David Cutler is a Harvard economist who was involved in the failed Clinton Administration initiative in the early 1990’s to reform America’s health care finance system. This NY Times Sunday Magazine article examines Professor Cutler’s evolving views on health care finance reform, and a number of them are quite interesting:

Cutler’s approach is radically different. He says that most health-care spending is actually good. Spending has been rising, he says, because it delivers positive, and measurable, economic value, and because it can do more things that Americans want. Therefore, Cutler says, we should focus on improving the quality of care rather than on reducing our consumption of it. Rather than pay less, he wants to pay more wisely — to encourage health-care providers to do more of what they should and less of what is wasteful.

A tweedy, self-effacing 39-year-old, Cutler is a seriously modified lefty. He envisions a system in which everyone could get insurance while free-market incentives would motivate health-care providers to be more effective as well as more efficient. Instead of suppressing the market by rationing care, restraining prices or regulating doctors, he wants to liberate it. It is neither Clinton nor Bush — but closer to Bill Bradley, whose 2000 campaign Cutler advised.

To make coverage universal, Cutler advocates a $6,000 credit for poor families (and less, on a sliding scale, for others, tapering off to a small credit for people earning $50,000 and up). The credits would be redeemable as a sort of health-insurance voucher. Significantly, Cutler would extend credits to everyone — even to people who are covered now. Many employers, for competitive reasons, would still offer coverage, but access to care would no longer depend on either employment status or age.

The problem is that most health care finance policy wonks believe that health care spending is “out of control” and, thus, Professor Cutler’s approach would make that spiral worse. However, the wonk solution — a single payor government system — simply creates even worse problems. Professor Cutler’s focus on the qualitative side of the problems is refreshing and merits serious consideration.
Finally, note that Professor Cutler’s ideas are similar in several ways to the ideas addressed in this previous post on business theorist Michael Porter‘s views on reforming the health care finance system.

Following on this post from a couple of weeks ago, this NY Times op-ed by University of Texas law professors Bernard Black and Charles Silver, University of Illinois law professor David Hyman, and Columbia law professor William Sage contends that there recent study of malpractice awards in Texas indicates that there is scant evidence that a crisis in states’ tort systems is the driving force behind the increases in medical malpractice insurance premiums. Here is how they summarize the results of their review of all closed claims in Texas between 1988 and 2002, which was the year before the Texas Legislature enacted sweeping tort reform measures:

Large claims (with payouts of at least $25,000 in 1988 dollars) were roughly constant in frequency.
The percentage of claims with payments of more than $1 million remained steady at about 6 percent of all large claims.
The number of total paid claims per 100 practicing physicians per year fell to fewer than five in 2002 from greater than six in 1990-92.
Mean and median payouts per large paid claim were roughly constant.
Jury verdicts in favor of plaintiffs showed no trend over time.
The total cost of large malpractice claims was both stable and a small fraction (less than 1 percent) of total health care expenditures in Texas.
In short, as far as medical malpractice cases are concerned, for 15 years the Texas tort system has been remarkably stable.

The authors conclude as follows:

Malpractice premiums have risen sharply in Texas and many other states. But, at least in Texas, the sharp spikes in insurance prices reflect forces operating outside the tort system.
The medical malpractice system has many problems, but a crisis in claims, payouts and jury verdicts is not among them. Thus, the federal “solution” that Mr. Bush proposes is both overbroad and directed at the wrong problem.

Unfortunately, this is not an unusual approach for the Bush Administration to follow in enacting legislation, as reflected by this legislation.

Don’t miss the latest segment (no subscription required for this series) in the Wall Street Journal’s Econoblog series, in which economist John Irons and George Mason University economics professor Russ Roberts discuss America’s broken health care finance system.

Alan Murray’s column today in the Wall Street Journal ($) reports on the subject of General Motors CEO Rick Wagoner‘s speech tomorrow to the Chicago Economic Club.
What do you think it would be? International trade barriers? GM’s bonds being rated at junk levels? Declining GM profits?
None of the above.

Instead, [Mr. Wagoner will] focus on fixing the U.S. health-care system.
[Mr. Wagoner] runs not only the world’s largest auto maker (a position threatened by Toyota Motor), but also the nation’s largest private health-care purchaser (a position threatened by no one.) He’s responsible for the health of some 1.1 million people, most of them retirees and their families, and paid $5.2 billion last year for the privilege. The cost of health care now adds more than $1,500 to every vehicle sold, and is rising at double-digit rates. . . To cure what ails General Motors, he has to cure what ails America: a very sick health-care system.

Mr. Murray then frames the issue nicely:

The U.S. spends a fortune on health care — 15% of its total output, compared with 10% in Germany and 8% in Japan. But it gets a lousy return on that money. Forty-five million Americans lack health insurance. . .
Curing the problem won’t be easy — which may be why the White House has put it on a back burner. . . fixing health care ultimately is more important to the nation’s future than overhauling Social Security, rewriting the tax code or cutting discretionary spending. But Mr. Bush wrestled with health care in his first term, and has decided to give these other issues top billing in his second. That means there’s little chance he’ll have the time or energy to give serious attention to health care again before leaving office.
If costs continue to rise at their current pace, however, you can expect Mr. Wagoner and his business buddies to join forces with beleaguered state governors and insist that health care become the issue of the 2008 presidential campaign.

