• Government IS good at some things

    I’ve written about this before, but it’s worth bringing it back to add in some numbers. Let’s recap my prior argument:

    There are plenty of things that government does poorly. Or, at least you can make that argument, and find some support for it out there. For instance, many people believe that government does a terrible job at sparking innovation. I could imagine a debate there. Some think that government does a bad job at providing choice. That’s entirely defensible. Government run systems also allow less room for profit, which can drive out entrepreneurs. Also arguable.

    But what government systems do well is hold down costs. They use central planning. They use their large market power to negotiate for reduced reimbursement (see Part 2). They buy drugs cheaper. They eliminate profit and overhead.

    This is what government does well. It’s why every other country that has more government involvement than ours spends less than we do.

    Part of our problem is that even when we allow the government into the game (ie Medicare), we set restrictions that hamper its ability as a government-run insurance plan. For instance, Medicare is – by law – prohibited from considering cost at all when making coverage decisions. So even though Medicare has been better than the private insurance sector at holding down costs. But how much better could it be?

    There’s a new paper in Archives of Internal Medicine, “Cost Control in a Parallel Universe: Medicare Spending in the U.S. and Canada“:

    As the U.S. was implementing Medicare in 1966, Canada was phasing in its own Medicare program which covered all Canadians under provincially-administered plans. While these provincial plans varied, all incorporated significant payment reforms – global budgeting of hospitals and stringent capital expenditure controls – and ban copayments and deductibles.

    Before the mid-1960s the two nations’ health care financing systems were similar, and health costs were comparable. Since then overall U.S. costs have grown more rapidly, but no study has compared spending for the elderly – the populations covered by Medicare in both nations.

    So this study simply compared the growth of health care spending of the two programs (Canada Medicare and US Medicare) for people 65 and older from 1971 through 2009. They excluded Medicare Part D, which started in 2006, so that the new program didn’t make the US look worse. What did they find?

    In 1980, US spending was $1215 per enrollee versus $2141 in Canada. Since then, US spending has grown by an inflation adjusted 198.7% versus 73% in Canada. Here are some more details:

    Per-elder Medicare hospital spending grew 44.7% in Canada vs. 81.9% in the U.S. Physician spending grew 100.7% in Canada, vs. 274.3% in the U.S. Hospital’s share of total Medicare spending fell from 49.6% to 41.5% in Canada and from 68.4% to 41.5% in the U.S. Spending for other services (e.g. home, hospice and skilled nursing facility care) rose from 3.9% to 23.6% of spending in the U.S. and from 39.7% to 44.3% in Canada.

    Here’s the kicker. If the US Medicare program had grown at the same rate as Canada’s did over this period, we would have saved more than $2.9 trillion. In 2009, the trust fund would still have been running a surplus, instead of a deficit.

    I can already hear the protests of rage and bluster. You’ll argue that Canada rations, or that Canada is different, or that you have to wait a year to see the doctor once you discover you’re pregnant. I’ve covered many of these things before. They still miss the point. You know what Canada is better than us in? Keeping costs down. Period. If your main complaint these days is that the health care system, or Medicare specifically, is a entitlement we can’t afford and that we have to cut, you’d think we’d be open to recognizing that this is something other countries do better. They keep costs down. Ignoring that makes no sense.


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    • Here’s the kicker. If the US Medicare program had grown at the same rate as Canada’s did over this period, we would have saved more than $2.9 trillion. In 2009, the trust fund would still have been running a surplus, instead of a deficit.

      Is that percentage wise or in dollars?

    • “If the US Medicare program had grown at the same rate as Canada’s did over this period, we would have saved more than $2.9 trillion.”

      In other words, the govenrment would have cheated the health care industry out of $2.9 trillion?

      Just think, that probably would have destroyed the entire US economy. For decades.

