Creating Healthcare – an exercise in choice and control

In 1990, a genial project was announced by James Watson, the co-discoverer of DNA and head of the National Centre for Human Genome Research at the National Institutes of Health (NIH) in the United States.  The purpose would be, over a period of 15 years, to extract the complete genome of human beings.

It was a big project and received support and funding from big governments.  As with all such projects, it would be difficult to measure exactly how rapidly such a project could be run and at what cost.  Pitched as being equivalent to landing a man on the moon, 15 years and a budget of $3 billion seemed completely appropriate.

In 1998 a gauntlet was thrown down which had the impact of an earthquake in a glassworks.  Craig Venter, and his firm Celera Genomics, declared that they would produce the genome in a fraction of the time of the public effort, and for only $300 million.

In 2002, the genome was completed, ahead of time and under budget.

How much does any good cost?  What happens if the good concerned is expensive and important?  Back in 1990, governments felt justified in financing the Human Genome Project because, it was felt, private companies would see no value in the results and could not carry the cost.

Craig Venter and his investors thought differently.  That Celera Genomics lost a fortune on the endeavour is unimportant (except for the investors).  By competing with the state, the company saved taxpayers a fortune.

And there’s the problem for single-payer entities; without competition it is frequently impossible to calculate what something should cost.  The original, publically-funded, approach to sequencing used “heierarchical shotgun” sequencing, in which small chunks of DNA are sequenced and then reassembled.  It is slow and methodical.

Venter’s team used “whole genome shotgun sequencing”.  It was the innovation that allowed sequencing to proceed faster and cheaper.

Costs aren’t static.  Competition drives not just cost-saving through streamlining of processes, but also innovation in the processes themselves.

Healthcare is considered no less a public good than the human genome.  There are numerous ways in which governments attempt to finance this good.  The effects are difficult to measure, given the scale and lack of symmetry in implementation.

The most heated discussion is that in the US.

The Economist has an in-depth analysis which I won’t go into, but I will summarise.  The US system costs 16% of US GDP, and leaves some 15% of the population uncovered by healthcare.  The UK system of national health covers everyone, and costs 8.4% of GDP.  Life expectancy in the US (a crude measure of the benefits from healthcare) is 77.8 years, while in the UK it is 79.1.

However, in the US five-year mortality rates for cancer are dramatically better than in the UK.

Healthcare in the US is both rapid and effective; however, it is not available for everyone.  This lack of comprehensive care turns up in the life-expectancy rates.  In the UK more people have care, but it is of a slightly lower quality.

The debate in the US has become crippling and ugly.  People with care, no matter what it costs, are scared of seeing that care rationed or downgraded.

Of course, capitalist systems already ration scarce things through high prices.  So the argument of rationing (whether by the state, or through high fees) is moot. 

The structure of paying for healthcare is critical to the debate.  Whether governments, insurance companies or individuals pay for care, the money is ultimately derived from company profits and individual salaries.  The problem isn’t about who pays, but how payment is made.

If there is a single-payer (whether public or private) then competition is stifled and innovation stops.

The sad truth is that the rest of the world free rides on the expense and innovation of the US system.  Healthcare companies generally use the US as the place to introduce their new products, test them out, build scale and then take them to the rest of the world once the costs have been covered.

If the US moves to a single-payer as well, then innovation will plunge.

What is needed is a system that encourages sufficient competition to promote both innovation and cost-containment, without making the competition so extreme that it excludes so many from care.

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16 replies »

  1. Very good article. In the US, a lack of free market forces is keeping the health care costs artificially high and is distorting the market. Whatever solution is found is going to piss somebody off. I have a friend who strongly advocates making all health care insurance providers non-profit. I asked about how the share holders of these companies would be reimbursed for their loss and the answer was, to paraphrase “If you can afford to have stock, you’re rich and can afford to lose your investment, as the market is risky.” I couldn’t believe my ears that someone would advocate Soviet style collectivization and confiscation, and that it would even be allowed in the USA. Then I remembered Chrysler and GM, and realized that this has already come to pass in this country.


