Robin Hood, Robber Baron, or Rubik's Cube?
How Fair Is the Distribution of Benefits in the U.S. Health-Care System?
About This Event

In a recent article, Duke University law professors and health-care policy researchers Clark C. Havighurst and Barak D. Richman argue that ordinary Americans with health coverage pay substantially higher premiums to support a vast enterprise that primarily benefits health-care industry interests and other higher-income consumers and taxpayers. They find “serious Listen to Audio


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and systematic unfairness in the American way of financing, regulating, and dispensing health care.” Havighurst and Richman urge closer examination of the health-policy factors behind who pays and who benefits in our health-care system.

Two specialists in the financing, regulation, and delivery of health care in the United States, economist Alain C. Enthoven of Stanford University--who is known as the godfather of managed competition--and law and medicine professor David A. Hyman of the University of Illinois College of Law, will assess the comparative efficiency and effectiveness of the authors’ critique that the U.S. health-care system operates more like a robber baron than like Robin Hood. AEI’s Thomas P. Miller will moderate.

Agenda
9:00 a.m.
Registration
9:15
Presenters:
Clark C. Havighurst, Duke University
Barak D. Richman, Duke University
Discussants:
Alain C. Enthoven, Stanford University
David A. Hyman, University of Illinois
Moderator:
Thomas P. Miller, AEI
11:15
Adjournment
Event Summary

May 2007

Robin Hood, Robber Baron, or Rubik's Cube?

In a recent article, Duke University law professors and health-care policy researchers Clark C. Havighurst and Barak D. Richman argue that ordinary Americans with health coverage pay substantially higher premiums to support a vast enterprise that primarily benefits health-care industry interests and other higher-income consumers and taxpayers. They find "serious and systematic unfairness in the American way of financing, regulating, and dispensing health care." Havighurst and Richman urge closer examination of the health-policy factors behind who pays and who benefits in our health-care system.

Two specialists in the financing, regulation, and delivery of health care in the United States, economist Alain C. Enthoven of Stanford University--who is known as the godfather of managed competition--and law and medicine professor David A. Hyman of the University of Illinois College of Law, assessed the comparative efficiency and effectiveness of the authors' critique that the U.S. health-care system operates more like a robber baron than like Robin Hood. AEI's Thomas P. Miller moderated the discussion.

Clark C. Havighurst
Duke University

While much health policy debate has focused on the plight of the uninsured, not enough research has centered on the insured, working Americans who actually pay for our health-care system. To address this point beyond the usual scope of access, cost, and quality, our paper analyzes a fourth pillar of health care: equity and distribution of the costs and benefits.

A major component driving the unequal distribution of costs and benefits is the tax treatment of health insurance. The tax subsidy, encourages people to purchase more expensive health insurance rather than the desire to protect one's self against future, unbearable costs. In addition, the absence of information regarding the true cost of health care incentivizes people to favor more and better care. Such preferences have caused the political strategy regarding health care to favor continued price opacity, further removing the populace from health-care reality.

Barak D. Richman
Duke University

The United States health-care system's reliance for care on health insurance companies with tremendous market power poses two distinct problems that lead to a regressive redistribution of wealth. First of all, adverse selection in health insurance markets leads to excessive output and excessive demand because copayments for health-care services, which are less than the marginal costs of those services, determine consumption rates. Secondly, price opacity and excessive demand, regulation, and malpractice fears allow insurance companies to charge excessive prices for care.

The excess revenue, derived from the excess demand and prices, are redistributed in two ways. Money is redistributed from premium payers to providers and health insurance company shareholders. Secondly, the excess money is used to pay for uncompensated care as well as innovation. Although everyone pays equal premiums, the system through which premium payers take advantage of innovation and other insurance benefits heavily favors high-income consumers.

