EconLog’s Arnold Kling is doing some of the best thinking and writing on America’s broken health care finance system these days. In this lucid Cato Unbound article, Kling channels one of this thoughts from his book Crisis of Abundance: Rethinking How We Pay for Health Care (Cato 2006):

The health coverage most Americans have is what I call ìinsulation,î not insurance. Rather than insuring them against risk, most familiesí health plans insulate them from paying for most health care bills, large and small. [. . .]
Real insurance would pay for treatments that are unavoidable, prohibitively expensive, or for illnesses that occur relatively rarely. Instead, insulation reimburses even relatively low-cost services, such as a test for strep throat or a new pair of eyeglasses. Insulation pays for treatment even if it is commonplace or discretionary.
For health care providers, insulation is a bonanza. Because consumers are not spending their own money, they accept doctorsí recommendations for services without questioning them and without concern for cost. Faced with an insured patient, a health care provider is like a restaurant catering to convention-goers with unlimited expense accounts. The customer will gladly take the most high-end recommendation and not worry about the price.
Consumers are happy as well. Insulation relieves the patient of the stress of making decisions about treatment. The patient also does not have to worry about shopping around for the best price.
The problem with insulation is that it is not a sustainable form of health care finance. Individuals, employers, and government are all under stress. [. . .]
Today it is fairly deeply ingrained with most Americans that health care services are something that you should not have to pay for yourself. Insulation is the norm, and real health insurance as I would define it is almost nonexistent.
Ultimately, I think we are headed for a collision of cultural values. We prefer insulation to real insurance. We expect services to be readily available, without the supply limitations or waiting lists that exist in countries where government is responsible for more health care funding. And yet we are growing increasingly concerned over the expansion of health care spending that takes place in a system that lacks constraints on either supply or demand.
Real health insurance may not be popular now. But when Americans see that the providers of insulation, including Medicare, have to turn to the rationing of health care services in order to meet budgetary constraints, real health insurance may start to look like a good alternative.

Don Boudreaux, chairman of the economics department at George Mason University and the driver of Cafe Hayek, authored this Christian Science Monitor op-ed that addresses a fundamental problem with reforming the American health care finance system — the expectation of most Americans that health care is a basic human right and entitlement. Boudreaux explains the fallacy of that attitude:

But not everything that is highly desirable is a right. Most rights simply oblige us to respect one another’s freedoms; they do not oblige us to pay for others to exercise these freedoms. Respecting rights such as freedom of speech and of worship does not impose huge demands upon taxpayers.
Healthcare, although highly desirable, differs fundamentally from these rights. Because providing healthcare takes scarce resources, offering it free at the point of delivery would raise its cost and reduce its availability. [. . ]
Medicare, Medicaid, and tax-deductibility of employer-provided health insurance created a system in which patients at the point of delivery now pay only a small fraction of their medical bills out of pocket.
This situation leads to monstrously inefficient consumption of healthcare. Some people consume too much, while many others with more pressing needs do without.
Because the wasteful consumption caused by heavily subsidized access drives up healthcare costs, taxpayers must pay more and more to fund Medicare and Medicaid, while private insurers must continually raise premiums. The sad and perverse result is that increasing numbers of people go without health insurance.

Employer-based health insurance — which proliferated as a means to attract scarce labor during the wage and price controls of World War II — triggered the societal shift in attitude regarding payment of health care costs. Milton Friedman summed up the basic problem during an interview several years ago:

There are four ways in which you can spend money. You can spend your own money on yourself. When you do that, why then you really watch out what you’re doing, and you try to get the most for your money.
Then you can spend your own money on somebody else. For example, I buy a birthday present for someone. Well, then I’m not so careful about the content of the present, but I’m very careful about the cost.
Then, I can spend somebody else’s money on myself. And if I spend somebody else’s money on myself, then I’m sure going to have a good lunch!
Finally, I can spend somebody else’s money on somebody else. And if I spend somebody else’s money on somebody else, I’m not concerned about how much it is, and I’m not concerned about what I get. And that’s government. And that’s close to 40% of our national income.

Baylor College of Medicine’s struggle to define its future in the choppy waters of America’s health care finance system has been a frequent topic on this blog. But Baylor is far from the only medical school that is struggling with such problems. This Kevin Moran/Houston Chronicle article reports on the recent troubles at Texas’ oldest medical school, the University of Texas Medical Branch at Galveston. Those troubles were alluded to in this earlier post.

