However, when patients pay their own medical bills, they act like normal consumers ― comparing prices and looking for value. And when patients act like prudent consumers, doctors who want their patronage must respond by competing on prices, convenience and other amenities.

Consider cosmetic surgery, one of the few areas of medicine where consumers pay out of pocket. The inflation-adjusted price of cosmetic medicine actually fell over the past two decades — despite a huge increase in demand and considerable innovation [See Figure]. Since 1992:

• The price of medical care has increased an average of 118 percent.
• The price of physician services rose by 92 percent.
• The inflation rate, for all goods and services, as measured increased by 64 percent.
• Yet cosmetic surgery prices only rose only about 30 percent.

The price of cosmetic medicine was held in check by a variety of competitive forces: Doctors who perform cosmetic services quote package prices, and generally adjust their fees to stay competitive. The industry is constantly developing new products and services that expand the market and compete with older services. As more cash-paying patients demand procedures, doctors rush to provide them. There are few barriers to entry in cosmetic surgery. Any licensed physician can enter the field.

Entrepreneurial physicians are also on the lookout for new ways to market their services. Consider the ubiquitous deal-of-the-day emails, where Groupon and LivingSocial offer goods and services to subscribers at greatly reduced prices. These daily deal promoters offer numerous medical-related services, including Botox, corrective eye surgery, dental teeth cleaning, teeth whitening, laser hair removal, laser facial resurfacing, cosmetic fillers, spider vein and brown spot removal at highly discounted prices. This defies the conventional wisdom that a doctor would never advertise a bundled cash price — much less extend the offer to hundreds of thousands of random people sight-unseen. Yet the offers land in millions of email inboxes every day, and competition is fierce.

Consider botulism toxin injections, such as Botox and Dysport. According to surveys by the American Society of Plastic Surgeons, the average fee to administer botulism toxin was $369 in 2012, compared to $365 a dozen years earlier in 2000. Groupon and LivingSocial have occasionally offered Botox deals for as little as $99, with $149 quite common.

Another competitive service is laser skin resurfacing, which cost about $2,556 in 1996, according to the American Society of Plastic Surgeons. Physicians began offering less-invasive, fractional laser resurfacing that reduced recovery time. The cost of fractional laser skin resurfacing fell to $1,113 by 2012. Yet, couponing websites have offered numerous laser resurfacing deals for only $299. One Dallas-area Med Spa even offers this service, available with a one-year membership, for as little as $149 — a mere fraction of the cost elsewhere.

Wherever there is price competition, quality competition tends to follow. Take corrective eye surgery. From 1999 (when eye doctors began performing Lasik in volume) through 2011, the price of conventional Lasik fell about one-quarter due to intense competition. [See Figure]  Eye surgeons who wanted to differentiate themselves from other surgeons, and charge more, began to provide more advanced Custom Wavefront Lasik technology using IntraLase (a laser-created flap). By 2011, the average price per eye for doctors performing Custom Lasik was about what conventional Lasik had been more than a decade earlier; but the quality is far better. Occasionally an eye surgeon will offer a daily deal at half this price.

One criticism skeptics often voice in discussions about fostering patient consumerism is that a patient having a heart attack is not in a position to shop for the cheapest cardiac care from the back of an ambulance taking him to the emergency room. Few people would disagree. But only about $1 out of $20 is spent on patients who enter the health care system through the emergency room door.

Consider the experience of an insured patient whose doctor orders an abdominal CT scan. Receiving this service at a hospital outpatient department could cost the patient (or her health plan) nearly $3,000 depending on whether the patient’s deductible has been met. Yet this same service is available outside the hospital at a medical imaging center for prices that are often 85 percent less. Few health plans provide the tools for enrollees to compare prices and few patients have an incentive to ask about prices.

Doctors and hospitals don’t quote prices and don’t compete on price because most patients are largely insulated from the adverse effects of not making price comparisons and acting like consumers. Both economic studies and common sense confirm that people do not shop carefully and prudently when someone else is picking up the tab. The contrast between cosmetic surgery and other medical services is important. One sector has a competitive marketplace and stable prices. The other does not.

The medical marketplace should work more like the market for cosmetic surgery.

Study: The Market for Medical Care Should Work Like Cosmetic Surgery.

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Civilization as we know it is coming apart according to the editorial board of The New York Times. This is how last Thursday’s lead editorial addressed the failure of the states to expand Medicaid, even though the federal government is willing to pick up 100 percent of the costs of the expansion for the next few years:

As Robert Pear of The Times recently reported, more than half of all people without health insurance live in states that are not planning to expand coverage. Many of those states already do a terrible job of covering the poor and have no interest in changing their ways, no matter the financial incentive.

On Medicaid, education and many other issues, the map of the United States is becoming a patchwork of conscience and callousness. People on one side of a state line have access to health care, strong public schools and colleges, and good transportation systems, while those on the other side do not. The breakdown of a sense of national unity in Washington is now reflected across the country, as more than two dozen states begin to abandon traditions of responsible government.