Five situational examples support the hypothesis that high-income consumers derive more benefit from the same health insurance coverage than low-income consumers. First, high-income individuals select more generous plans offered by their employers and lower-income individuals are reluctant to use many services because of copayments. Second, the logistical ability to seek care, be it by geography or by the ability to take time off work, favors high-income workers. Third, providers' referral rates for expensive treatments discriminate by race and income. Fourth, patient preferences for different venues of care vary according to race and income. For example, lower-income workers may choose to receive mental health assistance through support groups or their community rather than from therapists and psychiatrist, which high-income workers prefer. Lastly, there remains a perception among non-white, lower-income patients that the efficacy of the health care they receive is of lower quality.

These reasons, coupled with the fact that health insurance benefit packages are aligned towards the preferences of higher-income workers, leads to a regressive redistribution of wealth from lower-income workers both to higher-income workers and to firms and providers in the health-care industry.

Alain C. Enthoven
Stanford University

Havighurst and Richman bring an important and original insight to the question of the size and direction of America's health care finance and delivery system. America's health-care economy is filled with the cost-increasing incentives of monopolies and fee-for-service. The ability of these monopolists to increase their wealth is enhanced by moral hazard, protection from competition, and by the dysfunctional system of employer-based health insurance. Employer-based health insurance is unsustainable and should be replaced by a model of universal health insurance based on consumer choice and competition in the private sector. This would enhance value for money and distributive fairness.

Many people incorrectly believe that what we have is the product of market forces. The path to where we are begins with the medical profession. In the 1930s, the American Medical Association principles called for free choice of providers, free choice of prescriptions, doctor-patient negotiation of fees, fee-for-service payment, and solo practice. These remain deeply ingrained in medical culture and has been enforced by nasty tactics and political action. The providers of health care also created their own insurance companies, the Blue Cross Blue Shield companies, in order to have insurance companies behave according to their principles, and they granted these companies preferential rates.

Employers' and insurers' decisions and the tax code also contributed to the current situation. Employers, reinforced by doctors, created the myth that Americans do not like managed care and reverted to the wide, all-inclusive preferred provider organization model. Most people are locked into a fee-for-service plan or a plan with fee-for-service costs. The high-cost situation is exacerbated by the widespread conflicts of interest in medicine today. Fee-for-service itself creates a conflict of interest between the doctor and patient. Fee-for-service is bad for your pocketbook and arguably bad for your health. It rewards bad care and punishes good care.

What we need are accountable, organized, integrated health care delivery systems. I am working with the Committee for Economic Development on a reform proposal that starts with creating an agency we call the "health fed," based on the Federal Reserve model, to keep the running of the health care system out of pork barrel politics. It also calls for modernizing the Federal Employee Health Benefits program to make it into a chassis for regional exchanges, and an institute to evaluate medical technology, particularly high cost technology.

Reliance on high deductible plans and health savings accounts are not the way to lower costs, because health expenditures are concentrated on a small fraction of people and deductibles can discourage low income people from getting preventive care. It all reflects a wrong-headed understanding of health care finance. It should not be viewed as casualty insurance. It should be seen as financing needed care. Havighurst and Richman are right about the unfairness of the system and it is getting worse, not better.

David A. Hyman
University of Illinois

Havighurst and Richman highlight numerous problems with the United States health-care system. For example, U.S.-style health insurance weakens price elasticity and makes it possible for providers to reap supra-competitive profits from their monopoly positions. In addition, providers behave like self self-appointed, reverse-Robin Hoods, exploiting the poor and the working/middle classes and redistributing the resulting wealth and medical resources to the upper upper-middle class and the wealthy. Lastly, providers reject efforts to control moral hazards and implement cost benefit trade-offs, resulting in health insurance coverage terms and delivery systems that cost much more than many Americans are willing and able to pay. Hidden costs and explicit benefits artificially increase demand for health services, while regulation of the health-care sector serves the interests of elites and incumbent providers of services, and not those of consumers.

Though the paper correctly identifies the health-care system's problems and offers a pragmatic and market-oriented policy analysis, its acerbic rhetoric may hurt its cause. The paper also fails to identify a compelling and unifying theory of distributive justice with which one can assess the outputs of a health-care system. More importantly, Havigurst and Richman omit useful details, plans, and proposals to eliminate the well-defined symptoms.

AEI health policy program manager Elizabeth Walker and research assistant Jonathan Stricks prepared this summary.

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