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The supply of dollars and the demand for healthcare

RyanJust about any discussion of how to slow the growth of healthcare costs boils down to a question of rationing. So it will be too with the proposed Medicare and Medicaid changes that House Budget Committee Chairman Paul Ryan (R-Wis.) plans to include in the fiscal 2012 budget proposal he unveils this week. But Ryan thinks about the healthcare cost problem in a different way than many folks in Washington do, so his version of rationing will trigger a different kind of debate.

The main reason rationing seems inescapable in these discussions is that demand for healthcare is unlimited -- people may avoid seeing the doctor for minor ailments, but they won't generally go without healthcare when they really need it. So the cost-cutting mechanisms left at our disposal tend to be on the supply side, that is, rationing the availability of doctors and treatments.

Some of that rationing is economic. Although we're not willing as a (humane) country to deny emergency care to people who can't afford to pay for it, other forms of care are out of reach of many of the uninsured or poorly insured. Some of it is by insurance companies, which can withhold funding for procedures they don't deem necessary. And some of it is by the government, which can deny Medicare and Medicaid reimbursements and FDA approval for treatments deemed ineffective.

Ryan has approached the issue by ...

... trying to reduce the overall supply of dollars into the healthcare system. No details are available yet on this year's proposals, but his Medicare strategy is to shift the government from being an insurer to being a subsidizer of private insurance plans, as it does with prescription drugs. The change, which would apply to those 55 years old and younger who aren't yet eligible for Medicare, would allow the government to limit the amount of dollars it contributes to the program without making decisions about how those dollars are spent.

Limiting is the point of the exercise. Under Ryan's Roadmap proposal from 2010, which was a preview for this year's budget plan, the amount beneficiaries receive would grow more slowly than the rate that medical costs increased. That puts pressure on the system to hold down costs because otherwise the gap between the cost of insurance and the federal subsidy renders coverage unaffordable.

The assumption is that the limited supply of dollars would force insurers and providers to be more efficient and effective than they are today. Because they're more directly responsible for the cost of their care, Medicare beneficiaries would (in theory) be smarter shoppers when it comes to healthcare and insurance. In other words, competition would have the same effect on healthcare as it has in other markets.

But again, healthcare isn't like other markets. The demand for many types of care isn't price-sensitive; people don't say "no thanks" to chemotherapy in greater numbers when new, more effective drugs drive the cost up. 

One consequence of Ryan's strategy, then, is that more of the risk posed by healthcare inflation would shift from Washington to retirees, who already complain about the increasing burden of healthcare costs not covered by Medicare. His Roadmap called for the government to provide higher subsidies for elderly Americans who are poor or in need of more expensive care, which would help mitigate the shift in risk. Yet if healthcare inflation continued unabated under the new regime, retirees with limited resources would be the ones to feel the greatest pinch.

The new budget proposal would take a similar approach to Medicaid, switching from a joint federal-state insurance plan for the poor to federal block grants for state insurance programs. Again, the point is to limit the supply of federal dollars into the system. The main difference is that the states, not poor Medicaid recipients, would be left to manage the gap as the block grant grows less rapidly than healthcare inflation.

I don't have an opinion as to whether supply-side rationing can produce the changes needed to stop healthcare spending from growing faster than the economy as a whole. Depending on the political headwinds encountered, it could prevent healthcare spending from growing faster than the federal budget can manage them, which is something devoutly to be wished. Whether it can force the changes in delivery and payment systems needed to produce a more efficient and effective healthcare system is another question.

-- Jon Healey

Photo: Rep. Paul Ryan (R-Wis.). Credit: Mark Wilson / Getty Images



Comments () | Archives (12)

The comments to this entry are closed.

Anne C

How will this affect people's health care? If you put much pressure on providers and insurers, the people runs the risk of not getting the necessary care and services needed. Usually when we think about increasing costs, we look at health care spending. But inflation also plays a big part. No matter how much we skimp on health care at the expense of the people's health, costs will still go up if the economy becomes worse.

Rodney Wright

This is not about healthcare, its about sending more wealth to the top, why are we
talking about money rather than about health care, Ryancare , where does he get his funding?

Herbert Rubin. M.D.

