Voice and exit in health care policy: what can we learn from the recent controversy over mandated birth control coverage?
Henderson, M. Todd
Birth control was briefly the center of the U.S. health care debate
last year when President Obama proposed requiring insurance companies to
provide generous benefits for birth control costs. Some religious
institutions that oppose the use of certain types of birth control
criticized the proposal on grounds of religious freedom. Others
characterized the issue as one of respect and fair treatment for women,
citing examples of bad outcomes that allegedly flowed to individuals
denied insurance coverage for birth control. Name-calling and
exaggerated claims of doom and gloom then gripped both sides. But there
were larger lessons about health care policy and regulation that were
lost in the firestorm about religion and feminism. If we learn the
central lesson from this debate, we may be able to improve our
regulatory outcomes.
Who Pays for Birth Control?
Putting aside the (large and important) issues of religious
conscience and the First Amendment, the issue is a simple one: who
should pay for birth control? At first blush, one might reasonably
conclude that the individual consuming the birth control should pay for
it. In a capitalist economy, individuals generally pay for the things
they consume. If the average person wants cable television, the money
for it must come from his pocket, not someone else's. To be sure,
there are subsidies for the very poor, like food stamp programs, but
even the worst off in our society generally bear most of the costs of
recurring monthly expenses. This is especially true for rather trivial
expenses like birth control (about $10 per month for a generic
prescription). This is not to say that there is no one who cannot
"afford" birth control; clearly there are such people. But
many of the insureds who would be covered by the mandate would not be
considered poor.
The big question is whether birth control should be paid for via
health insurance or some other means. Insurance seems like an odd fit
for a small, predictable recurring expense like birth control. Insurance
is usually thought of as a risk-sharing mechanism for unforeseeable
expenses. I insure my car against loss, but not the costs I incur to
refill it with fuel each week.
Although we might expect most individuals to pay for their own
birth control, most insurance companies cover birth control, and
President Obama proposed that all be required to do so. Why? There are
several possibilities. Importantly, each of them is simply a reflection
of the aggregated desires of individuals in the common pool-that is, the
insured. Insurance companies provide services their customers value in a
way that tries to maximize the value of the business; governments try to
do the same for the welfare of society as a whole.
Obviously, those who plan to use birth control would want an
insurance company to subsidize the purchase price by making others who
were not planning to use it pay some or all of the price. Everyone likes
getting something for nothing. But whether they can get it depends on
the number of people wanting to use birth control, the number of people
not wanting to, and the ability of insurance companies to create viable
businesses for just the latter group. For instance, if non-users are not
a separable insurance pool and users are important customers, then a
cross subsidy might arise. In addition, the non-users may not object to
paying for users' birth control because the additional costs to
them will be trivial, so long as the ratio of users to non-users is not
too high. Most non-users (e.g., men) probably don't even know
whether their insurance plan covers birth control; those who do may be
married and therefore effectively a user from an economic standpoint.
[ILLUSTRATION OMITTED]
But there is a reason even non-users of birth control might be
willing to pay for others' birth control: doing so may be cheaper
than not doing so, given that the insurance will likely cover the
medical costs of not using birth control. Babies are more expensive than
their prophylaxes. Covering birth control may economize on total
expected payments and therefore allows the insurance company to offer
lower rates. This reason is about the costs of insurance for all
insureds, not just expected users of birth control.
Making others pay for an individual's birth control on this
ground must be based on an assumption that the individual will not pay
for it herself out of her own funds. This is an economically irrational
decision if one doesn't want a baby or would suffer negative health
consequences as a result of not using birth control. But individuals
might overweight a current expenditure and discount future ones (e.g.,
childrearing), and therefore consume less than the optimal amount of
birth control. If others in the same insurance pool believe birth
control will be under consumed if not covered by insurance, then they
would agree to pay for someone else's birth control in order to
lower their own premiums. This is true whether or not one expects to
consume birth control in the future. And it should, as a purely economic
matter, be independent of one's views about the propriety of birth
control. But perhaps those who are opposed to birth control would be
happy to pay for the costs of not using it, even at a high level, given
that they put such a negative value on paying for birth control and such
a high value on producing children.