With that level of hyperbole, it is only natural to suspect that the entire editorial was ghost written by Paul (if-you-disagree-with-me-you-must-be-evil) Krugman. Yet in his column the next day, Krugman showed that when it comes to irresponsible editorial writing, he is nonpareil:

[T]he only way to understand the refusal to expand Medicaid is as an act of sheer spite…Just think about this for a minute. It’s one thing when politicians refuse to spend money helping the poor and vulnerable; that’s just business as usual. But here we have a case in which politicians are, in effect, spending large sums, in the form of rejected aid, not to help the poor but to hurt them.

And the consequences of all this maliciousness?

Medicaid rejectionism will deny health coverage to roughly 3.6 million Americans, with essentially all of the victims living near or below the poverty line. And since past experience shows that Medicaid expansion is associated with significant declines in mortality, this would mean a lot of avoidable deaths: about 19,000 a year, the study estimated. (Emphasis mine.)

… Sorry for that pause. I was overcome by a sudden surge of grief…

But wait a minute. Something is wrong here.

 Let’s see…there are about 50 million uninsured…mostly living in states that are not expanding Medicaid…and as a result there will be 3.6 million who don’t get insured…And…3.6 divided by 50…is 7.2%.

Hmmm. Only 7.2 percent of the uninsured will fail to get insurance because half the states don’t expand Medicaid? We could fail to insure that many just by bureaucratic snafus alone.

I suppose we should cut the folks at The Times some slack. When you are contemplating the collapse of civilization and the virtual murder of thousands of innocent victims by spiteful Republican governors how can you expect editorial writers to spend too much time dealing with such nettlesome things as actual facts?

But for those whose curiosity impels them to try to understand rather than merely deplore, here is the rest of the story.

Let’s begin with Krugman’s claim that the failure of the states to expand Medicaid will cause 19,000 deaths a year. This number comes from an extrapolation by RAND Corporation researchers of a study by Katherine Baicker and her colleagues finding association, but not causation, between Medicaid enrollment and reduced mortality. What Krugman doesn’t tell his readers is that Baicker was the lead author of a more recent and much more careful study of the issue involving the Oregon Medicaid experiment. That study found no effect of Medicaid (versus uninsurance) on health! Further, the Oregon study is consistent with most of the serious literature on this subject, including a very famous study by the RAND Corporation itself.

Surely Krugman must know this. If he doesn’t, he could easily discover on his own or by walking down the hall at Princeton and asking his colleague Uwe Reinhardt.

With respect to the more general issue, the Obama administration cannot force the states to expand their Medicaid program, as a result of a Supreme Court decision. So what happens if they don’t? The Affordable Care Act (ObamaCare) says that people who are not eligible for Medicaid and who earn between 100 and 133 percent of the federal poverty level are entitled to enter the newly created health insurance exchanges and get full private insurance coverage by paying no more than 2 percent of their income in premiums (3 percent for those earning between 133 and 138 percent of poverty).

This means that instead of being pushed into Medicaid (with its well-known access problems and rationing by waiting) near poor families will instead be able to purchase private insurance for less than 5 cents on the dollar — all subsidized by the federal government. It also means that instead of receiving federal dollars to pay for Medicaid insurance, these states will be receiving even more federal dollars through the subsidies for private coverage.

When President Obama and most Democrats in Congress talk about health reform, they imply that subsidized insurance in the exchanges will be similar to the private insurance people have today. If so, the newly insured will have insurance much better than what Medicaid offers and doctors and hospitals will receive a lot more money than they would have received with Medicaid expansion.

On the average, Medicaid pays providers only about 59 percent of what a private insurers pay. In some states it’s even lower. For example:

• New York pays primary care physicians only about 29 percent of what private insurers pay.
• The comparable figure in New Jersey is 33 percent.
• In California it’s 38 percent.

Many believe that these low rates mean cost shifting — as other payers pay more to subsidize Medicaid patients who pay less, although see Austin Frakt’s review of the literature.

In a study for the National Center for Policy Analysis, Devon Herrick estimated how much additional medical spending each state would receive if 70 percent of those eligible got subsidized private health insurance in the exchanges rather than enroll in Medicaid. The numbers are quite large, totaling nearly $22 billion per year.

• Californians would enjoy about $3 billion a year in additional spending.
• Florida could expect $2 billion more dollars spent on care.
• Texas would receive about $3 billion more.

Krugman refers to a RAND study of 14 states that will apparently forego Medicaid expansion:

The result, the study concluded, would be a huge financial hit: the rejectionist states would lose more than $8 billion a year in federal aid, and would also find themselves on the hook for roughly $1 billion more to cover the losses hospitals incur when treating the uninsured.

Yes, but $9 billion would be a less than half the additional spending these states would receive if patients had private insurance instead.

There is one caveat. Subsidized insurance in the health insurance exchanges may not be like private insurance is today. It may be more similar to Medicaid.  We have to be alert to a bait and switch. As I reported last week:

Insurance sold in the Massachusetts exchange pays doctors and hospitals only about 10 percent more than what Medicaid pays. And for reasons that are not entirely clear, doctors are less willing to see the newly insured (with exchange subsidies) than Medicaid patients.

Also, in the California exchange:

[T]he fees paid to providers will not be the same as commercial insurance are paying. They will be somewhere between the commercial rates and Medicare rates.

It is even possible that in some states the subsidized plans will pay less than what Medicaid pays.

The choice to expand, therefore, is complicated — even from a purely financial point of view.

