Friday, September 21, 2007

BOOKS: Crisis of Abundance

On a non-fiction kick lately, I read Arnold Kling's Crisis of Abundance, in which he clinically diagnoses the problem with America's healthcare system. I believe he's hit the nail on the head in pointing out the irresistable forces and immovable objects that shape America's healthcare dilemma (or rather, "trilemma"), namely, (1) unfettered access (we should have access to any treatment that the patient and doctor agree may be beneficial), (2) insulation from cost (patients and doctors should not have to factor cost into their decisions), and (3) affordability (the healthcare system should be efficient and not require an inordinate amount of public resources). We currently have (1) and (2), with (3) running further and further out of reach. Kling's been thinking about this for a good while now, and he has some keen observations. Some of the key points he raises:
  • insurance vs "insulation". A viable insurance market is one in which consumers pay a premium in exchange for financial protection against an unlikely but severe risk (e.g., an auto accident, or your house burning down). What we call medical insurance in America today is really more like "insulation" rather than insurance. We are protected from all costs, including routine and predictable ones. This tends to foil the normal market mechanisms, because consumers are completely disconnected from their actual costs. Kling makes this amusing analogy: suppose we had something called "food insurance", where you (or your employer) paid a regular premium, an in exchange, you can eat for free as much and as often as you want at any restaurant (or maybe any restaurant in your "network"). How well would that work? Do you think that would encourage the highest quality restaurants? Do you think people would see the connection between eating with abandon and their rising premiums?
  • lack of cost-benefit analysis. In our medical system today, neither the doctor nor the patient gives any thought to cost-benefit analysis of various treatments and procedures. Most everyone would agree that people ought to get treatments that are necessary, and should not seek treatment that is unnecessary or whose cost and/or risk clearly outweigh a small benefit. But Kling argues that the majority of treatments fall in some gray area in between clearly necessary and clearly not worthwhile. Unfortunately, our current system doesn't incentivize doctors or patients to care about cost-benefit trade-offs.
  • rise of premium medicine. He describes America's growing consumption of what he calls "premium medicine", meaning increased use of specialists, advanced diagnostic techniques, and surgeries. In many cases, expensive diagnostics make little or no difference in treatment and outcome. Yet the doctor has no incentive to be concerned with cost-benefit analyses, he's more incentivized to take the extra precaution to avoid any possible malpractice exposure. And the patient says, sure, let's have the MRI if it increases my chances of health as much as a lottery ticket increases my chances of riches, who cares what it costs because I'm not paying for it. So part of this goes back to not caring about the cost. But Kling sees that as compounded by a cultural component, having to do with higher patient expectations and more availability of technology and specialists, and doctors wanting to meet patients' high expectations.
Kling is a professional economist turned professor turned think-tank wonk, focusing on health care (he is a regular contributor to TCSDaily), and he does a great job of explaining economic theory in layman's terms. He aims to delivering something respectable to professional economists while also comprehensible to non-PhD's. It's a fine line to walk at times -- we amateurs have to wade through a few more charts, figures, and supporting evidence than we might require to be convinced, while the pros must be patient with a few more analogies explaining things they already know -- but on the whole I believe he succeeds in satisfying both audiences.

So what is Kling's prescription? He lays out some innovative and sensible recommendations, starting with matching appropriate funding sources to groups based on their needs. His relevant demographics break us down into the very poor, the very sick, and the rest of us. (He also gets into the different but predictable needs of the elderly, and the special needs of the "permanently sick", e.g., those with diabetes, but the three broad categories are the gist of it.) He shows how if the government paid for the very poor, if catastrophic insurance (i.e., really high deductibles) paid for the very sick, and if the rest of us paid for a moderate and predictable amount of medical expenses out of pocket, we could all be paying a lot less and get a more efficient system. He has some intriguing ideas about new forms of insurance, and some other good recommendations like establishing a Medical Guidelines Commission (i.e., somebody who would care to figure out how often various procedures really are worthwhile). Now you know that if someone from the Cato Institute is advocating both a new government spending program (albeit in place of some existing ones) and a new government commission, then he really does think it would be better than what we have now, or the other alternatives floating around.

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