For those with idiosyncratically strong preferences about the
sexual matters of others, whether for religious or other reasons, they
can find out whether various insurance plans cover birth control and
then choose accordingly. If there are sufficiently large numbers of such
people, they could form an actuarially significant pool such that the
plan could exclude payment for birth control. And, in any event, the
prices of insurance should reflect individuals' willingness to pay
for the basket of services offered. If there are individuals who do not
want to pay for birth control, the price they pay for insurance may be
higher, since there may be more births or other medical costs that
result. The price difference between two plans-one that offers birth
control and one that does not-should reflect the value of this
idiosyncratic preference. The market should price these choices. In a
reasonably functioning market-that is, one with competition and
information available to purchasers-those who do not want to cover birth
control should bear the costs of that decision.
The reason for government involvement is to remedy any market
failure. So far we have seen two possibilities. First, if individuals
are too poor to afford birth control or are irrational (that is, not
making smart economic decisions in the long run), they may under-consume
birth control relative to their private and the social optimum. Second,
if the market is not providing insurance alternatives such that
preferences are priced, then individuals may find themselves either
coerced into a plan that does not offer them what they want or those who
have idiosyncratic preferences about others' sexual behaviors might
not have to bear the full costs of those preferences.
In the first case, the solution is to lower the cost for
individuals by having other people pay. If the problem is purely one of
money, then this can be done easily by taxing rich people and giving
money to poor people. Milton Friedman called this approach a
"negative income tax," meaning direct payments to individuals
to get them to at least a minimum income level. The idea would be to
guarantee income, and then harness the power of individuals acting in
markets to deliver the socially optimal level and type of goods and
services. This assumes that with the money, poor people would make
rational decisions-e.g., pay $10 per month for birth control to avoid
having to drop out of school or leave work and bear the huge costs of
(unwanted) child rearing. Of course, if the assumption is that poor
people are irrational, then this approach might not work. In that case,
a better approach might be to artificially lower the cost through an
insurance man date to cover birth control. Note two things about this
approach, however. First, it still assumes some rationality. A mandate
that insurance companies offer birth control does not compel individuals
to consume it. Second, unless tied to an income level, the result is not
just a subsidy from non-users to poor users, but to all users.
Ironically, some of the most vociferous proponents of the mandate were
relatively wealthy women.
The second type of market failure could be the lack of competition
or the ability of some people to "externalize" costs onto
others. Pollution is the classic case of an externality. Ifa factory
does not have to pay for the environmental damage it inflicts on a local
stream, the factory will produce more than the socially optimal level.
Effective environmental regulation is about forcing the factory to pay
all of its costs and therefore optimize output. Without law-either
regulation of outputs or lawsuits by injured parties-we would privilege
those firms or individuals who are best at making other people pay, not
those who are the most efficient producers.
This logic obtains for both users and non-users of birth control.
If women do not use birth control but can make others in the insurance
pool pay for their child birth and other associated costs of child
rearing, then they will engage in an inefficient level of production,
just like the polluting factory. On the other hand, non-users with
idiosyncratic preferences-that is, those who discount these
child-related costs because they highly value not subsidizing birth
control, or having control over others' sexual practices, or simply
having more babies--will only make sensible decisions if the costs of
those preferences are fully borne by them.
The best approach to this problem is to create a robust competitive
market where insurance companies offer a variety of baskets of services.
If there is only a single insurance company in a particular location,
all people desiring insurance have no choice but to accept the basket
offered by that company. For some it will be optimal; for others it will
not, and the losses suffered by that group in terms of satisfaction will
be gained by others in the insurance pool or the insurance company. It
is for this reason that some health care reform advocates have focused
on the ability of insurance firms to sell across state lines and other
reforms that would increase market competition.
Who Decides?
We've seen so far there may be a compelling case for either
private or public cross-subsidization of birth control. But there is a
big difference between the logic and practical effect of insurance
company cross-subsidies and government-mandated ones. Governments and
insurance companies both offer risk sharing pools. In theory, citizens
pay taxes that subsidize others in order to make everyone better off,
insured individuals pay premiums that improve the welfare of others in
the insurance pool. Two things are notable: First, government mandates
will, by definition, have the potential to reduce social welfare in that
they tolerate less choice. Imagine there are 100 individuals buying
insurance. Half the people prefer a plan that covers birth control and
half do not, whether it is for moral, ethical, or economic reasons. If
these two groups create a viable risk pool, we can imagine insurance
policies tailored to deliver to them their preferences. A government
mandate would necessarily make half the people (the ones who prefer no
coverage) worse off, while not necessarily improving the welfare of the
other half.
