Monday, March 14, 2016

The Trump-Sanders Bipartisan War on Free Trade

Like most economists, I am strongly inclined toward free trade. I cringe to see the way free trade is under attack, from both parties, during this primary season.

The two populist candidates are the worst offenders. Bernie Sanders, whom I support on many other issues [1] [2] [3], goes off the rails when it comes to trade. Donald Trump, whose policy views are sometimes too vague to pin down, has made clear-cut opposition to “horrible trade deals” a centerpiece of his campaign.

Nor is the pushback from the rest of the field as strong as one might hope. Hillary Clinton has changed her position on the Trans-Pacific Partnership (TPP), which she supported as Secretary of State, and runs away from her previous support for the North American Free Trade Agreement (NAFTA), which she liked well enough when her husband signed it into law. On the Republican side, Ted Cruz, Marco Rubio, and John Kasich all profess to favor free trade in principle, but when pushed, as they were during last week’s Republican debate in Miami, they quickly go on defense, hedging their support for trade with numerous “ifs” and “buts”.

Let’s take a look at some of the candidates’ least defensible arguments against free trade, starting with Trump and moving on to Sanders.

Friday, March 4, 2016

Why the US Needs a Healthcare System More Like Europe

The presidential election of 2016 reopened the healthcare debate in the United States. Republicans were unanimous in urging repeal of the Affordable Care Act (ACA), or "Obamacare," but were vague on a replacement. Senator Bernie Sanders, the most creative of the Democratic candidates, wanted to turn in the other directions. Rather than simply tinker with the ACA, he urged America to abandon it in favor of a healthcare system more like that of other wealthy countries. “The United States is the only major country on earth that doesn't guarantee health care to all people,” Sanders said, “And we end up spending far, far more per capita on health care as do the people of any other country: Canada, U.K., France, whatever.”

Here is why Sanders was right.

What to call it?

Sanders said he wants a healthcare system like those of other wealthy countries—one that provides better results at a lower cost than the one we have. Unfortunately, there is no generally accepted term for all such systems as a class.

Both critics and supporters often call them as “single-payer systems,” but that is not strictly accurate. Other wealthy countries do not all have a single agency would make directly pay healthcare providers with funds from the government budget.  Their plans are surprisingly diverse. Some, like those of Germany and France, funnel payments through multiple independent insurance funds. Others, including those of the UK and Canada, are more decentralized than the “single payer” label suggests even when the government budget is the ultimate source of funds. And, as shown in the following chart from an OECD report, private funding plays a substantial roll in all OECD healthcare systems. Government funds account for just 78 percent of total health expenditures on average, more than in the United States, but far short of “single payer.”

Conservatives describe the healthcare systems of Scandinavia, Germany, France and other wealthy countries as “socialized medicine,” but that term doesn’t uniformly fit, either. Socialized medicine suggests something like Veterans Administration healthcare in the US—a system that not only features a single payer, but one in which doctors are salaried government employees and hospitals are government owned. That description, too, fails to capture the diversity of foreign healthcare systems, where we find a kaleidoscopic mix of salaried and fee-for-service doctors; for-profit, private not-for-profit, and state-owned clinics and hospitals; and both unified and decentralized payment mechanisms.

We could stick with “high performing healthcare systems of other wealthy countries,” but that is too long winded. For this post, I will shorten that to Euro style healthcare, despite the obvious problem that non-European countries like Canada, Australia, New Zealand and Japan also fit the pattern.

Turning from terminology to substance, anyone who favors a Euro-style healthcare for for the United States faces critics both from the left and from the right. Let’s look at what some of them have to say.

Conservative Argument No. 1: The US already has the world’s best healthcare system

Many conservatives think, or at least pretend to think, that the United States already has the best healthcare system in the world, or at least that it did before the advent of Obamacare. Senate leader Mitch McConnell and former House Speaker John Boehner are both on record as having said so. A survey from Harvard University, taken not long before passage of the Affordable Care Act (ACA), found that 68 percent of Republicans (but only 32 percent of Democrats) thought the US healthcare system was the world’s best. To support that belief, conservatives often note that world leaders like former Italian Prime Minister Silvio Berlusconi, Jordan’s late King Hussein, and the Shah of Iran have all sought healthcare in the United States.

Unfortunately, hard data do not support that optimistic view. One of the most detailed recent comparative studies of healthcare systems in wealthy countries comes from the Commonwealth Fund. The following figure shows its ranking of eleven healthcare systems along with data on expenditures per capita (evaluated at purchasing power parity to avoid exchange rate distortions):

The United States ranks last in the fund’s overall evaluation of health care, despite having by far the largest per capita expenditures. The Commonwealth study is not the only one to have reached that conclusion. This earlier post discussed other rankings that agree. (We will return to some of the more detailed findings of the Commonwealth Fund report shortly, but the whole report is worth reading.)

Conservative Argument No. 2: European healthcare saves costs only by severely rationing care

The second conservative myth is that Euro-style healthcare achieves lower costs only by employing a degree of rationing that would be unacceptable to Americans. Here, for example, is David Brooks, writing the The New York Times: 

Sanders would create a centralized and streamlined system. His approach would also, as in Europe, reduce the rate of medical progress, increase the rationing of care, increase the wait times for patients, induce many doctors to retire, and centralize decision-making.

