Wednesday, October 28, 2009

Massachusetts is a Health-Reform Debacle

In an October 15th op-ed in the Wall Street Journal, Governor Deval Patrick proclaimed that “Massachusetts is a Health-Reform Model.” The reality is that since its inception in 2006, the reform has been a debacle. Its most insidious characteristic could perhaps be that it is being touted as a model for the entire country. The Massachusetts healthcare program is actually the antithesis of economically sound and beneficial reform.

Patrick at least correctly described the problem with healthcare as one of cost. The solution, though, is not the plan implemented in Massachusetts. There are two paths government intervention in a market can take: it can structure a set of mandates that force prices to rise, or it can implement price controls which inevitably lead to shortages. The Massachusetts model achieves both.

Instead of giving consumers more choice and control, the Massachusetts plan shifts power to government. It imposes a set of mandates that have forced prices up for all. Massachusetts is not only the costliest state in the country for insurance, but also is experiencing the greatest price inflation. The high costs fall on both the people directly, as well as putting a crunch on state government. Governor Patrick self-congratulates a balanced budget, but also must acknowledge that rising healthcare costs crowd out other government spending. The plan has not completely annihilated the budget because it receives an outsize subsidy from the Federal government. Thus, the rest of the country is actually subsidizing healthcare in Massachusetts – if the model was expanded, that subsidy only can come in the form of higher taxes. In the meantime, the available supply of healthcare in Massachusetts is declining as waiting times increase. Higher costs, lower quality – this is the Massachusetts model.

Mitt Romney, who signed the program into law as Governor, infamously quipped in a Presidential debate, “I like mandates. The mandates work”. Unfortunately, mandates are counterintuitive to free market principles. Mandates create distortions that lead directly to higher costs for all - this is a logical and empirical precept. Romney believed the cause of high healthcare costs is the uninsured utilizing the system and that their expenditures were being spread to the insured. He claimed in 2006 that, “Every uninsured citizen in Massachusetts will soon have affordable health insurance and the costs of health care will be reduced.” The opposite actually ensued as insurance has become less affordable, though more subsidized, and costs have risen dramatically. The Massachusetts reform was based on the specious concept that the uninsured are driving up costs. This conclusion unfortunately directed attention away from the real underlying sources of outsized inflation in healthcare costs.

In a market, the distance between payer and consumer is directly proportional to the level of pricing inefficiency. The current system of insurance propagates a discrepancy between the people who receive the healthcare, and those who pay for it. The cost of a visit to an emergency room is not exorbitant because of the uninsured who visit, but rather because virtually no one who visits actually pays the bill directly. Add on the fact that billions of dollars are wasted each year on unnecessary procedures in an effort to stem litigation. The Massachusetts model does not address either issue, and thus is failing miserably.

It is possible, fortunately, to tackle these problems. The current distortion in the tax code must be fixed such that all healthcare expenditures are treated equally. Additionally, health savings account should be expanded to become the norm. Consumers should direct their own dollars. Healthcare needs to be reformed in a way that gives consumers vastly more control than they currently have. Tort reform must be enacted to not only directly reduce the cost of healthcare, but also to eliminate the wasteful spending that indirectly increases costs.

As costs are contained, healthcare becomes more affordable. And as prices drop, the ranks of the uninsured will follow. Those who then still cannot afford healthcare can be subsidized by the government. There is little logic in transforming the entire healthcare system into a government controlled program when only a small portion is in need of help. If anything, the government needs to vastly reduce its role, as it currently controls roughly half of all medical expenditures. This has only further exacerbated the problem.

There seems to be a consensus that the central problem with healthcare is cost. The divergence, though, comes from the root cause of the high prices and how to reduce them. Prices are out of control because approximately 80% of costs are paid by someone other than the actual consumer, as well as a tort system that encourages wasteful spending. The Massachusetts reform addresses neither issue, and instead gives more control to the government. The results are as expected – higher costs and lower quality. Massachusetts is a health-reform debacle that provides ample evidence of a failed experiment and a blueprint of what not to do for the rest of the country.

1 comment:

Ken Grinspun said...


The main problems with health care are the costs of managed care and medicare mandates driving up costs.

Ken Grinspun MD