Why did the HMO revolution fail?

Mark Thoma cites this passage from Paul Krugman:

During the 1990’s it seemed, briefly, as if private H.M.O.’s
could play that role. But then there was a public backlash. It turns out that
even in America, with its faith in the free market, people don’t trust
for-profit corporations to make decisions about their health.

Read the whole link for a recap of Mark’s debate with Arnold Kling.  In my view what people objected to was not the for-profit status of HMOs per se but rather that they could be told they can’t get all the care they want.  That view will remain.  That’s one reason why covering 45 million or so additional Americans will lead to rising rather than falling health care costs.

On the administrative expenses of private health insurers, that is, at best, a one-time savings and health care costs still will be rising.  It’s also hard to argue that a) the really sick people are often denied care or coverage by private insurance, and b) we can pick up those same people and still lower total costs.  It’s the sick people who account for most of the costs, at any margin, and most of those costs come from medical procedures.

As the possibility of a real Democratic majority draws closer, expect to see more and more cognitive dissonance on this issue.  There’s a perfectly coherent case for greater government involvement based on the desire to spend more resources to alleviate the financial insecurity of many sick Americans.  But you are going to hear the "free lunch" version of the argument instead, based on the belief that the properties of American and European health care systems are somehow interchangeable at will.

That said, people on my side of the issue should admit that we could lower overall health care costs (or at least slow their rise) by having a true single-payer plan and putting most doctors on fixed salaries in small cooperatives, thereby altering their incentives to spend on wasteful capital expenditures.  (How many years would it take for costs to fall?)  That’s not, however, what we’ll be getting, so beware the bait and switch.  Under any plausible health care reform scenario, health care expenditures in America will rise rather than fall.  If only we had a betting market on this…

Addendum: Here is Arnold’s more direct reply.  Here are related remarks from Megan McArdle.


"In my view what people objected to was not the for-profit status of HMOs per se but rather that they could be told they can't get all the care they want. That view will remain. That's one reason why covering 45 million or so additional Americans will lead to rising rather than falling health care costs."

Very insightful. In the way that many (most?) Americans have an over-inflated sense of self-entitlement, this sense is very apparent when it comes to health care. What's going to happen when someone receives a terminal diagnosis that their family can't accept? I'm afraid that, eventually, it will mean that the government, meaning taxpayers, will be forking out billions for treatments and procedures that will have no effect on the patient's outcome.

Okay, I admit that by lowering quality and the ability to buy stuff, we can reduce expenditures on THOSE products. Anything else?

People are always going to complain about not getting all the care they want for free...you are right on that one. From my personal bias, and this is NOT a rational rebuttal, it somehow offends me a whole lot more knowing that my (theoretical) care was denied so that someone else could get richer/make a profit. I am personally less offended by inefficiency than greed. This isn;t a perfect substitute but....

I of course, have a more liberal bent.

If the government had been the single payor for the last thirty years, whether we should pay to treat AIDS would have been a political issue. And I have no idea what the outcome would have been.

No hard choices = no money saved

Per DanC's comment: I can tolerate living in a world in which premie babies born under 4 pounds are allowed to die from lack of care unless their parents are rich.

(I've also lost an infant, so I'm aware of the sorrow.)

For the cost of trying to save that small premie, many more pregnant women and infants can be provided normal levels of care.

"it somehow offends me a whole lot more knowing that my (theoretical) care was denied so that someone else could get richer/make a profit."

Care is denied because you (society) chose a cheaper plan.
In countries that have done this nationally, you may not even choose to pay more for better service. I am much more offended by this than anything else.

Regarding the idea that governments can save money spend of unproductive healthcare, I was very disappointed watching the PBS Frontline “Sick around the world†. It seems that other countries do not cut useless procedures; in fact they seem to cover wacky stuff like traditional Chinese medicine and acupuncture. They save money by squeezing providers with various forms of price controls.

Normally price controls will cause shortages and there are some shortages and waiting but in a situation like we have of exercise licensing where the supply of providers is artificially restricted, squeezing provider does not cause as much harm as normal. It may lower the quality of student entering medical school or nursing school but the quality today is much higher than it needs to be and so no shortages of doctors and nurses should occur. Hospitals today are over equipped so shortages or equipment will be blunted, hidden and come on slowly. The effects on drugs will be completely hidden since it will not affect supply of current drugs.

A little OT but I just ran across this idea:

Why look at other countries for medical spending reduction idea when we can look at Utah:


Utah spends about half the USA average on healthcare.