There are more considerations. The Heritage Foundation  finds that 80 percent of the states will be worse off from Medicaid expansion as the federal government reduces its commitment to bear 100 percent of the costs in the next few years. The fate of the states will be even worse if the federal government reneges on its commitments — certainly a possibility depending on future elections. Urban Institute economists disagree, but reasonable people can line up on either side of the argument.

At least for now, however, it appears that most states will gain by refusing to expand Medicaid to people between 100 percent and 138 percent of the poverty level. And if they currently cover some people in this income range, they would be better off by rolling back coverage to100 percent.

But there is another wrinkle caused by another oddity in the Affordable Care Act.

It turns out that below 100 percent of poverty, people who are not eligible for Medicaid will not be entitled to subsidized insurance in the health insurance exchanges. (In a lot of states, some populations are covered above 100 percent — say, parents with children — while other populations are not covered at all or are covered at a level below 100 percent — say single adults.) For this group, it is tempting to expand Medicaid coverage and let the federal government pick up the entire tab.

However, the Obama administration is unwilling to allow states to “partially expand” Medicaid — at least with the federal government picking up 100 percent of the costs of the expansion. I don’t necessarily blame them for this. If states could do whatever is in their own interest, the cost to the federal taxpayer would be large. I do blame them for not agreeing to win/win changes, however.

Take a state like Texas. It spends billions of dollars on indigent health care through “health districts.” In Dallas, for example, Parkland Hospital and its clinics offer care on a sliding pay scale to families up to 250 percent of the federal poverty level. But since these expenses are not part of Medicaid, the federal government doesn’t match them. A reasonable reform would be to allow Texas to have all its Medicaid money as a block grant, provided that the state agrees to integrate Medicaid with the health district money and cover all the population below 100 percent of the federal poverty level.

Rhode Island has shown that a Medicaid block grant can save money and improve care. It’s time to allow other states to have a shot at similar reforms.

For now, it is not the states that are standing in the way of insuring the uninsured. It is the Obama administration.

(Oops, Krugman does know about the Oregon study — see his blog entry. Just forgot to tell his NYT readers about it, I suppose.)

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The doctor knows more than the patient. As a result, doctors can recommend unnecessary care that enhances their incomes, even though it may be of no benefit to the patients. Doctors might also recommend one drug over another or one medical device over another because of their financial relations with the producers. Because of their limited knowledge, patients have no reliable way of evaluating the quality of the advice they are getting ― especially when they get different advice from different doctors.

About the only check on the system is third-party payer utilization review. But this is crude and highly imperfect activity engaged in by another party that has a financial interest in the outcome.

Arrow said this flaw in the market justifies occupational licensing and other government restrictions on doctor behavior. Health economics textbooks have generally accepted Arrow’s critique, holding that the free market for medical care has no answer to the problem.

Until now.

2nd.MD is a Houston-based company that has come up with an ingenious solution. The company arranges virtual consultations with some of the top doctors in the country so that patients can get a second opinion. The doctors represent 250 subspecialties and they are at places like Harvard Medical School, the Cleveland Clinic, Mayo Clinic, etc. Since the doctor who gives the second opinion has no financial interest in the patient’s subsequent care, the only motive behind the advice is the welfare of the patient.

The system works like this. Employers sign up with 2nd.MD and make its services available to the employees for free. If an employee questions whether a recommended procedure (surgery or an MRI scan, for example) is really needed, the employee can contact 2nd.MD’s Care Team and they direct the patient to an appropriate group of specialists. The patient can go on line and read about the specialists, check out their credentials, choose one (there are usually two or three choices) and let 2nd.MD arrange for the consultation.

The Care Team helps obtain the patient’s medical records and makes them available to the specialist in advance. The consultation can be by phone or by video.

Why are some of the top-rated doctors in the nation willing to give “second opinions”? One reason is that the remuneration is attractive. They receive from $100 to $400 for a consultation that usually lasts about 20 minutes. Another reason is the ease of performing the service. They can do it from their home or office and they can choose the hours when they consult. Also, there is very little fear of a malpractice problem. But if the specialist is worried that a malpractice claim might emerge, she can choose to pay $3 and get immediate insurance covering the consultation before it takes place.

Here are some obvious questions:

• How are the specialists able to get around state laws that require doctors be licensed to practice in the state where the patient receives the care? Answer: these doctors are not actually “practicing medicine”; they are just giving advice.
• Why is the malpractice premium so low and why does this insurance not fall under state regulation of malpractice insurance? Answer: again, these consultations are not considered “practicing medicine”; so the insurance is not technically “malpractice insurance.”
• Do the employers urge or require the employees to use the service prior to expensive care? Answer: so far, the consultations are completely initiated by the employees; but in the future “nudging” is a possibility.
• If employers are picking up the tab, they must think medical costs will be lowered. But how do we know that the specialist won’t recommend procedures that are even more expensive than the original doctor? Answer: Academic doctors and staff doctors are naturally more conservative than fee-for-service physicians.

2nd.MD is currently covering about 30,000 employees and that number could double or even triple in the next few months. Clint Phillips, the entrepreneur behind the venture estimates that:

• Every 100 consultations results in the avoidance of 11 surgeries, 12 optical scans and 12 further physician visits.
• Overall, he says the average specialist consultation saves about $1,986 in direct medical costs.
• Among the most impressive results, these consultations have avoided an unnecessary liver transplant, saved a patient’s eyesight, saved a patient’s hearing and saved two patient lives (because they were being mistreated for cancer).

