How Much Do You Trust the Government? Politics, Patients, and Perverse Incentives

Just as noneconomists think wages can be set at any level, some people think that any public policy is possible. If wages are judged to be too low, the noneconomist thinks that’s because the business owner is hardhearted. If a public policy is judged insufficiently generous, the person unfamiliar with public choice thinks that public officials are hardhearted. In both cases, the error is the same: the belief that decision makers have enormous discretion when, in fact, they have very little.

The Politics of Spending Decisions

As I discuss in my new book, Priceless: Curing the Healthcare Crisis, in a typical health insurance pool, about 5 percent of enrollees will spend 50 percent of the money. About 10 percent will spend nearly two-thirds.[1] The numbers differ a bit from group to group, but in any given year, a small number of people spend most of our healthcare dollars.

Now suppose you are a Minister of Health. Can you afford to spend half of all healthcare dollars on 5 percent of the voters? Even if they survive to the next election, they may be too sick to get to the polls and vote for your party.

From a political point of view, the answer is clearly “no.” The inevitable political pressure is to skimp on care for the sick to spend on benefits for the healthy. Put differently, the politics of medicine pushes decision makers to underprovide to the sick so they can overprovide to the healthy.

That is why it is easier to see a primary care physician in Britain than it is in the United States but harder to see a specialist and much harder to access expensive technology. In the 1970s, the British invented the CAT scanner and for a while supplied half the world’s usage (probably with government subsidies). But the National Health Service bought very few CAT scanners for use by British patients. The British (along with the United States) also invented renal dialysis, but today Britain has one of the lowest dialysis rates in all of Europe.[2]

The Politics of US Medicare

In the US Medicare program, policymakers achieve through patient cost sharing what other countries achieve through the rationing of services: They punish the sick to reward the healthy. For example, although basic Medicare pays for many minor services that most seniors could easily afford to purchase out of pocket, it leaves the elderly exposed to thousands of dollars of catastrophic costs. This is exactly the opposite of how insurance is supposed to work.

Medicare’s hospital deductible is $1,156. Seniors experiencing an extended stay lasting more than two months, however, are required to pay $289 per day in cost sharing. This increases to $578 per day after three months, and Medicare pays nothing in hospital costs for patients who stay more than five months.[3]

When the federal government began regulating Medigap insurance (which fills the gaps in Medicare), Congress forced insurers to follow the same pattern. Medigap must pay small bills, but seniors can still experience thousands of dollars in out-of-pocket costs.[4]

The pattern is repeated in the new Medicare prescription drug program (Part D). A “donut hole” exposes the relatively sick to significant out-of-pocket expenses for no other reason than the political desire to provide first-dollar coverage to the relatively healthy. In 2012, the maximum deductible for a Medicare Part D plan is $320. Once the deductible has been met (not all plans have a deductible), Medicare Part D pays 75 percent of the next $2,610 in drug spending until total drug expenditure is $2,930. The donut hole reflects drug spending that falls between $2,930 and $4,700. Until 2012 it was the responsibility of the enrollee to pay all costs inside the donut hole. The Patient Protection and Affordable Care Act created a new benefit in 2012 that pays for 50 percent of the costs. After $4,700 in total drug spending, Medicare Part D enrollees pay only a modest co-pay of $2.60 and $6.50 for each prescription. The donut hole is slated to close by 2020, however.[5]

The Medicaid Exception

It is not uncommon for Medicaid programs to underpay doctors and overpay hospitals. Or they underpay hospitals less than they underpay doctors. In either case, this limits the availability of doctor-provided primary care and drives low-income patients to hospital-based services. How can we explain this apparent exception to the pattern described above?

If low-income people don’t vote, or if they always vote for the same party, politicians won’t compete for their votes. That means the only significant political pressure comes from providers; and hospitals seem to be much better at pursuing their interests in politics than doctors.

[1] Mark W. Stanton, “The High Concentration of US Healthcare Expenditures,” Agency for Healthcare Research and Quality, Research in Action 19 (2006).

[2] John C. Goodman, Gerald L. Musgrave, and Devon M. Herrick, Lives at Risk: Single Payer National Health Insurance Around the World (Lanham, MD: Rowman & Little-field Publishers, 2004), 62.

[3] For an explanation of Medicare cost-sharing see “Summary of Medicare Benefits and Cost-Sharing for 2012,” California Health Advocates, November 15, 2011.

[4] William J. Scanlon, “Medigap: Current Policies Contain Coverage Gaps, Undermine Cost Control Incentives,” Testimony before the Subcommittee on Health, Committee on Ways and Means, House of Representatives, March 14, 2002; also see Noam N. Levey, “Once Politically Taboo, Proposals to Shift More Medicare Costs to Elderly Are Gaining Traction,” Los Angeles Times, July 15, 2011.

[5]2012 Medicare Part D Outlook,”, undated.

Note: Cross-posted at Psychology Today blog, “Curing the Healthcare Crisis.”

John C. Goodman is a Research Fellow at the Independent Institute, President of the Goodman Institute for Public Policy Research, and author of the Independent books, Priceless: Curing the Healthcare Crisis and A Better Choice: Healthcare Solutions for America.
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