That American entrepreneurial spirit

The New Yorker recently published a wonderful article on health care in McAllen Texas, America’s poorest metro area.  Only in America would the government spend a fortune insuring certain poor people, and nothing on others:

In 2006, Medicare spent fifteen thousand dollars per enrollee here, almost twice the national average. The income per capita is twelve thousand dollars. In other words, Medicare spends three thousand dollars more per person here than the average person earns.

. . .

I was impressed. The place had virtually all the technology that you’d find at Harvard and Stanford and the Mayo Clinic, and, as I walked through that hospital on a dusty road in South Texas, this struck me as a remarkable thing. Rich towns get the new school buildings, fire trucks, and roads, not to mention the better teachers and police officers and civil engineers. Poor towns don’t. But that rule doesn’t hold for health care.

Suppose McAllen was an independent country with universal health care.  How much would it cost the government to insure the entire population?  If independent, McAllen would be poor relative to the US, but it certainly wouldn’t be poor in any absolute sense.  My guess is that it would come in somewhere around Portugal or Slovenia.  And I would also guess that it would spend less insuring the entire population than we now spend insuring the relatively small share of the population covered by Medicare.

Many on the left say we should adopt the European health care system.  A good place to start would be federalism.  The EU is roughly the size of the US, but has 27 members, each with their own health care system.  If we are to copy Europe, the first thing to do is to delegate health care to the 50 states.  No more Medicare and Medicaid.  Any public health care should be fully funded at the state level, just as in Europe.  My guess is that the good citizens of Houston and Dallas are not going to be enthusiastic about spending $15,000 per enrollee in McAllen, when the prestigious Mayo Clinic spends $6688 per enrollee.  If those on the left aren’t enthused about this idea, then let’s not hear any more talk about copying Europe’s health care system.  (After completeing this post I noticed that Robin Hanson had an even better idea.)

One reason why everyone should read The New Yorkerarticle is that it doesn’t matter whether you are a liberal or conservative, it has something for everyone.  Think that the profit motive perverts the health care system?  McAllen certainly supports that theory.  Think that the government can’t control costs?  There’s evidence for that theory as well.  While reading the article I kept thinking of all those single-payer advocates who brag that Medicare only spends about 2% on administrative overhead.  I guess it’s pretty easy to hold down administrative costs if you make little effort to prevent thieves from stealing hundreds of billions of dollars from your program.

Another interesting fact is that the problem is only recent, despite the fact that Medicare has been around since 1965:

In 1992, in the McAllen market, the average cost per Medicare enrollee was $4,891, almost exactly the national average. But since then, year after year, McAllen’s health costs have grown faster than any other market in the country, ultimately soaring by more than ten thousand dollars per person.

Does this remind you of anything?  How about our defined benefit pension system?  We have insured pensions since 1974, but suddenly the PBGC’s deficit is soaring.  And according to Reason, the state pensions are suddenly taking much bigger risks:

Large public pension funds have a selfish notion of risk: heads they win, tails you lose. If they gamble on risky investments that pay off, they are heroes, although the predetermined benefits don’t increase. But if those investments go south, tax dollars will have to bridge the gap.

Or perhaps it reminds you of FDIC, which seemed to work reasonably well for decades but has grown increasing dysfunctional in recent years.

So why is health care so expensive in McAllen?  My first thought was culture.  Hollywood films like Touch of Evil and No Country for Old Menled me to wonder if corruption was a problem in the border area.  And I also noticed that the low cost Mayo Clinic is in sqeaky clean Minnesota.  But the facts didn’t support my prejudices.  El Paso has very similar demographics, and yet Medicare costs are only half as high as in McAllen.  And the Mayo Clinic was able to offer very low cost health care at a branch in South Florida, despite the fact that nearby Miami is the only city in America where per enrollee Medicare costs are higher than McAllen.

Even though my simplistic cultural explanation turned out to be wrong, there may still be some sort of problem with the culture of health care in McAllen:

One afternoon in McAllen, I rode down McColl Road with Lester Dyke, the cardiac surgeon, and we passed a series of office plazas that seemed to be nothing but home-health agencies, imaging centers, and medical-equipment stores.