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One of the lesser-known provisions of the Affordable Care Act was an expanded tax credit for families that adopt children. According to a report from the National Taxpayer Advocate, domestic adoptions can cost up to $15,000 for fees and legal expense, so in 1996 Congress adopted a tax credit of up to $5,000 to help families offset some of those costs. The amount of the credit grew over time and was up to $11,650 by 2008. This was a credit against existing taxes, so only families that actually paid taxes would benefit, even though other families also were on the hook for the costs of adoption.

As part of the Affordable Care Act, Congress increased the amount of the credit to $13,170 per child and made it refundable for the tax years 2010 and 2011, so any family that adopted a child would be eligible even if they did not otherwise pay taxes. It put the IRS in charge of issuing these credits.

It seems this was an almost insurmountable challenge for the IRS. It wasn’t sure what documentation would verify the claim and it was terrified of fraud. It ended up flagging 90% of all the returns that claimed a credit, usually for lack of documentation or income information, and it actually audited 69% of the returns. Rather than simply calling the taxpayer to request better documents, it kicked these returns over to its correspondence audit department, which took on average 126 days to complete.

In spite of the massive scrutiny, out of $668.1 million in tax credits claimed in tax year 2011, the Service disallowed only $11 million, and failed to find a single case of fraud. It also had to pay out $2.1 million in interest on claims that were held up for over 45 days.

The Tax Advocate’s report sums it up thusly –

The IRS’s Compliance Strategy for the Expanded Adoption Credit Has Significantly and Unnecessarily Harmed Vulnerable Taxpayers, Has Increased Costs for the IRS, and Does Not Bode Well for Future Credit Administration.

Now to be fair, this isn’t just the IRS’s fault, Congress bears some blame here, too.

The provision was inserted into the ObamaCare law even though it has nothing to do with health care. It was a very generous benefit, but it was written to last only two years, presumably to keep ObamaCare looking less expensive than it actually is and get a better score from CBO. And the tax credit expired completely except for special needs children at the start of 2013, and even that will be phased out for taxpayers with incomes over $186,000, making administration even more complicated. A footnote to the report says –

The refundability of the credit expired on Dec. 31, 2011, and the credit has reverted to a nonrefundable credit of up to $12,650 for tax year 2012. Rev. Proc. 2011-52. For 2013 and beyond, the credit will be available only for special needs adoptions and may only be claimed for qualified expenses incurred up to a maximum of $6,000. Economic Growth and Tax Reconciliation Act of 2001, Pub. L. No. 107-16, raised the limit of the original credit to $10,000 and does not apply to taxable years beginning after Dec. 31, 2012.

This whipsawing of tax law has become characteristic of the Democrats in Congress. Last year before the “fiscal cliff” agreement no one could predict in December of 2012 what their tax rates would be the following month. How can anyone plan for even the near future under these circumstances?

And importantly, how can the IRS develop information systems, explanatory brochures, the necessary forms, and train staff when they don’t know from month to month what is expected of them?

Still, if there was all this chaos for the tiny handful of families who adopted children in 2010 and 2011, the prospects for effective management of the many millions of people who are expected to claim a health insurance tax credit are not bright.

One of the problems for the adoption tax credit was that, being refundable it reached lower-income families who are not accustomed to filing taxes or providing documentary proof of expenses. Many of these people are barely literate and have a hard time understanding bureaucratic paperwork. Imagine how they will respond to the maze of forms and paperwork required under the Affordable Care Act.

The report is very concerned about the prospects. Its conclusion is stark –

By design, the adoption tax credit plays a critical role in helping taxpayers — particularly low and middle income taxpayers — meet the financial burden that may be involved in adopting a child. The IRS, facing a sizeable refundable credit, reacted with an enforcement strategy that was focused on stopping nearly all returns claiming the credit and subjecting a large percentage of them to an audit, instead of reaching out to stakeholders (including states) to understand the impacted taxpayer population. When problems emerged, the IRS simply continued selecting returns for audit. This approach forced taxpayers to withstand lengthy delays and the IRS to expend valuable resources with very little to show for them. As the IRS faces a new refundable credit in the form of the Premium Tax Credit, it should study and learn from its mistakes to avoid repeating them again, when there will be even more at stake.

The response to this report from the Service is not encouraging. It is defensive and arrogant. It explains that it did everything that could be reasonably expected. Too bad some people don’t understand. The tone is very similar to the tone is has been taking with Congress ― we’ve done nothing wrong and only stupid people would think otherwise.

What a ride we are in for.

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Boston University professor Lawrence Kotlikoff has suggested that Krugman return his Nobel Prize. I hope he doesn’t. As long as someone with Krugman’s professional status gets his facts wrong in column after column, and does so in an arrogant and pompous manner, attacking the integrity and hurling insults at all who disagree with him…well, there will always be a market for a writer who is able to show that the scourge of sensible people everywhere has written one more erroneous editorial.

Krugman may not always be wrong. On some economic issues he may actually be right. But when it comes to health care, he almost never misses. He is wrong 100% of the time.

So wrong,
For so long.