      Or something like that…

      • How is it “cheating” the health care industry by the government? The insurance industry has been cheating US! What do you get for all the money that goes into that industry? Half-assed insurance which is getting worse: policies with actuarial value of 70% and deductibles so high that more than 50% of bankruptcies due to medical costs occur in people that had health insurance when the medical costs were incurred!
        More than that, insurers are beholden ONLY to shareholders and bottomline… so, the best way that they can make money is by DENYING reimbursement for claims, valid or otherwise. They are not, nor will they ever be, in the business of doing what’s best for the citizen. At least government’s role is to serve/represent the best interests of the people being governed… the governments role should never be to cheat citizens (although one could make a compelling argument that the current tax code would suggest otherwise).

        So no, it’s the insurance industry that’s cheating us, by charging us ridiculously high costs for substandard coverage for our care. Clearly, in other countries, the same type of coverage can be provided (and doctors can be paid just as well) for far far less cost. It’s simple… remove the middleman (whose goal is to make a buck and create administrative complexity thereby disenfranchising the individual) and let’s get back to paying for real health care, using a system not determining to squeeze money out of us for providing a made-up service.

    • You mentioned that Canadian Medicare is provincially administered – in fact, each province is keenly aware of what other provinces are doing and none is afraid of stealing good ideas. A case in point, was the Ontario move to reduce generic pharma costs in 2010. Other provinces followed Ontario’s lead to reduce generic costs by up to 50%.

      “The key element — and the main point of dispute — is the banning of what are called professional allowances. Those are the fees that generic drug companies pay to pharmacists. The government says those fees — estimated at about $750 million — inflate the cost of drugs.”

      Executive compensation is also a huge difference – no multi-million dollar CEOs. Here is an example for British Columbia (the managers in the linked article report to BC Government bureaucrats).

      “Charles Blanke, who heads up systematic therapy at the BC Cancer Agency, is the highest paid public servant among health authorities with pay of $502,659 in fiscal year 2010-11.”

    • OK, so, the point is that government is good at some things – but perhaps could be a lot better at driving costs down if they had full monopoly power and could push reimbursement rates to at cost or below cost levels?

      OK, in the US, you want to ignore the cost shift that is an obvious result of the “negotiated” pricing – where providers have multiple prices for the same procedure depending on the ability to charge.?

      I think I get your single payor concept – where the government sets reimbursement rates and reduce utilization via direct controls or indirectly, via limits on access via at cost or below cost provider reimbursement levels. Is that your point? What is your point?

      • I think the point is that if one assigns a lot of importance to the overall economic impact of high health care spending and high rates of health care cost growth, then one should acknowledge that other trade-offs are acceptable towards the goal of reducing spending.

        Aaron, as a Canadian I feel no need to defend the country’s system, because I think it does pretty poorly at spending and value-for-money. Japan and Germany do much better than we do. Canadians are pretty smug about their system because, like so much of the commentariat, they believe that there are only two health care models in the world. At least the US is having an open policy debate.

        • Seriously? You call what has happened in America an open policy debate? I’ve had Republicans tell me that what Switzerland and Singapore have done are socialist dystopian apocalypses waiting to destroy the world, and the ACA is arguably more market-oriented than either of those countries’ health care systems. Even hinting at eliminating the tax exclusion for employer-sponsored insurance or letting anyone enroll in Medicare creates conniption fits so big that you can see them from space. Calling the last four years of death panels, total government takeovers of health care, and breaches of liberty an open policy debate is an insult to what real open policy debates are.

          • “I’ve had Republicans tell me that what Switzerland and Singapore have done are socialist dystopian apocalypses waiting to destroy the world, and the ACA is arguably more market-oriented than either of those countries’ health care systems.”

            Please explain how the ACA is more market-oriented than the Singaporean system. I tend to think the exact opposite. If you replace the term “market-oriented” with “public choice” does the answer stay the same or change?

            • You’re correct. I didn’t edit my comment before I posted it. I should have said that the ACA is arguably LESS market-oriented than Switzerland or Singapore’s health care systems. I blame my working for 13 hours before I read this post and responded to it.

