October 5th, 2017
Written by - David Huston
Like most people, when I hear the topic of healthcare brought up, my eyes glaze over and I prepare myself to listen to a barrage of statistics and heart wrenching stories that either bore me or make me suspicious that I’m being manipulated. Perhaps you share the feeling? That’s why I’ll try to do neither in this essay. What I will do, however, is to explore the peculiar ideas we Americans have developed about healthcare and how it gets paid for. My goal is to get to the bottom of our confusing public debate. What is the real issue here? And, why is it so difficult to resolve?
Let’s start with a simple comparison between the need for healthcare and the need for transportation. Almost all adults need both.
Neither is free. So, how do we think about what economists call the “distribution problem”? Who gets transportation and how? Historically, we have regarded transportation as a private matter. If you need transportation, it’s up to you to provide it. You can walk, ride a bike, get a horse or carriage, or, later, drive a car or truck. It was your business how you gained access to these various modes of transportation. You could purchase any of them outright, or you could rent them as needed, or borrow from someone who was willing to loan you theirs. Gradually, as the population of cities grew and traffic congestion with it, cities began to provide various systems of public transportation. The fares weren’t free, but they were kept low so that even poorer people could afford a ticket and the government subsidized the actual cost of building and operating these systems through taxation. That’s roughly where things stand today. How does this compare with health care? All adults need some sort of health care. For most of American history, they were on their own to purchase it. You hired the services of a doctor to receive it. Like any service provider, the doctor would send you bill and expected you to pay for it out of your income. Occasionally, since illness and injury often involve considerable pain and suffering, humanitarian efforts were made to provide free medical care to those unable to pay for it themselves. Doctors waived the payments from some patients. Hospitals would provide some free care. Unusually, groups of philanthropic individuals would come together and found charity hospitals for the indigent.
So far, the parallels between transportation and health care are pretty clear: these were basically private services which individuals handled on their own. Gradually, a secondary system of subsidized services was created to handle the needs of small numbers of users who couldn’t afford to purchase their own services. Obviously, in health care, things have changed dramatically since those simpler times. However, for transportation, they have remained basically the same. What caused these differences to emerge? The most important difference has been the amazing progress made by modern medicine in the last 75 years. Before World War II, the vast majority of medical care was restricted to repairing minor injuries, treating and alleviating the symptoms of illnesses, and palliative care for those for whom medicine had no effective treatments or cures. For the most part, the cost of medicine was manageable most of the time. On the rare occasion when serious or extended medical crews needed, special arrangements were made so patients were allowed longer periods of time to pay their bills. Nothing like the Cleveland Clinic or UH existed, where literally hundreds of various medical specialists and complex medical technology was brought to bear on treating individual patients. For a serious or extended medical episode today, the cost can easily run into the hundreds of thousands of dollars. This is far beyond the ability to pay of all but the wealthiest individuals. Clearly, something needed to be done to enable more people to take advantage of these amazing medical advances.
Enter health insurance. Starting in the 18th century, various insurance schemes had developed to cope with the risk of a devastating loss. Originally, the first insurance policies were issued to merchants who wished to insure themselves against the possible loss of cargo shipped on the ocean seas to storms or pirates. Since most traded cargo reached its destination unharmed, merchants needed to insure themselves against the occasional loss. Financiers, seeing an opportunity to make a profit, reasoned as follows: “Since most cargo successfully reaches its destination, what if we charged a premium to each merchant, promising to compensate them if their cargo did not reach its destination? Past experience indicates that only a small percentage of ships fail, so if we charged enough to replace the value of those cargos that failed, plus something for ourselves, we could lessen the risk to the merchants and make a profit for ourselves in the bargain.” Thus Lloyds of London was born, and insurance companies sprang up left and right in different markets, to handle risk. Of course, the scheme only worked when the data about past catastrophes was accurate and dependable, and when the insurance firms themselves were honestly financed so that when claims were made, there was sufficient capital to compensate the claimants. Today, you can ensure yourself for just about any eventuality—accidents, fire, injuries, bad weather, failure to honor contracts, untimely death—you name it. All insurance schemes work the same way: people know there is a risk of bad things happening, so they are willing to pay a certain amount now in order to lessen the burden of a much greater--if unlikely-- loss in the future. The scheme works because the risk and cost is shared among a large number of people, the vast majority of whom will not actually need to make a claim—at least in the immediate future. But none of them knows for certain who will need to make a claim. It’s that combination of high probability that a few will need it combined with the ignorance of exactly who those people will be and when they will need it, that creates the conditions needed for a successful insurance scheme. If only those who knew they were going to file a claim purchased the insurance, there would be no way for the insurance providers to make a profit. They benefit from everyone’s uncertainty. That’s why, for example, everyone needs to contribute to the health insurance funds--healthy and sick. If only those who knew they would get sick or injured contributed, insurance companies would have to charge them exactly what their care would cost. There would be no savings--and no profits--from distributing the risks.