“Medicine has become a pig trough here,” he muttered.

Dyke is among the few vocal critics of what’s happened in McAllen. “We took a wrong turn when doctors stopped being doctors and became businessmen,” he said.

. . .

“In El Paso, if you took a random doctor and looked at his tax returns eighty-five per cent of his income would come from the usual practice of medicine,” he said. But in McAllen, the administrator thought, that percentage would be a lot less.

He knew of doctors who owned strip malls, orange groves, apartment complexes””or imaging centers, surgery centers, or another part of the hospital they directed patients to. They had “entrepreneurial spirit,” he said. They were innovative and aggressive in finding ways to increase revenues from patient care.

So Marcus Welby has been replaced by Gordon Gekko.  But isn’t this good?  Isn’t entrepreneurial spirit what America is all about?  Don’t we love people who work hard and take risks?  The people who build expensive (federally insured) homes on coastal floodplains certainly show a zest for risk taking.  So do the S&L owners that lent (FSLIC-insured) money in the 1980s for speculative commercial developments.  So did the bankers who made sub-prime loans with FDIC-insured funds in the past few years.  And then there are those state pensions that are showing an increasing penchant for risky investments.  So these South Texas doctors are part of a long American tradition, they are showing real entrepreneurial spirit.

The problem with this country is not that we have too much laissez-faire capitalism.  Denmark has freer markets than we do.  Nor is it that our government is too big.  Nor is it that our government is too small.  Australia and Canada have similar-sized governments.  The problem is that we have developed a weird public/private health care hybrid that is unique in the world.  And it doesn’t work very well.  Even worse, the signs are that it is becoming less efficient at a rapid rate, as that good old American entrepreneurial spirit is finding ways to game the system faster than we can fix the problems.

If we had a federal system like Europe we would face the same sort of problems, but to a much lesser extent.  Bigger governments are simply much easier to rip-off.  Think of the $400,000,000 high school recently built in LA, and ask yourself if the taxpayers in Vermont or New Hampshire would have spent that kind of money on a school.

So where do we go from here?  Robin Hanson has convinced me that most of the money we spend on health care is wasted.  Thus Singapore’s system of health savings accounts looks pretty good.   Singapore spends about 5% of GDP on health care and has universal coverage.  The argument against health savings accounts is that patients aren’t able to negotiate like consumers:

The third class of health-cost proposals, I explained, would push people to use medical savings accounts and hold high-deductible insurance policies: “They’d have more of their own money on the line, and that’d drive them to bargain with you and other surgeons, right?”

He gave me a quizzical look. We tried to imagine the scenario. A cardiologist tells an elderly woman that she needs bypass surgery and has Dr. Dyke see her. They discuss the blockages in her heart, the operation, the risks. And now they’re supposed to haggle over the price as if he were selling a rug in a souk? “I’ll do three vessels for thirty thousand, but if you take four I’ll throw in an extra night in the I.C.U.”””that sort of thing? Dyke shook his head. “Who comes up with this stuff?” he asked.

There are 4 ways of thinking about this issue:

1.  Use one’s intuition

2.  Use empirical evidence

3.  Use economic theory

4.  Use introspection

I’ll give point one to The New Yorker, the idea of patients holding down costs seems silly.  But economic theory says that incentives matter, and there is empirical evidence from Singapore that it works, and if I use introspection I notice that many of my health care expenditures never would have happened if I had to pay out of pocket (even though I could easily afford them.)

Three out of four ain’t bad, so let’s take a closer look at point one.  Notice that the example used (bypass surgery) is something that would probably be covered by the catastrophic insurance part of the plan, and I imagine those insurers would be quite capable of bargaining with doctors.  The problem is that the vast majority of intellectuals rely on just one of the four criteria outlined above.  And unfortunately it is the most unreliable—intuition.