In last week’s New York Times column Krugman pronounced ObamaCare a success before it has even been tried. Why? Because the premiums to be charged in California’s health insurance exchange are apparently lower than what the experts thought they would be:

Well, the California bids are in — that is, insurers have submitted the prices at which they are willing to offer coverage on the state’s newly created ObamaCare exchange. And the prices, it turns out, are surprisingly low. A handful of healthy people may find themselves paying more for coverage, but it looks as if ObamaCare’s first year in California is going to be an overwhelmingly positive experience.

I did a quick check and discovered that if a 25 year old in Los Angeles chooses the least expensive plan offered on the California health instance exchange, the premium will be $142 a month. Yet the cheapest plan offered on eHealth today is only $92 a month.

Aah…let’s see…Everybody thought health insurance premiums would be 100% higher. In fact, they are only 60% higher…Hooray…Break out the champagne! (BTW, Avik Roy concludes that the new premiums will be effectively double what people are now paying.)

I’ll come back to these price comparisons in a minute. For the moment, I would ask: what kind of an economist would celebrate an expected price decline without asking what happened to quantity or quality? This is an Econ 101 mistake.

As it turns out, the health insurance to be sold in the California exchange excludes some of the best hospitals and the best doctors. Also, the fees paid to providers will not be the same as commercial insurance are paying. They will be somewhere between the commercial rates and Medicare rates. This means that people with exchange-acquired insurance will be less desirable to providers from a financial point of view than people in orthodox plans. As the Los Angeles Times explains:

People who want UCLA Medical Center and its doctors in their health plan network next year, for instance, may have only one choice in California’s exchange: Anthem Blue Cross. Another major insurer in the state-run market, Blue Shield of California, said its exchange customers will be restricted to 36% of its regular physician network statewide.

And Cedars-Sinai Medical Center, one of Southern California’s most prestigious and expensive hospitals, said it’s not included in any exchange plans at the moment.

Krugman points to the experience of health reform in Massachusetts in predicting how wonderful health reform is going to be:

Massachusetts has had essentially this system since 2006; as a result, nearly all residents have health insurance, and the program remains very popular. So we know that ObamaCare — or, as some of us call it, ObamaRomneyCare — can work.

But what has really happened in the Bay State? Insurance sold in the Massachusetts exchange pays doctors and hospitals only about 10% more than what Medicaid pays. And for reasons that are not entirely clear, doctors are less willing to see the newly insured (with exchange subsidies) than Medicaid patients.

The Massachusetts reformers believed that once everyone was insured, patients would go to the doctor’s office for primary care rather than to the hospital emergency room. But in expanding the demand for care, they (just like ObamaCare) did nothing about supply. The newly insured can’t go to doctors’ offices for their primary care if there aren’t any more doctors’ offices.

Here is what is happening on the ground. Traffic to hospital emergency rooms in Massachusetts is higher today than before health reform. Traffic to community health centers is almost one-third higher than it was before reform. Yet, the time it takes to get care is growing. The wait to see a new doctor in Boston today is two months ― the longest wait in the entire country.

On balance, the only thing that seems to have changed in Massachusetts is that patients are waiting longer. They are going to the same places to get care that they went to before. They are getting the same care from the same providers. In the process, more money is being moved around. A lot more money.

Let’s return to the subject of California premiums. Krugman links to a Jonathan Cohn New Republic column claiming that premiums on the newly created health insurance exchange will actually be lower that they are today. Yet this assertion is based on comparing premiums in today’s small group market with expected individual premiums on the health insurance exchanges. That’s not the right comparison. Small group premiums are significantly higher than individual premiums in most states. The relevant comparison is today’s individual insurance premiums versus the individual premiums in the exchange. Exchange premiums are going to be higher.

With health reform, California premiums will be higher than they are today, but the sticker shock will not be as severe as in other states. The reason: California already has unisex rate requirements. As a result the age differential for males (60 year old versus 20 year old) is already close to the 3 to 1 band required by ObamaCare. In states without unisex regulation, the age differential would be 6 to 1.

Still, middle class families in California should brace themselves. The surprises in ObamaCare are going to be just as arbitrary and unfair on the West Coast as they will be in the rest of the country.

P.S. The folks at InsureBlog have discovered more Krugman errors.

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In one system, patients will be able to see doctors promptly. They will talk to physicians by phone and email. They will have no difficulty scheduling needed surgery. If they have to go into a hospital, a “hospitalist” (who reports to them and not to the hospital administration) will be there to make sure their interests are looked after. They may even have an independent agency that reviews their medical records, goes with them when they meet with specialists and gives them advice on every aspect of their care.

In the other system, waiting times will grow for almost everything ― to get appointments with physicians, to get tests, to obtain elective surgery, etc. Patients may find that they don’t have access to the best doctors or the best hospitals. They may find that the facility where they are treated does not have the latest technology. In terms of waiting times and bureaucratic hassles, health care for these patients may come to resemble the Canadian system. It may become even worse than the Canadian system.

The evolution toward a two-tiered system was already under way before Barack Obama became president. But ironically, the Affordable Care Act (ObamaCare) is accelerating the pace of change. It is doing so in four ways.

