Question: How many American families have proper health insurance?

a) over 90 percent.

b) between 80 and 90 percent.

c) between 10 and 80 percent.

d) less than 10 percent.

Given that about 15 percent of American families do not have health insurance, the correct answer would appear to be (b). However, in my opinion, the correct answer is (d).

The health coverage most Americans have is what I call “insulation,” not insurance. Rather than insuring them against risk, most families’ health plans insulate them from paying for most health care bills, large and small.

Real insurance, such as fire insurance, provides protection against rare, severe risk. Real insurance is characterized by:

– low premiums

– infrequent claims

– large claims

American health insurance—including employer-provided insurance and Medicare—is the opposite. Families typically are paid claims several times per year, often for small amounts. Premiums are high—the cost of providing insulation often exceeds $10,000 per year per family. However, most families pay these premiums only indirectly, through taxes and reduced take-home pay from employers.

Real insurance would pay for treatments that are unavoidable, prohibitively expensive, or for illnesses that occur relatively rarely. Instead, insulation reimburses even relatively low-cost services, such as a test for strep throat or a new pair of eyeglasses. Insulation pays for treatment even if it is commonplace or discretionary.

What is Wrong with Insulation?

For health care providers, insulation is a bonanza. Because consumers are not spending their own money, they accept doctors’ recommendations for services without questioning them and without concern for cost. Faced with an insured patient, a health care provider is like a restaurant catering to convention-goers with unlimited expense accounts. The customer will gladly take the most high-end recommendation and not worry about the price.

Consumers are happy as well. Insulation relieves the patient of the stress of making decisions about treatment. The patient also does not have to worry about shopping around for the best price.

The problem with insulation is that it is not a sustainable form of health care finance. Individuals, employers, and government are all under stress.

Families that are in the individual insurance market face sticker shock when they confront health insurance premiums. Many choose to remain uninsured.

Employers are finding health care expenses an increasing burden. A noticeable gap has arisen in the past twenty years between the growth of total employee compensation and the growth of wages. Take-home pay is stagnant or shrinking, as much of the growth in compensation is diverted to health care.

Medicaid has become the largest item in many state budgets. Medicare is responsible for America’s biggest long-term fiscal crisis, with a looming gap between promised benefits and expected tax revenues rising to several percent of GDP per year in the middle of this century.

From an economic standpoint, insulation is both inefficient and inequitable. It allocates too many resources to health care, and it includes regressive subsidies that flow up the income scale.

Insulation leads people to over-consume health care services. Americans make extravagant use of services that have high costs and low benefits. Many studies that compare groups with similar conditions show that those with the largest levels of health care spending fare no better in terms of outcomes than those that spend less.

Insulation is also inefficient because of the large taxes that it requires. Payroll taxes support Medicare. Income taxes support Medicaid. Moreover, income tax rates are higher than they would be otherwise, because employer-provided health insurance is a deductible expense for companies but is not taxable income to employees. Taken together, higher payroll and income taxes to support insulation discourage work and thrift, leading to what economists call a “deadweight loss” to the economy.

Insulation also is inequitable. Millionaires on Medicare have their treatments paid for by taxes on low-income workers. High-income earners derive relatively more benefit than low-wage workers from the tax exemption of employer-provided insulation from health expenses.

We Have Had Insulation for Several Decades. Why Is It a Problem Now?

Today, over 85 percent of our health care spending is paid for by third parties—either private health insurance or government programs. America has one of the highest rates of insulation in the world.

At the same time, and partly in response to the bonanza provided by insulation, medical specialization and medical technology have surged. In my book, Crisis of Abundance, I call this phenomenon premium medicine. Primarily because of premium medicine, the share of our income devoted to health care in this country has roughly doubled over the past 30 years, from about 8 percent of GDP to about 16 percent of GDP.

Sometimes our skilled specialists and advanced technology make a difference for patients, extending lives and alleviating suffering. Often, however, services are provided that make no difference. The MRI exam that I had when I hurt my back moving furniture was pointless—the treatment would have been rest and anti-inflammatories, whatever the exam showed. My doctor’s referring me to a nephrologist for microscopic hematuria (blood in a urine specimen not visible to the naked eye) was equally pointless—like many people, I have this symptom sometimes, and then it mysteriously goes away.

We have accumulated a dazzling array of human and physical capital, and we are developing a culture that insists on using it to the fullest extent. The use of medical services well beyond the point of diminishing returns is what is driving up our health care costs and making it difficult to finance individual insurance, employer-provided insurance, and our government programs.

Can We Solve Our Health Care Crisis by Being More Efficient?

By definition, our health care system would be more efficient if we could deliver the same health care services at less cost. While greater efficiency is certainly possible and desirable, it would not relieve the stress in health care finance.

For example, pundits such as New York Times columnist Paul Krugman claim that private health insurance is inefficient due to overhead. However, even if one eliminated all of the overhead in health insurance, this would reduce total health care spending by about 1 percent of GDP, still leaving us spending 15 percent of our GDP on health care, about 5 percentage points more than most other countries.

Moreover, any gain in efficiency would not slow the growth of health care spending, which is driven by the ever-increasing supply of premium medicine in the context of unchecked demand. The only reliable way to slow the growth of health care spending is to slow the rate of increase in consumption of premium medicine. We cannot address the problems caused by the extravagant use of health care services that have high costs and low benefits by trimming the overhead expense involved in delivering these unnecessary services.

Other countries spend less of their GDP on health care, with little apparent difference in health outcomes. (Note, however, that the standard measure of health care outcomes—average longevity—is a flawed indicator, because it ignores many benefits of health care and does not take into account other factors that influence lifespan.) This is because premium medicine is less available in those countries, and the constraints on supply limit the extravagant use of procedures with high costs and low benefits. For example, the use of colonoscopy to screen for colon cancer in healthy patients over 50, as recommended in the United States, is not possible in Canada, due to the scarcity of equipment and trained personnel. Yet this may make relatively little difference in average longevity, because colon cancer tends to emerge late and to move slowly, so that many of its victims die of other illnesses first.

How Would Real Health Insurance Work?

Real health insurance would pay claims to people who come down with expensive illnesses. Typically, these expenses accumulate over a period of years.

In Crisis of Abundance, what I have suggested is a health insurance policy that you buy this year, but reimburses you in five years, based on cumulative expenses. Such a policy might pay nothing if your total expenses over the next five years are less than $30,000. It might pay 100 percent of expenses thereafter.

For example, if I buy a policy in January of 2007 and my expenses from 2007 to 2011 total $35,000, I would be reimbursed for $5000. The policy that I buy in January of 2008 would reimburse me based on expenses that I incur from 2008 to 2012, so that if my expenses for that period were $33,000, then I would be reimbursed for $3000.

These overlapping five-year policies would provide a better safety net than the annual policies that we have today. The typical catastrophic illness does not stop requiring treatment on December 31.

However, there are other ways to implement real health insurance that are worth considering. For example, one could have a health insurance policy where you make a claim when you are diagnosed with an expensive condition. First-stage breast cancer might result in a $25,000 payment. A heart condition requiring major surgery might result in a $40,000 payment. And so on. Only major medical problems would trigger claims, and payments would be for fixed amounts, not for reimbursement for procedures.

Real health insurance would not require high premiums. Fewer people would be discouraged from obtaining insurance by sticker shock.

It is not just private health insurance that needs to be changed if we are to move to real health insurance. Medicare would have to change as well. Instead of the insulation of Medicare, real health insurance for the elderly might be what I call “Remaining Lifetime Care Insurance.”

Between age 65 and death, medical expenses average a total of $100,000 per person. However, even if an individual saves $100,000 by age 65, the individual still needs protection against unusually large expenses. At age 65, you might keep $75,000 to pay for expenses out of pocket, and then spend $25,000 on an insurance policy with a remaining lifetime deductible of $75,000. That insurance policy only pays when the expenses that you accumulate after age 65 exceed $75,000. However, it guarantees that your out-of-pocket medical expenses will not exceed $75,000.

With these sorts of policies, individuals would be protected from extreme financial loss. However, they would be insulated from much less of their health care expenses than they are today. In fact, some simulations I performed using the government’s Medical Expenditure Panel Survey showed how it might be possible to increase the share of out-of-pocket spending from 15 percent to over 50 percent, while still providing a safety net to the very poor and the very sick.

Having individuals pay for more of their own health care would be more efficient. It would reduce the disincentives to work and thrift caused by the collectivization of health care spending. It would also make individuals less inclined to undergo procedures that have high costs and low benefits. Consumers also would have the incentive to engage in comparison shopping when they encounter outrageously high charges from providers.

Can Consumers Make Reasonable Health-Care Decisions?

One common objection to real health insurance is that it is too burdensome for individual consumers to make health care decisions based on costs and benefits. The argument is that if we switch from insulation to insurance, then consumers will make bad decisions.

Harvard University health care economist David Cutler, in a conversation with economists at Cato, made such a point. He said that consumers do not really differentiate between necessary and unnecessary health care. As a result, he predicts that if consumers have to pay for more health care out of pocket, they will cut back proportionately on both cost-effective and cost-ineffective health care. Wasteful spending will decline, but so will useful spending. Ultimately, consumers’ health will suffer.

My view is that the solution to this potential problem is better information for consumers. I have endorsed the idea of a commission, perhaps with government funding, to study medical protocols in order to provide guidelines for what is typically cost effective.

How Would We Get There Institutionally?

Many government policies favor insulation rather than real health insurance. Changing these policies would help to encourage a transition to real health insurance.

State laws concerning health insurance tend to encourage comprehensive insurance. Lobbyists push for laws requiring insurance to cover treatments. These might include eye care, dental care, or fertility treatments. Such laws or regulations are inconsistent with insurance that is designed to protect against catastrophic illness.

Federal and state tax laws allow individuals to “launder” their health expenses through their employers in the form of comprehensive health insurance. We should reform the current system, in which employer-provided health insurance is deductible to companies but not included in individual compensation. One approach would be to count employer-paid premiums as compensation, or to put a cap on the amount of employer-paid premiums that would be tax exempt.