How did the culture of corruption develop in McAllen?  Here’s how I think about it.  If you are going to overcharge a little old lady for a useless test, you face two problems:

1.  She might put the test off for financial reasons.

2.  You will have a guilty conscience.

Medicare eliminates those two problems.  Why doesn’t El Paso have similar problems?  I don’t know, but if we don’t change the system I would be surprised if it doesn’t eventually follow in the footsteps of McAllen.

Of course this has already happened in banking.  We’ve all seen the heartwrenching scene in It’s a Wonderful Life where Jimmy Stewart has to face the depositors after losing their money.  Isn’t it convenient that our modern bankers who made all those sub-prime loans don’t have to face their depositors?

The leftists who sense that something has changed for the worse in our culture since the 1960s are on to something.  But I don’t think they fully understand how big a role government insurance has played in the corruption.  (And even private health insurance is a creation of our tax system.)  Perhaps the problem can be fixed with tighter regulation.  But is there any reason to believe that regulating a vast diverse country of over 300,000,000 people will produce the sort of results they get in Denmark?  The market has many flaws but at least it can regulate behavior.  Perhaps it’s time for another look at the Singapore model.

PS.  I think a lot of people view the current fight over health care as a sort of fight over an endpoint.  A fight over the kind of health care system we will “end up” with.  In my view it’s just the opposite.  Universal health care is merely the starting point, the prerequisite for the real fight over cost, privilege, freedom, equality, paternalism, and all the other issues that separate Medicare, the Canadian system, and the Singaporean system.



8 Responses to “That American entrepreneurial spirit”

  1. Gravatar of Joe Joe
    10. June 2009 at 12:32


    As a fairly socially liberal but finacianly and economically educated New Yorker, I think your blog and ideas and commenst are soem of teh best I have ever read. We need you to help start a real third political party in the US. We just might be okay if we do….


  2. Gravatar of MBP MBP
    10. June 2009 at 17:18

    Scott – Very insightful stuff. I’m a health care research analyst on Wall St and I find your perspective interesting because you see the issue very differently than investors. Investors (private equity, VC, hedge funds, etc.) are much like the McAllen doctors with “entrpreneurial spirit”. They will take advantage of the system created by government to game the system by discovering very profitable niches within Medicare. The government will eventually put a stop to it and then investors will find a new area to exploit. The stories about completely legal over charging and over use in Medicare and Medicaid are too numerous to count (never-mind the illegal, which are common as well).

    And you’re right – it’s capitalism at work in a perverse way. Our third party financing system and arcane reimbursement scheme have created a class of health care providers and investors who are smarter and work harder than the government at discovering loopholes to exploit. And the way the government addresses these issues is not thru revamping the payment or financing systems but by lowering payments per unit of care – which is only a very temporary solution., which further distorts the supply of providers in certain geograpic areas and in certain specialties.

    AS to why El Paso doesn’t have similar costs – very good question. I wonder if the El Paso market is dominated by a single or small number of hospitals — possibly non-profit hospitals. This could discourage some types of over-utilization and also discourage doctors from setting up surgery centers, imaging centers, etc outside of the hospital. Physician ownership of these facilities tends to drive increased number of procedures.

    Interestingly, Medicaid (the program for the low-income population) is funded partly by states and partly at the federal level (as opposed to Medicare which is 100% federal). So states have a much greater incentive to monitor/control costs in this program. Not surprisingly, states are much more innovative. They limit prescriptions, they check eligibility more carefully, they pay doctors less. But, they also outsource a much greater portion of the administration of the Medicaid program to the private sector than does Medicare. states have found that the private sector has more of an incentive to control costs thru discouraging use of the emergency room and encouraging preventive care, to give 2 examples. State governments believe that they can save 15-30% by outsourcing.

    Sorry for the long response. I urge you to write more about health care. It would be helpful to have a non-partisan perspective out there while the country debates universal coverage.

  3. Gravatar of ssumner ssumner
    11. June 2009 at 03:52

    Joe and MBP, Thanks for the comments.

    I didn’t know that Medicaid was managed differently from Medicare. I may do a post like this on occasion, but I don’t know enough about health care to do a regular column.