New doctor hours: 9 to 5

First, ObamaCare is supposed to insure 32 million additional people by this time next year. If the economic studies are correct, these newly insured will try to consume twice as much medical care as they have been. In addition, most of the rest of us will be forced to have more generous coverage than we previously had. There will be a long list of preventive services that all plans will be required to cover ― with no deductible and no copayment ― and commercial insurance will be required to cover a great many services previously avoided (including, everyone must know by now, contraception). These two changes alone will boost the demand for care considerably.

On the supply side, there is really no provision under ObamaCare to create more doctors. In fact, the supply of doctor services is likely to decrease because of two more features of health reform. Doctors, who are already weary from third-party interference in the practice of medicine, will step up their retirement dates as they contemplate the prospects of even more bureaucracy. Also, hospitals are acquiring doctors as employees at a rapid rate. Indeed, more than half of all doctors are now working for hospitals. When doctors quit their private practices and start working for hospitals, they reduce the number of hours they work. (Forty hour work weeks and golf on the weekends replaces 50 and 60 hour work weeks.) Since they have a guaranteed income, they also become less productive.

These four changes add up to one big problem: we are about to see a huge increase in the demand for care and a major decrease in the supply. In any other market, that would cause prices to soar. But government plans to control costs (even more so than in the past) by vigorously suppressing provider fees and the private insurers are likely to resist fee increases as well. That means we are going to have a rationing problem. Just as in Canada or Britain, we are going to experience rationing by waiting.

Consider how much waiting there already is in the U.S. health care system. On the average, patients must wait three weeks to see a new doctor. In Boston, where we are told they have universal coverage, the average wait time is two months to see a new family doctor. Amazingly, one in five patients who enters a hospital emergency room leaves without ever seeing a doctor ― presumably because they get tired of waiting.

All this is about to get worse. Waiting times are going to be especially lengthy for anyone in a health insurance plan that pays providers below-market fees. The elderly and the disabled on Medicare, low income families on Medicaid, and (if the Massachusetts precedent is followed) people who acquire health insurance in the new health insurance exchanges will find they are financially less desirable to providers than other patients. That means they will be pushed to the end of the waiting lines.

Those who can afford to will find a way to get to the head of the line. For a little less than $2,000 a year, for example, seniors on Medicare can contract with a concierge doctor. These doctors promise prompt access to care and usually talk with their patients by telephone and email. They serve as an advocate for their patients, in much the same way as an attorney is an advocate for his client.

But every time a doctor becomes a concierge doctor, he (or she) leaves an old practice serving about 2,500 patients and takes only about 500 patients into the concierge practice. (More attention means fewer patients.) That means about 2,000 patients now must find a new physician.

Because the two tiers of health care will compete with each other for resources, the growth of the first tier will make rationing by waiting even more pronounced in the second tier. As a result, waiting times in the second tier could easily exceed those in Canada.

I also believe all this is going to happen much more rapidly than anybody suspects.

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In 2012, Milliman calculated how much the price controls are likely to raise costs for those unlucky enough to be affected by them. Here are some examples of the variations caused by market pricing for an Anthem HSA policy for an individual living in Marion County, Indiana, in November, 2011:

Based on estimated rates for ObamaCare policies and subsidies keyed to exchange silver plans, Milliman concludes that ObamaCare rules would have the following impact on the cost of then current $5,500 deductible plans (ObamaCare outlaws individual market deductibles of $5,500.)

Men, especially the young ones, are the biggest losers.

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It is illegal for government officials to solicit money from companies they regulate, according to Sarah Kliff from The Washington Post. She writes –

Federal regulations do not allow department officials to fundraise in their professional capacity. They do, however, allow Cabinet members to solicit donations as private citizens “if you do not solicit funds from a subordinate or from someone who has or seeks business with the Department, and you do not use your official title,” according to Justice Department regulations.

That should be a no-brainer. But Ms. Sebelius has violated the law before. Michael Cannon of the Cato Institute reminds us that in 2012 –

…the U.S. Office of Special Counsel concluded that Sebelius violated the Hatch Act by campaigning for President Obama and other political candidates while traveling on official business, an offense for which other federal workers are fired.

Ms. Sebelius apparently suffered no penalty for this transgression. Instead she continued to exercise unprecedented power in handing out waivers for unions and select others to avoid the requirements of ObamaCare, with absolutely no standards or guidance. Obeying the health reform law is mandatory, unless she decides it isn’t.

Industry shakedowns are nothing new for this administration. Before Mr. Obama was elected in 2008, you may remember that the pharmaceutical industry was the Democrats’ favorite whipping boy. Hardly a week went by without one of them demanding price controls or “re-importing” drugs from Canada. The industry was constantly accused of killing sick people by overcharging for medications, and profiteering from government-funded research. PhRMA was terrified of what the new administration was planning.

But in one of the most amazing turnabouts ever in Washington, PhRMA went from full-throated opposition to ObamaCare to full-throated support ― in just a matter of months.

On November 14, 2008, just a week after the election, The Washington Times reported that, “The nation’s largest pharmaceutical lobbying group is preparing a multimillion-dollar public relations campaign to tout the importance of free-market health care and undercut an expected push by the Obama administration for price controls of prescription drugs.” The article went on, “The stakes are especially high for drug makers, which stand to lose as much as $30 billion in revenue if President-elect Barack Obama‘s plan to let the federal government negotiate Medicare drug prices is implemented.”