For people under 65, government should provide a safety net that is consistent with real health insurance. People who cannot afford to pay for health care will require government support, even to obtain basic services. People who have already been diagnosed with expensive illnesses probably will need a government subsidy in order to obtain real health insurance. Perhaps what some economists have called “catastrophic reinsurance,” in which government would pay all expenses above, say, $50,000 in a year, would enable the very sick to obtain health private health insurance. In any event, apart from the very poor and the very sick, government need not be involved in paying for health care.

Ultimately, people over 65 should be paying for health care out of savings. This means that Medicare ought to be phased out. I have proposed doing so by gradually raising the age of eligibility for Medicare. The age would stay the same for people currently on the verge of becoming eligible. It would rise somewhat for people in their 40s and early 50s. It would be raised considerably more for people now in their 30s, and Medicare would be phased out altogether for people under age 30.

How Would We Get There Culturally?

Today it is fairly deeply ingrained with most Americans that health care services are something that you should not have to pay for yourself. Insulation is the norm, and real health insurance as I would define it is almost nonexistent.

Suppose that we were to remove the tax benefits and other institutional supports for insulation. It is by no means certain that what would emerge instead would be real health insurance.

It could be that if health insurance were relatively unregulated and unsubsidized, then many people would opt to do without health insurance. This raises the issue of people “free riding” by doing without health insurance while healthy and then turning to government assistance when illness or injury occurs. It is to address this free-rider problem that some analysts propose making health insurance mandatory. This is a controversial idea, not well received at Cato. In any event, it is very difficult to justify a mandate for insulation, rather than a mandate for something closer to real health insurance.

Ultimately, I think we are headed for a collision of cultural values. We prefer insulation to real insurance. We expect services to be readily available, without the supply limitations or waiting lists that exist in countries where government is responsible for more health care funding. And yet we are growing increasingly concerned over the expansion of health care spending that takes place in a system that lacks constraints on either supply or demand.

Real health insurance may not be popular now. But when Americans see that the providers of insulation, including Medicare, have to turn to the rationing of health care services in order to meet budgetary constraints, real health insurance may start to look like a good alternative.

In his insightful book and in this interesting essay, Arnold Kling has made several leaps forward from the pack of “America-first free marketeers.” If you want to see them in action, take a look at the comments page of any blogger who dares to suggest that spending nearly double what its economic competitors are spending on health care — primarily because it is paying its providers more for more or less the same volume of services — may mean that the U.S. is not getting too good a deal.

It’s apparent to any serious student of health care that the impact of medical care on overall raw measures of health is not sufficiently important that differences in spending here or there make too much difference to health. The somewhat pedantic arguments over life expectancy and infant mortality, and the slightly more real ones over the appropriate treatment of predominantly elderly people with serious diseases, are all massively less important than the political and medical culture in which the health care system exists. So there is broad agreement, I believe, among most rational observers that the activities Kling describes as “premium medicine” are far more in the interests of providers and suppliers (including those middlemen who mark up the price without taking on much risk) than they are in the interest of patients, and certainly of society as a whole.

Culturally, however, we are still long way from getting past this argument. And to be somewhat brutal, Kling has once or twice in the past, trod the path which several of his colleagues on the political right within and outside of Cato have charged down. And although that path is an intellectual dead end, it’s a very important one for the debate in the United States. I’m talking of course about the concept that single-payer health-care systems — and by extension all foreign health care systems, even if they are not single-payer — must ration care, and thereby kill people.

Of course, all systems ration care somehow because — as at least one wag has put it — good health is just a state of incomplete diagnosis. So the promotion of the unnecessary “premium medicine” MRI which Kling describes, and which would probably not have been done in Canada, does have an impact even in the U.S. The impact is, of course, that the cost of care is sufficiently high that a significant proportion of Americans do not receive insurance, or insulation, in our voluntary system, and so have to rely on public funding. And that public funding results in significant rationing of their care from safety net providers — as that Communist rag the Wall Street Journal pointed out in a long series in 2003.

The result is that in the 2004 presidential debate, the Republican president was able to decry the Democratic candidate’s proposal for a rather bizarre re-insurance scheme, as “government-run health care” — safe in the knowledge that Americans understood this was an unnecessary evil, and even safer in the understanding that no rational debate about whether or not government-run health care had any merits was going to happen. This is despite the fact that the major government-run system in the U.S., the Veterans Health Administration, is not only good enough for our brave servicemen and women but is also on many measures providing some of the best medical care in the country.

So I welcome (at least some of) the contributions of Kling, John Goodman, and others, who realize that we need to create some method of rational allocation of resources to health care. Because, frankly, for the last 30 years this has been a conversation between the Enthoven school and the single-payer crowd. The core business, corporate, academic and media players who hold the political and economic power in the United States have not really been interested in taking part. The consequence has has been the dominance of health care providers and suppliers over those paying.

Kling is the latest in a long line of commentators to suggest that the vast increase in costs that this has caused means that the financing system is not sustainable. While that may be academically correct, the greatest Cambridge economist of them all once remarked that “in the long run we are all dead.” And there are plenty of examples of commentators on the American health care system who have gone to their graves never seeing either the system collapse nor the great reform to prevent it, which they regarded as being inevitable. In fact, the political strength of the health care system actors combined with the disaggregated weakness of the consumers and those paying the bill — intermediated by the costs of health care being hidden within overall employment compensation and buried in the murky finances of the federal government — has meant that the system has chewed up and spat out any serious attempt to reform it since the 1930s.

But let’s assume — somewhat appropriately when replying to an economist who has written about the Internet bubble — that “this time it’s different!” There are three broad approaches to dealing with the insulation and overuse of medical care in the U.S. and the crisis of unaffordability and the related lack of insurance that it is causing.

The first is some form of single-payer with a global budget. This is essentially how it is done in most other countries, where either by use of a fee-schedule, central budgets, or some combination thereof, a more or less explicit trade-off is made between the available resources for health care and those for the rest of the economy. Of course, as part of this deal no citizens are left below a floor, which in some cases is pretty high, and the consumption of medical care is explicitly not a financial transaction at the point of service. In contrast to today’s American experience, this means that the concept of paying medical bills and the very real likelihood of financial cataclysm resulting from the inability to pay the bills is absent. Those on the political right who say “it can’t happen here” would do well to consider this last statement in an America in which the middle-class is feeling extremely insecure and in which their incomes are becoming highly variable. Even for those who are doing pretty well, losing health insurance and facing a financial meltdown is a real possibility. And as that fact gets better known, the attraction of single-payer will increase.

However, personally I believe we are still some way away from the political acceptability of single-payer, even though I believe it is the likeliest outcome in perhaps a decade or so. The reason I think it is the likeliest outcome is that, despite Kling’s optimism, I don’t think that we can institutionally or culturally get to one of the two other alternatives.

Those alternatives are either highly regulated “managed competition” or some version of individual consumer control of spending at the point of service. Personally, I am far too dyed in the Enthoven wool to really believe that medical care can appropriately be bought on an individual service basis. It seems to me that even Michael Porter’s theory of services being bought by disease state is not actually how medical care works. It seems to me that most people faced with any kind of significant medical decision will either be too ill, too susceptible to the influence of providers, or unable to get good enough data about their individual situation, to be able to make a rational choice. For that reason, it seems to me that it is more logical to make a decision about which total environment of care you will choose to be treated in, and to assume that the providers working in that environment will do the best job possible with the amount of of resources that you have decided to commit to it.

This is, of course, essentially how the rest of the consumer economy works. Most people don’t send off for a automotive kit, put it together and augment it with spare parts from Pep Boys themselves. Instead they buy a car within a certain class, knowing that the manufacturer has put together an appropriate combination of parts for their “driving solution.”  My assessment is that those promoting individual accounts (with some level of what essentially is re-insurance) believe that we are going to become a nation of health care kit-builders, when perhaps instead we’d prefer the emergence of the health care version of Toyota, GM, Ford, Mercedes, and the rest. To be honest, the compendium of interlocking concurrent insurance products, mixed with subsidies for chronic care illness pools, and other Heath Robinson approaches that will be required, in theory, to make Kling’s approach work are so complicated that I don’t think there is any hope of them being fully understood. Consequently vital parts (such as appropriate cross subsidies for chronic illness pools) will be left out of the political solution, which will lead to more of the same problems as we have today.

At one level, that is my main dispute with Kling, Michael Cannon, and their other Cato colleagues. The other level is one on which Kling may be splitting away from his colleagues (depending on the correct interpretation of the third to last paragraph of his essay). He tentatively admits “that if health insurance were relatively unregulated and unsubsidized, then many people would opt to do without health insurance.” Anybody observing American health insurance today knows that this is true. Of course, that means that in order to cover everybody with health insurance, the market for it does need to be heavily regulated and subsidized. The reason for this is not just the free-rider problem that Kling mentions, but also the ongoing intellectual problem that I have yet to find any “free marketeer” explain away. That problem is of course that health-care spending is highly concentrated amongst a very few people. So, by definition, almost all the money spent on medical care needs to be transferred within an insurance pool from healthy to sick people. This is even the case within catastrophic pools — although we only see this in theory because in current reality catastrophic high deductible plans exclude anybody who they think might get sick.

Even if you can overcome the financial problems of switching from a pay-as-you-go system to one in which health spending is pre-funded over an individual’s lifetime (and I don’t think that you can realistically require extra money to be put into the system or set aside during that transition), you will still be left with a system in which large cross-subsidies within the catastrophic pools will be required to make them work. Unless legislation explicitly prevents this, the next step will be entrepreneurial insurers figuring out a way to cleave the pool so that some groups end up healthier (and more profitable for the insurer) than others. This will then require greater continued subsidies from the government for the sicker pools, which one assumes will not be rationally put up with for long in a compulsory insurance system — although current evidence suggests that this is happening in Medicare managed-care even now.

If there is no attempt to either regulate the behavior of insurers, or to force free-riders to pay into the pool, then I simply do not see why the future system Kling proposes does not end up like the current disastrous individual insurance market in most of United States. And, in the responses heard from Cato, Pacific Research Institute, and others to the proposals from Republican governors in Massachusetts and California, it is pretty evident that the concept of compulsory insurance is not acceptable to many of those associated with this type of free-market approach.

So, in summary, as you might expect, I think that Kling has provided a decent analysis but has proposed a solution that both ignores the political and cultural realities of the health care system, and probably wouldn’t even work in theory. Of course, he wouldn’t be the first and won’t be the last to do that!

