Government intervention has lowered the quality of medical care and made it more expensive.
Miron: Topic for today’s discussion is health. As you know, governments intervene enormously in health markets and health insurance markets. In the U.S., this consists most importantly, perhaps, of subsidies for purchasing health insurance under Medicaid, Medicare, the Affordable Care Act, also indirectly via the Favorable Tax Treatment of employer-paid health insurance premiums. Another broad area of intervention is the licensing of physicians, nurses, other healthcare professionals, regulation of hospitals, and so on and so forth. Still a different category is that the Food and Drug Administration requires all new medicines and medical devices to be approved by the FDA before they enter the marketplace. And there’s much other regulation as well on whether, say, a new hospital can arise in an area without prior approval from the government.
This is an area where there’s of course broad support for government intervention. Healthcare is now viewed as a right, as something that everyone should have, and not just minimal or basic healthcare but broad kinds of healthcare, state-of-the-art healthcare. So it’s something that is politically extremely difficult to address because current opinion is so strongly in favor of government taking a large role.
Libertarian position says of course healthcare is good. Having health insurance is nice. It’s understandable why everyone wants it. But of course, everyone would like to have all sorts of things, but they cost money. So the interventions are going to likely do much more harm than good or going to be providing something at low or no cost to people who are not paying for it themselves. So that’s going to generate all sorts of negative effects in health insurance markets. So in a nutshell, it’s going to be incredibly costly to provide healthcare at nearly the level and nearly the expansiveness that we currently do. And in the process, we’re not only going to make it more costly; we’re going to have huge negative effects on the healthcare system and make health worse for almost everyone.
We discuss five major areas in today’s discussion. First, what are the arguments for subsidizing health insurance in the first place? Should we take those as compelling? Or should we think that there’s not such a strong case to begin with? Second, given that we are subsidizing, what are the costs and negative effects of that type of government involvement? Third, what sorts of effects, positive or negative, does the Food and Drug Administration, do the prior requirements on introduction of new medicines have? Then turn to licensing. And we’ve discussed a little bit already in the previous lecture. But we’ll discuss more specifically in the context of doctors. And finally talk about immigrations restrictions, which play a surprisingly large role in healthcare in the United States.
To begin, why should government be subsidizing healthcare in the first place? It sounds like a crazy question in this day and age because almost everybody takes as given that we should be subsidizing healthcare. But there are all sorts of nice things that people like and enjoy and are important for their lives, from food to housing etc., that we don’t subsidize or don’t subsidize nearly as much. Why is healthcare different? Why should that be something that gets special treatment from government?
There are three main arguments. The first argument is known as the adverse selection or the asymmetric information argument. It says that private health insurance markets won’t work very well, and they won’t work very well because people differ in their health types. Some are healthy, and they know it. Some are unhealthy, and they know it. But an insurer who is considering what price to charge someone who’s seeking to purchase health insurance can’t tell who’s a good health risk or bad health risk, who will have lots of health expenditures that have to be imbursed by insurance, and who will have relatively few? So the insurer faces dilemma as to what price to charge because it can’t tell who is who. If it charges the same price to everyone, say the average price of all the expenditure across all types of people, what’s going to happen? What’s likely to happen is that people who know that they are good health risks and won’t have very high expenditures on average don’t want to purchase that insurance. It’s a bad deal for people who are good health risks. It’s only a good deal to purchase that insurance for people who are bad health risks, who have lots of need for health expenditure. So the insurance company will go broke if it charges the actuarily fair price, if it charges the average cost of everyone in the entire economy. And that means that either private health insurance might not be provided in the first place, or if provided, will only be available to the very unhealthy at very high prices. All the other people who would like to have insurance against the variability in their health expenditures won’t easily be able to get it or will have to pay excessively high prices. And there’s an argument that says if government comes in and mandates that everyone has health insurance, then this adverse selection, this tendency for only the bad health risk to apply for insurance doesn’t happen because everybody has to get insurance. So the government can in principle solve this problem that private health insurance markets might not work well on their own. So that’s one argument.
The veil of ignorance argument is somewhat different. It says that behind the veil of ignorance, before you’re born, say, you don’t know whether you’re going to be very healthy or very unhealthy. You might be willing to pay something in terms of your future consumption or give away some of your future income to know that you will be taken care of if you turn out to be unhealthy, if you have higher than average health risk or very bad health or something like that. So the idea behind government provision is to provide a kind of social insurance, insurance against being born unlucky, with bad health. Therefore, we can in principle make everyone better off because everyone would ex ante want to make this trade, give up the right to some of your income in future, i.e. the income you’ll pay in taxes for government-provided health insurance, in exchange for being protected in the event that you have very poor health.
