Healthcare’s Reform Pareto Trap

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It is reassuring that in a country which produced HL Mencken, Homer Simpson and Mark Twain, reports of death of satire have been grossly exaggerated.

Recently, the faculty at Harvard were up in arms because their new health plan involves copayments and deductibles. With ninety cents to the dollar covered, the plan is generous by national standards, and would be rated “platinum” in Obamacare’s exchanges. It’s not as if the professors were placed on Medicaid to show solidarity with the poor.

Increased out-of-pocket contribution is the trend post health care reform. That same reform which many Harvard professors supported and some designed. This is why their revolt, an Orwellian political satire, has spread schadenfreude amongst conservatives who are enjoying Gore Vidal’s favorite words in the English Language: “I told you so.”

I can say with confidence that the present day Jacobins won’t be storming the Bastille, if cost sharing is involved. Lest the political right gets positively tumescent with schadenfreude, they should not forget “Hands off my Medicare.” That was written on a placard at a protest against Obamacare organized by the Tea Party. Said differently: “government, hands off my government,” or “you and your government, stay away from me and my government.” That’s one way of limiting government.

Satire is the most reliably bipartisan element in American politics. As well as the fact that any reform of healthcare will disappoint both Republicans and Democrats. This is the root of Obamacare’s problem: its attempt at a Pareto improvement. Named after Italian economist Vilfredo Pareto, this is policy which makes some people better off without making others worse off. A Pareto improvement was promised by the president at the launch of his signature reform. “If you like your doctor, you can keep your doctor”, he assured.

Not so. To lower costs, i.e. make health insurance more affordable, insurers limit the physicians in their network. Unlike other markets, in healthcare it is often restriction, not choice, which reduces costs. Forbidding insurers from denying coverage or raising premiums to those with known disease, and mandating free preventative services are, no doubt, humane. But someone must pick up the tab. Which means healthy professors in the Liberal Arts will pay more than if the insurers were cherry picking.
Insurance is, by definition, redistribution. Remarkably, this truism eludes many. For insurance to be meaningful, that is not have a ridiculously low ceiling of $50, 000 which can be crossed by a single air rescue or treatment of a rattlesnake bite, insurers must raise premiums.

This means that Joe will pay more. This won’t be a Pareto improvement for Joe unless he gets bitten by a snake and ruptures his spleen in a car crash. That is unless Joe gets shafted by fate he won’t get his money’s worth from insurance. What a twisted calculus.

It is important to repeatedly emphasize that insurance is not a Pareto improvement for the many that will never need it. Of course, we don’t know who will or won’t need insurance. If we did, it wouldn’t be insurance.

The cost structure of healthcare is complex, arbitrary, illogical and feral. Price of medical imaging, for example, varies by several factors between two hospitals in the same town for no better reason than “just so”. Medicare, a single payer for a large segment of the population, does not act as a monopsony (large buyer) and dictate the prices of drugs and medical devices. That would conflict with the ethos of limited government; a small step to National Socialism, according to the (il)logic of some.

The leviathanic costs of healthcare have been partly fueled by third party payers. The high costs justify high insurance premiums. High premiums sustain the high costs. Breaking this interdependence will be painful for many, in the short run.

Imposing out-of-pocket obligation on consumers does, however, lower the price and use of services of marginal need such as advanced medical imaging. Americans face a catch-22. They will be punished by the grotesque costs of healthcare. The costs can be tamed if consumers have greater financial skin in the game. This means to solve the cost disease in the long run some must bear greater fiscal pain in the short term. The questions in the short run are who bears the pain, who gains and who votes?

Any volunteers?

Someone from Harvard remarked that cost sharing is a “tax on the sick.” Indeed it is. Cost sharing disproportionately affects the sick. It is supposed to. By design. You could redistribute those costs to the well. Then the healthy will complain that they are being taxed for prudence and keeping fit. Both the sick and healthy have a point. That is the Tragedy of Commons. Everyone has a point.

In the 2012 presidential elections Democrats accused Paul Ryan of throwing granny off the cliff with his Medicare Premium Support Plan. Ryan accused Democrats of stealing from Medicare to pay for Obamacare. Both the political right and left fought to prove they can be most trusted with a government entitlement. How cute!