Of course, if there are a large number of individuals who desire
coverage (whether or not they can pay) who are unable to sort into these
two policies, then a mandate might make sense. This would only be true
if the gains to the people who get the coverage are greater than the
losses to the people who are harmed by providing it. (This could be the
case, for example, if society puts a low value on individuals trying to
control others' birth control choices.) The point is simply that
government mandates tolerate less local variation, which leads to fewer
choices and potential destruction of social welfare. The government
could mandate that all cable companies show only PBS, and this would
likely make some people better off, but it would make many more worse
off. Less ambitiously, the government could simply require all cable
companies to carry PBS regardless of demand. This cross-subsidy from
non-watchers of PBS to watchers of PBS would be justified only if the
PBS watchers would be otherwise unable to watch PBS and the gain from
doing so exceeded the cost of the cross-subsidy.
The important takeaway here, however, is that any decision, by
either a government or an insurance company, to create a cross-subsidy
is based on an imperfect assessment of whether or not the transfer is in
fact welfare-enhancing. There is a big difference along this dimension
between governments and insurance companies. Governments make
one-size-fits-all decisions based on the opinions of experts, while
markets operate based on the tacit knowledge of hundreds of millions of
individual actors. While command-and-control can make sense in some
cases, what Fredrich Hayek called the "knowledge problem" will
plague any attempts to answer complicated questions based on limited
information available to experts. We will return to this issue in a
moment.
Voice or Exit?
There is another problem that was revealed starkly by the birth
control flap. That difference has to do with what economist Mbert O.
Hirschman called the choice between "voice" and
"exit." Individuals have these two choices to influence the
world around them. First, individuals can exercise "voice,"
that is, some direct control over the goods or services they are
offered. Voting, whether it is for representation or directly on an
issue, is the classic manifestation of voice. Individuals-say, parents
in a school district-can vote for individuals to represent their
interests on the school board or they can vote directly on a particular
spending or curriculum issue. This is representative versus direct
democracy, and there are arguments for both in various contexts.
Second, individuals can "exit"; that is, express their
preferences about a particular policy offered by a particular
institution by choosing to leave that institution and have their desires
satisfied elsewhere. Customer choice is the classic manifestation of
exit. If one has a bad meal at a restaurant, one does not try to get the
chef replaced or seek input into the recipes used; one simply goes to
another restaurant. Although this seems a silly example, exit is the
primary way we shape our lives. Voice is the exception and only used in
cases in which exit is unavailable or very costly.
The interplay between voice and exit is crucial to understanding
how the birth control controversy implicates larger issues in health
policy. In other contexts, we see that voice and exit work as rough
substitutes for each other. Where individuals have lots of exit options,
then we do not expect them to exercise much voice. Individuals
won't demand it and we won't observe it in practice. The
restaurant example above shows this point, but it is an easy case.
Consider instead a case in which the individuals exercising voice or
exit are not just customers, but owners of the institution in question.
Corporate America is such a place. Holders of shares in large
American corporations have very little power over how those firms
operate, even though shareholders in essence own the company.
Shareholders elect the board of directors, which governs the firm, but
those elections are more like elections in North Korea than North
Dakota. Board members are hand-picked by the chief executive officer and
are very rarely replaced. Shareholders also don't have much, if
any, say on corporate policies or decisions. Why is there so little
voice for corporate owners?
The reason is that exit costs are so low. Ownership stakes in firms
are readily transferable at extremely low cost. Shares of large
companies are traded in highly liquid public markets, like the New York
Stock Exchange, and shares can be sold online through discount brokers
like E'Trade for a few dollars per trade. In addition, there is no
market for any particular stock; there is just a market for the
risk-return trade off offered by each stock, for which there is an
infinite number of alternative combinations. Thus, stocks look like
restaurants. The rational thing for a shareholder in a company that
makes a bad decision to do is to sell the stock and buy another company
instead. This can be done for less than $10, compared with the enormous
expense and uncertainty involved in trying to change corporate policy.