              In any case, my point still stands. Doing what Switzerland and Singapore have done with their health care systems nationwide would have been impossible because even their systems were (and still are to some extent) seen as crypto-Communist destructions of liberty to Republicans, and they were ready to vote no on anything Obama proposed. Hell, they were prepared to vote no on a tax cut because Obama supported it!

    • Just to stretch the debate a little further, I think we should get past this idea that it’s about government versus the market. It’s about policy and sound information. Some jurisdictions have great policies where efficient markets deliver decent care at a manageable price. In the US, many state governments have terrible policies compared to others. The same is true of Canadian provinces.

      At this juncture, somebody on either “side” is going to toss out a reference to information asymmetry, with a conclusion that this is why the government should/should not or the market should/should not do X. You read this a lot in partisan commentary. Yet the role of asymmetry in health care is not always clear. One has to understand it well, see it working in both daily interactions as well as policies, and in general think rather deeply about it to understand what effect it has. Tossing everything into the lap of information asymmetry is just a nerdier way of shouting “let the market solve it!” or “social justice!” at random intervals.

    • It looks like increases since 1980 has brought US spending per enrollee from about half of Canada’s ($1200 vs $2100) to parity–about $3600 (US) vs $3700 (Canada). It may be in the original article, but I think we need more data about initial conditions and changes in the respective health care systems in order to make this comparison useful.

    • The substantive argument has never been about the government’s capacity to control spending and prices if granted the power to do so, it has always been about the nature of the consequences that will follow from doing so.

      The government is also much than the private sector at forcibly conscripting civilians and sending them off to fight wars – but this does nothing to establish the case that endowing the government with this power is actually a net benefit for the country, or even the army for that matter.

      Engaging the non-trivial form of this argument takes us back to the dreary work of hauling out statistical aggregates derived from populations with *vastly* different values, habits, and lifestyles and claiming that they tell us something meaningful about the comparative clinical efficacy per-unit-cost of the health systems that treat them.

      • It feels like you’re arguing from another universe sometimes. There are legions of people who believe that it is the private sector which is more likely to reduce the cost of healthcare. You dismiss all of that in the first sentence. You’re not getting out much if you believe that everyone believes that government has the capacity to control spending.

        I’m also tired of having to repeat myself on your last point. I’ve answered it many, many times on this blog. Not every metric can be wiped away by your assumptions.

        • The central difficulty here is that your opponents in this debate do not recognize the terms “cost” and “price” as synonymous. I am not certain how you understand or define them, but I’ll attempt to speak for the “Government is bad at controlling costs” camp and lay out how people in this group think about these terms.

          Those who argue that the government is bad at controlling costs define “costs” as the total value of the inputs required to create a good or service, and “price” as the amount of money that consumers are willing to exchange for the said good or service. In our minds there is not always a predictable relationship between the two.

          Consequently it’s entirely possible to accept that the government has the power to specify and enforce a maximum price that a producer can charge for a given good or service without believing that exercising this statutory power will necessarily reduce the cost/value/quantity of the inputs required to generate them.

          If you are not simply making the trivial claim that governments can control prices, but rather that:

          1) Governments can make the actual process of producing a given medical good or service more efficient by reducing the total value of the inputs required to generate it.

          2) Governments are demonstrably better at improving efficiency than competitive market processes are, or ever could be, at least when it comes to health care.

          Then, yes, there are indeed legions of people who disagree with that.

          That’s an interesting claim, because it suggests that even in the absence of statutory price controls, Canadian health systems could be imported to the US (or patient care could be outsourced to Canada) and deliver specific goods and services at a lower real cost as a result of their superior industrial organization.

          E.g. Canadian hospitals can organize their care in an ICU such that a given nurse can attend to 10 patients without compromising their care, whereas a nurse in the US could only attend to 7, their surgical theaters have a higher throughput or require fewer staff per procedure, etc, etc.

          I am genuinely interested in learning precisely what you mean when you stipulate that the government is better at controlling costs, so if I have misunderstood or misrepresented your argument I’d welcome a clarification.