Arnold Kling has provided a succinct and accurate—as far as it goes—diagnosis of what’s wrong with health care in the United States. His distinction between health plans, public and private, that merely insulate consumers against the cost of health services and those that efficiently insure individuals against unpredictable and unbearable risks is right on the mark. Poorly designed health coverage has created expectations that are far too costly for the nation to honor any longer.

Regrettably, we have little experience in designing efficient health insurance. Any health coverage, after all, makes some things costless, or nearly so, to covered individuals, thus inviting them to over-consume those things and generally to be less cost-conscious than they otherwise would be. Indeed, economists have a name —“moral hazard” — for the natural tendency of consumers to spend more freely when they’re spending someone else’s money. Economists also understand that health insurance can be spectacularly inefficient unless it is specifically designed to counteract not only this tendency but also health care providers’ exploitation of it by prescribing tests and treatments without regard to cost. Kling’s essential point is that U.S. health plans do not seek to offer subsets of the consumer population coverage that balances the value to them of the financial protection provided against the added costs of moral hazard, including administrative costs incurred to curb insurance-induced spending. Thus, private and public financing plans generally have low deductibles, use only mild cost sharing to deter consumption, and impose only trivial contractual or legal limits on what will be paid for. With the resulting over-insurance hugely inflating demand for more and costly services over a long period of time, the supply side has responded predictably, by developing and deploying expensive clinical practices and technologies having negligible marginal value — what Kling calls “premium medicine.”

The Kling essay might have been clearer about precisely why U.S.-style health coverage, both public and private, has evolved into an entitlement program under which everyone expects nothing less than the very best that “modern medicine” has to offer. The subsidy for the purchase of health insurance created by excluding the cost of employer-sponsored coverage from employees’ taxable wages and income, although regularly remarked upon, is an even more fundamental problem than most observers seem to appreciate. Although the subsidy is widely criticized for disproportionately benefiting high-bracket taxpayers, that is not the real problem; indeed, the more than $200 billion in revenue that the subsidy costs the federal government each year is presumably recouped by taxing other income at higher marginal rates, so that higher-income individuals probably derive no net tax benefit at all. Instead, the true vices of the tax subsidy are three. First, it has caused taxpayers to prefer coverage that enables them to pay as many bills as possible with untaxed rather than after-tax dollars, thus accounting for the ubiquity of coverage that effectively insulates patients from the cost of the services they consume. U.S. health coverage has been primarily designed, not to provide optimal insurance against unpredictable risks, but to exploit a tax loophole that, because it affects payroll as well as income taxes, is lucrative for all earners.

The second vice of the tax subsidy is less widely recognized. By making employers responsible for designing or selecting health coverage and effectively hiding most of the cost of that coverage from employees, the tax subsidy has induced employees to believe that their health coverage is paid for mostly by their employer, not themselves. The irony here is that, unlike the insulation patients enjoy against the cost of care they receive, the insulation of employees against the cost of their health coverage is only apparent, not real. Economists are virtually unanimous in holding that, whatever their pay stubs may say, employees bear the full cost of their coverage in the form of reduced compensation of other kinds. Although employers and labor unions have happily claimed credit for the rich health benefits conferred on workers, their apparent beneficence has been financed by diverting dollars from the workers’ pay envelopes. Insulating employees from the truth about who pays for health coverage (now over $11,000 per year for the average family) has spawned the kind of coverage that Kling appropriately deplores.

The final — and, to my mind, most destructive — vice of the tax subsidy is its effect on the political economy of health care. With insured consumer-voters generally believing that someone other than themselves is paying for their health care, they see no reason not to approve regulatory and other public policies that raise the cost of that care and foreclose opportunities to economize. For example, consumers’ backlash against managed health care in the 1990s, though partly attributable to the ineptitude, dishonest marketing, and opportunism of managed-care organizations, resulted in large measure from consumer-voters’ failure to appreciate that MCOs were performing a useful service in keeping costs under some control. The surge in health care spending after employers and legislatures joined the public backlash by discouraging MCOs’ cost-containment efforts was an ironic consequence of public ignorance about who ultimately bears the cost of health care.

The tax subsidy thus introduces new “moral hazards” into health care decision-making. Not only are employers, union leaders, legislators, and courts happy to commit employee-voters’ money in ways that make themselves appear to care about health above all things, but their stake in not having to say “no” to more and better health care also coincides perfectly with the preferences of the politically powerful health care industry. For these reasons, the tax subsidy has survived through political thick and thin even though every policy wonk knows that it is a principal cause of wasteful spending on health services. Liberals, of course, resist proposals to fix this glaring defect in the incentive system that drives health care spending. Why fix incentives to encourage consumers to make more appropriate health care choices when big government stands ready to choose for them?

The preference of liberals for a single-payer health plan notwithstanding, something approaching their goal of universal health coverage could be achieved by ending the current tax subsidy and offering refundable tax credits of, say, $6000 to families that spend at least that amount in health plan premiums or contributions to a health savings account (HSA). Although citizens would be free to go uninsured, those who do so would forgo the tax credit, thus in effect contributing funds to maintain the public safety net. Because the tax credit would not be sufficient in itself to buy the kind of insulating coverage to which Kling objects, the market should quickly supply products qualifying, more or less, as “real” insurance. Consumers wanting conventional coverage would have to spend after-tax dollars to get it.

Kling’s ideas for new kinds of health insurance — in particular his notions that coverage should have a time horizon longer than one year and that cash indemnities might replace payments for costs incurred — deserve to be fleshed out and tested in the marketplace. But the market should also leave room for those consumers who are fearful of taking too much responsibility for their own health care to choose comprehensive coverage by health plans that act as their corporate agents in purchasing care and in making difficult choices. Some plans would presumably be integrated with health savings accounts in order to keep track of high deductibles and coinsurance and to ensure that patients have funds available to pay for care that they desire but which is not covered under the plan’s contract. Some corporate health plans would not be insurers at all but would actually provide care through participating physicians who ration care according to the plan’s protocols or clinical guidelines. Kling’s criticisms of overly broad insurance should not be taken to preclude consumers from enrolling in comprehensive, integrated health plans of the HMO variety. Plans like the admirable Kaiser-Permanente system, which can efficiently provide care tailored to the preferences of particular consumer groups, should be encouraged, not discouraged. Integration of physicians into such efficient plans and significant quality improvements could both be fostered simply by making HMO-type plans legally responsible for their providers’ torts.

There is still room, I believe, for policy measures that encourage private health plans to drop their role as enablers of the public’s addiction to “premium medicine” and to become, at long last, efficient insurers against predefined risks. Public programs could then be redesigned either to emulate the private sector’s new economizing methods or, better still (assuming that some daunting practical problems can be overcome), to facilitate their beneficiaries’ enrollment in private health plans that compete to give consumers good value for money, not just easy access to standard medical care. But even though market-based reforms are still feasible, the mouths of big-government enthusiasts are watering once again at the prospect of “health reform,” just as they did in the early Clinton years.

I’m glad Arnold Kling wrote this essay — and the book on its which it is based. Not only is he smart, provocative, and an unusually clear writer. He has also focused on what I would argue is the single most important debate in health care policy today: the definition of “real” insurance.

Kling’s definition is one that most health care industry executives, along with most conservatives I know, share. As he puts it, real insurance “provides protection against rare, severe risk” — the kind that generates “infrequent claims” and, as a result, “low premiums.” In the context of health, he goes on to explain, “real insurance would pay for treatments that are unavoidable, prohibitively expensive, or for illnesses that occur relatively rarely.”

But that’s not the way health insurance works nowadays. Health insurance subsidizes a lot more than just the occasional, unpredictable medical crisis. It also pays for the routine and the predictable.

This isn’t “insurance,” Kling warns us. It’s “insulation.” And that makes it fundamentally unsustainable.

I’m tempted just to grant the rhetorical part of his argument. Frankly, I could care less whether we call health coverage “insurance,” “insulation,” or something else entirely. But I do care about how insurance works. And I have a different take on it.

Let’s start with King’s analysis of why “insulation” inflates medical spending. As an example of the kind of routine care that such traditional health insurance subsidizes — but allegedly shouldn’t — Kling cites strep throat tests for kids and regular eye care. Later, he talks about an unnecessary MRI a doctor ordered up for him.

I have no doubt that, as the now-famous Rand studies of health care demonstrated decades ago, generous insurance has encouraged many a useless strep test. (“Kid has a sore throat? Sure, go ahead and swab…”) But strep tests for healthy kids isn’t the reason American health care is so expensive. Neither is routine eye care or even MRIs from over-enthusiastic neurologists.

It’s a cliché of health care policy, but an important one, that some 80 percent of the money we spend on health care every year covers treatment for 20 percent of the people. So if you want to make health care a more sustainable expense by spending less, then you’ll have to find the savings there.

I gather that, anecdotes aside, Kling understands this. Indeed, probably his most well-argued point is that we’ve become accustomed to what he calls “premium medicine” — namely, all the high-tech goodies and expensive surgeries that medical science can create. And we throw them at patients willy-nilly, even if — and sometimes especially if — they’re near the end of life.

In retrospect, not all of this spending makes sense. Some of it is flat-out unnecessary or wasteful. It doesn’t improve health or even longevity. Some of it does contribute to better outcomes, but only at an extraordinarily higher expense.

Still, it’s one thing to recognize waste exists, particularly if you have the luxury of looking at medical care after-the-fact. It’s quite another thing to squeeze out that waste, particularly if you have to do it in real time.

We have precious little evidence to believe that people can distinguish good care from bad care. (Kling quotes Harvard economist David Cutler making this point, and I couldn’t agree more.) And particularly in the case of the people who are most price-sensitive — that is, the poor — there’s every reason to think they will do precisely the opposite and make the worst possible kinds of choices. Suddenly sensitized to higher medical costs, they’ll cut back on the kinds of routine, preventative measures that would ward off future medical calamities, thereby inviting not just bigger health problems but, over the long run, higher costs. (By the way, the Rand experiments suggested this, too.)