Some companies, however, do not trade in liquid markets, and
therefore selling shares is much more costly. Small, closely held firms
are in this group, since ownership is usually concentrated in a family,
and there are restrictions on who can sell, when, and how much. As such,
we would expect, and do see, much more active roles in governance played
by the shareholders in these firms. These shareholders demandvoice
because the costs of exit are high.
The consequence for these corporations with illiquid shares and
more shareholder voice is conflict. The corporate law casebooks are
filled with disputes among rival owners, typically family members,
squabbling intensely about the governance choices of small firms, While
large, publicly traded firms rise and fall as stock is bought and sold
based on individual investor sentiment, small, closely held firms
frequently find themselves in court fighting over corporate policy.
Hirschman's logic can be extended to the political realm. One
might ask, for instance, why voters seem to care more about elections
for the federal government than for local governments. One reason is the
relative costs of exit. Although it is expensive to move from one town
or state to another, the costs of moving abroad are dramatically higher.
The U.S. annual migration rate over the past 20 years has averaged about
15 percent, meaning about one out of seven Americans moves each year.
But very few Americans emigrate to another country. Local laws affect
property values, and as such are priced by the market. If Illinois
raises taxes dramatically, house prices will fall as people move to
Texas, where house prices should rise. Although not everyone will move
based on such considerations, marginal consumers set prices, and enough
bad laws will cause people to move. It is more difficult to avoid
federal law, and therefore it is more important to get it right.
For governments, this feature is called federalism. The chief
virtue of a federalist model in which sub-national states have much
authority over their citizens is competition. In a famous dissenting
opinion, U.S. Supreme Court Justice Louis Brandeis described it this
way: "It is one of the happy incidents of the federal system that a
single courageous State may, if its citizens choose, serve as a
laboratory; and try novel social and economic experiments without risk
to the rest of the country." If there is uncertainty about some
policy, say whether or not government should compel insurance companies
to create cross-subsidies for birth control, then allowing states to
experiment with different policy approaches reveals information about
the costs and benefits of each. This is simply a limited market for
government in the spirit of Hirschman's duality. Massachusetts may
compel birth control coverage while Maine may prefer to stay out of the
business of telling insurance companies what services they must provide.
Then we watch and see what happens. Later, Massachusetts, Maine, and all
the other states may take information learned from this experiment and
update their preferences about what is and what is not good policy.
In contrast, a federal policy is a single experiment that compels
compliance by the entire nation. Article VI, clause 2 of the U.S.
Constitution dedares federal law "the supreme law of the
land," which means it trumps any state law that directly conflicts
with or contradicts or impedes the purpose of federal law. While federal
experimentation is possible, it is more costly to write rules governing
the entire country and change happens more slowly. As the supreme
lawmaker, however, the federal government has other options, such as the
ability to coerce states into experimenting. In this role, the federal
government could set a target say, increasing the percentage of
individuals with health insurance and then require states to deliver
that target in whatever way they see fit, by a certain date. As
leverage, the Supreme Court permits Congress to use carrots and sticks
unrelated to health care, such as the withholding of federal funds for
highways, education, or the like.
But what can we expect to happen if the federal government deploys
the Supremacy Clause of the Constitution to make one federal policy for
a particular health care issue?
Two Approaches to Allocating Health Resources
There are two (and only two) ways to allocate all scarce resources:
markets and fiat. Market allocations are made using the price mechanism.
Buyers and sellers are matched at mutually beneficial terms by reducing
their preferences to a single price at which they are willing to buy or
sell. The chief virtue of price is that it encourages both producers and
consumers of a product or service to reveal information about the value
of the goods or services in question.
Fiat, on the other hand, is a mechanism that works based on
hierarchy. Those higher up in a particular hierarchy make decisions
about who will do what or receive what, and those allocations are
enforced by the hierarchy. At the macroeconomic level, this is the
approach of planned economies, such as the former Soviet Union, which
had "experts" develop five-year plans for the allocation of
all the resources in the entire Soviet economy. Gosplan, as it was
known, was a state agency staffed by economists, business people,
politicians, and scientists from various fields. They were charged with
determining the optimal way in which everything from wheat to steel to
shoes to health care would be produced and delivered.
