The award-winning documentary, Escape Fire: The Fight to Rescue American Healthcare, premiered on CNN this month. Like Steven Brill's 25,000-word drill-down into health costs, the film delivered an extremely engaging story even as it provided viewers with a distorted picture of the actual truth about American health care. Put simply, Escape Fire missed the forest from the trees.
Viewers likely were left with the impression that our current health system would perform better if it had less profits, less competition, and more government regulation. Indeed, it shouldn't surprise anyone to learn that many of those most prominently featured in the documentary are advocates of single-payer health care-a system that would maximize the role of government in making critical decisions, minimize the role of competition in allocating resources and cripple the incentive of profit-making firms to innovate to produce continuous quality improvement at stable or declining real prices.
Unfortunately, the path to a high-performing 21st century health care system-one that is efficient, innovative, and provides high quality care at reasonable cost-lies in less government regulation and more competition, especially by profit-oriented firms.
Government is the Problem, Not the Solution
Anyone who invested two hours in watching Escape Fire and who came away thinking they had been given an accurate diagnosis of the nation's health care system owes it to themself to read a new paper by University of Chicago business professor John Cochrane.
In it, he convincingly demonstrates that the principal reason effective markets have not emerged in most parts of health care-markets for generic pharmaceuticals and services not covered by insurance such as Lasik surgery being very notable exceptions-is because of government itself.
Prof. Cochrane reminds us that certificate-of-need laws-still in operation in 36 states-are quite similar to the restrictions that the Civil Aeronautics Board used to impose on airlines. Just as hospitals have to get permission from regulators to add beds or equipment, airlines used to have to prove to the CAB that new routes were needed. The process permitted incumbent competitors to argue against these routes on grounds that any excess profits earned on one route were being used to cross-subsidize less traveled routes. Indeed, CAB tightly controlled entry, exit and airline prices. Not surprisingly, this cozy arrangement to hold down competition permitted airlines to charge such high prices that even Senator Ted Kennedy (not exactly known as a fan of smaller government) concurred that deregulation was a good idea.
The results of airline deregulation were impressive. In inflation-adjusted dollars, airfares today are almost three times cheaperthan they were in the late 1970s. As a consequence, Americans are flying a lot more, employment in the airline industry boomed and air travel is safer than it's ever been.
Competition Can Work in Health Care
Prof. Cochrane notes that in other industry, the key driver of innovation is competition from new entrants, not incumbent firms. These new firms either actually drive existing firms out of business (e.g., Kodak) or force them to accept unwelcome, disruptive changes. But that's an important point: fierce competition-the kind that greatly benefits consumers through lower prices or improvements in quality-also is very disruptive, even painful.
- Insurance companies: "we'll give you more business by forcing Americans to buy your product if you'll let us rig the rules so that the costs of subsidizing the sick are hidden from view in the form of higher premiums for everyone instead of unpopular higher taxes; by the way, how about a $60 billion rebate to help pay for all this?"
- Drug companies: "we'll give you more business and even agree not to regulate your prices if you'll rebate us $34 billionto help pay for coverage expansions"
- Doctors: "we won't cut your fees by 21.5%-in fact, we'll give you a permanent "doc fix"-in exchange for not standing in the way of our health reform plan."
- Hospitals: "Look, we're going to whack the bejesus out of your Medicare and Medicaid payment rates, but don't worry, we're also going to let you create Affordable Care Organizations that will give you local monopolies in your area, thereby permitting you to jack up rates for your privately insured patients to make up the difference."
Neither the single-payer system preferred by many of those featured in Escape Fire nor Obamacare will encourage the kind offierce competition Prof. Cochrane believes would be necessarily to transform the American health economy. And all of the blame cannot be laid at the feet of Obamacare. Even without the law, there is a huge regulatory thicket in health care that would need to be cleared away if we want competition to work its magic. That said, he concludes that "The ACA and the health-policy industry are betting that new regulation, price controls, effectiveness panels, ‘accountable care' organizations, and so on will force efficiency from the top down." In short, we are moving in precisely the opposite direction of what makes sense.
Profits are the Solution, Not the Problem
Prof. Cochrane further observes that "About 70% of hospitals and 85% of health-care employment is in non-profits, whose legal and regulatory treatment protects much inefficiency from competition." For-profit companies find it that much harder to compete since whatever rate of return they earn is after taxes, whereas their nonprofit competitors face no tax burden. Of equal importance, shareholders hold for-profit companies to account, so there is an inherent drive for efficiency that is absent in nonprofit companies whose mission may have it pursuing goals far afield of efficiency.
In contrast, many of the principals in Escape Fire abhor the notion of profits in medicine. To them, profit-seeking in medicine is a problem to be avoided, not something to be actively encouraged. The same mentality pervades Obamacare, which is replete with provisions that overtly or implicitly favor nonprofits over their for-profit counterparts. Yet profits are an important reason that "the United States is responsible for a disproportionate share of the monetary returns to medical innovation." This, in turn, is an important factor explaining why the U.S. far outpaces the rest of the world in medical innovation. These innovations are responsible for saving literally hundreds of thousands of lives.
There is much that is informative in Escape Fire. It surely is more balanced than Michael Moore's polemic Sicko. I encourage people to watch it if they have not already done so. But do not suffer under the illusion that you have been given the truth, the whole truth and nothing but the truth, as nothing could be further from the truth.
 Former CMS Director Donald M. Berwick's views on single-payer health care are pretty well-know, codified nicely with video clips here. Andrew Weil is equally unabashed in his enthusiasm: "One can only hope that the single-payer system will eventually come to pass." Former director of communications for insurance giant CIGNA Wendell Potter is on record assaying "We eventually have to get the for-profit insurance companies out of providing coverage, and we need to move toward a system or systems like in the other developed countries, that don't permit for-profit companies to run their healthcare systems." Shannon Brownlee, director of the New America Health Policy Program, believes all doctors should be salaried and that the Veterans Health Administration offers a promising model for the nation. Likewise, Dr. Steven Nissen has a great antipathy towards profits and is a great fan of putting all doctors on salary. I'm not arguing that Escape Fire was a screed for single-payer health care. Indeed, true believers in a single-payer solution were frustrated that the film did not go far enough in advocating this as an obvious solution to the ills codified in it. My only point is that the film's principals generally come from a worldview that regards competition and profits with disdain and an optimistic believe in the ability of government experts to manage things properly.
 OK, I'll admit, I made this up: the evidence for the other quid pro quos is on the public record. No one has characterized the "deal" with hospitals in quite this fashion. But it's the only way I have to explain the otherwise baffling decision of Obamacare's designers to limit competition and enhance hospital market power via ACOs when all the evidence says that a) increasing concentration in hospital markets has been an important driver of rising hospital costs; and b) that competition among hospitals is welfare-enhancing (lower prices and/or better quality) up to a level of five hospitals in a local area.