Just nine months later, in August 2009, the publication Medical Marketing & Media was reporting just the opposite ― “PhRMA will launch a big advertising push for healthcare reform later this week, with T.V. spots airing in key states and on cable channels nationally.” The story continues, “News outlets including The New York Times and the Associated Press put spending on the ads in the range of $150 million ― a figure that PhRMA SVP Ken Johnson called speculative.”

What happened? The story quotes PhRMA president Bill Tauzin, “We were assured (by the White House): ‘We need somebody to come in first. If you come in first, you will have a rock-solid deal.’”

Apparently, PhRMA agreed to $80 billion in cuts aimed at filling the Medicare drug program’s “donut hole” and to spend $150 million in advertising to support Obama in exchange for a pledge that the White House would oppose price controls and re-importing drugs. And we haven’t heard a word of criticism of the pharmaceutical industry since then.

This time around it is the insurance industry that is being asked for favors ― to donate to Secretary Sibelius’ favorite “charity.” This is the very industry she directly or indirectly regulates.

The Ways and Means Committee is pretty concerned about this latest scam. It wrote a letter to the secretary which reminds her of the federal Anti-Deficiency Act, which reads in part –

From 5 CFR 2635.101 ― Basic obligation of public service.

(4) An employee shall not, except as permitted by subpart B of this part, solicit or accept any gift or other item of monetary value from any person or entity seeking official action from, doing business with, or conducting activities regulated by the employee’s agency, or whose interests may be substantially affected by the performance or nonperformance of the employee’s duties.

(14) Employees shall endeavor to avoid any actions creating the appearance that they are violating the law of the ethical standards set forth in this part. Whether particular circumstances create an appearance that the law or these standards have been violated shall be determined from the perspective of a reasonable person with knowledge of the relevant facts.

The letter goes on to demand answers to a series of questions about who exactly was solicited, by whom, and for what.

Looks bad for the secretary. Can she issue herself a waiver?

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What do the writers who are obsessing about it mean by “inequality”? They basically mean inequality of income. That would make sense if we all agree that the most important way in which people are unequal is differences in income. But what if that isn’t the case? Almost all of the people who are doing the complaining have chosen professions that earn less income than they could have had. That is, all these professors and editorial writers could have gone to law school or gotten an MBA or done something else that would have earned them more money. Obviously, money isn’t the most important thing in their lives.

The list below shows some other ways in which people are unequal. These things basically can’t be purchased. But if we were really concerned about life’s unfairness, we could compensate those who have less of these attributes and tax those who have more.

Intelligence

Physical health

Mental health

Happiness

Leisure time

Physical attractiveness

Athletic ability

Music ability

Life expectancy

Life is unfair.

On the last item, there has been a persistent gap between the life expectancies of men and women ― across all racial and ethnic groups. We don’t want to lower the life expectancy of women and we don’t know how to raise the life expectancy of men. But a general tax on women to be distributed to men would help redress some of nature’s injustice (see Dwight Lee.) Plus, with this tax there would be very little of the avoidance and evasion behavior we see with the income tax. (Not many people would get a sex change just to avoid paying it.)

To return to college professors, for a moment, they have an enormous amount of time to do whatever they feel like doing. They only have, say, six to nine hours of required work every week (teaching) and even then they have enormous discretion over what they actually do. Plus they have the whole summer off. The term “leisure time” doesn’t really capture what is going on here. Let’s just say they have leisurely jobs. Contrast that with people who have no discretion over how they perform their jobs, who work 40 hours a week or more, who hate their work and who can’t wait to retire. (College professors rarely want to retire.)

If you care a lot about inequality, an argument could be made for taxing college professors and giving the money to people whose work experience is boring, uninteresting, unfulfilling and has no purpose (for them) other than paying their bills.

If you believe Tom Wolfe, the most important thing on the list above is status. In Wolfe’s novels, status is far more important than income ― for almost everybody. What are some indictors of status? Being quoted in major newspapers. Being interviewed on TV. Winning a Nobel Prize. By way of contrast, think of all the people who have never been quoted in any newspaper, who have never been on TV and who have never won any prize. I believe there is far more inequality of status than inequality of income, although I’m not sure how to measure these things.

In any event, if inequality bothers you, think about a special tax on Nobel Prize winners, on TV talk show guests and on people whose names appear in the national news media ― with the proceeds distributed, of course, to people who have no status. Anyone called “counselor” or “esquire” or “doctor” is an obvious candidate for a status tax. Someone called both “professor” and “doctor” ought to be a candidate for double taxation. If the professor/doctor also has an eponymous blog, make that a triple tax!

I definitely would include politicians. In fact, if status is what is most important in life, there should be a special tax on elected officials and a huge tax on whoever is president.

There is a closely related issue. In my line of work I meet an enormous number of people who are frustrated because the world pays no attention to what they think. They have no forum from which to get their ideas in front of everyone else.

But imagine you could be an editorial writer for The New York Times. Better, imagine you could say anything you wanted to say ― ignoring facts and even saying things that are demonstrably untrue. Plus, no matter what you say, you never have to publish a retraction or apologize. Imagine that you could use your column to say mean and nasty things about people you don’t like and you could call them any name The NYT regards as “fit to print.”