One danger of this approach is the fact that, despite experts'
confidence in their own views and the public's confidence in them,
experts are often wrong. In his book Expert Political Judgment: How Good
Is It? How Can We Know? psychologist Philip Tetlock shows how experts
often get it wrong, sometimes spectacularly so. The book documents how
various decision making heuristics and biases-e.g., the confirmation
bias, the saliency or availability heuristic, and so forth-plague
experts as much as the rest of us. Experts can be subtlety led to
particular outcomes that confirm their hunches, which may not be correct
or even supported by the data. One need only pick up the newspaper to
see how scientists declare x one week and not-x the next. In the lay
press, this is known as the everything-that-was-bad-for-you-is
good-for-you problem. Butter is better than margarine, drinking (in
moderation) is good for you, so too is chocolate, too much exercise can
kill you, and on and on and on. More concretely, a recent news story
described how scientists at Amgen failed to replicate 47 of $3
"landmark" cancer studies published "in top journals,
fi'om reputable labs."
Errors can be expected, so the question is whether an expert-driven
approach is more likely to uncover them and reform them vis-a-vis a
diverse approach. Imagine 15 scientists, politicians, and other experts
tasked with making all scientific decisions or judging which scientific
discoveries to implement into policy. Although such a top-down approach
might have certain virtues in overcoming the irrationality of crowds in
some areas of science policy (perhaps global warming is such an issue,
although perhaps not), this approach probably strikes us as absurd. And
yet, as we'll see in a moment, it is precisely the approach to the
allocation of health care resources taken by the Affordable Care Act.
Another problem with an expert-driven approach is that it can lead
to complacency and dependency. The philosopher Immanuel Kant identified
the problems that flow from individuals relying on the decisions of
others in his essay "Answering the Question: What is
Enlightenment?" Kant argued powerfully against paternalism and rule
by expert, claiming that humankind could only be truly capable of
achieving its full potential when freed to deploy individual human
reason. He described humans, then under the tutelage of church and state
paternalism, as like cattle, incapable of thinking for themselves,
leading to a perpetual state of immaturity and therefore abuse.
This state of unthinking and blindness is manifest as well in
leaders. A well-known chestnut to demonstrate this point is the story of
the Soviet ambassador to London who, upon marveling at the abundance of
a local bakery, asked to meet the man responsible for ensuring the bread
supply in London. Such a question strikes capitalists as absurd, but it
was perfectly sensible for someone living under Gosplan. To these
people, asking whether government should provide a particular service,
like producing, distributing, and selling bread, is completely natural
because they cannot imagine it being produced, distributed, and sold
without government. (Many in the United States today probably feel this
about health care, where the government spends more than all but three
other countries in the world.)
But experts should not be discounted entirely, despite the failure
of every five-year plan and communism in general. Markets can be
inefficient in some cases, and they do not always allocate resources in
socially optimal ways. Environmental externalities, as discussed above,
are the obvious example. So is research in basic science, which may, for
a variety of reasons, be under produced by the market. Where market
failures are identified, the question is, what is the best way of
contending with the problem? In the environmental area, there are
examples of success based on both a price-based approach to regulation
and a command-and-control approach. To solve the problem of acid rain in
the 1970s and 1980s, the Environmental Protection Agency developed a
market for tradable emissions credits for sulfur dioxide that
dramatically reduced emissions, resulting in huge social benefits. In
contrast, there may be particular pollutants, such as arsenic or
mercury, that experts judge to be harmful beyond a certain level, and
which are best solved by simply banning the emission of them beyond that
amount.
In health care policy, the choice between markets and experts is
manifest in the political ideologies professed by different segments of
the electorate. Market-oriented reform proposals focus on empowering
individuals to make decisions (with cash subsidies for poorer
individuals) that will hopefully lead society in the direction of the
optimal and efficient allocation of resources. The Affordable Care Act,
on the other hand, implements a top-down approach in which politically
appointed experts will make decisions about who will be able to buy what
health care goods and services. The Independent Payment Advisory Board
will consist of 15 voting members appointed by the president and
confirmed by the Senate. The board will be responsible for ensuring that
the growth rate of Medicare spending does not grow faster than a target
rate. It will achieve this by rationing care-that is, deciding what
health care procedures, devices, and drugs will be available, and to
whom.
