The Plan Has the Potential to Make an Utter Mess of U.S. Health Care

October 17, 1993|By GREGG EASTERBROOK

Certain categories of ideas draw easy criticism. Nearly anyone can knock a hole in any proposal for reform of intractable problems such as crime, racial prejudice, the decline of public education -- or the travails of the health care system. No matter who was put in charge of President Clinton's health care reform effort, no matter what Mr. Clinton proposed, people would now be complaining.

That being said: Mr. Clinton's proposed health care reform has the potential to become a fiasco, with a capital F.

Mr. Clinton's plan has many thoughtful features, including universal access to care, standard insurance policies available to all regardless of pre-existing conditions and a national health board to set basic therapeutic guidelines for doctors and hospitals. But the plan also has the potential to make an utter mess of U.S. health care, while raising prices in the process. Let's run through just the highlights of the plan's many faults.

* Still more bureaucracy. In the name of cutting bureaucratic waste, Mr. Clinton proposes to abolish nothing, while creating an entirely new level of overhead in the form of large health insurance-purchasing alliances; establishing the new national health board and creating as many as 50 separate new theories of health care, since each state is to be free to devise its own.

Excessive overhead costs are already the leading objection to the American approach to medicine, with most studies estimating administrative expenses as consuming around 20 percent of U.S. health care costs. This is far higher than in any other industrial nation.

Health care spending in the United States was $838 billion in 1992, making the administrative cost alone, at 20 percent, a stunning $168 billion. Yet Mr. Clinton proposes adding to the bureaucracy to avoid what he seems most to dread, saying "no" to any organized interest group.

Establishing new layers of overhead is always easier for presidents than abolishing existing layers. But is there a single soul in America (other than, perhaps, presidential medical adviser Ira Magaziner) who believes the health care system needs more overhead?

Rather than cutting from any of the four existing medical hierarchies -- physicians, hospitals, insurers and medical suppliers -- Mr. Clinton will create a fifth major hierarchy, the health insurance-purchasing alliances, on the quaint notion that somehow the alliances will persuade the existing hierarchies to surrender turf voluntarily.

* No mandatory prices. Contrary to the popular misconception, not all national health care systems rely on government single-payer mechanisms. Germany, for example, has private insurers. But all successful national health care systems -- principally those in Canada, France, Germany and Sweden -- employ government-set pricing for physician and hospital services. Government-set prices are the only proven means to control health costs.

Yet, instead of having the new national medical board publish set fee schedules, Mr. Clinton ventures into the untested idea of restrictions on insurance premiums, and the debatable notion of caps on future rates of growth. The latter is self-defeating because, if nothing else, caps on future rates of growth guarantee that medical prices will rise to whatever level the caps permit.

* Naive ideas about competition. The United States already has, by a wide margin, the most competitive health care system in the world. Yet, rather than face down medical interest groups by establishing government-set fees, Mr. Clinton supposes that still more competition -- more of what already backfires in actual use -- will be a cure-all.

Consider this comparison. The United States invests about 20 percent of its health care dollars in administrative overhead vs. about 10 percent in Canada, the country with the second-most )) expensive medicine per capita. That is: Today's free-market U.S. approach generates double the overhead costs of Canada's government-run approach. Nothing is better evidence of the fact that, in the health care arena, market forces backfire.

Yet Mr. Clinton proposes still more competition. This belies an unwillingness to face something elemental about medical care: Market forces cannot work, no matter how cleverly the system is designed.

Market forces depend on price signals. The invisible hand cannot guide an industry toward efficiency unless it has, through price signals, a clear grasp of the benefit-cost ratios of competing allocations of resources. This works fine in sectors of the health care industry where goods are bought and sold: Hospital gowns or drugs with the same chemical formula, for example, are transacted under smoothly functioning, competitive market conditions.

But the system breaks down when it comes to the cost-driving essence of medical care -- physician and hospital services. In this arena, there is no relationship between the cost of service and its value.

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