‘Crisis of Abundance: Rethinking How We Pay for Health Care’

By: Arnold Kling
Reviewed By: Abhas Gupta

When I first cracked open this book and realized that it's published by the Cato Institute, I immediately became wary. If you are not familiar with the Cato Institute, it's a libertarian think tank that has a long history of advocating for free markets and limited government. Their recent agenda has included discrediting global warming and privatizing social security. Nevertheless, I have been eager to hear a different perspective on health care economics and Dr. Arnold Kling came through on that front. He argues that there are three central "Health Care Narratives" about why health care finance does not work in the U.S.:

1. Private health insurance breaks down - healthy people avoid insurance and insurers select against sick people. This results in many left uninsured and considerable dollars wasted on adverse selection and administrative costs. The solution would be a single-payer system (the government being the payer), but Kling indicates that there is no reason to believe that Medicare, and thus the government, is more efficient or able to control costs better than private insurance


2. Health care providers overcharge for their services - Kling quickly debunks this narrative with a crude financial model, concluding that "the increase in total health services consumed was slightly larger than the increase in the relative cost of health care services." Translation: health care costs are skyrocketing because of higher consumption and not higher prices


3. Premium medicine accounts for the rise in health care costs - described in greater detail below, premium medicine is the "greater use of specialists and advanced technology" with negligible increase in health care outcomes (life-expectancy, in particular). Kling believes that this narrative is the most persuasive and he offers his thoughts on how to revise our health care system

If you are wondering about other common narratives--high malpractice insurance or high drug costs--together these causes contribute to less than half of 1% of the GDP (health care spending being about 15% of the GDP). Of course, this contribution does not include the effect on physician diagnosis and treatment practices.

Physicians today rely more heavily on expensive diagnostic techniques (MRIs, CT scans, etc), thus contributing to the rise in premium medicine. Kling acknowledges that this trend is in part due to the culture of modern day medicine--physicians are expected to definitively determine the cause of illness and treat the causes directly. Moreover, Kling states premium medicine is compounded by redundancy--devices/approaches that provide negligible increases in diagnostic/treatment ability but are significantly more expensive. So why are such service overuses not controlled by the current reimbursement restrictions of private insurance? Kling believes that insurance companies are so overwhelmed with frivolous claims that they cannot effectively regulate "gray area" claims-reimbursement requests for approaches with incremental benefit and a substantial price tag. Moreover, denying "gray area" claims exposes insurance companies to negative publicity, lawsuits, and so on.

Kling contends that a perfect health care system would accommodate three central principles: 1) Unfettered access (health care is readily available to everyone); 2) Insulation (patients are removed from the financial burden of care); and 3) Affordability (society is able to bear the cost). However, these three qualities are not compatible with each other and a perfect health care system is therefore unattainable. One could achieve two of the three principles, but not all three. For example, ready access to care without regard to cost is possible, but it would quickly make health care unaffordable to society.

Nevertheless, Kling suggests numerous steps that we can take to improve our current health care financial system:

• Remove patients' insulation from average health care costs - making individuals bear the cost of their care forces them to shop around for the best price. Physicians will reciprocally be much more cost-conscious in their diagnostic and treatment recommendations. Eradicating patient insulation can be achieved by increasing deductibles to a sufficiently large number ($10,000) and encouraging personal savings through tax-deductible health-savings accounts


• Discourage employer-provided excessive coverage - such coverage fosters health care overuse and inflates health care spending. Instead, cap the amount of insurance that employer's can provide tax-free or even tax the employer-provided insurance as employee income


• Introduce a national commission to standardize best practices - such a commission would define protocols for diagnosis and treatment. These protocols would in turn dictate physician reimbursement and mitigate physician's exposure to malpractice risk


• Phase-out Medicare - Presently, Medicare makes up more than 80% ($68 trillion) of the federal government's unfunded liabilities (services the government has promised but does not have the funds to support). What does this mean? Medicare is unsustainable and we must either a) get rid of it gradually, or b) raise taxes immediately. Kling suggests eliminating it altogether. Instead, he proposes that individuals should be mandated by the government (through taxation) to accumulate at least $100,000 in personal savings for health care costs over the age of sixty-five. A quarter of these savings would used towards premiums for "Catastrophic Coverage"--insurance for very expensive treatments with a high deductible ($75,000)--and the remainder for typical costs and paying the high deductible


• Ease licensing restrictions - In line with simple supply and demand principles, increasing the number of available practitioners (physicians, assistants, therapists, etc.) will decrease the cost of services and thus the cost of care overall

There you have it folks: a plan to reform health care that is endorsed by the Cato Institute. I remain confident that these recommendations will not become policy anytime soon. Nevertheless, they highlight trends we can expect to see in the very near future; in particular, patient deductibles will steadily increase (making basic care more consumer-driven) and Medicare will be slowly phased-out (by pushing the eligibility age further and further back). Also, a national commission to standardize best practices is an eminent reality as several of the Democratic candidates for President have already proposed such measures.