The Accidental Socialists

Over the next few years, the U.S. healthcare system will be in the hands of academics from Cambridge, Massachusetts. New CMS Czar Donald Berwick was a member of the Harvard Medical School faculty. Joe Newhouse, who has been the senior adviser to Medicare for as long as I can remember, holds appointments in three different schools at Harvard. David Cutler, Dean of Harvard’s Undergraduate College, seems a good bet to lead the Independent Medicare Advisory Board. Countless of their colleagues and former students have taken key policy making positions in Washington.

I know most of these scholars. They are brilliant as a rule and are acting in the truest sense of public service. None of them are socialists in the usual sense of the word; they do not believe that the government is an efficient provider of most goods and services. I don’t think they want the government to provide health care either. They have never called for government ownership of hospitals or suggested that physicians join the civil service. But whether they realize it or not, they are the vanguard of a movement bringing socialized medicine to America.

My Cambridge colleagues are mostly economists and know a lot about how markets do and do not work. They have learned from economic theory and practical observation that free market health insurance is imperfect. Fearing adverse selection, unregulated insurers take steps that leave some individuals uninsured, while other individuals choose not to buy insurance and free ride off of taxpayer subsidized charity. Most economists (myself included) agree with this diagnosis of the problem with insurance markets.

Academics have proposed many fixes to these market failures. Conservatives like Stanford’s Alain Enthoven and Wharton’s Mark Pauly favor some sort of voucher or direct subsidy with which individuals can buy their own private insurance. Unfortunately, Wharton is hundreds of miles from Cambridge and Stanford is on the wrong coast. The preferred Cambridge solution is a combination of greatly expanded government insurance and a tightly regulated private insurance market. This is the essence of Obamacare.

But this solution does not end with a government takeover of health insurance. There isn’t a public or private health insurer anywhere in the world that doesn’t directly intervene in the delivery of medical care. Socialized insurance necessarily leads to socialized medicine, and if the government controls well over half of the insurance sector through Medicare and Medicaid, and tightly regulates the rest, it is only inevitable that it will also seek to control how health care is bought and sold. And I don’t think it will make much difference whether it is Democrats or Republicans in control. The temptation to set the rules for 17 percent of the GDP is too great.

Let me give you one example. Nearly 20 years ago, academics (from Harvard, naturally) devised a new way to pay physicians under Medicare. They anticipated that improvements in productivity would allow physicians to bill ever increasing amounts that would threaten Medicare’s long term solvency, so they crafted some rather clever rules to calibrate fees, while keeping both physicians and Medicare on an even keel. Those rules are still in place, but they have never been implemented. Every year, doctors protest and Congress overrides the rules. So the best laid plans of academics are cast asunder, doctor enjoy ever higher revenues, and Medicare faces insolvency. (Fees per “unit” of service actually fall, but the number of billed units increases at a faster rate.) This same issue is going to plague Obamacare. To take another example, I helped redesign a physician payment scheme in Alberta with the goal of increasing competition. The provincial government adopted part of the scheme and omitted key details. Now I fear that competition is going to be stifled.

The Obama administration has hired an army of academics to implement the new reforms. They bring with them the finest Cambridge pedigrees and promising ideas. They will write the first draft of the rules and academics everywhere will nod in approval at the cleverness of our colleagues. (Some of us may even enjoy seeing our own pet ideas turn into policy.) But in the fullness of time, the rules and regulations that will govern our health care system will bear the imprint of politicians more than academics. It is the nature of the beast.

My Cambridge colleagues do not favor socialized medicine. But I fear that the regulatory behemoth they have been entrusted to manage is too big for them, despite their talents. Ten years from now, we will look back at these days as the beginning of the end of market-based medicine in America. And my colleagues will only be able to look back, shake their heads, and say “it wasn’t supposed to turn out this way.”

UPDATE: My brother Joel reminded me that there are some parallels to be drawn with “The Best and the Brightest.” As chronicled by journalist David Halberstam, these were the Harvard whiz kids enlisted by Robert McNamara to modernize the Defense Department. I doubt whether these academics ever envisioned that their hard work would help McNamara wage war against the Vietnamese.

It is not well known but a young Alain Enthoven was one of the McNamara whiz kids. After serving as chief executive of a defense company, Enthoven took an interest in health care and, especially HMOs. He developed the principles of managed competition while a professor at Stanford. Enthoven’s ideas formed the intellectual foundation for Bill Clinton’s health reform proposal. But after reading the reform legislation, Enthoven commented “Of the 1700 pages in the Clinton proposal, Congress should throw out 1700 of them.” This is a sad reminder that when academic principles meet political realities, the politicians always win.

David Dranove is the Walter McNerney Distinguished Professor of Health Industry Management at Northwestern University’s Kellogg Graduate School of Management, where he is also Professor of Management and Strategy and Director of the Health Enterprise Management Program.  He has published over 80 research articles and book chapters and written five books, including The Economic Evolution of American Healthcare and Code Red.  He has a Ph.D. in Economics from Stanford University.