Jeez! Did any of you take Econ 101? Whomever pays the piper calls the tune. If government and insurance companies control the money, the consumer (patient) is out of control. No surprise that the controllers of the money want to continue; same reasoning as any dictator or monarch. Control is power. Being king is good, for the king.
Shrink government and insurance control of the money. Let the consumer keep the money, and the freedom to decide.
Taxes and the tax code, which obliterates all consumer power, need to be changed, so patients and doctors are back in control.

How is ObamaCare or Medicaid working out for you?

CBS from the West

This is precisely the wrong way to go about it. The best that can be said for Ryan's proposal is that it won't take effect for another decade, so there'll be plenty of opportunity to repeal it if it ever does become law.

The notion that consumers can use their decision-making power to discipline the modern health care market is preposterous. We've played that illusion out for decades now, and our costs keep growing exponentially (now 17% of GDP and double the average per capita cost for other industrialized nations) while we have more people with no access to non-emergency health care than any other industrialized country, and middle-of-the-pack health outcomes. Well, I guess that makes us number one in two out of the three categories?!?!?

The health care system is out-of-control system and cannot be contained by consumers because they lack the knowledge to challenge the decisions made for them by health-care providers. Even relatively knowledgeable patients like myself (I am a physician) can't do this: outside my own specialty I don't know enough, and even in my own specialty, when I am sick I am not able to make objective judgments about myself. The only decision that the patient really controls is whether to enter the health care system or not. Once in it, they are caught up in the maelstrom, and, if lucky, they come out the other side better off for the adventure. If unlucky, they come out maimed, bankrupt, or dead.

If we force people to pay more of their health care costs when they enter the system, we will deter some people from using health care at all. But people are not able to make that decision in a way that makes any sense. These decisions will be based mainly on how much they fear what lies ahead given their current symptoms, and how much they fear losing their homes and life savings and being bankrupted by the health care system once they enter it. Meanwhile, they have no useful information about the likelihood of any of those outcomes! (Did you ever try to get a straight answer from a doctor's office or hospital about what it's going to cost you? In fairness, the doctors themselves usually don't know either because they can't get straight answers from the insurers, and the drug companies are world-class experts at obfuscating the costs of drugs when they detail the physicians.) So we will still see gross overconsumption by some, while others will die or be maimed needlessly because they feared health care expenses more than they feared their symptoms. What a ridiculous way to do things in a supposedly civilized society.

All other developed countries have found better ways of doing this. We can learn from all of them and draw on their best ideas. Why on earth do we insist on pursuing the crackpot notion that health services can be rationally allocated by market mechanisms after decades of irrefutable evidence to the contrary?


The Hunt for a Red November

Who is the wonky budgeteer, so bold
That would the sacred Medicare remold;
Who walks the plank of Medicaid reform,
And calls out for his peers to help transform
The decades-old response of lethargy
To debt we use to fill our treasury?

He like a visionary does foreknow
That failure to attack the status quo –
A welfare state that throws a safety net
Sustained by IOUs and foreign debt
And birth to death pursues us through the years –
Will surely drown the country in arrears.

He knows the coming Democratic swarm
Will seek to obfuscate and misinform,
With masses marching in the public square
And congressmen who wail their false despair.
But toward the sound of battle he will stride
With Providence and reason by his side.

For does not debt this country now enslave,
And drown our children in its tidal wave?
But he recalls what Patrick Henry said,
’Tis better for a man that he was dead
Than sacrifice his sacred liberty
To wretches who are sunk in luxury.

So up from Janesville in the Badger state
Comes forth the wonky warrior to debate
The spenders who now reap what they have sown:
A country that survives from loan to loan.
For other candidates we need not delve,
Draft Ryan as our president in ’12!


Finding a good doctor is now becoming impossible, like finding a good rent-controlled apartment, for the same reason. Some clerk in some office sets the price, producing scarcity and inferior quality.

With my own money, I can get anything I need. I am free to decide.

Facts are stubborn. Free markets are better at allocating scarce resources than are price controlled markets. I thought we learned that lesson after socialism failed in the USSR.

Some irrationally cling to dead ideas.

Bowl Weevils

Doc Herbert, you seem unable to distinguish between an authoritarian dictatorship and a democracy choosing by voting and paying their taxes to select their government as primary funder of their healthcare.

