Subsidize something and drive others to consume more of it...duh

Oregon's deployment of a lottery to allocate scarce health care resources has provided us additional insights into human behavior. For those of you who might not be aware of this interesting pre-ACA interlude in health care policy, in 2008 Oregon expanded Medicaid on a limited basis, granting Medicaid coverage to 30K of a 90K pool of those interested and they did so by lottery. How they got this past their human subjects board is beyond me. I get push back when I want to administer surveys. I guess one can experiment in the policy world more readily than the medical world. One not need to dwell on the possibility of harm as long as your intentions are noble.

One of the major rationales for Medicaid expansion has been to relieve Emergency Departments of the crush of the uninsured and presumably if a major portion of the uninsured were covered by Medicaid, they would not frequent the ED, or at least that was hope, assumption, and selling point. No expected that this hypothesis to actually be tested.  It is always most convenient to be able to declare such items as fact by consensus, particularly when it has a useful political purpose. How could you ever test this?

Enter the Oregon random allocation scheme and viola, a randomized control trial with huge numbers and the tracking systems in place. The results of this "experiment" were published in a not too shabby journal Science in January of 2014 and the results are pretty unambiguous. ED visits in the covered population were increased by 40%. The authors looked at all sorts of subgroup analysis and what they found was no significant decline in ANY subgroup and increased in all subgroups examined except one.

They further subdivided the types of visits looking at visits which ranged from ones that only could be handled via the ED to various gradations to ones that absolutely were not emergencies and should have been handled in a routine ambulatory setting. There were increases in all types of visits except true emergencies.

The most obvious lesson from these findings is that our predictions as to how our policy interventions will end up "working" should be viewed with great skepticism. Heath care delivery is accomplished by a complex system with many different actors (none of them angels), unique circumstances, context specific motivations and incentives, all interlinked. Push here and watch where things bulge elsewhere. So much for relieving the crush on ED's. I am sure I will still hear bold claims that states not expanding Medicaid will create undue stresses on ED's. Never let actual data get in the way of passionate claims.

The accompanying commentary to the article also had some interesting insights. The first was a statement which said:

 " From the patients perspective, insurance is essentially an across-the-board price cut that makes all health services cheaper. The direct effect is, naturally, more consumption of health of all sorts - primary care, ER, and everything else".

Talk about stating the obvious, but perhaps it is just the obvious that needs to be stressed. The holy grail of free market based economic systems is the drive down costs and make better and unique services available to ever larger segments of the population. One can use subsidies to make things more affordable to specific segments of the population but this does really drive down costs in the long term. Subsidies simply hide costs from people and may actually make subsidized products and services more expensive. Look at health care and higher education. Huge subsidies, poor productivity gains, and rising costs characterize these industries.

The subsidized ED visit for that newly minted Medicaid recipient is just as expensive to deliver as the visit delivered to to the previous customer. That it has become more affordable to one end user provides little incentive to figure out how to deliver the needed service in a more cost effective way to a larger audience.

The second comment in the accompanying editorial provided an potential explanation for the unexpected  increased visits. Perhaps they should not have been so unexpected.  One of the reasons for the increased ED visits can possibly be linked to primary care physician behavior. As it turns out the primary docs are strapped and despite the newly minted coverage, there is no room on the PMD schedules, particularly to handle unscheduled and complicated patients. When faced with this, their responses were to tell their patients to go to the ED. One can view this a a rational decision given their resources. Their offices are functioning at capacity and have no surge capacity built in.

The lesson here is the problem is not the insurance. All insurance is in these cases is a price cut for the consumer without sending any sort of concordant price signal to suppliers. If fact, setting prices too low sends a signal to producers of particular services that what they produce is of little value. The rational response is to make less of what has little value. The problem is the value setters are not those who consume the services. The results of price mismatches are shortages. There is no reason to assume that what we may desire should or will be available when we desire it. However, many of us  have lived through a remarkable era of human history where we have become unaccustomed to any sort of scarcity. Everything we want is available virtually when we want it.

I have news for readers. That situation has existed in this brief moment in human history in a narrow portion of the world because the remarkable growth of wealth has occurred in areas using a price coordinated economy,  which in other words is a market based economy. Through the miracles of market set prices, signals travel at the speed of light to goods and products providers throughout the world who can see where there are opportunities to "make a buck". We are awash in goods and services because parties who best meet are needs and wants are rewarded handsomely. Everywhere this system was trashed you end up with some command and control totalitarian  nightmare like North Korea, Zimbabwe, and Venezuela.

We are experiencing more and more pain, more and more dysfunction, more and more scarcity in health care because we have all but removed the price coordination mechanism, attempting to create a better health care delivery system by trying to use the lessons of Eastern European command and control economies. When we see price signals that tell us that services are too expensive, we use subsidies to mask the signals and then are surprised by the unintended consequences of the subsidies. Predictably we never get not what was expected but some other less desirable outcome. Don't we just love surprises!

The way to get past scarcity is to incentive productivity which will drive down the actual costs, not the artificially set prices and subsidies using the insurance vehicle.