Citing this objection, Kling asserts, as the defenders of his approach often do, that people can become more intelligent shoppers in time, with more information. It’s a lovely idea, but one that seems highly dubious — particularly if you’ve ever had the experience of trying to read up on a condition via WebMD or wade your way through hospital quality ratings. The available information is useful, certainly, and someday it could be a great tool for consumer decision-making. But it’s hard to imagine we’ll reach that point anytime in the next few years. Even the experts themselves disagree on exactly what measures are the most useful, or how to interpret them.

I also think Kling is a little breezy about the economic impact of changing insurance as he suggests. And here, too, I think his writing is typical of what I often hear from the right. Kling agrees that government assistance should be available to the very poor — which, in his book, he defines as people at 100 percent of the poverty line. After that, he says, he’d prefer people take high-deductible policies — ideally, if I understand him correctly, policies that exposed people to $5,000 in out-of-pocket expenses each year.

But I wonder if Kling grasps what it’s like to live on $20,000 a year, which is the poverty line for a family of four. Once you’ve paid for rent, groceries, clothes, and utilities, there’s not much left — certainly not enough to pay off $5,000 in treatments for an ongoing medical condition. And even people making well above the poverty line would struggle to meet this sort of deductible. As scholars like Elizabeth Warren and Jacob Hacker have shown, it can take just one ailment — or one accident — to completely ruin even some middle-class families financially.

Maybe Kling is sympathetic to people who end up in such circumstances. (He certainly seems like an decent fellow.) But his definition of insurance doesn’t leave room for helping out these people financially — except in the most extreme cases — because it doesn’t fit his definition of what insurance should do.

After all, these large expenses are most crippling to families when they are part of a chronic, ongoing illness. And the expenses from such illnesses are highly predictable. Diabetics, for example, can count on spending thousands every year. (And that’s assuming they don’t end up with severe complications.) If insurance is meant only to prevent unexpected, unpreventable expenses, it has no business covering those bills.

But some of us have a slightly broader definition of “unexpected, unpreventable.” While misfortune can take the form of a physical injury or the onset of a sudden disease — the types of calamities that Kling concedes are worthy of insurance protection — misfortune can also take the form of genetic and economic bad luck, which, as any public health specialist will tell you, can result in a lifetime of high medcial bills. Insurance can protect against these risks, too — by subsidizing at least some basic medical care and mitigating the financial penalty from even predictable expenses. There’s even a name for this concept. It’s called “social insurance.”

Of course, our efforts to provide social insurance here in the U.S. have not been so successful, at least in health care, as anybody who reads the papers knows. Costs keep going up but quality doesn’t; meanwhile, more and more people find themselves without insurance and, as a result, with no way to pay their medical bills.

In both his essay and his book, Kling cites these problems as proof that my kind of insurance — i.e., social insurance — isn’t sustainable. But that’s simply not the case in other countries, where they manage to provide social insurance for medical expenses — and, in many cases, to do it well. They give everybody coverage. Then they find a way to pay for it, typically through some combination of taxes and “premiums.”

These countries can’t escape human nature: There’s always a tension between how little people expect to pay and how much they expect to get in return. But the universal health care systems have mechanisms for solving this. Some ration care explicitly. Some manage supply, through budgeting and regulation of hospitals. Some regulate fees to doctors. Some even vary co-payments to discourage frivolous care.

These efforts reduce premium care, in much the way Kling suggests, but they do so without exposing their citizens to the kind of severe financial hardship Americans experience all the time. And while each country uses a different combination of policies, producing an array of results, in general they do as well if not better than the U.S. on most health outcome indicators (a point Kling concedes, to his credit).

It’s true that, as their populations age, countries with universal health care — much like ours — will find it the challenge of financing health care more difficult. But because these countries already spend less than we do, they’ll have more room to accommodate such increases. (This isn’t just a product of their supply controls and rationing, by the way; particularly in the more generous countries, it may have more to do with the fact that they don’t have insurance companies competing to ditch the sickest patients.)

Precisely because these other countries have more control over the health care market than the U.S. does, they’ll be able to adjust the trade-offs between cost and services gradually, over time. In other words, contrary to Kling’s assertion, these countries have traditional health insurance systems actually seem quite sustainable — not to mention pretty darn good from the standpoint of the citizen who needs medical care.

Would Americans tolerate such a system here? Conventional wisdom says “no,” in good part because — thanks to years of propaganda — Americans have come to associate universal health care with the waiting lines and relatively low availability of technology that’s more characteristic of Britain and Canada than some of the other countries with universal health care. But I think most Americans would probably be perfectly happy in a system like the French, German, Japanese, or Swiss have — if only they knew how those systems really worked.

Of course, you also need a big government, with big taxes, to run these kinds of systems. And maybe that is what Kling really finds objectionable, on either moral or other practical grounds. That’s fine. In fact, on that point I suspect he’d get many if not most Americans to agree — at least at first blush. But that’s a rather different argument than the one he’s making — one I’d be happy to take up later in our exchange.

Holt

Matthew Holt raises a number of issues. His premises tend to be true. However, his conclusions do not follow.

1. Our system favors providers, not consumers

I agree that our system favors providers, but the question is what government can do to help. Almost every government intervention that I can think of, from insurance mandates to licensing restrictions to tax policy, has the effect of either restricting supply or subsidizing demand, all to the benefit of providers. This is not surprising, given what Holt himself calls “the political strength of the health care system actors combined with the disaggregated weakness of the consumers and those paying the bill.” It’s sort of Public Choice 101.

So I agree with Holt’s diagnosis, that health care providers have too much political power. But his prescription—to put more of the health care system under the purview of government—seems perverse. It is like telling someone with adult-onset diabetes to go eat more doughnuts.

2. Consumers cannot make good health care decisions on their own

Holt writes, “It seems to me that most people faced with any kind of significant medical decision will either be too ill , be too susceptible to the influence of providers, or unable to get good enough data about their individual situation, to be able to make a rational choice.”

Again, I agree. However, it does not follow from this that insulating consumers from the cost of health care will lead to better decisions. Instead, it will simply cause them to err in the direction of choosing the most expensive medical services—the overuse of premium medicine.

3. Insurance and Market Failure

Holt writes,

[Kling] tentatively admits “that if health insurance were relatively unregulated and unsubsidized, then many people would opt to do without health insurance.” Anybody observing American health insurance today knows that this is true. Of course, that means that in order to cover everybody with health insurance, the market for it does need to be heavily regulated and subsidized.

Here, I believe that I was misunderstood. Let me spell out what I mean by using an example. Suppose that a healthy 30-year-old has a 5 percent chance over the next ten years of contracting an illness that would require more than $25,000 in treatment. One insurance policy that would be appropriate in this case would be a policy that costs $1000 up front, is in force for ten years, and a policy that pays $20,000 if the expensive illness strikes, but otherwise pays nothing.

Consider three reasons why the thirty-year-old might not have such a policy.

1. Government regulations distort the insurance market.
2. The insurance market fails on the supply side, because of too much risk sorting and not enough risk pooling.
3. Consumers are offered fair policies, but some choose to turn them down. Some of them

   just would prefer to gamble that they will not need help paying for medical expenses.

What I was referring to is the third possibility, that even if the market works, some consumers will have so much risk tolerance that they will turn down catastrophic insurance.

However, let us suppose that Holt’s premise is correct, and that catastrophic insurance will not emerge in the private sector because of risk sorting. It still does not follow that government should provide insulation. Instead, what the government ought to step in with is a transfer mechanism that mimics catastrophic insurance. It should pay large benefits to a small percentage of unlucky individuals who have serious health problems. Yet when we observe single-payer health care in other countries, it makes small payments to everyone. Single-payer means insulation, not insurance.

4. Single-payer in America

In Crisis of Abundance, I point out that single-payer can take three forms. One form I call “doctor-friendly,” in which government picks up the check, but otherwise plays no role in medical decision-making. Medicare mostly works this way, with the predictable result of out-of-control spending and fiscal unsustainability. Another form I call “doctor-hostile,” in which government forces providers to offer the same services at lower prices. The final form I call “doctor-limiting,” in which the government acts like a managed-care company, controlling cost by limiting access to medical services.

My sense is that the version of single-payer that most closely resembles Holt’s preference is doctor-limiting, with perhaps a bit of doctor-hostile thrown in. In any event, doctor-hostile single-payer health care probably would look a lot like doctor-limiting health care, because many doctors would refuse to participate in a government program that severely limits fees.

Holt sees the public turning to government because of concerns about family financial security. I do not pretend to have my finger on the consumer’s pulse. However, I would suggest that the bad reception that America gave to managed care in the 1990’s seems to indicate some unwillingness to sacrifice the freedom to make extravagant use of premium medicine in exchange for financial security with regard to health care. In that regard, I could throw Holt’s words back at him and assert that in today’s America, single-payer health care “ignores the political and cultural realities of the health care system, and probably wouldn’t even work in theory.”

Havighurst

Clark C. Havighurst makes an eloquent case for getting rid of the tax subsidy for employer-provided health insurance. I endorse his view.

Havighurst writes,

something approaching their goal of universal health coverage could be achieved by ending the current tax subsidy and offering refundable tax credits of, say, $6000 to families that spend at least that amount in health plan premiums or contributions to a health savings account (HSA). Although citizens would be free to go uninsured, those who do so would forgo the tax credit…

I can endorse this, also, However, moving to this approach and abolishing the tax subsidy for employer-provided health insurance may be less acceptable politically than a compromise. The compromise would be to cap the deductibility of employer-provided health insurance premiums at, say, $5000 per family, in order to encourage employers to offer high-deductible plans. At the same time, individuals who buy their own health insurance could be offered Havighurst’s capped refundable tax credit. It seems to me that such tax reforms are relatively easy to implement, particularly in comparison with the proposals for expanding government-provided health care.

Cohn

Jonathan Cohn correctly criticizes both my essay and my book for being evasive on the issue of dealing with the very sick (e.g., someone with diabetes) and the near-poor. I believe that there is a role for government for providing a safety net for both groups. I am confident that such a safety net can be provided without government providing full-bore insulation for everyone. I am less confident about the best approach. Perhaps “catastrophic reinsurance” (having the government pay your insurance company if your annual bill exceeds $50,000) would facilitate risk pooling that covers the chronically ill. Perhaps a tax credit that phases out gradually with income could provide support for the near-poor. But taking the entire category of consumer spending that we call health care and declaring it a government responsibility strikes me as the least efficient approach.

