObamaCare system was clearly free market and now we tried the free market, so now it’s time to actually have top-down command and control.

John Goodman: OK, two things. One, I’m not predicting a crash. I’m just throwing it out there.

Trevor Burrus: OK.

John Goodman: As the worst thing that can happen. And it’s worrisome enough that people are talking about it, but it may not happen. Yes, if it crashes, that’s exactly what the single payer folks would say. But remember, we’re only talking about six to eight million people now that are in these exchanges getting subsidies at the moment and the 150 million people getting insurance from their employers, they’re not affected by this. The Medicaid, previous Medicaid population and seniors, they’re not much affected, at least not until now.

So it doesn’t mean the whole country goes to socialized medicine. It just means – what I think it would mean is another Medicaid-like program. If it crashed, the government would take it over. The government would subsidize it. Probably let the private insurers run it but they would do it like Medicaid and that would mean a greater government presence in healthcare. But we would not have socialized medicine for the whole country, no.

Aaron Ross Powell: Would socialized medicine for the whole country be better, worse than what we have now or the direction we’re headed? I mean people over – much of Europe has socialized medicine and the Europeans talk about how much they love it.

[Crosstalk]

Aaron Ross Powell: Yeah. I mean is it – what’s wrong with scoalized medicine?

John Goodman: The people who talk about how much they love it are people who are healthy. [0:40:00] If I’m healthy in Britain, I go to the doctor. I don’t have to pay anything. That seems like a pretty good system for me. The people who don’t, including people with cancer who cannot get the latest drug that’s available in the United States and – the British National Health Services, if you want it, you pay for it out of your own pocket and we’re talking about thousands and thousands of dollars.

So in evaluating health care systems, they’re all bureaucratic by the way and our system is just as bureaucratic as the Canadian system or the British system. None of them work like real markets. They all have problems and they have similar problems and most of these countries there are tragedies with people not getting care, having to wait too long for care. So it’s – and we get misled on the costs because other countries suppress the real costs of their healthcare system. They shift a lot of the cost of the doctors. 

But in real terms, it’s not clear that we’re spending more on healthcare than other developed countries and our outcomes are better.

Trevor Burrus: It seems to me that if we step back and try and think about healthcare differently, which of course is what we’ve been trying to do, but fundamentally we – innovation should be the top of our list because I’m not really that concerned about whether or not there’s an equitable distribution of blood letting. It’s not – oh man, all the rich people, all this blood letting. They have an imbalance of bodily humors and we need to figure that out. We need the fact that you can treat a heart attack with an angioplasty now and you couldn’t do that 30 years ago and that we should be focusing on – if you can unleash forces that would make treating cancer $20, very hypothetical there. But that would change the entire question about providing healthcare and who gets it or am I mistaken?

John Goodman: Well, the problem is that in a third party payer system or somebody other than patients paying almost all the bill, the incentive for the innovators is to figure out how to get more money out of the third party payers. 

So most of the innovation is innovation of a type that figures out how to create a computer program, that will get more money out of Medicare or a new product that will get more money out of insurers and instead of getting costs down, nobody is out there spending a lot of money trying to figure out how to make pills for $20.

Trevor Burrus: This is another thing too. If no one is paying for it in there, this is a question about like why can’t you email your doctor or why can’t you call them.

John Goodman: I can tell you.

Trevor Burrus: Yeah. Is it because no one is paying for it? It’s the same answer to your previous question.

John Goodman: It’s because the third party payers don’t pay for it.

Trevor Burrus: Yes.

John Goodman: And the only reason they don’t pay for it is because when we set up Medicare 45 years ago, that wasn’t one of the things that they put down on paper that Medicare would pay for. So Medicare has about 7500 tasks it pays doctors to do. For all practical purposes, the telephone is not there, email is not there and so this is how bureaucracies function. Every other profession, your accountants, your lawyer, the engineer, the architect, you can talk to them by phone, by email.

Trevor Burrus: Or your veterinarian.

John Goodman: Exactly. But not the doctors, yes.

Trevor Burrus: Well, that seems to be the moral of the story almost, that Medicare didn’t put it on the bureaucratic sheet 50 years ago, creating a sort of bureaucratic situation that created a culture of just being like hey, you should call your doctor and everyone says, “Are you kidding me? That’s the craziest thing I’ve ever heard.”