  4. Gravatar of gnat gnat
    11. June 2009 at 10:30

    Here is one reason:
    See this Boston Globe story about Partners HealthCare
    Gaming and monopoly

  5. Gravatar of Joe Calhoun Joe Calhoun
    11. June 2009 at 11:56

    If healthcare costs are rising faster than the rate of inflation, that implies that there is an imbalance between supply and demand. All the healthcare proposals I’ve seen concentrate on reducing demand to solve that problem. Why is it that no one addresses the supply side of the issue? We know we have a shortage of primary care doctors and also nurses based on current demand, but isn’t it possible that this is at least partially a supply problem rather than just a demand problem?

    I am also confused as to how politicians believe they can reduce healthcare inflation by adding more people to the health insurance rolls. Won’t that just add more demand to a system already in short supply? Just wondering….

  6. Gravatar of Jim Glass Jim Glass
    11. June 2009 at 15:47

    I kept thinking of all those single-payer advocates who brag that Medicare only spends about 2% on administrative overhead. I guess it’s pretty easy to hold down administrative costs if you make little effort to prevent thieves from stealing hundreds of billions of dollars from your program.

    Oh, for sure!

    Speaking of which, we have the example of an existing single-payer government-run health program, Medicaid, with a fully 40% fraud-and-“legal graft” rate from coast to coast. (Or at least on both of them).

    If Orszag could just start getting the wanton graft out of exising health care programs that the govt is running now, I might be willing to consider his claims that national health care can be financed from future efficiency savings to be derived from effectiveness studies and electronic medical recordkeeping, which as of this moment are as substantive as dreams.

    First things first, let’s start with the low-hanging fruit, like stopping the gross fraud. If they can’t do that…

  7. Gravatar of ssumner ssumner
    12. June 2009 at 04:40

    gnat, Thanks. And note that as with 99.9% of monopolies, this is a creation of government. It is illegal to buy health insurance from out of state insurance companies, which often offer far lower rates. I seem to recall that Delaware has very low rates, but residents of neighboring states can’t shop there. Of course there are many government interventions beside health insurance that drive up costs, such as the licensing laws that separate doctors and nurses (mentioned in one of my links.)

    Joe, Supply is a huge problem. In addition to restrictions mentioned in the previous response to gnat, there is the malpractice issue, and many other regulations. On the demand side I didn’t mention legal mandates for insurance to cover certain conditions. And I agree that extending coverage will only make the cost issue worse. I do agree that we need some form of universal catastrophic health insurance coverage, but for ordinary health expenses I prefer the health savings accounts approach, so that people are spending their own money.

    Jim Glass, I agree about the problem you cite. But just to be clear, governments almost never succeed in reducing “fraud and waste” if that’s all they try to do. They must actually restructure the program to give out different incentives. I don’t have any idea if the following would work, but here’s the sort of thing I have in mind:

    Say to the single payer advocates in McAllen, “OK, we’ll give you the same per capita spending that they do in the British program you love so much, and you guys set up an HMO for all Medicaid recipients and provide as much health care as you can for that sum of money. Cover the life and death problems first, as well as preventive medicine, and then work down to less essential items if you have the money. That would force providers to agree among themselves about how to control costs. It would be a hard limit on spending, not an open-ended entitlement. I am pretty sure the Brits spend much less on health care than we do, even if adjusting for the health status of each Medicaid enrollee.

    Again, I don’t know if this would work, but some similar radical change is needed to control costs, not just more bland promises to reduce “waste, fraud and abuse” from each new president. I’ve heard that my whole life.

    BTW, I am not proposing the British system for those not on Medicaid, as I think Americans demand a higher level of service. But if the European system is so wonderful, why isn’t it good enough for the American poor who depend on government programs? (I once went to a doctor in London, and it was definitely a level of service that Americans wouldn’t accept. But that was 1986, and I imagine even Britain is much better today.)

  8. Gravatar of TheMoneyIllusion » So you say you want Nordic-style socialism? TheMoneyIllusion » So you say you want Nordic-style socialism?
    6. November 2010 at 14:21

    […] had this to say about the New Yorker quotation: Suppose McAllen was an independent country with universal health […]

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