(BTW, the cackle you heard was Karl Marx laughing in his grave)

Recently, the Democrat governor of Vermont, the most liberal state, rejected single payer. Single payer system, such as Britain’s National Health Service, is the holy grail of progressives. Pareto struck again. The governor wanted all Vermonters to enjoy Cadillac insurance. But the governor did not wish to raise taxes. Perhaps he recalled the fate of Bush Senior who famously renegaded on his promise “read my lips, no new taxes.” If a liberal governor cannot trust progressives at the ballot to support economic patriotism, I mean raised taxes, who can he trust?

Arithmetic refused to help Vermonters. In healthcare arithmetic is elegantly simple. Between equality, choice, access, premiums and cost sharing something must submit. Harvard professors have discovered that talk is cheap. Compassion eventually catches up with personal finances.

As Republicans think of alternatives to Obamacare they would do well to read my lips. Let me parse slowly. There is no Pareto optimal healthcare reform. None. Never. Someone will be worse off. Always.

The American public deserves better than recycled Disneyland economics. Honesty, not Pareto, is the best policy.

Saurabh Jha is a radiologist who  believes in the pedagogic benefits of arguing. Follow him on Twitter @RogueRad.  









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28 replies »

  1. Do you think what ever the money you or me or any one spend in his health insurance is going to make live more if you got a disease like cancer or any rare diseases which increased this days . do you think this money will help you instead of your health!!
    Im with the statement which say health is wealth .
    one of my friends have rare disease in lung which keep him always carry a pulse oximeter ,he buy it through this link ( http://therateinc.com/health/best-pulse-oximeter-reviews )
    do you think the money will heal his lung?

  2. “Between equality, choice, access, premiums and cost sharing something must submit.”

    But the system has a 6th degree of freedom that you have left out: reimbursement rates. The European Union has healthcare equivalent or better than that of the U.S., and depending on the country they pay about 2/3s as much for drugs, and their physicians earn about 2/3’s as much also. The salary of a physician is not an unchangable physical constant of the universe, nor is the price of a drug.

  3. So they ensured that everyone could stay at there current doctor but then they made them go see a different one because that how they had to lower prices. so they are lying right to your face. “That is unless Joe gets shafted by fate he won’t get his money’s worth from insurance. What a twisted calculus.” so you have to be unlucky to get your money’s worth from this. it sounds like crap to me

  4. PS, I think I’m over my head with all you smart guys. I’m obviously the only one here who didn’t get a Harvard education!!

    But I do get to practice where doctors are (mostly) reimbursed at FFS rates, and the BBQ is excellent.

  5. Thanks Dr. Jha,

    I used to be . . . not active much lately within any concept of “organized medicine. I had grown very disillusioned with the AMA, ACEP, ACP, etc., including my own state medical assn.

    One thing I have enjoyed doing is teaching, I am fortunate enough to live in a place with a good medical school and a good law school and it’s been fun to teach both.

  6. Saurabh, I would say the “if anything” would be the essential part of my answer. I admire Burke, but am I Burkean? No.

  7. Thanks lawyerdoctor! Are you an MD-JD? Are you a member of the American College of Legal Medicine?

  8. “But if the patient does need it, it still will cost her an arm and a leg to get it.”

    Since patients have been paying more out of pocket, imaging centers are realizing that there is price elasticity, and the prices are dropping a little.

  9. “We have no right to tell patients anything when they are half insurers and half patients.”

    I would 100 % agree with that.

    There is really essential care. And marginal care. Increasing cost sharing can get more price signals in the latter.

  10. yeah that sound you heard was my head exploding . . .

    I really love it when patients who are “on disability” come to my ER to get a “work excuse.” I don’t know whether to laugh, vomit, congratulate them for their supposed “work ethic,” or report them to the Attorney General. (I would prefer the latter).

  11. Thanks Bobby,

    no, I am not taking credit for the “black hole theory” of ER over-utilization!! On the contrary, I think most of the ER docs in the US already are well-versed in at least the practical applications of that concept.

    I will admit I was previously unfamiliar with the Elhauge work, at least by name. I have actually taught some Health Law and Health Law Policy, and would TOTALLY AGREE with his premise on the evolution of the various drivers of health policy as it has evolved in the US. As you said, we like to think of our healthcare delivery as a “free market” system, but then the system doesn’t really act like a “free market” – if you put a CT scan on every corner of my town, the price of CT scans doesn’t actually go down. It can even go UP, as competition increases but the number of scans goes down!