In a year when this island city has avoided even the threat of a major natural storm, its largest and oldest employer ó the University of Texas Medical Branch ó is experiencing an unprecedented financial, employment and political tempest.
Facing a $20 million deficit and aiming to cut $130 million in spending in 2007, the 13,000-employee medical center started the year by hiring a consulting firm to heavily reduce expenses.
Faculty and staff feared that any solution involved a massive layoff. Morale dropped precipitously when UTMB announced in June it would cut 1,000 jobs. Next came a storm of dissatisfaction when administrators unveiled plans to cut salaries of tenured faculty, physicians, researchers and others.

The article goes on to report on how UTMB’s initiatives to generate more income is being opposed by competing physicians and how little of UTMB’s professional services are compensated through proceeds of health insurance. Although somewhat different from Baylor’s problems because UTMB operates its own hospital in Galveston, UTMB’s difficulties are another reflection of the cascading problems that are resulting from the federal and state governments’ failure to address America’s broken health care finance system. The risks of that broken system are a decline in the quality of physician training and medical care, which is something that should concern us all.

This Ft. Worth Star-Telegram article from about a month ago reports that, since enactment of the Texas Medical Malpractice and Tort Reform Act of 2003, medical malpractice lawsuits in Tarrant and Dallas Counties have been reduced by as much as 60%. A couple of weeks later, this Austin Business Journal article and this PIAA press release report that Texas doctors are enjoying one of the steepest declines in malpractice insurance premiums rates in recent history — almost 30% over the past four years.
Pretty hard to argue that the parallel reduction in lawsuits and insurance premiums are a coincidence.

Alex Tabarrok of Marginal Revolution fame is studying the causes of rising medical malpractice premiums, which is a subject explored in the recent book that he co-authored with Eric Helland, Judge and Jury: American Tort Law on Trial (Independent Institute, 2006).
In this excellent Wall Street Journal ($) op-ed, Professor Tabarrok takes on the canard that rising medical malpractice premiums are primarily the result of price-gouging by greedy insurance companies:

On its face, price gouging is a peculiar explanation for recent increases in insurance premiums. Is greed new to the world? Were insurance companies followers of Mother Teresa just a few years ago? If greed and gouging are the explanations for rising premiums, why did the St. Paul group — one of the nation’s largest suppliers of medical malpractice insurance — pull out of the market in 2001? Were the profits from all that gouging just too much for St. Paul’s guilty conscience? And consider that almost half of doctors are insured through mutual, i.e., doctor-owned, insurance companies. Are the doctors gouging themselves?

Professor Tabarrok then cogently explains the primary element in how insurance companies establish medical malpractice premiums — i.e., attempting to predict the future:

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This NY Sunday Times article explores Britain’s state-financed dental system and finds that the lines for treatment are so long that some citizens simply opt to treating themselves:

Britain has too few public dentists for too many people. At the beginning of the year, just 49 percent of the adults and 63 percent of the children in England and Wales were registered with public dentists.
And now, discouraged by what they say is the assembly-line nature of the job and by a new contract that pays them to perform a set number of “units of dental activity” per year, even more dentists are abandoning the health service and going into private practice ó some 2,000 in April alone, the British Dental Association says.
How does this affect the teeth of the nation? [ . . .]
“I snapped it out myself,” said William Kelly, 43, describing his most recent dental procedure, the autoextraction of one of his upper teeth.
Now it is a jagged black stump, and the pain gnawing at Mr. Kelly’s mouth has transferred itself to a different tooth, mottled and rickety, on the other side of his mouth. “I’m in the middle of pulling that one out, too,” he said. [ . . .]
A recent Guardian newspaper article about the company titled “D.I.Y. Dentistry” (meaning Do It Yourself) said that the previous week British drugstores had sold 6,000 jars of the filling replacement, and 6,000 of the crown-and-cap replacement.

Keep this article handy to show to the next person who advocates a state-funded health care finance system for the U.S.

