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Health Care's Continental Divide

Megan McArdle is a Bloomberg View columnist. She wrote for the Daily Beast, Newsweek, the Atlantic and the Economist and founded the blog Asymmetrical Information. She is the author of "“The Up Side of Down: Why Failing Well Is the Key to Success.”
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Bernie Sanders restarted the debate about single-payer health care on Sunday by proposing "Medicare for all." Leonid Bershidsky pointed out that in Europe, his idea would hardly be radical. But Megan McArdle finds the Sanders plan implausible in the U.S. Bloomberg View invited them to debate whether American health care could imitate Europe's.

Leonid Bershidsky: After just a few days into my visit to the U.S., no fewer than 10 people have told me this country will never adopt a European-style health-care system. It's incomprehensible to me. I live in Germany and, like 85 percent of all German residents, I'm covered by what's known as statutory health insurance. It's financed by mandatory contributions of 14.6 percent of income, shared 50/50 between employer and employee. The earner of the average German annual wage of $43,300 pays $263 per month, and any children he or she has -- plus a spouse or partner who doesn't work -- are covered by this amount.

In the U.S., the average Obamacare premium is $408 per person.

In general, per-capita health-care spending is almost twice as high in the U.S. as it is in Germany, but Germans receive better service with better results. They enjoy shorter waiting times for surgery and specialist appointments, as well as better health outcomes.

For the smaller amount of money we pay, we get full coverage of our medical needs. We don't have to worry about deductibles. The co-payments we are sometimes expected to make for medicines and some special kinds of hospital care are far smaller than our grocery bills and we don't have to deal with any paperwork -- we just hand our insurance card to the doctor and everything is taken care of. Pregnancies, chronic diseases, dental care -- they're all covered under statutory insurance. Medical debt? Never heard of it.

The remaining 15 percent of Germans are covered by private insurance, either because they're self-employed or because they want an even higher level of service, shorter waiting times and coverage beyond medical necessity. For many corporate employees, including myself, personal contributions to statutory or private plans are covered by employers.

My question is, What's not to like? Why don't Americans want to pay less so that they could, on average, get more? Is this just insularity and resistance to change, or is Bernie Sanders right about certain special interests preventing the creation of a comparable system in the U.S.?

Megan McArdle: You're raising the perennial questions in the health-care debate in this country: Why can't America be more like Europe? Why can't we have a system that is both cheaper and covers more people? (And also, advocates argue, produces lower mortality rates.) Conservatives who try to answer that often end up spinning dystopian fantasies of a world where you have to wait 11 months to get your torn jugular patched up.

These fantasies have the same grain of truth -- and the same shaky relationship to reality -- as Europeans' imaginings that Americans routinely die on the streets waiting for health care. The more intensively governments manage their systems, the more they are tempted to resort to rationing by queue, or rationing by not mentioning that that expensive, uncovered treatment exists. But most Europeans -- like most Americans -- are quite satisfied with their health-care coverage.

So given that every European system is cheaper, and covers more people, and the uninsured in America are quite a bit less satisfied with the system than others, why doesn't America sensibly follow its colleagues in the industrialized world? This question is actually two questions: "Shouldn't we?" and "Why don't we?"

Start with "shouldn't we." I've long opposed a comprehensive national health-care system for America, and my firm belief is that if Europeans were sensible, they'd oppose one, too. Why? Because the profligate, practically unmanaged, wildly uneven U.S. health-care system is subsidizing innovation for everyone else, especially in drugs. Innovative products have two cost components: development of the original product, and production of same. Someone has to pay that development cost, and if Europe bargains hard to get prices down to something like a cost-plus-modest-profit basis, then another country has to pick up the tab. That country is us, because the drab task of turning likely targets into drugs that can be made and dispensed at commercial scale still largely falls to the pharmaceutical companies. If Europe wants to keep its cheap systems yet continue to enjoy new lifesaving advances, they ought to be saying, "Oh, no, it's dreadful here. You'd hate it, really" instead of sneering across the Atlantic.

This is, of course, a rather cold moral calculus. But the number of people in the future who will suffer and die from things we can't currently treat, but might, is much larger than the number of people who die in America from lack of insurance -- which recent research suggests may be surprisingly close to zero.

But to address the other question -- "why don't we?" -- let's assume arguendo that we agree upon the desirability of a European-style system that lowers prices and provides universal coverage. The answer to that boils down to a few parts: First, we cannot get to European pricing levels; second, Americans do not trust the government with a complete takeover of the health-care system; and third, American politics is inhospitable to this sort of radical change.

One of the remarkable fallacies of the American health-care system is that we have a huge cost-growth problem. We don't. We used to have a health-care cost problem, in the 1970s and 1980s (which looks to be strongly related to our last foray into government health insurance -- the creation of the Medicare system). Now our cost growth is at the boring old OECD average. What we have is a very expensive medical plant, and very high labor costs in the system. Our providers are used to billing richly for the services they provide and enjoying higher incomes than their counterparts in Europe.

