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Priced Out: The Economic and Ethical Costs of American Health Care

Priced Out was never finished by its author. The book was completed by Uwe Reinhardt’s wife Tsung Mai-Cheng (a habitual co-author of Reinhardt’s and celebrated healthcare economist in her own right) and published posthumously.

It is burdened, in my view, by having three forewords instead of one: two fawning / mourning introductions by Paul Krugman and William Frist, which merely serve to put off any Republicans from reading the book (yes, I know Bill Frist was a Republican), and one by the author himself, who explains that there are exactly two problems with healthcare in the US:

1. An honest debate has never taken place on what we want from it: should the fortunate (i.e. rich and healthy) members of the public pay for the health of the unfortunate (i.e. poor and unhealthy)? Yes or no?

Because this debate has never openly taken place, we have stumbled upon a system that fails on both possible aims: (i) it’s far more wasteful than it would be if we did not care to provide for the less fortunate (ii) it’s far more inequitable than it would be if we did.

2. US healthcare is unnecessarily feeding far too many mouths, a fact that makes it expensive.

Having established these facts in the introduction, Reinhardt goes on to make a number of important points:

1. US healthcare is expensive beyond what you would expect given explanatory factors such as ability to pay (the “superior good” explanation) and demographic structure. Yes, rich countries with rich country demographics should spend more on healthcare than poor countries with a young population. But you run the regressions and the US is almost as much of an outlier after you’ve corrected for all that.

2. More relevantly, US healthcare is expensive compared to other nations if you allow for its effectiveness (outcomes, p.75), or adjust for obesity, diabetes etc. Americans get poor value, bottom line. They do so even after you adjust for the standard of care they receive (which is no great shakes) and they do so even after you account for the fact that “everyone’s fat” / “everyone smokes” / “everyone drinks” etc.

3. Only 17% of the cost of drugs is accounted for by the cost of production. Only 58% goes to pharmaceutical companies, even. The rest goes to a phalanx of intermediaries siphoning money to themselves: insurers, Pharmaceutical Benefit Managers, pharmacies and wholesalers!!!

4. US healthcare costs have been spiraling up at a rate that puts inflation to shame, any way you care to measure it.

5. Costs of procedures are (i) high relative to any country you care to mention (ii) amazingly varied from hospital to hospital (iii) amazingly varied within each hospital, depending on who’s getting treated (iv) opaque / hidden: you never know what you’ll pay (which makes the principle of co-paying cruel, Reinhardt adds, by-the-by.)

6. The government pays directly for half all healthcare and foregoes tax on part of the rest. Medicaid, Medicare and Public Health spending is half the spending. Private Insurance is only 34.3% and out-of-pocket is 11%.

7. US healthcare pays for an army of administrators. Each one of those layers of administrators, whose main function is to fight somebody’s corner in the 34.3% of the market that is paid for by private insurance, has a job that at some point in history made sense. Collectively, however, this is a leviathan that (directly, or via the public purse) sucks money out of everyone’s pocket, all while creating a vast lobby for the status quo, because all these people have jobs to protect.

Next, the author takes you both through Obamacare and through the House proposal and the Senate proposal for replacing Obamacare.

His analysis on Obamacare is not what you’d think. He basically deems it to be “a bad patch on a bad system” rather than the panacea we’ve been told it is. He concedes, on the other hand, that for those not lucky enough to get their employer to pay for their health insurance it is a massive improvement on what went before.

The main problem of Obamacare is that inevitably a line must be drawn above which you are not covered. The people right above that line ended up as the main losers: they’re paying more than they did before.

The reason is what Reinhardt calls the “death spiral” of health insurance, which comes in two parts: part one of the death spiral is that the top 10% of the insured suck up two thirds of all resources, meaning that most people lose from buying insurance and a select few benefit a whole lot. This situation gives rise to two ways to charge a patient: based on either his medical circumstances (“medically underwritten”) or on the fact that he has a pulse (“community rated”). Obamacare forces insurers to take everybody based on their community rating, pays for the poor and forces everybody else to pay for the insurance themselves (or pay a fine if they opt out).

Part two of the death spiral comes if not everyone is forced to buy healthcare, because then they only will if they need it. This means up to 90% of potential contributors can take their chances, leaving the 10% in the pool. So the costs to the insurers go up. This drives costs up, making the decision even more clear-cut for the potentially healthy, which in turn…. you get the idea, it’s called a spiral for a reason!

Now in theory Obamacare does not face a death spiral, because it forces everybody in. But life is not that simple! It turns out that the people who first ever bought healthcare under Obamacare were sicker than everybody else who was buying health insurance before. No massive surprise with the benefit of hindsight, but the result is that health insurers now need to charge more. And if you’re above the threshold for government handouts, you’re worse off, period.

There are other losers, those who would prefer to take their chances but are forced to either buy insurance they don’t believe they need or pay a fine. Reinhardt has absolutely no pity for them, however! The last chapter of the book penned by him is a tongue-in-cheek proposal whereby at age 26 every American has to say if he wants to be part of a national insurance plan. And if not, he can never enroll and take his chances. He gets to become, in the author’s words, an Uninsured Rugged American Individualist…

The analysis of the Republican plans should have been carved out of the book in my view, as they never came to pass.

The book closes with Tsung Mai-Cheng’s efforts to provide relevant quotations from her husband on a range of issues he never got to.

Obviously, he never wrote those bits, so we are relying here on Uwe Reinhardt’s wife to pick quotations that are in line with his beliefs, but they make for VERY uncomfortable reading.

Single-payer healthcare in the US he actually views as an invitation for a free-for-all, due to “capture” of the US government by private interests:

“I have not advocated the single payer model here because our government is too corrupt. Medicare is a large insurance company whose board of directors (Ways and Means and Senate Finance) accepts payments from vendors to the company. In the private market, that would get you into trouble. When you go to Taiwan or Canada, the kind of lobbying we have here is illegal there. You can’t pay money to influence the party the same way. Therefore the bureaucrats who run these systems are pretty much insulated from those pressures. Here you have basically a board of directors in the House Ways and Means Committee that gets money from lobbyists both at the regulatory writing stage and during normal operations. And they can call an administrator and demand they stop something from happening.”

Perhaps even more unsettling is that Reinhardt finds US healthcare to be one of the better features of the American landscape. To wit:

“I am actually quite optimistic about health care. First of all, it never was that bad a sector. People always say it’s the most inefficient sector in the world. That’s bullshine. If you compare heath care to education, health care towers over education in terms of concern about quality, concern about effectiveness et cetera. Compare it to jurisprudence. Have judges ever worried about how much time of the jury they pulverize? So I think the health care system actually is a lot better than people claim it to be. We keep beating up on doctors and nurses and they work very hard. But actually where we should start -there was an Institute of Medicine study out that said we spend $190 billion more per year on administration than we should. It seems to me that should be attacked before I hound more doctors and nurses… For some reason we talk about evidence-based clinical practice, but not ever about evidence-based administration… Say, how could you run an insurance system more cheaply than we do? How much should we save? Whatever we are spending, cut it in half.”

Overall, this book was a massive eye-opener for me, both because of the rational analysis offered and because it was short and had charts and tables and graphs. But the central message is the following:

The first thing we must do before assessing US healthcare is to have an honest debate on the issue Uwe Reinhardt opens with:

“To what extent should the better-off members of society be made to be their poorer and sicker brothers’ and sisters’ keepers in health care?”

Reinhardt strongly believed that it is our duty to be our sicker brothers’ and sisters’ keepers. But he was also a practical man.

I recommend you read “Priced Out” together with my friend Jonathan Cohn’s “Sick.”

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