Finally, an argument for subsidies is that we simply should be helping people who are poor, who can’t afford much healthcare or health insurance, i.e. we should just be doing this as one part of general redistribution.
Thinking about those three arguments, it’s fair to say that each has a grain of truth. It is absolutely the case that there’s a tendency for adverse selection in all sorts of insurance markets for people with particular characteristics, who know they’ll get a better or worse deal from the insurance, to be the ones who want to buy it or not buy it. So that’s a risk that might be there. Private health insurance markets might not work great. It’s certainly the case that the veil of ignorance applies to everyone. It’s a logical framework. You can imagine making a case for some degree of government health insurance or some degree of government redistribution. Likewise, many people, not necessarily the libertarians, but many people feel that we should be protecting the poor by government policies.
That said, none of those arguments is likely to imply that we should provide anything like universal health insurance. At most, they are likely to imply that there should be a small amount of health insurance for people who are truly poor. Why? Because providing the health insurance is going to have huge costs. So any benefit from fixing private health insurance markets from addressing the veil of ignorance in terms of just simple redistribution have to be balanced against all the negatives the government provision of health insurance will tend to create. So that’s the next thing we need to think about.
What are the costs of subsidizing health insurance? The first, the biggest, by far the most important cost to think about is what is known as moral hazard, the idea that once people are insured, their behavior is likely to change because they know they’re insured, and therefore the risk they face from different kinds of behavior are different. If you know that your bicycle is insured against theft, maybe you don’t bother locking your bicycle. If you know that your house is insured against fire damage, maybe you’re less likely to check your smoke detectors. If you know that you have health insurance, maybe you don’t go to the gym as often, maybe you don’t take as good care of yourself, and so on. But even more importantly, in the health insurance setting, if you know that your healthcare is covered, you’re likely to demand any kind of healthcare that might have any beneficial effect on your health – even if that benefit is small, or in particular, small relative to likely cost.
On the other side, your doctors and all the other healthcare providers, knowing you have health insurance, are going to feel free to recommend whatever it is that might be useful for you. Partially, the doctor wants to make you better so wants to do every test that might be useful. Partially, the doctor doesn’t want to get sued for not having done every possible thing to diagnose your condition or treat your condition. And partially, the doctor knows since you’re not paying for it and he’s not paying for it, why not do these additional tests, these additional surgeries, these additional procedures. After all, to doctors, doing healthcare stuff is fun. That’s why they became doctors or one of the reasons they became doctors.
So the existence of insurance is likely to lead to huge increases in the demand for healthcare. That’s going to mean way more care than is economically efficient, way more care that doesn’t generate much benefit compared to its cost, and therefore much higher expenditure on health insurance and healthcare system. Not only is there that excessive expenditure, but that excessive expenditure then leads to other bad effects. If government is the one paying, and it will be because government created this by subsidizing, then government is going to see its expenditure on Medicaid, Medicare, ObamaCare, and so on go up quickly. It’s going to realize that’s a problem. It’s going to try to stop that with rationing and price controls and other mechanisms. And that’s going to lead to an incredibly distorted healthcare system where you’re told you can’t have this procedure or you can’t have that procedure, based on what government has decided are ways to reduce cost, not on your willingness to pay for the procedure an/or your doctor’s recommendations about which procedures, medicines, and so on are good for your health.
So the end result is going to be a mess. And we have seen this in many, many countries, a lousy healthcare system because it’s trying to keep the expenditures very low for the poor and most of the middle class, possibly a pretty good healthcare system in parallel that the rich pay for through private clinics, private hospitals, and their own private contributions. So we end up back where we were almost before the subsidies with low-income and middle-income people facing lousy healthcare and the rich being able to still probably afford reasonable-quality healthcare. So the subsidies, however well-motivated, are just incredibly costly and likely to lead to huge distortions and misallocations in healthcare system that are bad for almost everyone.
