Single-payer health insurance

Here’s a post from Economist’s View starting with a novel argument against single payer health insurance: that it would hurt innovation. Mark Thoma then rebuts and throws in some Paul Krugman for safe measure. Krugman makes an important point that often we assume that innovation is always a good thing. True, some innovations lead to better health outcomes. Others do not. Either way technological development tends to increase the cost of providing health care. One benefit of a public insurance system is that there is an incentive for cost-control – ensuring that only what is proven to work is diffused widely – when the sky is the limit in terms of what could be spent on any given condition.

Single-Payer Health Care and Medical Innovation

This New York Times Economic Scene by Tyler Cowen argues against a single-payer health care system:

Poor U.S. Scores in Health Care Don’t Measure Nobels and Innovation By Tyler Cowen, Economic Scene, NY Times: Advocates of national health insurance cite an apparently devastating fact: the United States spends more of its gross domestic product on medical care than any nation in the world, yet Americans do not live longer than Western Europeans or Japanese. More Americans lack insurance coverage as well. It is no wonder that so many people demand reform.

But the American health care system may be performing better than it seems at first glance. When it comes to medical innovation, the United States is the world leader. In the last 10 years, for instance, 12 Nobel Prizes in medicine have gone to American-born scientists working in the United States, 3 have gone to foreign-born scientists working in the United States, and just 7 have gone to researchers outside the country.

[Of the] six most important medical innovations of the last 25 years, … four innovations … were developed in American hospitals or by American companies… Even when the initial research is done overseas, the American system leads in converting new ideas into workable commercial technologies. In real terms, spending on American biomedical research has doubled since 1994. By 2003, spending was up to $94.3 billion…, with 57 percent of that coming from private industry. The National Institutes of Health’s current annual research budget is $28 billion, All European Union governments, in contrast, spent $3.7 billion in 2000, and since that time, Europe has not narrowed the research and development gap. America spends more on research and development over all and on drugs in particular… From 1989 to 2002, four times as much money was invested in private biotechnology companies in America than in Europe.

Dr. Thomas Boehm of Jerini, a biomedical research company in Berlin, titled his article in The Journal of Medical Marketing in 2005 “How Can We Explain the American Dominance in Biomedical Research and Development?” Dr. Boehm argues that the research environment in the United States, compared with Europe, is wealthier, more competitive, more meritocratic and more tolerant of waste and chaos. He argues that these features lead to more medical discoveries. About 400,000 European researchers are living in the United States, usually for superior financial compensation and research facilities.

This innovation-rich environment stems from the money spent on American health care and also from the richer and more competitive American universities. The American government could use its size, or use the law, to bargain down health care prices, as many European governments have done. In the short run, this would save money but in the longer run it would cost lives.

Medical innovations improve health and life expectancy in all wealthy countries, not just in the United States. That is one reason American citizens do not live longer. … The gains from medical innovations are high. For instance, increases in life expectancy resulting from better treatment of cardiovascular disease from 1970 to 1990 have been conservatively estimated as bringing benefits worth more than $500 billion a year. And that is just for the United States.

The American system also produces benefits that are hard to find in the numbers. … Given that many Americans walk less and eat less healthy food than most Europeans, the longevity boost from health care in the United States may be real but swamped by the results of poor lifestyle choices. In the meantime, the extra money Americans spend to treat allergy symptoms, pain, depression and discomfort contributes to personal happiness.

Compared with Europe, the American system involves more tests, more procedures and more visits with specialists. Sick people receive more momentary comforts and also the sense that everything possible has been done. This feeling is of value to the family even when the patient does not improve. In contrast, European countries have not created comparably high expectations about the medical process…

American health care has many problems. Health insurance is linked too tightly to employment, and too many people cannot afford insurance. Insurance companies put too much energy into avoiding payments. Personal medical records are kept on paper rather than in accessible electronic fashion. Emergency rooms are not always well suited to serve as last-resort health care for the poor. Most fundamentally, the lack of good measures of health care quality makes it hard to identify and eliminate waste.

These problems should be addressed, but it would be hasty to conclude that the United States should move closer to European health care institutions. The American health care system, high expenditures and all, is driving innovation for the entire world.

First, the main argument is that switching to a single-payer system would stifle innovation. But I’m not convinced the case has been made that it is the difference in health care systems that has caused the agglomeration of research facilities in the U.S. Even if the U.S. were a single-payer system, drug companies, etc. would still do research and it is likely that much of it would be carried out in the U.S. just as it is now.

In addition, as noted in the article, much of the research that is done here is funded directly or indirectly by the government. Second, given that European countries can free ride on this research, comparing the amount spent in the two countries may not accurately reflect European willingness to fund health care research since the two figures may not be independent. If the U.S. spent less, European countries might be induced to spend more.

Third, Tyler says “The American government could use its size … to bargain down health care prices… In the short run, this would save money but in the longer run it would cost lives.” I understand less spending would cost lives, but I’m not sure I see why driving prices down toward marginal cost is necessarily inefficient from the free market perspective taken in the article, particularly if drug companies, etc. have market power.

Fourth, the Veteran’s Administration hospitals are far ahead of private sector hospitals in implementing information technology undermining the claim that private sector providers are more innovative. With 20 cents of every dollar insurance companies spend devoted to avoiding paying claims and with all the other waste and inefficiencies in the current system, but with only 2 cents needed for overhead in the VA system, the VA can use the reclaimed resources to improve health care rather than to avoid paying the bills.

Finally, here’s Paul Krugman on the need to control cost escalation arising from the pressures from the powerful “medical-industrial complex” to adopt increasingly expensive drug therapies and procedures:

[T]o get health reform right, we’ll have to overcome wrongheaded ideas as well as powerful special interests. For decades we’ve been lectured on the evils of big government and the glories of the private sector. Yet health reform is a job for the public sector, which already pays most of the bills directly or indirectly and sooner or later will have to make key decisions about medical treatment. …

Consider what happens when a new drug or other therapy becomes available. Let’s assume that the new therapy is more effective … than existing therapies … but that the advantage isn’t overwhelming. On the other hand, it’s a lot more expensive than current treatments. Who decides whether patients receive the new therapy? We’ve traditionally relied on doctors to make such decisions. But the rise of medical technology … makes … medicine … in which doctors call for every procedure that might be of medical benefit, increasingly expensive.

Moreover, the high-technology nature of modern medical spending has given rise to a powerful medical-industrial complex that seeks to influence doctors’ decisions. …[D]rug companies in particular spend more marketing their products to doctors than they do developing those products … They wouldn’t do that if doctors were immune to persuasion.

So if costs are to be controlled, someone has to act as a referee on doctors’ medical decisions. During the 1990’s it seemed, briefly, as if private H.M.O.’s could play that role. But then there was a public backlash. It turns out that even in America, with its faith in the free market, people don’t trust for-profit corporations to make decisions about their health.

Despite the failure … to control costs with H.M.O.’s, conservatives continue to believe that the magic of the private sector will provide the answer. …