Cutting the incomes of such a large group of workers, closing unprofitable hospitals, etc., is an incredibly difficult task. No European system has managed the kind of cuts that would be needed to get us to their pricing levels; what they did was keep costs from growing in the first place. We haven't even managed modest changes such as keeping the cost of Medicare reimbursements to doctors down; as soon as the cost restraints began to bite, Congress rushed through a "temporary" fix, a ritual that was repeated annually until they finally gave up and made the fix permanent.

Path dependence matters. Whatever Russia might have been had the Bolsheviks lost, we found out in the 1990s that we could not get there simply by removing the government and putting in its place a set of legal and economic institutions that looked reasonably like the ones in the West. The U.S. health-care system is the same: We're stuck with what we did 30 years ago, not what we should have done. 

But why can't we at least start controlling costs now? That goes to American politics. It is, compared to most European systems, extremely decentralized. Our party discipline is weak, and members of Congress are exquisitely sensitive to the feelings of the folks in their districts about everything. Our party discipline is simply not strong enough to survive the heart-wrenching ads about nursing reimbursement cuts and emergency room closures, or the flood of angry phone calls that rain down on lawmakers who dare to touch such a powerful set of lobbies. It took a historic financial crisis to deliver huge congressional majorities, plus a fair amount of self-delusion on the part of Democrats, just to get something like Obamacare passed.

And that's because Americans don't trust the government to take over their health care. We don't like taxes on the middle class, we don't particularly trust our government, and we're probably right not to, because on domestic programs, the U.S. government is simply less competent than the governments of Germany and Scandinavia, for a bunch of institutional and cultural reasons. The experience of Obamacare, where the insurance has proven to be much more expensive, and much less generous, than people were expecting, has certainly not increased their appetite for more government in this sector. So it's hard to see how we undertake further reform.

Another way to put that is that post-Obamacare, we do basically have the German system. Only we have what it looks like in America, badly deformed by our decentralized politics and crippled by our reluctance to impose taxes on the middle class.

LB:  There's something to the argument that the U.S. system is only inefficient for Americans but great for the rest of the world. The pharmaceutical industry is highly globalized, and many important new drugs, even those marketed by European companies, are developed in the U.S. On the other hand, Viagra, for example, originated in the U.K., even though Pfizer is a U.S. company. Pharmaceutical research takes place throughout the world, much of it in countries with lower development costs than in the U.S. The U.S. market is much bigger than the European one, but research and development expenditures in Europe and the U.S. are comparable. And the research wouldn't stop if the U.S. moved to a comprehensive health-care system: The same pharmaceutical companies operate profitably throughout the world, including Europe, and they would cheerfully keep doing so. Certain Martin Shkreli-like excesses would be avoided, though. Here's how.

Germany is a highly decentralized country that consists of 16 federal states. It doesn't have a single-payer health insurance system as such: There are 132 payers -- so-called sickness funds -- that collect people's contributions. These funds are all members of an association; there is also an association that unites doctors who work with statutory insurance. These groups form a national committee to negotiate care standards, but they also negotiate prices and specific local issues on the state level. Pharmacies and drug manufacturers also take part in these negotiations.

This system results in lower drug prices than in the U.S. because most pharmaceutical companies want their products to be part of the statutory insurance system. Those that don't want to can serve the remaining 15 percent of the population, if they can agree with private insurers.

The corporatist system of negotiations, of course, also drives down the incomes of medical professionals. A general practitioner in Germany makes an average of $52,000 a year, or 20 percent more than the national average. A U.S. general practitioner makes almost $142,000, or 250 percent of the national average. Reducing that disparity is a matter of competition and negotiation; besides, German doctors aren't burdened with student debt (higher education is free).

You mentioned handing health care over to the government. Where is the government in the German scheme? Well, the parliament does regulate the system, particularly when fears arise that costs might get out of hand and the existing contribution level may not be enough. For the most part, however, it keeps out of dealings among quasi-public players such as the sickness funds, public and private hospitals (there are approximately equal numbers of these in Germany), and fully private players such as doctors, pharma companies and pharmacies.

Doesn't this bargaining system -- with the possibility of opting out in favor of a fully private arrangement -- look quintessentially American? I understand that Germany has had, and perfected, its system since the 1880s (even the Nazis didn't scrap it), and the U.S. has created a lot of different regulation and bred players best served by the status quo, but I've seen countries go through bigger change. To continue your Russian analogy, after Communism failed, Russia had to build most of its institutions -- including a weird hybrid American-European health-care system -- from scratch.

