Some Health Care For All, but not Too Much

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By Josh Barro

Tyler Cowen caught a lot of flak recently for saying something that is clearly correct. A lot of the flak has come from people who have misunderstood the implications of what he wrote.

Here's the relevant passage:

Trying to equalize health care consumption hurts the poor, since most feasible policies to do this take away cash from the poor, either directly or through the operation of tax incidence.  We need to accept the principle that sometimes poor people will die just because they are poor.…  We shouldn’t screw up our health care institutions by being determined to fight inegalitarian principles for one very select set of factors which determine health care outcomes.

Cowen is right. As both inequality and health-care costs rise, it becomes more difficult to equalize health-care consumption through transfer payments. The size of the transfers eventually becomes untenable. They also become wasteful: You end up providing hugely expensive health-care transfers to people with low incomes who would be better off with cash, housing or something else. Even if it meant they wouldn’t live as long, at least the quality of their lives would be higher.

I think a lot of liberals have taken umbrage because they read Cowen as implying that government programs designed to get health care to poor people aren’t worth the cost. But that does not follow. Cowen is simply saying that we should apply the cost-benefit analysis more rigorously, and that our guarantees of health care are not unconditional.

For example, let’s imagine that there are two diseases, Ailment A and Ailment B, both of which are equally common and both of which shorten life spans. There is a treatment available for each, each of which extends life by an average of one year. But the treatment for Ailment A costs $1,000, and the treatment for Ailment B costs $100,000.

Providing treatment for Ailment A to those who cannot afford it should be a clear public-policy priority. Treating Ailment B is a much less compelling government purpose, and we might leave people to finance such treatment on their own. Thus poor people who lack privately purchased insurance and get Ailment B would die sooner simply because they are poor.

Maybe that sounds cruel to you. Maybe you think Ailment B should be covered at taxpayer expense. So let's imagine that treating Ailment B costs $1 million, or $10 million, or that the treatment only extends life by only a month, or a week. There has to come a point where treatment is so cost-ineffective that financing it is a bad use of taxpayer dollars -- even though those with the means to get treatment might choose to buy it. The question for policy makers is this: Where should that line be drawn?

In deciding, it’s important to remember why we have transfer payments in the first place. There is declining marginal utility of money: A person who makes $10,000 gets more value out of an extra dollar than a person who makes $100,000 does. So, transferring wealth from rich people to poor people makes the public better off in the aggregate.

But high tax rates and generous benefit programs both discourage people from working and producing. Public policy needs to strike a balance between transferring wealth and encouraging the creation of wealth -- and therefore leaves some people much wealthier than others.

So, the transfer budget has to be limited, and policymakers have to decide how to allocate it. It’s not obvious that “fully equalized health care access” should be anywhere near the top of the priority list.

That calculus is already implicit in any government health-care program. No program simply cuts a check for anything a patient or physician wants. But politicians don’t like to talk about that, because Americans react badly to the idea that health benefits should be subject to cost-benefit analysis. In recent years, they have been egged on by Republican politicians who insist that attempts to increase cost control in Medicare amount to “death panels.”

In practice, the political barriers to getting government-funded health programs to deny treatments are much higher than they should be, which is a big reason the U.S. spends so much money on health care. This wasn’t a reason to leave tens of millions of Americans without insurance. Still, expanded coverage will make the lack of cost control even more fiscally pressing than it had been.

Unfortunately, the cost of health-care entitlements will swallow the federal budget if we don’t get more comfortable with the idea of cost-benefit analysis. In time, we will need to set stricter limits on what sort of treatments taxpayers are expected to finance. In other words, we’re going to have to get more specific on when exactly we will let people die simply because they are poor.

Of course, this is not consistent with the idea that there is a “right to health care.” A right to what health care? Well, “basic” health care, is usually the reply. Or, if you prefer, “sufficient.” So what does “basic” or “sufficient” mean? That this is a question subject to political debate and cost-benefit analysis is your clue that we’re dealing not with a right but with a strategic question of how to best improve public welfare, in which health care is only one of many goods available.

Instead of “Health Care for All,” maybe the slogan should be “Some Health Care for All, but not Too Much.” It’s not sexy, but unlike the policy status quo or the health-policy agendas of both parties, it’s something we can afford for decades to come.

(Josh Barro is lead writer for the Ticker. Follow him on Twitter.)

Read more breaking commentary from Josh Barro and other Bloomberg View columnists and editors at the Ticker.

-0- Jul/06/2012 10:46 GMT