Meanwhile, Harvard Law and former University of Texas law professor Elizabeth Warren pens this Washington Post op-ed today in which she addresses the recent Harvard study that found that half of the nearly 1,800 study participants interviewed admitted that medical costs had been the primary cause of their bankruptcy filing. As Professor Warren notes:

The problem is not in the bankruptcy laws. The problem is in the health care finance system and in chronic debates about reforming it. The Harvard study shows:
? Health insurance isn’t an on-off switch, giving full protection to everyone who has it. There is real coverage and there is faux coverage. Policies that can be canceled when you need them most are often useless. So is bare-bones coverage like the Utah Medicaid program pioneered by new Health and Human Services Secretary Mike Leavitt; it pays for primary care visits but not specialists or hospital care. We need to talk about quality, durable coverage, not just about how to get more names listed on nearly-useless insurance policies.
? The link between jobs and health insurance is strained beyond the breaking point. A harsh fact of life in America is that illness leads to job loss, and that can mean a double kick when people lose their insurance. Promising them high-priced coverage through COBRA is meaningless if they can’t afford to pay. Comprehensive health insurance is the only real solution, not just for the poor but for middle-class Americans as well.
Without better coverage, millions more Americans will be hit by medical bankruptcy over the next decade. It will not be limited to the poorly educated, the barely employed or the uninsured. The people financially devastated by a serious illness are at the heart of the middle class.

As noted in this post on the funding crisis in Medicaid, the failure to address the true crisis in this country — i.e., the broken down system of financing health care — is not only a daunting failure of the Bush Administration and the Republican Party, but a huge political opportunity for the Democratic Party.
If the Dems can resist their normal temptation to address the problem through nationalizing the entire health care finance system, then the Democrats could establish a political foothold that could cut across normal party lines and provide the party with the basis for a comeback in the 2006 and 2008 elections.

This Wall Street Journal ($) article is an excellent overview of how subsidizing Medicaid is overwhelming state budgets across the country. The article uses the state of Mississippi as an example, where federal and state funding of the program has doubled from $1.8 billion to $3.5 billion over the past five years:

In the current fiscal year, which ends June 30, Medicaid is projected to cost $268 million more than the state budgeted. Officials are now warning that the program will run out of money by the end of this month unless the legislature passes an emergency appropriation. To open up funds for Medicaid, the state has slashed road construction and may delay plans to raise the salaries of public-school teachers who earn an average of about $35,000 a year.
Forty years ago, Congress, as an afterthought to the Medicare program for the elderly, created Medicaid to help pay for the medical needs of about four million low-income people. Today, the program covers 53 million people — nearly one in every six Americans — and costs $300 billion a year in federal and state funds, recently surpassing spending on the federal Medicare program. In some states, Medicaid accounts for one-third of the budget.

The article is quite good in describing the many facets of the dilemma, including the issue of how to ration care, the under-representation of poor people who truly need some type of subsidy for medical costs, and the knotty problem of trying to make a flawed government program more efficient:

As states try to slash costs under current rules, they run into many roadblocks. Federal law mandates that states must cover many types of care, such as pregnancy care for certain low-income women. Reducing the number of beneficiaries is hard because they often have nowhere else to turn. What’s more, because Medicaid is a “fee for service” program that pays doctors and hospitals every time they treat a fever or patch up a cut, it’s difficult to encourage efficiency.
Patients, too, have little incentive to ration their own care because they pay at most a small sum to see the doctor. “When something is free, people don’t care what it costs,” says [Governor Haley] Barbour in Mississippi.

Which reminds me of an observation that Milton Friedman made in an interview awhile back about the inefficiency of federal programs that interfere in the market’s allocation of services and products:

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.

Read the entire article. As with the entire employer insurance-based, third party payor system of American health care finance, the Medicaid program has grown into a hulking mess largely because of the skewed economic incentives involved. Absent addressing the fundamental problem — i.e., the subversion of market forces in the allocation of health care — reforming the Medicaid program will be akin to rearranging the deck chairs on the Titanic.
Social Security reform is necessary over the long term, but the more pressing need in his country is the reform of the health care finance system. The introduction of Health Savings Accounts is a good start, but the Bush Administration and Republican Party’s reluntance to address the fundamental problems in our society’s third party payor system of financing health care may doom our children and grandchildren to the worst of all results — that is, socialized health care finance by default.

Health Savings Accounts (“HSA’s”) are still a new concept in health care finance, but McKinsey & Company partners Paul Mango and Vivian Riefberg write in this Wall Street Journal ($) article that there are promising developments in the insurance infrastructure that suggest that HSA’s are going to have a larger effect on America’s broken down third party payor system of health care finance than many experts are currently predicting.
The authors point out that the quickly emerging financial industry surrounding HSA’s will eventually compete effectively with typical third party payor health insurance and that this competition will force traditional insurers to improve their performance or suffer. After describing four areas of the financial service industry that are developing in regard to HSA’s, the authors observe the following:

In each of these four businesses, incumbent health insurers’ positions are open to attack from new entrants. They will need to decide whether to try to build the new skills themselves, acquire them, or partner with others. The growth and popularity of the new HSAs is exceeding expectations, so resolving these questions quickly will be vital. Insurers, asset managers and banks have already announced several key acquisitions and alliances that will exclude others from locking up the best partnerships.
The smart money is already moving fast to stake out its place in the new marketplace. Hold on for what promises to be an interesting ride.

Could several large traditional health insurers that fail to adapt to the changing marketplace in health care finance turn into the health care insurance equivalent of legacy airlines? Stay tuned.

This NY Times article reports on former House speaker Newt Gingrich‘s interest in reforming American health care and health care finance. Nothing earth shattering here, but it’s good to see a leading conservative thinker examining issues — particularly in the health care finance field — that desperately need attention.

The excellent HealthLawProf Blog provides this post that lists the 25 most read health care finance articles from Health Affairs, which is the preeminent journal on health policy and economics. The ten most read articles may be reviewed for free from the Health Affairs website through January 11.