In a recent televised debate, Presidential candidate Ted Cruz put it even more bluntly:

Socialized medicine is a disaster. It does not work. If you look at the countries that have imposed socialized medicine, that have put the government in charge of providing medicine, what inevitably happens is rationing.

Canada is Exhibit A for many who make the rationing argument. Consider, for example, this “explainer video” from Vox, titled “What is Single-Payer Healthcare?” After noting that such a system could save administrative costs, the narrator says, “But there’s a catch.” The catch is said to be longer waiting times and other limits on services, illustrated by a graphic showing that waiting times for health services are longer in Canada than in the United States.

Detailed data from the Commonwealth Fund report show how unfair the charge of rationing is, especially when based on a comparison with Canada. Of the eleven countries covered in the survey, the US ranks last overall, but Canada is next to last. One of the main reasons for Canada’s poor performance is its poor record on measures of rationing, where it has the lowest ratings of the countries surveyed.
  • 48 percent of Canadians reported an emergency room waiting time of over two hours (11th place) compared with 28 percent in the US (7th place) and 14 percent in New Zealand (1st place).
  • 38 percent of Canadian doctors reported that patients had difficulty getting specialized tests like MRIs (10th place) compared to 23 percent in the US (7th place) and 3 percent in Switzerland (1st place).
  • 18 percent of Canadian doctors reported a wait of four months of more for elective surgery (9th place) compared to 7 percent in the US (6th place) and 1 percent in The Netherlands (1st place).
To compare the US with Canada in terms of rationing by waiting, then, is to make a sub-par system look better by comparing it with one that is truly terrible. Most wealthy European countries do better than either of their North American peers when it comes to rationing by waiting, and still manage to spend less.

Instead of rationing by waiting, the American system practices rationing by cost. Relatively few private plans, whether employer-provided or individual, give free access to a full range of providers, drugs, and services. Most middle-class insurance plans steer their members toward hospitals and doctors who are in a preferred provider network and drugs that are on the company’s preferred list. The uninsured often find themselves rationed out of anything but emergency services by high prices.

The burden of rationing by cost shows up clearly in the Commonwealth study:
  • 37 percent of Americans reported that they did not fill a prescription, skipped a test or treatment, or failed to visit a doctor when ill—the worst of all countries. In Canada, the figure was 13 percent, a respectable 4th
  • 28 percent of Americans reported that their insurance company denied payment or paid less than expected for treatments they received, the worst of all countries. In the top ranked countries, Norway and Sweden, the figure was 3 percent.
What is more, the pressure toward rationing by cost is intensifying. A recent New York Times article describes the situation in these terms:

Once emblematic of everything wrong with health insurance, the health maintenance organization is making a grudging, if somewhat successful, comeback. But its reputation for skimping on care has so tainted the plans that the insurers and companies resurrecting them have gone through innumerable steps to try to avoid using the term H.M.O. . . . Despite the stigma and many failed efforts, insurers say they are eager to push a revamped version that revives many of the same features that restrict choices as a way of lowering costs

In short, far from achieving their cost savings through rationing, European systems provide more timely care with fewer people skipping needed services for economic reasons.

Liberal critics also focus on cost

Unlike their conservative counterparts, Liberal critics approve of Euro-style healthcare in the United States, yet many of them seem to have bought into the idea that such a system would be unaffordable. That attitude was on display during the 2016 campaign when supporters of Hillary Clinton turned their fire on Sanders own healthcare plan, which he called Medicare for All.

The most widely publicized critique came from Kenneth Thorpe of Emory University. In this critique, he estimates that Sanders’ plan would be almost twice as expensive as the candidate claims. Instead of leaving most middle class households better off, Thorpe claims the Sanders plan would make 71 percent of households worse off, when the taxes needed to fund it fully are set against savings in healthcare costs.

I find Thorpe’s analysis disingenuous. The problem is that he construes Sanders’ plan in a naively literal way that makes it very different from the healthcare systems of Europe as they actually operate.

The first difference concerns just who pays for what under high quality, low cost Euro style systems. When many Americans think of European healthcare, they assume that the government pays for everything, providing a broad range of services at no charge to the consumer. That is not strictly true, as the chart given above showed. Instead,  the government share of total healthcare expenditures ranges from nearly 90 percent in Sweden and the UK to around 75 percent in Switzerland, compared with a little under 50 percent in the US.

The reasons for the substantial private healthcare expenditures vary from one country to another. Most countries expect copayments for some, if not all, services and medications. In many, people purchase private insurance to cover services not provided in the government’s basic package, for example, private hospital rooms. Some countries do not fully cover dental and vision services. However, it is worth noting that most Euro-style systems have special mechanisms in place to shield low income families from some of these cost-saving measures.