    Since I’m a doctor (first and foremost) I would like to think that the “best” paradigm is the “professional” one – driven by physicians who try to do the right thing by their patients. This paradigm, alas, has been killed off, not because doctors don’t want to do right, but by the complete loss of control over the healthcare system. Doctors no longer have any input in the operation of the hospital, the OR, the ER, the outpatient services, home health, hospice care, etc.

    We are simply the people whose signature is needed so that all the rest of these folks can get paid . . .

  12. Excellent point Barry, I used to do some UR (utilization review) work with these populations and we would try to address some of the real “outliers” – like the woman who had 189 ER visits in one calendar year. But in reality it’s useless because you can’t keep them from abusing the system.

    You are quite correct that at least HALF of the Medicaid spending goes to NURSING HOMES. We can debate whether that $ is well spent or not (since the patients generally all “spend down” to become eligible and a large % are sitting there with PEG tubes and mouth in permament “O” sign).

    My concern about expanding Medicaid (the REAL purpose of “Obamacare” is that will only dramatically increase the number of medically un-necessary ED visits and the attendant utilization of services, this is a number that is already high and grows ever year by about 10%.

  13. “There is literally no amount of money in the entire universe that will pay for EVERY Medicaid patient to use EVERY ER in the US as their own private free clinic, ad libitum. ”

    You act as if this is some kind of original contemporary insight.

    Elhauge, 1994, “Allocating Health Care Morally” (in which he noted that health care COULD suck up every available discretionary dollar in an economy)

    “Health Law policy suffers from an identifiable pathology. The pathology is not that it employs four different paradigms for how decisions to allocate resources should be made: the market paradigm, the professional paradigm, the moral paradigm, and the political paradigm. The pathology is that, rather than coordinate these decision-making paradigms, health law policy and employs them inconsistently, such that the combination operates at cross purposes.

    This inconsistency results in part because, intellectually, healthcare law borrows haphazardly from other fields of law, each of which has its own internally coherent conceptual logic, but which in combination results in an incoherent legal framework and perverse incentive structures. In other words, health care law has not – at least not yet – established its self to be a field a law with its own coherent conceptual logic, as opposed to a collection of issues and cases from other legal fields connected only by the happenstance that they all involve patients and healthcare providers.” [pg 1452]

    I cited this years ago.


    The Elhauge paper is a relevant today as it was 21 years ago (link to his paper provided in my blog post).

  14. Just itching to hear your thoughts on the recently published JAMA Oncology study indicating patients basically request almost no unnecessary care; I love the aroma of frying bacon, and I imagine your brain cells will give off the same scent

  15. If there was no coercion and individuals voluntarily purchased insurance created in the free marketplace that would mean that each and everyone of them believe they are better off. Pareto efficiency is achieved.

  16. To drive the cost of shopable care such as imaging down, we need to drive it out of hospitals and out of hospital owned stand-alone facilities. To do that, we need to eliminate certificate of need (CON) laws where they exist and we need transparent prices. If referring doctors are incentivized to keep such referrals within a hospital system that they may work for, patients need to speak up and let the doctor know that out-of-pocket cost is an important issue for him and to ask if there is a non-hospital owned facility that can do the job just as well for a lot less money. To ensure adequate competition in the market, anti-trust regulators need to do their job as hospitals try to grow by acquisition of other hospitals, medical practices and independent medical facilities.

  17. I’m told that in Taiwan’s single payer system, they keep track of cumulative spending by each enrollee and if someone is deemed to be using too much healthcare or using it in an inappropriate way, they get a “talking to” by the authorities.

    While I’m a vehement opponent of the single payer approach, keeping track of aggregate spending by Medicaid enrollees might be a reasonable idea. For those that use the ER excessively and inappropriately, co-pays or even revocation of Medicaid benefits could be imposed after a few warnings.

    However, I’m somewhat skeptical of how serious a problem this is on a nationwide basis as most hospitals claim that only 8%-10% of their revenue comes from Medicaid. Maybe it’s a significant issue at safety net hospitals but not at most other hospitals. I just don’t know. What I do know is that over 70% of Medicaid spending is on behalf of the aged, blind and disabled elderly population much of which is for long term custodial care and home healthcare services. For the 9-10 million elderly and disabled poor that are eligible for both Medicare and Medicaid (Dual-Eligible), hospital based care is paid for by Medicare.