Turning to the Food and Drug Administration, under U.S. policy, manufacturers of drugs and medical devices have to first demonstrate that these things are safe and efficacious before they’re allowed to be put on the market, and they have to demonstrate that through these long clinical trials that are very time-consuming and very costly. So the issue that arises is what’s an alternative and how would that compare. If there were no FDA, there would of course be private mechanisms that would try to discipline bad drugs, devices from getting on the market. They would do clinical trials. They would do all sorts of standard things to test their medicines and medical devices. But they might do it more quickly. They might do it in more cost-effective manners. They would be checked by private mechanisms like Consumer Reports, new versions of those that would arise to deal with it. Physicians of course would not prescribe medicines and procedures that they thought were going to kill their patients. That’s just bad business in addition to the fact that most physicians want to improve their patients’ health and so on and so forth. So in a private system with no FDA, there would of course be checks and balances, there would of course be ways to prevent bad outcomes that the FDA is trying to prevent. But it would be done with an eye to benefits compared to cost. The FDA knows that if it lets a new drug on the market too soon and something bad happens – there are some side effects that show up 3, 5, 10 years down the road – there are congressional hearings, heads roll at the FDA, all sorts of bad things happen for the FDA. If they impose extra trials, they take extra time, they try to be extra certain about everything, they introduce delay. That delay doesn’t lead to big protest. It doesn’t lead to hearings. It doesn’t lead to people getting fired. But it kills people because all the drugs which churn out should be on the market have been delayed in being allowed on the market, and that’s very, very costly. So the existing evidence suggests pretty strongly that the FDA is erring strong in the direction of too much caution. A private system would get that balance much better. And note the private system would still have the tort liability, a partially government system in the background. People who are injured would be able to sue manufacturers of faulty medications and devices to collect bad exercises and other sorts of discipline on manufacturers of medicines and devices.
The next aspect of the healthcare system to discuss is the licensing of physicians. In the U.S. and most countries, to practice as a physician or a nurse or other kinds of healthcare professionals, you have to have graduated from an accredited medical school, passed various tests administered by state licensing boards, and so on. The reason for that is an attempt to improve the quality of physicians will reduce the quantity because most patients according to this view are not able to make good decisions on their own, choose good doctors, evaluate the advice that they’re getting. Therefore, government has to make sure that only good doctors are in the marketplace. That argument is unpersuasive for several reasons. First of all, the private mechanisms that would do a lot to discipline doctors who are giving bad advice. Malpractice insurance that doctors want to purchase so they’re not subject to huge lawsuits. So malpractice insurance companies are going to be careful not to provide that insurance to doctors who don’t seem qualified. And the tort liability system more generally allows people to sue doctors who’ve injured them and caused them harm in ways that were not justified by the risk they assumed ex ante.
There are other private mechanisms such as equivalence of consumer reports for rating doctors or larger organizations that provide lots of healthcare to people and acquire reputations as being organizations that consistently provide high-quality healthcare such as health maintenance organizations.
So overall, the argument for license of physicians, just as the argument for licensing more generally, is not convincing. It is clearly reducing the quantity of healthcare professionals and raising the cost substantially. There’s little evidence that it’s actually improving the quality, so everyone is getting a lousy deal out of the licensing system – except of course for those doctors who do get to be licensed and thereby earn higher salaries and compensation they otherwise would. But that is not the right objective of policy. The objective of policy should be to help consumers, not to help the providers of a particular service.
Finally, another key intervention in the market for healthcare is restrictions on immigration. There are lots and lots of medical professionals who would move to the United States and practice in the United States if they were allowed to do so under the immigration system. Indeed, many of them trained here, partially at the expense of U.S. taxpayers. So our current system is both spending U.S. dollars to train people and then sending them away and not letting them come back and have the advantage. If the H-1B limits – H-1B is part of the U.S. immigration system – were substantially larger, there would be far more doctors, other professionals who could reenter or stay after having received their training here, doctors from other countries. That would increase the quantity, maybe even increase the quality, by having fewer restrictions. That’s a win-win for everyone, of course except the existing doctors, the existing U.S. doctors, who are the ones who don’t like it. But that of course should be ignored in setting policy, policy should be determined based on the welfare of consumers, not the welfare of the people supplying a good in an industry.
To sum up, the existing interventions in healthcare and health insurance in the U.S., libertarians argue should be drastically cut back and probably eliminated. Certainly eliminate Medicare and the Affordable Care Act. Eliminate the tax subsidy for employer-paid premiums. At a minimum, scale back the FDA so its procedures were far less costly and far less time-consuming, and probably eliminate that entirely. Similarly, with licensure, there might be some case for very mild licensing if it were done thoughtfully and carefully, but that’s unlikely to be the case, so probably eliminate that as well. At a minimum, cut it back. And loosening the immigration restrictions is just a no-brainer. Letting people who are talented and trained and want to work in the United States and supply their services work here is good for almost everybody, other than the doctors who have to compete with them.
All these problems are efficiency problems in part. We’re making the healthcare system less effective. The one thing which is an exception is Medicaid. Medicaid is justified, mainly as redistribution. It is possible that in a really thoughtful system of redistribution, you would partially help people by cash and by welfare payments or something like that, and partially by subsidized healthcare. So Medicaid is a slightly more difficult one to address if you take as given that government should be redistributing. But even that has substantial scope to be cut back and made more efficient by introducing bigger copays and deductible so that people think about how much healthcare they’re getting. Overall, government intervention in healthcare is doing far more harm than good. It wrecks the healthcare system and is incredibly costly to boot.