  2. Jeff, I think the problem is more nuanced than whether the market is or is not free. It’s binary. If you can afford it, your standard and access to care is good. It may be more expensive than it should be, but part of that is cultural (simply the way Americans like to consume healthcare) and part of that is structural (perverse tax incentives and asymmetries of legislation).

    That isn’t particularly different in single-payer places in Europe where private cover is permitted (and is better than public as well). Canada and parts of Europe don’t allow private care, so they have a single-speed system, but they’re pretty much the only places where you will find such a monopoly on ideas and treatment.

    As you point out, if government made health insurance charitable, investors would simply pull out and the scheme would collapse and the poor would suffer.

    One way or another, those who can afford to always find a way to buy what they want. It is the poor and under-employed that a well-organised system can benefit. That doesn’t have to be laissez fair, but it doesn’t have to be a single-payer either.

    The problem with debates of this nature is that they always become about what the rich can afford to pay on behalf of others, rather than about the structure of innovation and efficiency.

    What the credit crisis should have taught is being ignored: that relying on the financing of your entire economic system through the taxation of a small number of people and companies (whether they can afford it or not) leaves you tremendously vulnerable should they suddenly not be there anymore.

  3. You’re right, it is a binary solution, and that disturbs me. I would be inclined to speculate that the government will try to save medical costs by rationing life ending care and hastening the demise of old people. It’s a win/win situation for the government as they will pay less in social security and medicare also. There was a disturbing op-ed in the WSJ last week.

    I don’t know what to think of this.


  4. The US, for better or worse, is a democracy. The debate about rationing life expectancy is a red herring. Those without access to healthcare already have their life-expectancy effectively rationed. They’re demanding the right to have any care at all.

    Those that have healthcare are in the majority and are voters. If any government cut the care they are used to then that government will serve precisely one term.

    The real debate is over cost. Expanding cover to everyone without also grappling with the costs will leave a tremendous financial burden in its wake.

    The idea of managed healthcare is not as to whether granny dies when she becomes a burden on the state, but as to how many tests you should have to find out that you’ve got high blood-sugar from eating too many burgers.

    Americans like to have lots of tests, and to have them often. This does help with early diagnosis, but it is overkill and overly expensive.

    I figure that a base-care system should be designed and run that is covered by both public and private payers (e.g. all insurers must offer a minimum policy at a basic price that covers a set of goods agreed upon by an industry regulator). Competition between insurers will figure out the best way to offer this minimum standard of care, and top-up fees will allow the wealthy (and hypocondriacs) to get expanded care (at fees that are attractive to investors).

    Such a base system can use clever vehicles like catastrophe insurance to cover motor accidents and critical end-of-life care, and the broad base of it (by bringing in young people who don’t usually require much care) can ensure cover for the sniffles and sneezles that make up the bulk of basic treatment.

    One way or another, though, everyone gets, and everyone pays.

    • The US, for better or worse, is a democracy. The debate about rationing life expectancy is a red herring. Those without access to healthcare already have their life-expectancy effectively rationed. They’re demanding the right to have any care at all.

      Thank you, thank you, thank you. It’s illustrative that South African libertarians living in England can so readily grasp obvious facts that are beyond the ken of American conservatives.

  5. Sam, grasping the concerns of those without healthcare is the easy bit 😉 The difficulty is that this is not a one-sided concern. Since the uninsured are asking that someone else foot the bill, the process by which bill-footing and the actual price is arrived at is the source of a contentious debate.

    There are several ways that the bill can be paid:

    1. Tax the rich, paying for whatever the cost of healthcare happens to be;
    2. Force healthcare companies to charge less by creating a single payer;
    3. Set minimum standards of care,remove all obstacles for competition and cut all subsidies and protections that get in the way;

    The problem in the US is that the debate is about points 1 and 2. Most people quickly recognise that this has to lead to an increased tax burden and deficit as well as rationing of the care that those who currently enjoy full cover have.

    There are lots of red herrings thrown up to keep the debate here by both sides. It suits healthcare companies to talk about rationing, but it also suites pro-Obama healthcare pundits as well.