But evasiveness cuts both ways. Where the Left gets evasive on its proposals for health care is on how it will handle the trade-off among insulation, access, and affordability. For example, Jacob Hacker wrote recently,

If one word captures the essence of Health Care for America, it is “guaranteed.” Health Care for America would guarantee coverage; it would guarantee a generous package of benefits; it would guarantee greater choice; and it would guarantee real savings and improved quality.

To me, this sort of “guarantee” is inconsistent with having an intelligent, grown-up discussion of health care policy. Instead, it is an exercise in evasion.

When asked how they will lower costs, the Left will point to countries that do not offer the same autonomy and availability of services as Americans enjoy. But when asked how they will offer the choice that Americans are used to, the Left will say, “it will work like Medicare.” Neither Jacob Hacker nor anyone else offers a credible way to achieve lower expenditures without restricting supply.

The Left is happy to use Medicare as an example of a government-run health program that is liked by its beneficiaries. But the Left is evasive on the topic of Medicare’s financial problems. What are we going to do about the tens of trillions of dollars in unfunded liabilities in Medicare, meaning the gap between promised benefits and expected taxes in the future? What are we going to do about the extravagant use under Medicare of procedures with high costs and low benefits, as documented by the work of John Wennberg and colleagues at Dartmouth?

Finally, the Left is evasive on how it will preserve America’s leadership role in developing new diagnostic procedures and treatments. For example, in the United States, five-year survival rates for various forms of cancer tend to be higher than in other OECD countries. Suppose that we take the least generous interpretation of this data for the United States, which is to presume that we are no better at treatment. That is, all we are able to do better than other countries is diagnose cancer sooner.

Even under this least-generous interpretation, my guess is that when better treatments are developed, it will be in the United States. My guess is that some of the more effective treatments will work better when diagnosis is early rather than late, and then we will start to see differences in cancer mortality relative to other countries. Finally, even if we gain no advantage from earlier diagnosis, cutting back our diagnostic efforts to European or Canadian levels is something that would be resisted by American consumers and physicians.

Another complaint I have about the Left is that they are always citing the same handful of studies that appear to support their views, while ignoring many more studies that go the other way. See Anna Bernasek or the aforementioned Jacob Hacker for classic examples of what I call the high-investment strategy for avoiding truth. By simply reading my work with an open mind, Cohn is standing head and shoulders above many of his colleagues.

1) Kling and I both believe that providers are too strong in the current American system. I believe that if you make the price of health care visible at a level where consumers have to make either a monthly choice, or the government has to make a choice between spending money on health care versus other priorities – which becomes a political choice between visible tax increases, and/or cutting other services, as it is in the UK, Germany and other countries – then you can get to reasonable trade-offs. And in that situation the power of the collective will outweigh the power of the individual special-interest. Of course it is quite possible that the government and/or private payers could be captured by the industry (as it has been by defense in the U.S.) But then what will be the significant difference between that and what we have now?

2) It seems to me that, as Kling agrees that consumers cannot make rational decisions at the point of service, the entire concept of exposing them to price information by unit of service breaks down. So the rational option is to get them to compare prices for overall bodies of service, or if you like, healthcare experiences. You can probably organize this in different ways, but the easiest and most familiar seems to be the annual premium for a comprehensive HMO type plan. Alternatively, you can remove the decision another step by having the government rationally allocate resources, using a technique similar to the British NICE. This of course gets rid of the need for the government to directly subsidize those who cannot afford those premiums, and thus prevents that group from being segmented off into a “separate but equal “pool – which is a great fear of those Democrats who resist the privatization of Medicare.

You will note that those are the two main techniques of, on the one hand, the Enthoven school and, on the other, the single-payer crowd. When Kling says that those techniques will be insulating consumers from the cost of their health decisions, I would refer him to the point that John Cohn made that he does agree with: almost all the costs of health care are spent on a very few sick individuals. If it is not the providers, then somebody else will have to control those costs. Clearly the sick individuals are not in the best position to do so, so some other technique or intermediary must be used. Saying anything else can work is the great fallacy of the political end of the consumerist health care movement. (Although I appreciate Michael Cannon will beat me up for this statement!)

3) I want to stress that my favored outcome for reform of the American health care system is an Enthoven type model in which there is compulsory membership in universal national or regional pools, and in which providers supply pre-paid care, complete with global pricing for a set of clearly defined services. Having sat through Enthoven’s classes in the early 90s and watched the industry pick apart the Clinton plan, which was closely based on his ideas, I’m extremely cynical about its chances of ever passing. Instead I believe that the industry will destroy any reform attempt until the health care system becomes so patently wasteful and unfair that there is a genuine political revolt. At that point, single-payer – probably by extending Medicare for all – will be the obvious political answer. It will be some mix of Kling’s three variants of single-payer, and hopefully will evolve into a system where competition is carefully managed to improve the consumers’ experience–this is roughly what is happening in Holland and (one might argue) also in the UK and Sweden. But my point is not that I want UK-style 1950s single-payer, although I do think it is an improvement over what we have now – certainly for the cost. My point is that that is what we are likely to end up with, unless the healthcare industry decides that it is able to stop gilding the lily now. So far I’ve seen no evidence of any voluntary shared sacrifice on the industry’s part.

If Kling really thinks that this forecast lacks political reality, one only has to run the numbers out into the future and contemplate a typical family premium approaching 50% of the median income to realize that our current employment-based system is only sustainable for the middle class for a decade or so. When the middle-class becomes those people who they used to be scared of providing socialized medicine for, then their views (or at least enough of their views) will change. I don’t think this is a short-term process, which is why I’ve said elsewhere that the current round of Arnie/Romney/AHIP health reform is unlikely to succeed.

Meanwhile, if we are talking about ignoring political realities, then Havighurst’s call for eliminating tax deductibility of health benefits would absolutely be in that category, at least currently. I do like Kling’s idea of capping the amount. This is similar to what the British government did with capping mortgage interest deductibility in the 1980s, which has now essentially been eliminated by time and inflation. But you may remember that a commission addressing this last year was immediately ignored by George Bush. Frankly if we have the political will to do this, I suspect it’ll be part of a much, much bigger reform.

And, finally, I can’t really comment on Kling’s reply to John Cohn, as he was mostly dishing it out to Jacob Hacker. But reform of the way Medicare pays for care, and the way variation in care is to be removed, are subjects that will be tackled by a group of elites who actually understand this stuff, out of the view of the public eye. So the real issue is how people get coverage or insulation. Anybody who has observed American politics in the last two decades knows that issue will be decided by a simple slogan like “Medicare for all,” because, after all, the use of similar simple slogans is how we generally decide questions like the fate of the estate tax (“death tax,” anyone?), going to war with Iraq, and other weighty matters. I myself have been a major critic of the way Medicare – and all fee-for-service medicine, for that matter – operates. But Kling can’t have it both ways. If there were no budget-busting Medicare Part B, along with its multimillionaire oncologists, those cancer survival rates would look the same as the rest of the world – I don’t see much of the beauty of the free market in that.

Something that particularly caught my eye in this exchange is the title of Jonathan Cohn’s as-yet-unpublished book, Sick: The Untold Story of America’s Health Care Crisis — and the People Who Pay the Price. Not having seen the book, I am curious whether he has really focused, as the title promises, on “the people who pay the price” – namely, the payers of health insurance premiums (and payroll taxes). Or has he instead, like most commentators on the political left (and his comments here), focused only on the plight of the uninsured? My curiosity arises in part because I, too, have a work in press (to be released this month) that addresses the question of who pays the price.

I and a colleague, Barak Richman, have edited a symposium issue of Law and Contemporary Problems that bears the title “Who Pays? Who Benefits? Distributional Issues in Health Care.” Our lead article in that symposium, entitled “Distributive Injustice(s) in American Health Care,” argues forcefully that far too little attention has been given to how the extraordinary costs of health care are borne by the subset of working Americans who still have health insurance. In our view, lower- and middle-income premium payers may reasonably be viewed as the system’s primary victims.

Although the uninsured certainly deserve sympathy, many of them are uninsured more or less by choice and, as a direct consequence of not paying health insurance premiums, have more resources to spend on other things. To be sure, they are sometimes hit with large bills, and some are bankrupted. But, in literal terms, the uninsured are not the main class of “people who pay the price.” Indeed, much of the sympathy expressed for their plight originates with providers whose real concern is that the uninsured are not paying their share to support the system. In truth, both premium payers and the uninsured are victims of the same overblown system, which artificially inflates the cost of medical care and deprives people of meaningful opportunities to economize in purchasing it – except by going bare. Richman and I believe lower- and middle-income premium payers are being victimized far more than they know. And therein lies the problem.

Our first key point is that Americans with health coverage pay not only for their own families’ health care but also to sustain a vast enterprise that primarily benefits others, many of whom are more, not less, affluent than themselves. The system is able to finance itself in part because U.S.-style health insurance – the kind that Kling abhors – greatly amplifies price-gouging opportunities for the many health care firms, including hospitals and pharmaceutical companies, that enjoy a degree of monopoly power. Although monopoly profits are often applied to caring for the uninsured or providing other public goods, the burden of paying for arguably (but not necessarily) valuable goods and services falls ultimately on premium payers more or less equally and without regard to ability to pay, like a severely regressive “head tax.” This is the wrong way to finance the production of public goods. Likewise, the burden of inducing health-sector R&D (some valuable, some wasteful) should not be borne disproportionately by America’s premium payers.

Richman and I also observe that insured consumers bear excessive costs for their own health care, both because many unit prices are supra-competitive and because the coverage they must buy, if they are to have any coverage at all, necessarily includes an entitlement to what Kling calls “premium medicine.” Among the many explanations we offer for the failure of the marketplace to offer significantly lower-cost insurance options is over-regulation, including the professionally dictated standards of medical care that are both incorporated by reference in insurance coverage and enforced in malpractice litigation. To be sure, consumer-voters have generally favored cost-increasing health sector regulation, just as they have demanded overly costly coverage from their employers and resisted employers’ efforts to economize. But, as emphasized in my earlier essay in this series, the preferences thus revealed exist only because consumer-voters do not see with any clarity the high cost of the coverage they enjoy. Richman and I emphasize not only the market effects, but also the political effects, of a tax system that induces consumers to believe that the cost of their health coverage falls mostly on their employers, not themselves. In addition to the usual advantages enjoyed by special interests in influencing legislative choices, the tax subsidy makes it especially easy for the health care industry to accomplish its political agenda. This agenda includes not only keeping consumers ignorant about how, and how much of, their money flows into health care but also greatly limiting their opportunities to economize in purchasing it.