One of the reasons that critics like Thorpe come up with such high cost estimates is that they take at face value the version of the Sanders plan posted on his campaign website. That version promised to “cover the entire continuum of health care, from inpatient to outpatient care; preventive to emergency care; primary care to specialty care, including long-term and palliative care; vision, hearing and oral health care; mental health and substance abuse services; as well as prescription medications, medical equipment, supplies, diagnostics and treatments.”

I do not think we have to take that language literally in estimating the cost of translating Sanders’ political aspirations into a specific program for implementation in the real world. The very fact that Sanders describes his plan as “Medicare for All” suggests that a final version is likely to include deductibles and co-payments similar to those in Medicare as it now exists for seniors. Nor would we need all of the features of the website version of the plan in order to meet Sanders’ often-repeated goal of equaling the quality and cost performance of other countries.

The hard part lies ahead

It is easy to criticize a campaign slogan and to inflate the cost of ambitious aspirations. Liberal critics, who ostensibly share Sanders’ aspirations, ought to put their energies into the hard part—filling in the details that would allow the US to equal the cost performance of the best Euro style healthcare systems without loss of quality.

Including Medicare-style deductibles and co-payments would go a long way toward closing the gap between Thorpe’s estimates of the costs of Sanders’ healthcare plan and the candidate’s own estimates, but it would not entirely close it. There are many other problems to deal with.

Administrative costs are one. The Sanders campaign estimated that administrative savings from his plan would reduce total healthcare spending by 13 percent. Thorpe says it would save 4.7 percent. If we split the difference, the savings would be a little under 9 percent. But reducing per capita healthcare spending to the level of The Netherlands (the most expensive after the US among the eleven covered in the Commonwealth study) would require US spending to fall by 33 percent. To get to the level of the UK (the least expensive of the eleven) would require a 60 percent cut. So, even viewed optimistically, administrative savings are just a start.

A second major saving claimed by the Sanders team comes from lowering the price of prescription drugs. The US currently spends about $300 billion per year, or 10 percent of total healthcare costs, on prescription drugs. Cutting that in half—a truly heroic accomplishment—would save another 5 percent of total healthcare costs.

Beyond prescription drugs and administrative costs, where would the additional 20 to 40 percent saving come from that would be needed to bring US healthcare costs down to the level of the best performing Euro style systems? There are only two possible sources: Cuts in quantity of services or cuts in prices.

Cutting quantities is not as easy as it sounds. To be sure, there are some areas where the US does seem to provide excessive services or procedures. For example, the US rate for Caesarian sections is more than 30 percent, compared to around 7 percent in The Netherlands and Scandinavia. On the whole, however, as healthcare economists like Princeton’s Uwe Reinhart note, the quantity of healthcare services provided in the US is actually lower than in other advanced countries. It does not seem realistically possible to cut service quantities further while extending healthcare coverage to the 13 percent of Americans who remain uninsured, even under the Affordable Care Act, and to do so without any loss in quality of care.

Prices, says Reinhart, are the elephant in the room. US Prices for common medical procedures like appendectomies or normal deliveries average three or four times the levels in Europe. What is more, the prices for such services, or for tests like an MRI or colonoscopy, can vary by a factor of two, three, or more even with in a city. Worst of all, says Reinhart, “Fees in the private health care sector have been jealously guarded trade secrets among insurers and providers of health care.” That makes it impossible for consumers to shop around for the best price, as they would do if they wanted a new set of snow tires.

Liberal critics don’t even pretend to address the problem of healthcare prices. The widely cited Thorpe study simply assumes that prices under the Sanders’ plan would be an average of the prices now paid by private insurers and the modestly lower prices now paid by Medicare.

Any serious healthcare reform, whether it comes from the left or the right, will have to face up to the problem of prices. Unfortunately, there is no single solution. Instead, the problem would have to be approached one piece at a time. Coordinated bargaining for lower prescription drug prices is just a start.

Lowering the prices charged by the most expensive hospitals to those charged by the most effective ones would help—and no, they are not necessarily the same hospitals. A single government payer would have more bargaining power. Greater transparency in pricing would help, too. So would greater competition among hospitals. The present trend toward mergers and consolidations demonstrably pushes up prices.

Another reason for the higher cost of US healthcare services are higher earnings of physicians. US doctors earn considerably more than their European counterparts do, even when we adjust fees for differences in expenses and cost of living. But changing compensation practices for American doctors would not be easy without reforming other pieces of the healthcare complex. European doctors typically receive free education, so they don’t begin practice with tens or hundreds of thousands of dollars in student debt. Entry into medical schools is not as tightly restricted in Europe as in the United States. And less adversarial systems to deal with malpractice claims free European doctors from a major cost item while giving them less incentive to practice unproductive defensive medicine.

The bottom line

It is hard not to conclude that Sanders is right to think that America needs a healthcare system more like those in Europe. True, the campaign version of his Medicare for All plan was more aspirational than operational, but what did other candidates offer? Hillary Clinton proposed building on Obamacare, but there is nothing in the byzantine complexity of the Affordable Care Act that makes it easier to solve any of the cost and price problems we have discussed, and many things that make it harder. Republicans have a field day enumerating the problems of the ACA, but are still struggling to define what they would offer in its place.

This is a substantially revised version of a post from March 4, 2016. The original version is archived here.