    I would like to see the debate being about competition and innovation. I would always like to see the debate being about competition and innovation. However, that implies that one has to trust the selfish pursuit of profits by the few for the good of the many.

    I believe in this process, and enjoy it. I don’t believe that many “progressives” are very comfortable with it and prefer the self-delusional certainty of tax and spend.

    The current debate in the US media is about who pays with the assumption that it is a zero-sum game. Either the poor pay, or the rich do. But innovation and competition introduce the prospect of a positive-sum game. Prices can come down through better systems and practices.

    If you believe it is zero-sum, then either you’re getting or you’re giving. If you believe in positive-sum, then the nature of that arrangement is worth discussing.

  6. You’re not the first person who has pointed out that ability to pay is a de facto rationing system, yet when I mention it to my friends and co-workers (insofar as I discuss politics with them) they’re usually surprised and, at least initially, unwilling to believe it.

    It’s basic supply and demand. Anything with a finite supply is going to be rationed in some way, shape, or form. In the U.S., that rationing method is price. I don’t personally feel that price is a moral or ethical way to ration something as fundamental as health care, but is fine for other things (computers, TVs, telephone service, etc). Your suggestion for a base level of health care for all sounds pretty good to me.

  7. @Brian I understand your morality of rationing something as far as medical care. What about the morality of rationing food where the prices fluctuate as a function of crop size, weather, supply, carry over, demand, the US Dollar, and exports, to name a few. Food is rationed by price on a worldwide basis, even in areas that are totally government controlled. Is it in the farmers best self interest to get the top price for his crop or herd, or should he be altruistic and not worry about making money?



    • Jeff, in my personal view of a utopia, basic human needs would not be rationed by price. Wants absolutely would be. That means enough calories and nutrition to not starve or suffer from malnutrition, clean and potable water, sufficient clothing to survive the elements in the region, shelter, access to a certain level of medical care, and safety of life and limb. Those would all be guaranteed to a level somewhat over survival level, but not to the level of everyone being able to eat at Romano’s Macaroni Grill every night, drink bottled water imported from Fiji, shopping at Barneys or Saks, owning a McMansion, or being able to go to the Mayo Clinic for a cough.

      In my opinion, providing those basic human needs, plus protection, are the first duty of government. HOW government meets those obligations is a different question.

      Right now we have billions of people worldwide who are malnourished in some fashion, due to either lack of calories or lack of sufficient vitamins and minerals. Part of the reason is that food costs more than they can afford. In my opinion, this state of affairs is immoral. The question is how best to remedy this situation. Is it to donate millions of tons of grain from the U.S. to those countries? Maybe. Maybe it’s a better idea to donate the monetary equivalent of that grain to NGOs who can help those malnourished people grow their own food instead. And maybe it’s a global systemic problem that can only be improved by changing the entire way food is grown and distributed globally. I haven’t studied the problem in anywhere near enough detail to say what the “best” solution would be. But saying “there’s nothing we can do so we shouldn’t even try” is, IMO, immoral.

      Does that answer your question?

      Whythawk – I realize the problem with invoking morality in this discussion, but without understanding that tens of millions of people view it in moral terms is a failing of your argument. I understand that pragmatism needs to win out here, but most of the people I’ve talked to (anecdotal, not data) want single-payer do so because they believe it’s more moral than the existing system. Convincing them that a step toward improved health care coverage and cost control is also moral will be vital to developing support from the left in support of the changes. Similarly, many on the conservative/libertarian side of this are opposing it because they believe that government mandates are fundamentally immoral – not just a distortion of the marketplace, but actually immoral. Note that I’m not specifically including either you or Jeff in this generalization as I’m thinking of several of my co-workers and an number of writers I’ve read on the web in various places.