Much of the discussion so far in this series focuses, as usual, on whether the market can solve the problem of giving consumers good value for the money they choose to spend on health coverage or health care. The argument that consumers might make poor choices, while valid, is not in itself a reason to deny them opportunities to make any consequential choices at all. It does point, however, toward trying to structure a system in which subsidies and rules against fraud and malpractice prevent them from making truly bad choices. A key point, briefly made in my initial essay, is that consumers should be free to reject paying for health services at the point of service and to choose instead a sophisticated corporate agent – a health plan – to help them make those difficult choices. Mark Hall and I wrote not long ago in Health Affairs about the potential benefits of combining health savings accounts with well-designed and well-administered health coverage. As Matthew Holt also believes, there is still much virtue in the managed-competition model as Enthoven originally put it forward. And managed care – although it needs a new name, more honesty and openness in its execution, and greater integration of providers in the project of offering consumers good value – could be expected to make a comeback if insured consumers were finally made aware of the costs they bear.

Although there are serious practical problems (e.g., adverse selection), there is no definitive reason why private health plans could not offer consumers all the cost-containment services that Cohn says government could provide. Indeed, with less regulation and more freedom of contract, competition among different types of health coverage is the only way to avoid the one-size-fits-all problem that is the principal reason for objecting to a single-payer system of the kind most likely to be created in the United States. Whatever the case in other countries, it is hard to imagine Congress enacting a program that does not nominally guarantee access to all care meeting professional standards of quality and necessity. Yet many consumers would be better off with more money in their pockets and less access to “premium medicine.”

As to political reality, I see no reason why a populist of the Right or Left should not finally tell voters the truth about who pays for American health care and about how its benefits accrue disproportionately to industry interests and high-income consumers and taxpayers rather than themselves. Out of the scandalous unfairness of the present system, skillful politicians should be able to fashion a movement for fundamental, market-based health reform. Here is a chance for Republicans to seize the populist banner and offer something other than a socialist remedy. At a time when lower- and middle-income workers are having trouble keeping up, income-wise, with the Joneses across the tracks, it is nice to know that there is a way to increase both their disposable income and overall welfare while at the same time enhancing, rather than further undermining, the efficiency of the overall economy.

Matthew Holt writes, “reform of the way Medicare pays for care, and the way variation in care is to be removed, are subjects that will be tackled by a group of elites who actually understand this stuff, out of the view of the public eye.”

So under Holt’s ideal medical system, the practice of medicine will be governed by elite technocrats, far removed from doctors and patients. Concerning this approach, one may ask:

1. Is it moral?

2. Is it efficient?

3. Is it politically acceptable?

I believe that the answer is “no” on all three grounds.

It is immoral because it concentrates power in the hands of an elite, and it takes autonomy away from doctors and patients. The news today reports of Art Buchwald’s death, and the obituaries mention his difficult decisions regarding terminating dialysis. Taking those decisions away from individuals and their doctors is simply wrong.

It is inefficient because the best decisions are made closest to their point of impact. Are consumers perfectly rational decision-makers? No. Do they have all the information they need to make perfect health care decisions? No. But the alternative to imperfect consumer choices is not optimal decision-making. The alternative to imperfect consumer choices is someone else making mistakes that are, on average, worse. One of the essential insights about markets is that they process information efficiently, by getting information to the point of decision.

Let us assume that “a group of elites who actually understand this stuff” can come up with really well-researched guidelines about whether I should get an MRI for a back injury. (In my book, I propose establishing a commission to develop those sorts of guidelines.) Then the most efficient way to process this information is to give it to my doctor and me, and then to let me decide whether or not to pay for the MRI. If the guideline says that I should not get an MRI, but my doctor and I prefer to go against the guideline, then I should be allowed to do so. Especially if it is my own money that is paying for it.

Finally, Holt’s version of single-payer is politically unacceptable. He wants to reduce the power of physicians, not only in the political process but in day-to-day decision-making about medicine. That is going to meet resistance not just from the medical profession but from the typical consumer.

Holt uses the slogan “Medicare for all,” but what he has in mind is nothing like Medicare today. His political strategy amounts to bait-and-switch. Promise people cake, and then serve them spinach. If you can pull that off, then you can make anything politically acceptable. But if you are constrained to be honest, you could never sell Holt-Care to the American people.

Health care spending is going to present us with tough choices, and we need to be up front with the American people about that. As spending rises, it has an impact on the typical American, whether it comes through medical bills, health insurance costs, shifts in compensation from wages to health benefits, or taxes. Insulation does not take away the impact, any more than not telling a patient about a serious long-term illness takes away the impact of that illness.

I was going to answer Kling’s original response – and still plan on doing so, shortly. But I just have to jump in and comment quickly on his reply to Holt. I’ll let Holt explain why the vision Kling paints of technocrats secretly cooking up medical guidelines is grossly misleading. Instead, I am curious about this line in Kling’s piece:

Finally, Holt’s version of single-payer is politically unacceptable. He wants to reduce the power of physicians, not only in the political process but in day-to-day decision-making about medicine. That is going to meet resistance not just from the medical profession but from the typical consumer.

Whoa, when did political reality enter the situation? One of the things I appreciated about Kling’s original essay (and book) was its frank acknowledgment that his ideas for reforming health care were at odds with the desires of most Americans, who had become accustomed to “premium medicine” at low cost. In other words, he was proposing a reform – but he recognized that it was not one that most Americans would embrace, at least initially.

But if he’s going to dismiss single-payer as politically unrealistic, then I have to ask him: Does he think his vision politically realistic?

Kevin Drum, who writes the “Political Animal” blog on the Washington Monthly site, had a great entry the other day – responding to our exchange here – in which he pointed out just how unappealing the idea of turning medical care into a giant marketplace really might seem to many patients. Here’s the money quote: Kling, Drum says,

thinks the healthcare biz need less insurance and more free market capitalism in order to drive down costs and force people to buy only the care they need. I doubt it. More likely it would result in what I saw today: medical offices becoming more like Turkish bazaars (or used car dealerships), filled with distraught patients trying to decide whether they can afford a crown today or if they should wait and run the risk of needing a root canal later. No thanks.

Drum’s story is pure anecdote, I know. And I’m sure there are some people who really would be prefer a more consumerist model (which is why, within reason, I’m willing to give people at least an option of having it — if it’s within the context of a universal health care system). But there’s actually research to show that people prefer security, even if it means earning less money, to risk, even if it includes the possibility of making more money.

I’ll be talking more about that research shortly; I have to go back and read up on it again in Jacob Hacker’s book – which, reminds me, I have some issues with Kling’s characterization of Hacker’s work, too. But before I do that, I want to offer my best evidence that Kling’s vision is not politically viable (at least, not more so than single-payer). That’s the experience of two other countries.

One is Singapore, a country the advocates of Kling’s consumerist approach often tout as proof that Health Savings Accounts work. Singapore has universal health care, but not of the traditional sort. It offers just catastrophic coverage; then it gives people special savings accounts, which they can fill and then use to cover routine medical expenses. In effect, it’s just like HSAs here.

But guess what’s happened? Affluent people ran out and bought private supplemental insurance to cover what the catastrophic insurance didn’t. It turns out that, when faced with a choice, they really did prefer to have more insulation and less risk.

The same thing happened in France. It will boggle the minds of conservative Euro-bashers, I know, but some time ago the French decided to increase cost-sharing in their national health insurance plans – imposing up to 30 percent co-payments – for outpatient services. And what did the affluent French promptly do? Exactly what their counterparts in Singapore did. They ran out and got supplemental insurance, which is why very few people in the French middle class actually face high cost-sharing now.

You may have noticed that, in both cases, I referred specifically to the affluent (by which I mean the middle class as well as the poor). That’s because the poor couldn’t afford the supplemental coverage. In France, the government decided to subsidize supplemental insurance for low-income people, which is why you don’t have serious financial barriers to care in that country. In Singapore, they’ve been less successful at solving the problem. (Singapore, to its credit, does have an extensive public clinic network that helps provide routine care, particularly to the poor. So that helps offset the effect of the high-cost sharing on poor people who can’t afford the supplemental insurance. But I don’t gather that the advocates of consumerism here would support a scheme to develop a similarly massive network of government-run medical clinics.)

Truth be told, part of me hopes that conservatives keep promoting this. It only makes universal health care seem that much better by comparison.

Something just occurred to me. Kling attacks Holt and advocates of universal health insurance because under the schemes they recommend “the practice of medicine will be governed by elite technocrats, far removed from doctors and patients” – something Kling deems immoral and inefficient, as well as politically unacceptable.

Let’s suppose Kling is right. Fine. Now, under his vision of health care financing, everybody gets these high-deductible insurance policies. This puts a much greater share of health care spending on the consumer, I see. But not all of it. Catastrophic expenses – that is, everything over $5,000 a year – are still covered by insurance.

Not only does this represent care for the most seriously ill, as we’ve discussed previously. It also represents some of the most ethically tricky treatment decisions possible: Do you pursue a new, experimental cancer treatment with slim but still realistic chances of success? Do you prescribe ongoing physical therapy for somebody for whom recovery from an injury is unlikely, but still possible? Do you perform radical invasive surgery on somebody who probably, but not certainly, will die within six months?

Clearly, somebody has to make those decisions. And simply leaving it to the doctor and patient won’t work, at least according to Kling, since they’ll be insulated from cost just like they are now.

So who’s making those decisions? How? And why are those decisions any more moral and efficient than the ones being made under the schemes Holt and I have advocated?

Cohn writes, “But if [Kling]’s going to dismiss single-payer as politically unrealistic, then I have to ask him: Does he think his vision politically realistic?”

