Why Subsidize-And-Regulate Isn't Enough to Fix Healthcare

For another perspective on why plans that focus on Federalizing the regulation of and providing subsidies to the existing employer-based healthcare system aren't likely to be an effective pathway to reform, David Goldhill's article in September's Atlantic Monthly is worth reading. In the opening section of his article, Goldhill writes…

The persistence of bad industry practices—from long lines at the doctor’s office to ever-rising prices to astonishing numbers of preventable deaths—seems beyond all normal logic, and must have an underlying cause. There needs to be a business reason why an industry, year in and year out, would be able to get away with poor customer service, unaffordable prices, and uneven results—a reason my father and so many others are unnecessarily killed.

Like every grieving family member, I looked for someone to blame for my father’s death. But my dad’s doctors weren’t incompetent—on the contrary, his hospital physicians were smart, thoughtful, and hard-working. Nor is he dead because of indifferent nursing—without exception, his nurses were dedicated and compassionate. Nor from financial limitations—he was a Medicare patient, and the issue of expense was never once raised. There were no greedy pharmaceutical companies, evil health insurers, or other popular villains in his particular tragedy.

Indeed, I suspect that our collective search for villains—for someone to blame—has distracted us and our political leaders from addressing the fundamental causes of our nation’s health-care crisis. All of the actors in health care—from doctors to insurers to pharmaceutical companies—work in a heavily regulated, massively subsidized industry full of structural distortions. They all want to serve patients well. But they also all behave rationally in response to the economic incentives those distortions create. Accidentally, but relentlessly, America has built a health-care system with incentives that inexorably generate terrible and perverse results. Incentives that emphasize health care over any other aspect of health and well-being. That emphasize treatment over prevention. That disguise true costs. That favor complexity, and discourage transparent competition based on price or quality. That result in a generational pyramid scheme rather than sustainable financing. And that—most important—remove consumers from our irreplaceable role as the ultimate ensurer of value.

Based on Goldhill's description of the problem, allow me to re-iterate a question I posed at the beginning of this year's town hall season: could supporters of the President's healthcare reform framework provide a few examples to use as a model from economic history where Federalizing regulation, providing subsidies, and mandating spending has brought down the cost of something, while solving the multiple irrationalities that Goldhill describes?