Following on this post from last week regarding the Veterans Administration as a model for a government-sponsored health care finance system, this NY Times article reports that the Canadian government-administered health care finance system — which has been widely-heralded as a model for a similar U.S. system — is showing signs of imploding as a result of a recent Canadian Supreme Court decision:

Canada remains the only industrialized country that outlaws privately financed purchases of core medical services. Prime Minister Stephen Harper and other politicians remain reluctant to openly propose sweeping changes even though costs for the national and provincial governments are exploding and some cancer patients are waiting months for diagnostic tests and treatment.
But a Supreme Court ruling last June ó it found that a Quebec provincial ban on private health insurance was unconstitutional when patients were suffering and even dying on waiting lists ó appears to have become a turning point for the entire country.
“The prohibition on obtaining private health insurance is not constitutional where the public system fails to deliver reasonable services,” the court ruled.

The Times article goes on to report that the Canadian Supreme Court decision is spurring the markets to respond to the deficiencies in the Canadian government-administered system:

The country’s publicly financed health insurance system ó frequently described as the third rail of its political system and a core value of its national identity ó is gradually breaking down. Private clinics are opening around the country by an estimated one a week, and private insurance companies are about to find a gold mine.

My late father had extensive experience in providing and administering medical care in the Veterans Administration system, which he used to characterize as a good example of an unnecessary governmental program that perpetuated itself because of the vested interests of those who administer and profit from the system. “It’s a reasonably competent system for dispensing penicillen,” he once observed to me. “But you wouldn’t want to have gall bladder surgery over there.”
Thus, imagine my surprise a few weeks ago when NY Times columnist Paul Krugman, in his generally informative series on America’s broken health care finance system, authored this Times Select ($) column in which he touts the VA system as a model for a single-payor, government-administered health care finance system in the US:

American health care is desperately in need of reform. But what form should change take? Are there any useful examples we can turn to for guidance?
Well, I know about a health care system that has been highly successful in containing costs, yet provides excellent care. And the story of this system’s success provides a helpful corrective to anti-government ideology. For the government doesn’t just pay the bills in this system — it runs the hospitals and clinics.
No, I’m not talking about some faraway country. The system in question is our very own Veterans Health Administration, whose success story is one of the best-kept secrets in the American policy debate.

Krugman goes on to extol the virtues of the VA’s integrated system, which includes the government’s superior ability to “bargain hard with medical suppliers, and pay far less for drugs than most private insurers.”
Clear Thinkers favorite Peter Gordon sums up what my father’s opinion of Krugman’s analysis almost certainly would be:

This is very cool. I imagine that nearly everything could be obtained cheaply if only the federal government were put in charge to “bargain hard.”
Silly me. I fear that the government is an expensive middleman. I fear that it is a highly politicized middleman. And I fear that with enough hard bargaining, suppliers will leave the industry — as many have ever since Medicare and Medicaid began to “bargain hard.”
Think of the many readers of the NY Times op-ed page, many predisposed to this silliness, who get their public policy economics from Krugman.

The Washington Post’s Robert J. Samuelson has seen the problem with the American health care finance system — it’s us:

Americans generally want their health care system to do three things: (1) provide needed care to all people, regardless of income; (2) maintain our freedom to pick doctors and their freedom to recommend the best care for us; and (3) control costs. The trouble is that these laudable goals aren’t compatible. We can have any two of them, but not all three. Everyone can get care with complete choice — but costs will explode, because patients and doctors have no reason to control them. We can control costs but only by denying care or limiting choices.
Disliking the inconsistencies, we hide them — to individuals. We subsidize employer-paid health insurance by excluding it from income taxes (the 2006 cost to government: an estimated $126 billion). Most workers don’t see the full costs of their health care; a reported Bush proposal to add new tax subsidies would magnify the effect. A similar blindness applies to Medicare recipients, whose costs are paid mainly by other people’s payroll taxes. Despite complaints about rising co-payments and deductibles, out-of-pocket costs are still falling as a share of all health spending. In 2004, they were 12.5 percent; in 1993, they were 15.8 percent.
We’re living in a fantasy world.

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Following on prior posts here, here, here and here, this NY Times article addresses the unhealthy economic effect of the favored tax treatment of employer-based health insurance. As opposed to individual health insurance policies, employer-based health insurance is a tax deductible expense of the employer and employees are not required to report the economic benefit of that policy as taxable income on their individual returns. The amount of the subsidy (in foregone tax collections) is about $150 billion and is expected to increase to $180 billion by 2010. As Harvard economist David Cutler notes: “If you had $150 billion to play with, you could come very close to universal coverage.”

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