  18. I enjoyed Dr. Jha’s article, even if I had to whip out my thesaurus to read it. (but it’s cool, my best friend and residency director is a Penn man!)

    [O]ne of our favorite saying[s] in the ER is “money is never an object when you are not the one paying the bill.” Put another way, everyone demands an MRI when they have zero deductible and zero copay, i.e., Medicaid. The guy who works at the gas station and doesn’t have insurance isn’t interested in running up a $5000 ER bill for his back pain. He wants a coupla lortabs and some robaxin and he’ll go back to work on Tuesday, cuz (like me) when he doesn’t work, he doesn’t get paid, and when he doesn’t get paid, he doesn’t eat.

    All this back and forth about deductibles and copper vs. gold vs. platinum plans is just a bunch of “talk in a bag” as our friend Al Capone says. The REAL goal of obamacare a.k.a. “health reform” is the MEDICAID expansion/explosion, which people don’t talk about, unless it’s to denigrate the (mostly southern) states who declined to accept the free crack cocaine offered by the biggest crack dealer/candyman of all time, the federal government.

    Expanding Medicaid to where 50% of my state’s population is getting 100% free everything is not sustainable, and never will be. The goofballs (within and without the government) who falsely argue that the cost of Medicaid is somehow “free” money from the federal government forget that those federal taxes come from SOMEWHERE, and that somewhere is mainly me.

    Medicaid turns every ER everywhere in the US into a 24/7365, walk-in free clinic. Almost zero % of these visits are actual emergencies, but they pour in anyway by the zillions. I’m sure it helps pay for lots of babies, and helps Ob/gyn’s everywhere send their kids to college, but in my world it’s pure unadulterated evil:
    “my kid has a runny nose.”
    “oh, and my other four kids are checkin in too, doctor, they were sick last week and need a doctor’s excuse to go back to daycare.”
    “I’m on disability and I need a shot of dilaudid for my headache.”
    “oh, I’m allergic to toradol, doc.”
    “no, I didn’t call my PCP”
    “I had a 2 mph mvc yesterday, but I need to get checked (before I call my lawyer)”
    “I went to my doctor’s office but they were busy and said I would have to wait, so I checked in to the ER.”

    And so it goes . . . Do you honestly think any of these encounters would exist for someone who was making a co-pay and had a $5000 deductible??

    There is literally no amount of money in the entire universe that will pay for EVERY Medicaid patient to use EVERY ER in the US as their own private free clinic, ad libitum. ER’s are expensive to run, and the reimbursement is too little for our hospital so we are (not so gradually) being literally bled dry by “the government.”

    Maybe that’s what those cranky old folks with the Gadsden flags were complaining about . . . I don’t think they object to folks who are truly indigent getting some help, but a family of four who makes $96,000 a year = healthcare subsidies?? really????

    Thanks and good article, btw! (I’ll await the retorts from my friend BobbyVegas, et. al. but since I’m the token redneck on this blog, I had to weigh in.)

  19. “Increased out-of-pocket contribution is the trend post health care reform.”

    It was also the trend pre health care reform.

  20. “To lower costs, i.e. make health insurance more affordable, insurers limit the physicians in their network. Unlike other markets, in healthcare it is often restriction, not choice, which reduces costs. ”

    You hit the nail on the head, Saurabh. But we are not cutting costs at all, we are cutting spending, and entirely different animal. If we cut costs, an MRI should cost $200 instead of $1200 for instance. That makes it somewhat more affordable to those who may have high OOP plans.
    What we are doing with ACOs, etc is cutting spending by cutting services, limiting networks albeit to less expensive providers, but ultimately taking choice out of the hands of the consumer.
    It’s all well and good to tell the patient, “Look, you just have low back pain, not nerve pain, you don’t need an MRI right now”. But if the patient does need it, it still will cost her an arm and a leg to get it.
    Americans need to be very careful about what they want or expect out of healthcare. Whoever holds the purse strings directs the care you get.

  21. They are even talking of a copper plan with an actuarial value of 50%. This says that 50% of the covered services shall be oop, on average. The lower the actuarial value, the less sense it makes to define the benefits because when folks are paying half of the costs oop they are actually partners of the insurer and we should bring them into the Board room and ask them what they want covered. We have no right to tell patients anything when they are half insurers and half patients.