No. I wrote here:

I should start by saying that the book does not contain a single major policy recommendation that is politically palatable today… Maybe some years down the road, after the public is fed up with health care gimmick policies that don’t work, the policy establishment will discover the ideas in Crisis of Abundance.

As that essay emphasizes, no serious health care policy approach (including the status quo) works well politically, because no approach is painless. The economic analysis says that we have to absorb pain in terms of limiting access to health care, limiting consumer insulation from health care costs, committing extravagant resources to health care, or some combination of all three. However, those trade-offs are evaded in political debates. Instead, there is strong demand in the political marketplace for gimmicks that purport to provide painless solutions.

Cohn and Kevin Drum (whom he cites) argue that individuals will pay a premium in order to avoid the stress of having to factor in cost when making health care decisions. That’s fine! There are all sorts of things that individuals pay for that I think are not worth the value. Cable television, for example. No one forces me to get cable TV, and I don’t force other people not to buy cable TV. I think it should be the same with health care insulation. If people want insulation, they are welcome to pay for it. And if they cannot afford it, meaning that they choose to spend their money on other things, so be it. Doing without insulation is not the same as doing without catastrophic insurance or doing without health care.

With the President having proposed a new health care plan in his State of the Union Address, this might be an occasion to comment. The plan is to recognize employer-provided health insurance premiums as taxable income, while creating a standard deduction that everyone with health insurance can use. Because the deduction is limited to $7500 for individuals and $15,000 for families, the most expensive policies would lose their tax subsidy. Thus, this is a small step toward tilting the tax system away from insulation and toward real insurance.

The President’s policy is reasonable and centrist. If you had shown it to me six months ago, I could have not guessed whether it came from a Republican or a Democrat.

Daniel Pink, in the book Free Agent Nation, sees employer-provided health insurance as an anachronism. He is passionate on the issue of the unfairness of the tax code for workers who are outside the large organizational umbrella. He writes, “becoming a free agent means entering a sort of tax hell. You’re hit with double taxation. You’re not permitted to deduct much of your already towering health insurance premiums.”

Pink is no Republican—he worked in the Clinton White House as a speechwriter for Al Gore. Yet he recognizes that the current system is a “tax hell.”

Since the President’s plan was leaked, I have seen three complaints from the left.

1. The tax break benefits the rich more than the poor.
2. The tax break encourages people to leave employer-provided health plans and instead get health insurance on their own.
3. The proposals encourage catastrophic health insurance rather than insulation.

In my view (2) and (3) are positive developments. I am curious whether Holt or Cohn finds them objectionable.

As for (1), I fail to see the cause for alarm. Consider the status quo. An economist on the faculty at Princeton who receives generous health benefits from the University is able to enjoy them tax-free. So can the professor’s secretary. But, as with all tax breaks, there is a vertical inequity—the professor derives more benefit from the tax break than does the secretary. But today there is a horizontal inequity as well. A self-employed economist and a self-employed secretary get no tax break for obtaining comprehensive health insurance.

Now, if the President’s proposal is enacted, the self-employed economist and the self-employed secretary will get a tax break. It is true that this introduces a new vertical inequity—the new tax break benefits the economist more than the secretary. But those who complain about this vertical inequity leave themselves open to the charge of being insincere. If they believe that vertical equity is more important than subsidizing health insurance, then why don’t they support getting rid of the tax break for employer-provided health insurance?

Personally, I could get behind eliminating the employer-provided health insurance tax break. But the President is dealing with political reality, and he is taking a different approach. I think it is a reasonable approach.

In the past, when Democrats have suggested centrist ideas, I have given them fair consideration. For example, I was supportive of the “catastrophic reinsurance” idea when it was floated by the Kerry campaign in 2004. My sense is that the hard left is going to dig in against the President’s proposals. Too bad for the millions of people for whom health insurance is more expensive simply because where they work falls outside the corporate umbrella.

This discussion has gone in so many directions that it is hard to find a way to wrap it up. Unfortunately, President Bush’s latest proposal is such a pitiful response to a huge problem that I don’t even want to talk about it.

Instead, let me embrace, with Matthew Holt, the basic Enthoven managed-competition model, with one amendment. Rather than having all health plans offer identical coverage (which some have thought necessary to preclude adverse selection), I would encourage price-focused competition over the scope and nature of benefits specified in insurance contracts. Plans should be free to offer both catastrophic coverage tied to health savings accounts and comprehensive coverage of care provided by closed panels of providers. In either case, innovation in establishing and administering coverage limits should be encouraged.

Competition will solve the cost problem only if consumers are made acutely cost-conscious (at the margin) and if health plans can make relatively cheap coverage available by aggressively counteracting moral hazard and foreclosing easy access to “premium medicine.” Accepting contractual limits on their entitlements is one way – in my view, the better way – for consumers to avoid paying for care that is useless, unproven, or just not worth paying for in advance. (Out-of-pocket purchase is not precluded, of course, and health savings accounts will make that option more realistic than it was under first-generation managed-care plans, which effectively rationed not just third-party financing but care itself.) The adverse-selection problem could be dealt with by making it hard to upgrade coverage once a health need arose; contractual authority for a plan to invoke limits in a patient’s previous contract in covering a pre-existing condition should be sufficient. On the other hand, risk-selection by insurers could be minimized in a managed-competition framework by pooling the premiums paid by individuals and then paying the various insurers on the basis of the risk profile of the group actually enrolled.

Mark Pauly has recently recognized that – as I have argued for many years — the health sector cannot be efficient as long as all health plans undertake to finance all “medically necessary” care and courts and regulators require all care to meet “professional” standards. “Medical necessity” obviously excludes benefit/cost tradeoffs at the outset, and the law’s tests for determining professional negligence also come from professional sources that pay virtually no attention to cost. Any health policy initiative that leaves these tests for coverage and quality in place is a recipe for ever-higher costs and more “premium medicine.” Interestingly, the Clinton task force in 1993 explored ideas of this kind, but Hillary Clinton and Ira Magaziner wouldn’t hear of them. Because neither of the Bush presidencies seized this issue, we may have to wait for another Clinton administration to return to the managed-competition model, this time (let’s hope) allowing freedom of contract.

It would obviously be difficult to write and administer contracts that specify unconventional limits on coverage and authorize cost-justified deviations from professional standards of care. Patients will not easily accept that fine print in their low-cost insurance contracts precludes their access to some desired service, entitles them to less than the highest standard of quality, or denies them conventional tort remedies. Likewise, courts will not be easily persuaded that a consumer knew that the insurance contract he was purchasing was neither a Mercedes nor a Cadillac. Moreover, courts generally construe ambiguities in insurance contracts against the insurer, even when ambiguity was practically unavoidable, making it hard for health plans to take firm positions against coverage even in many not-so-close cases. These serious problems could be met more or less satisfactorily, however, by requiring truth in advertising, by referencing selected (cost-conscious) clinical practice guidelines in health plan contracts, and by stressing the availability of health savings accounts as alternative sources of funds when coverage is not available. Choices could be clarified by public or collective private development of several standard-form contracts each providing a different level of entitlement to care in the no man’s land where perceived benefits may not justify incurring the associated costs.

As I suggested earlier in this discussion, financing needs to be put on a more progressive (or less regressive) basis, with less reliance on exclusions and deductions from taxable income (which are more advantageous to those in higher tax brackets). Refundable tax credits equal to at least a substantial fraction of premiums paid could enable everyone to purchase at least (very) basic coverage, thereby inviting competing health plans to find ways to provide such coverage. Although some plans would let patients make many spending decisions at the point of service, some restrictions on the spending of insurers’ funds once deductibles are exhausted are inevitable and appropriate. In a market featuring freedom of contract and free choice of health plans, managed health care might finally be legitimized and accepted as an essential feature of an efficient health care system and as a preferable alternative to a one-size-fits-all single payer.

Ironically, the strongest argument for a single-payer plan is a “second-best” one. Despite the attractiveness of the managed-competition model as I have sketched it, the American political and legal systems may be incapable, in the last analysis, of creating and maintaining a market for health care in which public involvement is limited to providing appropriate subsidies for purchasing health coverage and facilitating and effectuating cost-conscious consumer choices. Thus, because political intermeddling is already prevalent in so many spheres, can occur at so many places and in so many areas of government, is supported so effectively by special interests, and is generally so much a part of the American way, there may be no realistic alternative to a scheme in which government is the dominant player. For some of us, of course, it is extremely frustrating and depressing to realize that government’s own shortcomings strengthen rather than weaken the claim that only government can operate a tolerable, workable health care system. Yet, whatever big-government liberals may allege about market failure as a justification for their remedies, in fact it is government’s irremediable incompetence and their own obstructionism that may leave the nation with no alternative to letting government assume more direct responsibility.

A lot has been said about health care since my last post, and not just in this space. Indeed, I hope my fellow contributors, along with my readers, will forgive this delayed response. I would have answered sooner, but I was busy tracking down the details of President Bush’s new health care plan.

I won’t talk about that plan here. (If you’re really curious to read my assessment, it’s posted over at the New Republic’s website.) Instead, I’d like to go all the way back to Arnold’s first response to me.

(Arnold, I hope you don’t mind if I use your first name. After this exchange, I feel like such familiarity is warranted.)

In that essay, Arnold, you graciously admitted you had no easy answer for what will happen to the working poor and the chronically ill — and suggested that might be a proper function for government. I appreciate the concession and take your word seriously. I’ll simply caution you that we’ve been trying to take that very approach for the last 40 years or so. And it hasn’t worked too well. The reason? Programs exclusively for poor people tend to be poor (because they lack powerful political constituencies). I guess you could also say that programs exclusively for the chronically ill tend to be chronically ill themselves. If you don’t know what I mean, I suggest you examine more closely the very checkered history of state high-risk pools — a supposed innovation to help the chronically ill that has a decidedly checkered record.

Now, conservatives typically respond to this explanation by asking why I have faith in government to take care of everybody’s health care if it can’t even take care of some people’s health care. My answer is that they do it, and do it well, abroad.

This brings me to the curious turn your initial response took. Having made your concession to me, you decided to attack the left more generally, citing in particular the writing of Jacob Hacker — whom, I’ve since noticed, you regularly criticize as intellectually dishonest. Readers can scroll back to see your whole explanation; I think you summed up your thesis when you said this: “Neither Jacob Hacker nor anyone else offers a credible way to achieve lower expenditures without restricting supply.”