Aaron Ross Powell: But didn’t that cover consultations?

John Goodman: Oh, it will pay for consultations.

Aaron Ross Powell: So is an email just – or does it actually say like an in-person consultation?

John Goodman: Absolutely. Oh, and since you brought that up, we have a huge problem with tele-medicine. So you have the Mayo Clinic that wants to take care of stroke victims in rural areas and in Minnesota and other states and the AMA is against it. The Medicare won’t pay for it and so we have a huge battle in bringing American medicine to the 20th century. That may surprise you but we have people – the American Medical Association and Medicare want to live in the last century.

Trevor Burrus: So the story – we can – like the story so far, we have this bureaucratic system. Let’s say we start with the insurance model coming through the price – the tax break through your employer, Medicare and Medicaid, a ton of other things in between. We get up to the point of ObamaCare and we have a system defined by bureaucratic red tape and the price list and whether or not you can call your doctor and all these things.

It just seemed that in almost everyone, the situations, the Affordable Care Act, doubled down and entrenched that model even more and then added even another layer on top of it all in the name of this pursuit to get higher access and lower care which it’s not – it doesn’t seem to be doing. Is that an accurate story?

John Goodman: Well, that is accurate. You have to understand that on the left, people do not like the idea of using economic incentives to get a more efficient system and they don’t even like to talk about it and they think that the economic incentives shouldn’t really be part of a good healthcare system. It’s only people on the right that talk about getting the economic incentives right.

Aaron Ross Powell: Although they seem less enthusiastic when it’s Medicare.

John Goodman: Well, the incentives that they are talking about are – the only incentives that they like on the left are incentives created by government to try to get people to do something government wants them to do and all those experiments are not working very well at all.

Trevor Burrus: Well, that’s one – in Priceless you mentioned the private-public dichotomy which I think is interesting. If the government denies you a procedure, it’s OK. If a private insurer denies you a procedure, it’s a hue injustice.

John Goodman: This is what many members of the public think and yeah, it’s how they would think in Britain for example. If you don’t get your kidney dialysis, the doctor would say, “Well, we just can’t afford it,” and people accept that. If you’re a private insurer, they would go wild.

Aaron Ross Powell: Is this just an outgrowth of government is the public will? So it’s …

[Crosstalk]

Aaron Ross Powell: … capricious individual who has denied it to you in the private sector, but if it’s denied by government, then what it is, is that the people, all of us as a community …

Trevor Burrus: Including Bob the GS-12.

[Crosstalk]

Aaron Ross Powell: … which is a much more reasoned decision that took into account the interests of everyone.

Trevor Burrus: Aaron is doing a good job of – I just can’t even pretend not to laugh. Like, Bob, the guy in the cubicle, GS-12, he’s the one. He’s the epitome, the embodiment of public will apparently.

John Goodman: What happens here is in Medicaid, Arizona Medicaid start cutting people off, ran out of money. So it didn’t give people heart care and other kinds of expensive surgery and some people died and people just accepted. But I guarantee if you’re not [Indiscernible] they would be outraged.

Trevor Burrus: That probably like for – I think a good summation question is the last chapter in your newest book, which is titled Why I Am More Egalitarian on Healthcare than Most Liberals.

John Goodman: Yes, I am.

Trevor Burrus: Why?

John Goodman: What I think we ought to do is get rid of all the ways that we subsidize healthcare, which are different ways at work and in exchange and in the marketplace and just have a universal tax credit that’s vital to everyone. I would set it at about $2500 for an adult, $8000 for a family of four. That’s what you get from government to subsidize your health insurance. 

That amount of money will buy a Medicaid-like insurance plan and if you want more options and more access, then you would add additional after-tax dollars of your own or your employer can do the same. I would do this for everybody. So basically I’m more egalitarian. I would treat everybody the same. So Bill Gates gets his $8000. A poor person gets $8000. They’re all treated the same. To me that’s – if we’re going to have government be involved at all, let’s have it do something very standard, do the same thing for everybody and then get out of the way and let the individual choice and markets determine how this is moved out.

Trevor Burrus: Thank you for listening. If you have any questions, you can find us on Twitter, @FreeThoughtsPod. Free Thoughts is produced by Evan Banks and Mark McDaniel. To learn more, find us on the web at www.Libertarianism.org.