Obviously, injury and illness fall into this category. We all know we run the risk of both throughout our lives; we just don’t know when and how severe those episodes will be. As modern medicine became more knowledgeable and capable, and the complexity and expense of providing that treatment grew at astonishing rates, the need to share the risk of these costs grew as well. Before WW II, only the highest paid executives in American business purchased medical or health insurance. Actually, they didn’t purchase it; it was a “benefit” offered to them by their employer, in lieu of additional salary, which in those days was taxed while “benefits” were not. The rest of the country continued to pay for its medical care the old-fashioned way: one doctor bill at a time. WWII changed all that. With so many men in the military, there were serious labor shortages everywhere. In any situation where demand outruns supply, prices rise. If there is a shortage of labor, employers will increase pay to attract workers. The government feared these possible pay increases would lead to rising prices and out-of-control inflation. To avoid that, the government imposed a wage freeze. Employers looked for other ways to attract workers. They borrowed the executive-only system of “untaxed benefits” as a way of luring workers to their companies without raising “wages.” One of the benefits they offered was “health insurance.” Thus was born the peculiar American system of receiving health care via one’s employer—a system almost unique to the U.S. European nations had started offering some form of basic health care to their citizens as far back as WWI. However, in all these countries, health care was paid for as a public benefit. Health care was spoken of as a basic right that all citizens should enjoy. In America, health care was a private good that individuals were responsible for securing on their own.
Let's consider this difference for a bit. Consider this analogy: healthcare is to the health and wellness of our bodies as police protection is to the safety and security of our persons and property. How do we secure that protection for our persons and property? Most of us depend on the police and courts. The police are a force of publicly paid individuals whose job it is to protect the public—to prevent harm and, when harm is done, to detect, apprehend, and punish those responsible. Theoretically, we could handle this task privately. Each person would be responsible for hiring his own bodyguard or security service to protect his person and property—and those of his family. Centuries ago, this was how the problem of security was handled. Those with sufficient power and wealth employed their own private security force. Often, they were called the army. A little reflection and much painful experience, taught us that this method created more conflict than it solved, and left millions without any protection for themselves. Hence, our current system of “socialized protection.” We all need security, so we have agreed to pay taxes to the government who, in turn, provides us with a police force and court system to protect us. There are exceptions, of course. Some situations are so risky that reliance on just the public security system of the police is regarded as inadequate. So, we are used to seeing private security forces, armed just as the police, at vulnerable spots like banks, airports, stadiums, etc. In addition, some individuals, afraid of personal attack, hire their own private security forces. Some of us prefer to live in defended or gated communities, with their own security force. We guard our homes with security systems, triggered to alert the polka if any suspicious activity is detected.
So, how does this compare with health care? Is healthcare regarded in America as a “public right” deserving of public protection via some kind of medical equivalent to the police and courts? Until quite recently, no. It hasn’t been so regarded. This is more the result of historical accident, circumstance, and vested interests more than logic. I think that the analogy between our physical safety and our bodily health is very close and worth pondering. While it’s true that both are private goods, our mutual interest in securing these goods create a wide basis for shared risk. We all know that we are vulnerable, that at one time or another, we are likely to need protection and help, and that it is far more practical and effective to organize a system to deal with this eventuality. A police force that protects an entire neighborhood is far more effective than one that protects only certain people and residences. I think the same thing holds for health care. While we are all our own best “primary caregivers”, a system that addresses our common health care needs is far more efficient than one that selectively treats only the few who can pay out of their own pocket while leaving out the rest who cannot. Just as with public police protection, sometimes a publicly provided health care system may not be enough for some people. They will seek their own solutions. This should always be their right. But their ability to do this should not obviate the need for basic services for the rest of us.
This is my fundamental point. Health care is a public good which should be addressed and met the same way we address our other needs for public goods. Call it a right if you like. Just as we have a right to peace and security, so we have a right to health—so far as either of these goods can be provided on a reasonable basis to all members of society. Just as we would be horrified by the prospect of living in a society which did not guarantee the physical safety of its citizens, so should we be alarmed by a society which did not give equal regard for the health of its citizens. If healthcare is such a right, than we—collectively—have the duty to provide that good.
I believe this is the fundamental debate that we have not yet conducted honestly and forthrightly in America. Behind all the complicated and confusing details of various health care plans—Obamacare, Trumpcare, Medicare, Medicaid—there is this fundamental divide between those who believe healthcare is strictly a private good that individuals should provide for themselves and their families, and those who regard healthcare as a public good that we have the duty to provide all our citizens.
Once we can achieve a consensus on this fundamental issue, then we can hammer out the best method to carry out that task. Our current impasse is the consequence of trying—and failing—to conduct a disguised debate over whether health care is a public or private good via a discussion of the various complex schemes of providing it. That’s why the issue is so rife with talking points, brain-numbing schemes and statistics, and bad faith. Let’s first have a frank discussion about what sort of good health care is and then, based on our conclusions, design the scheme best able to provide it.
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