Life Expectancy: 78.7 years
State ranking: 3

The top two counties in Utah with the highest life expectancy are Morgan and Summit Counties, both at 80.8 years.


Agency capture seems like it would be a major concern with a single-payer system. You'd have lots of motivated, intelligent doctors who regulators deal with every day -- almost perfect conditions for capture.

I wonder if agency capture could perversely explain the lower costs in other countries? If costs come disproportionately from innovation, a regulatory environment might protect existing doctors by avoiding investment in new technologies (which require retraining, make old skills obsolete, etc.).

You know, I regularly mention vouchers here, but the idea is never attacked or endorsed. It falls in a well. That seems a little strange, given how quickly libertarians rose to endorse vouchers in education.

Is this a tactical choice? When government has the schools, vouchers are better ... but when insurance companies have medical care vouchers are better left unconsidered?

When Zach and others talk about single payer, is their assumption of single provider fair, or is it tactical?

16 million of those 45 million uninsured are working-uninsured--that is, they make over $50,000 a year and can generally afford health insurance.

Similarly, the average unpaid medical bill (the amount that causes people to declare bankruptcy) is $3,600 to the average $12,000 cost per medical episode. Why aren't these people purchasing insurance? Like Tyler says, HMO objections are largely attributable to lack of options rather than for-profit status.

For those advocating the single payer system: A Second Opinion, by Arnold Relman, does a really nice job outlining the expectation that, "Payment for comprehensive health care services on a prepaid per capita basis would greatly simplify national budgetary planning and would avoid most of the overhead costs." Alternately, though, George Halvorson argues for the continuation of a market-based system in his Health Care Reform Now! He says that, "Market forces...shape participants through both the wholesale and retail marketplace. [...] Healthcare, [he believes,] also needs to figure out how to use both wholesale and retail market models and functionality in order to simultaneous improve quality and reduce prices." He does not, therefore, advocate for a change to the way the insurance system is run, but rather for increased consumer awareness about healthcare costs so as to create a dynamic market environment where low cost and high quality wins out—much like any other competitive, market-driven economy.

Seems to me we could lower health care cost by not letting food producers put so much weird crap in the food we eat (partially hydrogenated oils, high fructose corn syrup, "corn fed" beef), etc.

"Obviously, setting up a monopsony (single buyer/payer) would lower overall cost of the product, but must also lead to a shortage of the product provided (care)."

Does any contender in the US system propose a true monopsony, one which would dis-allow supplemental private insurance, cash and care, or private doctors?

The trick I think is to make the "shortage" in a monopsony map to "extra" or "cosmetic" care.

"Does any contender in the US system propose a true monopsony, one which would dis-allow supplemental private insurance, cash and care, or private doctors?"

Nobody would vote for that today, but once the system is nationalized to any significant extent, it is very much in the government's interest to start to regulate the private sector (even more).

The government won't want competition from the private sector, which might drive their costs up - doctor's wages and other capital, or to end up subsidizing private care. If the private sector offers "supplemental care" that doesn't relieve much burden from government (which still must cover all the most expensive stuff) then government will want to set the prices for supply by being the sole purchaser of inputs.

This is the primary justification for banning private insurance in Canada, isn't it?

The advocates for single payer are fixated on the idea that preventive care services will drastically reduce acute care costs later. This was the same idea that Paul Elwood advanced when he "invented" the HMO concept. Look where that led. Primary care doctors (I am one who began practice in 1982)were given the task of assuming financial risk for patients in their practice. This was a built-in conflict of interest with immediate negative consequences for the doctor-patient relationship, no matter than some (like me) denied it for years. Today's hybrid creation is being called the "medical home" and the basic concept is the same: cajole, browbeat or otherwise convince patients to exercise, lose weight, stop smoking and other self-injurious behaviors with the hope that they will be stricken with fewer chronic diseases which drain dollars. The trouble is, no one has of yet demonstrated long term savings using this scheme. People have the troubling capacity to continue bad habits in spite of knowing the consequences. In addition, even the healthiest of us eventually ages and requires expensive health care, particularly high tech interventional procedures that may prolong life by only a short time. Americans demand the best of everything. Rationing, other than the covert form being used now, is anathema, even to nanny-state liberals who seem to think laws banning trans fats, or requiring restaurants to provide a calorie count with each item on the menu will add years to our lives cost-free.