Now imagine auctioning off the right to have this job. How much do you think people would be willing to pay? I’ll bet there would be some willing to pay $1 million for the opportunity.

In any event, there should be a special tax on whoever gets this job. A very big tax.

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Liberals are tired of being lectured by conservatives about what’s wrong with their approach to health policy because conservatives haven’t been a productive partner in seeking a fix.

Josh is half right. Yes, the left gave us a “fix” in the form of ObamaCare. But I believe it’s fair to say that no serious effort was made to work with Republicans. Remember: ObamaCare didn’t get one Republican vote on final passage. That’s not surprising. A few years back, when the Republicans pushed through the Part D drug benefit under Medicare, I don’t think a single Democrat offered to help with the legislation.

I’ve been a close observer of health care politics for a quarter of a century and in all that time I have seen very little productive interchange between the left and the right on this subject. And this is not just true of Washington. It’s true generally across the country.

Why is that?

At the most fundamental level, the left and the right approach the subject from completely opposite directions. The left invariably focuses on benefits. The right invariably focuses on costs. The left is concerned about what people are going to get. The right is concerned about how we are going to pay for it. You can find left wing health reform plans that barely mention how the reform will be paid for — or who will pay what for anything. You can find right wing reform plans that don’t even mention what medical care anyone will actually receive.

This, of course, is part of a larger division. In general, the left focuses on spending. The right focuses on taxes. But in health care the division is more pronounced. In fact, in health care the two sides don’t appear to be talking about the same subject.

 Don’t take me half the way.

On the left, Zeke Emanuel and Victor Fuchs published a health plan in the New England Journal of Medicine a few years back. They proposed to replace all private and public insurance with a universal health insurance voucher, funded by a value-added tax (VAT). Yet the two did not even do a back of the envelope calculation of what kind of VAT tax would be required or whether there is any country in the world that successfully collects a VAT tax of that magnitude.

On the right, Marty Feldstein has proposed a universal scheme under which every family would receive a voucher sufficient to buy an insurance plan that would cover all medical expenses above 15% of the family’s income. True to form, Feldstein tells us almost nothing about the benefit side. (What expenses count in arriving at the 15%, for example?) But he tells us quite a lot about how the financing works:

A typical American family with income of $50,000 would be eligible for a voucher worth about $3,500, the actuarial cost of a policy that would pay all of that family’s health bills in excess of $7,500 a year.

The family could give this $3,500 voucher to any insurance company or health maintenance organization, including the provider of the individual’s current employer-based insurance plan. Some families would choose the simple option of paying out of pocket for the care up to that 15 percent threshold. Others would want to reduce the maximum potential out-of-pocket cost to less than 15 percent of income and would pay a premium to the insurance company to expand their coverage. Some families might want to use the voucher to pay for membership in a health maintenance organization. Each option would provide a discipline on demand that would help to limit the rise in health-care costs.

Now here is the interesting thing, and I can’t believe I am the first person to have noticed this: THERE IS NO INCONSISTENCY BETWEEN THESE TWO PLANS!

Hard to believe, but true. If you want to fill in the missing details on how the Emanuel/Fuchs plan would actually be financed, one way to do it would be to turn to Marty Feldstein. If you want to fill in the missing information about the benefit side of the Feldstein plan, one way to do it would be to turn to the Emanuel/Fuchs proposal. I am not saying that you have to complete the proposals this way. But it is possible.

Economists have long known that specialization and comparative advantage create opportunities for gains from trade. So why not let the left specialize in designing the benefit side of things and let the right specialize in designing the financing side?

[There is one possible impasse I am glossing over here. The left believes in defined benefits. The right believes in defined contributions. That is, the left wants to fix the benefits that it wants everyone to have and then leave it up to the political system to somehow find the money to pay for them. The right wants to fix the amount of money each family has to spend and then let competition in the marketplace determine what the buying options are. I'm not entirely sure how serious this impasse is.]

Let’s go back to Congress for a moment. In the 2008 presidential election, the most important domestic policy issue was health care. Barack Obama had a vision of benefits that he wanted everyone to have, but he had no clear explanation of how they would be paid for. John McCain had a very clear vision of how to reform our system of paying for health insurance, but he had no clear vision of what the product would finally look like or how people would get it. I would argue that these two visions are not inherently at odds. It seems possible that the two approaches could have been merged in a way that left both sides satisfied.

What if President Obama had asked John McCain and Max Baucus to jointly propose a health reform plan? What then? It would have been much better than what we got.

Since the Republicans were completely left out, we got something that should have been predictable. On the benefit side, everyone is more or less equal. The whole country is being pushed toward a standard benefit package, ultimately defined in Washington. On the financing side, however, we have a Rube Goldberg contraption that is creating havoc in the labor market and that defies all common sense.

Ah, what might have been.

P.S.: Megan McArdle has a reform plan that is superficially similar to Marty Feldstein’s and which she describes this way:

[T]he McArdle Plan…eliminates the tax subsidy for employer-sponsored insurance, zeros out coverage mandates, gets rid of Medicare and Medicaid, and has the government provide 100% insurance for all expenditures above 20% of income. Simple, efficient, and keeps the incentives where they belong.

Well not quite. This sounds more like national health insurance with a high deductible. And if that is what is it, the pressure to lower the deductible would be enormous.

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