No one is forcing Swedes, Canadians, Germans, and just about every other developed nation to have government provided health care. And no one is forcing them to vote for socialist political parties.

And somehow they manage to achieve better outcomes in terms of quality of life and life span than in the US. They are horrified by the American system and feel sorry for the unnecessary cruelty in the system.

You may view health care as a "market" many others view it as a basic human right, as fundamental as freedom of speech.

Maybe with your money you can get the health care you want, as a highly paid MD. Try getting health insurance in the US if you have a 30K a year income and any pre-existing conditions.

With my money, I would be dead. I had 500,000 worth of surgery over the past year. Which would take me over 16 Thousand years to pay for, and even that assumes no taxes are taken out of my 30K.

Facts are indeed stubborn: thousands of Americans have been forced into bankruptcy by health care costs, and many of them actually had health insurance.

I have found good doctors. They recommend I leave the country for health care purposes because no US insurer would ever offer me an individual policy, and I am too ill to get a job with an employer provided health plan. I am currently dependent on my soon to be ex-wife's plan. Remaining in the US would likely result in my demise.


Let's put the Republican proposal into the proper perspective. Kick the can down the road. Don't assume any responsibility that a Republican politician can shift the blame to someone else. Think about it. If the government is responsible for health insurance, the politicians are responsible for making it work. They don't want the responsibility. Isn't that the height of irresponsibility? Sending it to the states. What do they do? The use the Means Test to exclude as many as they can. Also with regulations. Make it so difficult to apply that it will disenfranchise many from even trying to protect their health. All of this can be summed in in the SCHADENFREUDE TEST; A MALICIOUS SATISFACTION IN THE MISFORTUNE OF OTHERS. If you get sick, die quickly.


The op/ed has it wrong. Yes it rations care just like we do now, on the basis of the ability to pay.

People will just end up dying sooner and that's really the plan.


Dear Doctor Herbert - you may be a medical doctor but you're not an economist. There is no "free market" in health care, and there never will be. As long as there is for profit entities in the health care market, there will be shareholders to pay dividends to, at the expense of someone. That someone is never the doctors, nor the suppliers, that someone is always the patient.

The patient who needs life saving treatment is in no position to bargain for lower costs, and he or she is who we as a society end up spending ever increasing amounts to cure.

Until you can tell me exactly how much it will costs to have a gall bladder removed and guarantee the price, then let me bargain with other health care providers to get a lower price, there is no "free market". As long as there are for profit companies doing the core research and then profiting handsomely on their patents, there is no "free market".

Marcy zwelling-Aamot, MD FACEP

I am a physician and I highly resent the idea that anyone would think that patients don't have the capacity to make their own health and medical decisions.
If we spend the time to offer education and present a value proposition, patients are perfectly capable to making decisions about their life and their health.
The problem is that we have left them out entirely and we (doctors, hospitals and all other provides) don't post our prices or give patients an opportunity to make a "value" decision.
Putting dollars into the hands of our patients and allowing them to be good consumers in a transparent marketplace would absolutely work to control cost by making demand appropriate.
We know it works... there is data to this effect where patients pay for their care.
Treating the American consumer with the proper respect and giving them the freedom of choice is self determination is the ONLY answer to our escalating healthcare costs ..
Marcy L. Zwelling-Aamot, MD FACEP

Jon Healey

@Marcy -- I think you're missing jth90c's point. A person who needs a car can choose among many different models and places to buy them, all of which compete. Dealers hide their mark-ups, but there's enough 3rd party information about dealer costs to make the supply of information pretty symmetrical. When it comes to medicine, though, the information flow is grossly asymmetrical. Not only are prices hard to discover, the typical patient is totally dependent on his or her doctor to supply the information needed to make a decision. That's why patients trust their doctors -- they have little choice. Even if they use the Internet to try to diagnose themselves and learn about treatments, they can't come close to the knowledge their doctor brings to the table, and they know it. Doctors can lay out options for them, but even then the doctor dictates what the choices are and what the pros and cons of each option is.

One other point in response to you and Dr. Rubin -- Allowing self-determination in healthcare doesn't mean individuals will have the wherewithal to exercise their newfound power to choose. Medicaid and Medicare are great enablers of healthcare because they put routine healthcare within reach of millions of people who'd otherwise depend on ERs. So there's the tradeoff.



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