In the end, going from a dysfunctional system to a more promising one is a matter of determination. Obamacare is an example of insufficient determination: People got less than what they bargained for, at a higher price.

MM:  Drug development does take place all over the world, of course, but that doesn't mean that's where they expect to get their profit. The market for drugs is global, and if someone isn't allowing bigger profits, then the incentives for developing drugs will disappear.

Martin Shrekli is actually an interesting case in point. He is frequently associated with big pharma in the minds of the public, but in fact, his strategy is the opposite: Rather than developing new drugs and charging high prices for them during their patent window, he buys up old drugs, long in the public domain. Why, then, can he charge such high prices? Because U.S. regulators make it very hard to get your generic drug certified for sale, and in the relatively small markets he targets, it is simply not worth the expense for another manufacturer to go through the process.

Why does this problem persist? Because American regulatory agencies are rules-bound and slow-moving in a way that their counterparts abroad are not. We have extensive community review of almost everything, and our legal system favors hard rules and regulatory silos rather than principles-based regulation and collaboration. The red tape can be cut through in extremis, but it almost never is. So any idea of making the U.S. government do something has to start with the premise that it will not be very efficiently regulated.

As for bargaining: American health insurers do bargain. They bargain hard. Three U.S. health insurers -- Aetna, Wellpoint and UnitedHealth -- cover about as many people as all of Germany's funds, and they each cover more people than the Netherlands, Belgium, Australia, Czech Republic, Portugal, Greece, Hungary, Sweden, Austria, Switzerland, Denmark, Finland, Slovakia, Ireland and Iceland. Why, then, do all of those countries get so much better prices than our big insurers?

Because they bargain in a legal and political environment that won't support it. We've had periodic movements to control costs: the managed care revolution of the 1990s, as well as various reforms of government payment systems that dramatically curtailed payments to providers. With the exception of Medicaid, where reimbursements are kept low and many providers refuse to take the insurance, they were undone. Health-care workers and consumers both revolted. 

Monopsony power helps, of course; it's hard to cut payments to doctors if they can just go across the street to another insurer, because patients will be mad when no one takes their insurance. But it would probably not be constitutional to do as Canada has done, and make it illegal to have private health-care access. Which means that a private system would continue to operate in parallel with the official system, and that pricing competition that makes it hard to grind down rates as you suggest would persist. In Washington, where I live, it is already hard to find a primary-care physician because so many are converting to no-insurance "concierge" practices.

Indeed, we already have a rate-setting mechanism with huge bargaining power: the Medicare rate schedule. It does not pay those low German rates, and yet it often does not quite cover the cost of providing the service. American hospitals are, as a British colleague once said, "like hotels" compared to their European counterparts; American hospital workers collect substantial paychecks. And not because of their student loans. They get paid that much because they expect to get paid that much, and there are few enough of them that they can get it. If you try to create some sort of committee to cut their income by two-thirds, they will attack their legislators with the white-hot fury of a thousand suns. And they will win, because legislators know that the health-care workers will vote on this single issue, while the vast majority of consumers will not. 

We know this from experience, because Obamacare was not America's first time at the health-care-pricing rodeo. Saying that it's a matter of determination is true enough, but not very helpful. Legislators are not determined enough to take on the provider lobby, because every time they do, they lose. There's a reason medical-device manufacturers got the worst deal out of Obamacare, while insurers did middling-badly and providers did well. This is in roughly direct proportion to the number of voters each industry can move out to the polls when their income is cut. American legislators are more responsive to these sorts of coalitions than those in most countries, because again, they have little protection from their parties. They stand and fall on their own votes for or against a piece of legislation; if they vote against a powerful interest group, those voters can and will take them out.

When I was a fledgling journalist, I used to watch governments in emerging markets do things that were obviously crazy and counterproductive in the not-very-long run. I was bewildered. But over time, I came to realize that what they were doing was not crazy; they were making policy under very heavy political constraints -- bad policy, terrible policy, but often, the only policy they could choose without getting turfed out of office in more or less unpleasant ways.

We might like an American government that was better at technocracy (or we might not), but we don't have one. We have instead a messy, fractious democracy that offers interest groups almost unlimited veto points against legislation they don't like. Love it or hate it, these forces make our government extremely bad at controlling costs, which shows up not just in our health-care and education systems, but also in the price of building our infrastructure or providing various social services.

I expect that during your time here you'll find a lot to mystify you about American government and institutions, as well as, hopefully, much to like. Hopefully, we can chat again, as you wind your way across this vast, weird land of ours.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the authors of this story:
Megan McArdle at mmcardle3@bloomberg.net
Leonid Bershidsky at lbershidsky@bloomberg.net

To contact the editors responsible for this story:
Brooke Sample at bsample1@bloomberg.net
Philip Gray at philipgray@bloomberg.net