With all due respect, I beg to disagree — and not just because I happen to be very familiar with Jacob’s work, which is extremely rigorous intellectually. (Last time I checked, Yale’s political science department doesn’t grant tenure to scholars of his absurdly young age if there’s even a whiff of dishonesty about them.) Since the argument seems to baffle you, though, let me give it a shot: Universal health care systems are inherently more efficient than our system, more so if they take the form of a single-payer system or some similarly streamlined system. So at least theoretically, it should be possible to give everybody affordable health care — for the same or even less money than we pay today — without rationing or otherwise restricting care any more than our present system does.

Now, you scoffed at this argument. Specifically, you suggested that the administrative overhead in private health insurance — a factor upon which critics of the industry frequently seize — can account for only a small difference in the difference in spending between the U.S. and nations that provide universal health care. Ergo, something else must be happening. True enough. But you were either being coy, or are seriously misinformed, if you think that’s supposed to be the only source, or even the most important source, of higher costs here. Myriad other factors come into play as well, starting with the hidden costs associated with having a system of private insurance companies competing for business.

There’s the extra billing personnel in doctor offices and hospitals. There’s the endless parade of benefit consultants that come through corporate offices; and so on. And then there’s the waste generated by insurance companies who compete not on the basis of who provides the best medical care, but on the basis who can avoid insuring the sickest patients. I think it was my friend Ezra Klein who really nailed this point not long ago: Critics commonly refer to the health insurance market as prone to failure, but it works just fine — if you consider that its main goal is to make profits for insurers. It just so happens that when insurers compete to make profits, they do things — like trying to cut corners on care for the seriously ill, or trying to avoid insuring such people in the first place — that make medical care less affordable, not more, for those who need it most. And it’s quite possible this also raises costs for the whole system, because when all the cost shifting is done, you end up paying more not just in various transaction costs and administrative hassles - think of the money spent on collection agencies, and corresponding legal fees, alone — but in transferring medical treatment from relatively affordable primary care settings to relatively expensive emergency rooms.

Now, the fact that you could theoretically have universal access at current U.S. spending levels, without rationing or restriction, doesn’t mean that’s what countries with universal health insurance actually do. And here, Arnold, you have a good point: Most countries I know do make at least some efforts to restrict the supply of medicine or otherwise ration care. Some do it through what are effectively price controls. Some do it with global budgets and other controls on the diffusion of technology. Some do it the way by using cost-sharing as a disincentive to coverage. Some do it by applying more scrutiny to new devices and treatments before approving them for use. Some use combinations of these approaches. And, of course, they all do it to varying degrees of intensity.

But, as I’ve argued elsewhere, the best information we have suggests the medical results in these countries are generally no worse, and in many cases generally better, than here in the U.S. And that’s without the access problems we have here. In other words, maybe every country does make trade-offs. But the trade-offs abroad are much more palatable.

In any event, if you think that folks on the left aren’t honest about what their schemes implicitly cede, I wonder if you’ve thought a lot about what some of your fellow travelers on the right have been saying. Conservatives who oppose universal health care, including many that call themselves libertarians and advocate schemes similar to the one you envision, go on and on about rationing abroad. Many of these stories are pretty exaggerated, but never mind that. What they never acknowledge is that rationing takes place all the time right here in the U.S. It happens implicitly every time we make people without health insurance wait in long queues that form at public hospitals and other charity providers. It happens explicitly every time somebody in a managed care plan has her physician’s request for a referral, procedure, or test denied. And under the system you advocate, in which there’d be even less cross-subsidy for the severely ill, it would happen even more.

Here I want to switch gears for a second and answer Clark’s question. Clark, you want to know whether, in my forthcoming book, I examine the price that all of us pay for a broken health care system — in the form of higher costs (borne broadly as premiums, taxes, and out of pocket expenses) than a more well-constructed system would force upon us. The answer is “yes” and “no.” Yes, in the sense that I talk about the way the system distributes high health care costs broadly, though not equitably or evenly; no, in the sense that I really do focus — at least for the purpose of illustration — on a handful of people who ended up in truly dire straits.

I don’t regret that focus, however. It was a deliberate choice on my part, to demonstrate not only what already happens to the unlucky souls left out of our health care system — but what can, in fact, happen to virtually any one of us if, like these people did, we suffer some form of physical or financial misfortune.

This brings me to a broader point, which, Arnold, I think gets back to your more fundamental argument — and that of the right, generally. One of the things I admired about your original essay (and book) was its frank admission that no health care system is perfect. I readily agree. On paper, there may be some magic combination of incentives and regulations and taxes and whatever other factor you want to throw into the mix — a combination that gets us to a perfect nirvana where everybody gets good health care, everybody can afford it, and the system is perfectly efficient economically, spending not a dime more on care that a well-functioning free market would allocate to it.

But I have no illusions that we can create such a system here right away. In my book, while I praise both Medicare and several systems abroad, I was careful not to mythologize them (as are many other advocates on my side).

But while every system has its flaws, some flaws are worse than others. And I’m willing to make a value judgment about which ones are.

If giving everybody affordable health care means creating an insurance system with some high level of moral hazard, which in turn drives up costs unnecessarily, passing along modestly higher bills to every member of society, I can accept that. Why? Because, while it’s hardly perfect, I prefer it to a system like the one we have now — or, worse yet, one like the system Arnold envisions - and what it does to the least fortunate among us.

Maybe, Arnold, you don’t believe the stories you’ve read or heard. Maybe you buy into one of the many myths circulating about the uninsured and underinsured these days — like the idea that most of these people are just too lazy or cavalier to take advantage of coverage perfectly available to them; or that even people without adequate insurance can always get adequate care through an emergency room; or that people who end up with overwhelming medical debt are probably there because of their own financial irresponsibility.

Well, I’ve met quite a lot of these people over the years. None of them are saints, but, then, who is? (Certainly not I.) But in all too many cases, they are all people of basically good faith and judgment, who went about their lives doing what they thought was proper and right for themselves and their families, and ended up with their lives being turned upside down. Even to the extent I could “blame” some of these people for bad decision-making, the consequences that followed — which, in the worst of cases, include financial ruin and medical catastrophe - seem wildly disproportionate to the offense.

Arnold, I don’t know whether you think a decent society allows that to happen. But I know that some of your ideological allies do. And I know that I disagree.

Reading over this conversation, and looking over some of the other interesting things being said about health care policy around the Web, I find myself wanting to approach health care policy by starting with a blank piece of paper and seeing what I come up with.

Clark, I can pretty much guarantee that I won’t come up with “managed competition.” To me, managed competition means combining public sector rigidity with private sector greed, leading to things like the California energy debacle of a few years ago.

Jonathan, I also doubt that I will come up with a universal system as a solution, instead of a system where the government takes care of the very poor and the very sick. Your argument against the latter is that government will offer inferior care to the poor and the sick, but with a universal public system we will offer the same care to everyone. I think that a universally good public system is a dream. My guess is that such a system would turn out more like the public school system, with the most affluent and health-conscious staying away in droves. To use terms with which I hope you are familiar, “exit” is a much better tool than “voice.”

As for tenure at an Ivy League University representing a certificate of intellectual honesty — Jonathan, don’t get me started. It is my contention that we in the elites are skilled in the art of intellectual deception, including intellectual self-deception. Resisting deceiving others and fighting the tendency to deceive oneself are ideals that are much higher than those typically found in the ivory tower. I am not being insincere when I say that I impressed by your willingness to give credit to alternative points of view. I hope that I do the same.

I’ll end my comments with two quick thoughts. The first is that as Michael Cannon, I, and some others bickered over health care “transparency” at a conference yesterday and today, somehow (OK, it was my fault) the idea emerged that doing a kitchen renovation is damn complicated and expensive. And even if you think you know what appliances and cabinets you want and know what things (especially labor and appliances) cost, you don’t. And after you’ve managed one renovation (as Michael and I both just have) you’re only an expert on how to do your own again — so it’s a non-transferable skill! So the need for full transparency of cost, quality, etc. in health care is in my view strong, so long as the person who (unlike me doing my kitchen) has that view knows what to do about it. For the expensive part of medical care (i.e., the care of the low number of high-cost people), someone who is not the patient has to take the role of decision-maker, or the provider system will roll all over the purchaser — as they have for 6,000 years and especially the last 60.

It may be that the U.S. government is culturally incapable of performing that role (although some government agencies like the U.S. Marine Corps seem to be pretty effective). It may also be that, for quality reasons, we see a growth of high-end health advocates who perform this role for the well-to-do. (Concierge primary care is heading this way). But we should be able to create a system in which purchasers care about that cost, and the “agents” managing the process signal to the end-consumers by price, quality, and other measures that they are providing a better service. The only rational way for that to happen is, in my view, (as Michael says) to have those agents compete on a level playing field. That’s Enthoven style managed competition, and frankly all proper markets are managed — there’s a reason we have an SEC and a CFTC. You can’t sell the same bushels of corn on the Chicago futures market to different people at different prices, or make your bushel bigger or smaller than the markets’. The rules need to be the same for everyone. If Clark’s view of managed competition comes true, the sick will be paying more for their health care bushels.

And, as I said in somewhat more flippant tones to an emailer from the NCPA complaining about my Spot-on article today, if you don’t manage the insurance market by providing incentives to the insurers, or the intermediaries, to compete on providing the most cost-effective care at a rational and visible level (which in my view is a population-average rate charged per month for all care), then the private insurance market will continue to disintegrate. It’s been held together this long only by the “social insurance” provided by large employers, and that’s going away fast. For sure, that may be the intention of some of the Grover Norquist ilk, but I fear that the end result of all of that will be an increasingly elderly and uninsurable segment of middle class America.

Which is why I still believe the most likely outcome (assuming that we don’t have national Arnie-care any time soon) is a continued decline of private insurance and insulation, increased middle class insecurity, and an eventual populist rallying cry making “Medicare for all” the law of the land. And, frankly, it’s the polices of the right that are encouraging the “go it alone” attitude in an unreformed individual insurance market that make that outcome most likely.

You guys don’t want that to happen. Do you?