There are a lot of conversations on how to manage paying for health care, but hardly anyone ever brings up the actual cost of medical services.

Medicine is expensive in America because it's good, but also because it is scarce. American Medical Associations has a tight monopoly on who can provide medical services. The medical malpractice insurance system is both rigid and expensive. The system encourages doctors and other medical personnel to hide incompetence, mistakes and misconduct, rather then price them into the system.

"...even in America, with its faith in the free market, people don't trust for-profit corporations to make decisions about their health."

And then there are those that have faith that all other things held equal is a reasonable assumption, or that a normal distribution can be assumed.

The problem with the market in healthcare is that none exists and I doubt one can actually be created. Markets require pricing information, transparency, knowledge of quality, quantity, results expected, etc. None of that exists. All we have is a cost based system that makes up costs as it goes along. The natural treatment for such a system is regulation similar to utility regulation. Providers can benefit from innovative cost saving but not from additions of dubious value. They are allowed stable profits in return for efficient effective provision of services. Interestingly it is the fee for service model that has worked. Managed care hasn't worked anywhere because of disparate motivations. Medicare could start this by requiring cost effectiveness of any proposed treatment for coverage.

"... the VA has a rep as perhaps the finest health care system in the world and its physicians and nurses are government employees."

Really? I was a VA physician for five years, a service chief for most of that time, until I couldn't stand it any more and left. Let me tell you about the VA - low pay, lots of bureaucracy, and you can't fire anyone. Now just what kind of doctor do you think that attracts?

See "Does Universal Health Insurance Make Health Care Unaffordable? Lessons From Taiwan", from Health Affairs

This paper examines the performance of Taiwan’s National Health Insurance (NHI), a universal health insurance program, implemented in 1995, that covers comprehensive services. The authors address two key questions: Did the NHI cause Taiwanese health spending to escalate to an "unaffordable" level? What are the benefits of the NHI? They find that Taiwan’s single-payer NHI system enabled Taiwan to manage health spending inflation and that the resulting savings largely offset the incremental cost of covering the previously uninsured. Under the NHI, the Taiwanese have more equal access to health care, greater financial risk protection, and equity in health care financing. The NHI consistently receives a 70 percent public satisfaction rate.


Occupational licensing allows the division of labor to stay as-is even though enormous increases in efficiency (and hence drops in price) could be achieved by allowing nurses and other professionals to take on duties that the licensing laws say must be done by a doctor.

Patent and copyright laws are to protect works and inventions from being stolen and profited from by those who didn't have anything to do with them. A lack of licensing laws does not give somebody free, unearned access to another person's human capital. The two policies are unrelated.

You want to attract people to the medical profession. Training is long, involved and expensive. Lacking incentives to protect those investments in time and money who will take the risk. If Jacob wants to argue that most doctors are a waste of resources and wants to discourage people from taking such a career path, that is his choice.

Patents and licensing laws are related in that they encourage investments in areas that, absent such aid, investment would be less then optimal for the society.

If you tell prospective doctors that the credentials that they may earn will have little or less value in the future, what will happen to the supply of doctors? So do you assume that there are too many doctors or too few? And do you assume that the quality of doctors will remain the same if you can easily substitute less trained individuals? Or do you think medical training is a waste of time?

Do we as a a society want to encourage people to become physicians? Do physicians create externalities for society? Or is Jacob correct that physicians are mostly a drain on resource who offer little real value in our medical system?

"BTW if the government takes over health care you better hope that you have a disease that the politicians think is worth treating."

Right now you have to hope that your insurer can make money treating it. I'll take my chances with the politicians. If I threaten to cough on them they'll probably pass the requisite legislation. It's not as if my senator gets to take home the spare cash after Medicare pays everyone.


I think it would be more productive to focus on privatizing the defense sector than the medical sector. If everyone had war vouchers to spend on military services we might have attacked our enemies instead of Iraq and likely avoided the debacle in Vietnam. (OK, you can spend your vouchers anyway you want - Freedom for Tibet, Save the Darfur, Bomb Bomb Bomb Iran).

People want unlimited medical care. We all want to live and be healthy for as long as possible. This is not economically rational, but that's the way it is for most biological organisms. There is a more rational market for military services. People are more likely make sensible economic decisions about whom to attack and how to defend than similar decisions regarding their own continued existence.

With so many already covered under private plans in this nation, why are costs continuing to rise? And if costs are going up anyway, why is the FUD around "socialized care" (or "nationalized care", if you will) all about costs going up?


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