      Even though I do see this debate in moral terms, pragmatism will win me over so long as I think that it’s a step in the right direction. That’s why I support the “public option.” It’ll actually introduce competition in certain markets where it doesn’t exist, or just barely exists, now. Page 5 of this report is an extraction of AMA data released in 2008 that shows just how highly concentrated (read “near monopoly”) insurance is in some states. Alabama is the most concentrated in a single provider, with Blue Cross Blue Shield company providing 83% of the insurance in the state. Hawaii is the most concentrated in two providers, with 98% of insurance coverage provided by Blue Cross Blue Shield and Kaiser Permanente. By another measure (how many times larger the largest provider is than the second largest provider), Alabama is again the most concentrated (BCBS covers 16.6 times more people than Health Choice), with Arkansas coming in a close second (12.5x).

      If you’re going to tell me that there’s a better way to provide that base level of care and guarantee competition in states like these than a public option, I’m happy to listen. Maybe government competition isn’t the best way to go. But I don’t see how it can be done without government intervention of some kind (more regulation, for example).

      • Excuse me – I noticed an error upon re-reading. “Wants absolutely could be.”

        I view capitalism in much the same way that Churchill viewed democracy: it’s the worst possible system, except for all the others that have been tried. Some mix of capitalism and socialism is probably the “best” scheme that I’ve come across thus far.

        Personally, I’d love to live in a StarTrek world. Something tells me that I won’t live long enough to see the 24th century, however. 🙂

  8. Brian, I think care needs to be taken about the use of the words “morality” and “price”. You’ve put your finger straight onto the hot button in the US debate.

    There are only two choices in paying for any good you want:

    1. You pay for things you want;
    2. Someone else pays for things you want;

    If someone else pays, you immediately open up a can of worms. Say we were talking about motor-cars. Everyone wants a nice car, but not everyone can afford it. Self-selection means that the wealthiest get the nicest cars. Is that moral? I’m sure you probably think that’s a silly question to pose of morality.

    By what about chemotherapy? Should everyone get the same chemotherapy? But it isn’t universally available. The best surgeons and treatment are scarce and expensive. So how should a scarce resource be allocated to the best place for it?

    In terms of benefit to society, how would you do this? Should it be a list, and whoever gets in first – prince or pauper – gets treated first? How will you stop the bribery and corruption that may result from such a system?

    Second, how will you pay for it? The wealthiest – for whatever reason – are frequently the most productive members of society. Their taxes will pay for this healthcare system. However, if you bias against them – no matter how slightly – and they either die or move to countries where healthcare is their choice. Either way, your healthcare system will rapidly become unaffordable.

    The terms of the healthcare debate have to be about universal access to a basic standard of care, and ensuring competition to yield innovation and price savings. And that is it.

    Introducing “morality” into the discussion is going to touch too many nerves to allow for any reasonable debate to continue. Europeans may be comfortable with it, but the frenzy that the US media is showing demonstrates that Americans are uncomfortable with their government making such personal decisions about access to health.

  9. Brian, you’re right, there are billions of people on Earth who are poor, malnourished and impoverished. However, that is symptomatic of the real problem, which is that the political systems they exist within place them in that position. In economic terms, it is the opportunity cost of a social choice.

    Simply donating food to them, whether directly or through NGOs, is no more going to solve the problem than will giving a pain-killer to a person with a steel beam through their chest.

    Zimbabweans, North Koreans, Burmese, Congolese …. they’re poor, hungry and ill because of their governments, not because Americans eat a lot or have lots of healthcare.

    And that’s the problem with making this a question of morality. There is no lump of healthcare that has to be divvied out any more than there is a lump of labour or lump of food. Innovation is a bit like the loaves and the fishes of the New Testament; it can make a little go a lot further than you would ever expect or imagine.

    There are certainly lots of options as far as financing basic healthcare is concerned. Government doesn’t have to be that single-payer in order to make it happen. They can legislate it quite easily.

    The Dutch option, of state-directed minimum standards of care financed by private insurers, would seem like a good one to investigate.

    • While I generally agree with you, innovation isn’t perfect either. It needs to be guided and regulated to some greater or lesser degree to keep it from going crazy. And there are fundamental physical limits to how much innovation can create loaves or fishes. In some cases we may be at or beyond those limits, while in other cases we’re not even close to the limits and may end up choosing not to approach those limits.

      That’s probably a discussion for a different thread, however.