This approach can theoretically achieve reductions in spending
because the board could make an assessment of various health care
alternatives and decide to exclude those procedures that are not cost
effective or not supported by strong evidence. I'm sure readers can
imagine circumstances in which such an approach could be successful and
beneficial at improving health outcomes or reducing costs. But I'm
also sure readers can imagine instances in which this approach could
lead to worse outcomes. The question is whether we trust these 15
people, subject to some limited oversight, to get the answers right.
The expert model is not unprecedented, as it is used in other
jurisdictions with some efficacy. In Germany, private health insurance
is common, but an expert agency akin to our new 1S-member board deems
certain procedures to be unnecessary and therefore not reimbursable. The
Institute for Quality and Efficiency in Health Care (Institut fur
Qualitat und Wirtschaftlichkeit im Gesundheitswesen, or IQWiG), which is
similar to the National Institute for Health and Clinical Excellence in
the United Kingdom, investigates drugs, medical devices, and all medical
treatments to determine efficacy. If the treatment is deemed not cost
effective, then another group-a committee representing doctors, nurses,
insurance companies, and hospitals-decides whether to authorize
reimbursement.
According to a senior minister in the German Health Ministry,
"most patients and doctors usually accept IQWiG's
recommendations." American health care policy expert Uwe Reinhardt,
who saw the IQWiG in action and marveled at its effectiveness, told
critics of the Independent Payment Advisory Board: "Go to Germany,
study [the IQWiG], and you will find that this really works. ...
It's civilized."
What We Can Learn from the Birth Control Debate
Can the rationing of U.S. health care spending be civilized? This
brings us to last year's very public debate about birth control
coverage. It was not civilized, as illustrated by radio commentator Rush
Limbangh's insult of mandate proponent Sandra Fluke. The question
is why such a firestorm would arise, when in fact almost every health
plan covers birth control and the vast majority of Americans have no
problem with the implicit cross subsidy.
While birth control or some other drug, device, or procedure might
not be salient for most members of the common pool, be it insure& or
taxpayers, it may become so when the issue becomes political. By
political, I mean that the issue is decided by majority vote, crudely
speaking, such that 50 percent plus one of the people set the rule for
everyone. W'hen the president sought to make birth control a
mandatory part of all insurance plans, this was a political decision
regarding health care. This is not to disparage political decisions in
general, but merely to point out this feature of them, that they bind
those who disagree.
In contrast, apolitical or market decision-making involves
individuals choosing what maximizes their own interest. This depends on
there being choices that exist to satisfy individuals' preferences.
Monopolies can undermine this result. It also depends on the choices of
some individuals not harming others; if my decision to swing my fist in
the air does not impact your nose, you have little ground to complain;
but if it does, then certainly the law should speak loudly to set right
the wrong and deter future acts of this sort.
Whether political or not, the common pool always votes. For
governments, the voting is clear. For insurance companies, the choice is
made individually by buyers of insurance, but their individual choices
are aggregated at the firm level to produce a suite of services that
will be offered. Looking at it another way, one can vote about what
insurance plans should offer, or one can vote about which insurance to
buy, thus expressing a preference for what insurance plans should offer.
Again, if there are enough people who express a particular view-one way
or the other about a particular service being part of the common pool,
then it will be offered by an insurance plan. In this way, the
competitive forces working on insurance companies result in a more
continuous satisfaction of individual preferences than the dichotomous
choice presented by a political calculation. There may not be an
insurance plan to satisfy everyone's ideal basket of services and
price, but there are more of these provided by the market than by
political decision making.
With this as background, what we should take from the birth control
debate is that while the German experience may suggest that, for that
population, political decision making or expert decision making can be
effective as a means of deciding who gets what medical care, such a
policy is much more fraught in our country. A relatively simple, low
cost, and widely accepted practice like birth control became a firestorm
when individual choice and local variation were overridden on the
grounds of improving social welfare. The airwaves and print media were
filled with analysis, name-calling, and hyperbole. Kitchen tables, like
my own, were filled with debate about how we should vote about the
financing of other peoples' use of birth control. The reason for
the intensity of the debate-the powerful expression of voice-was the
fact that exit options were dramatically limited. This was a debate
about a federal rule that would apply to everyone. Hirschman predicted
intense expressions of voice, just as we saw.Just imagine what the
debates will look like when the stakes become-as they inevitably
will-whether expensive cancer thempies, surgeries, or other procedures
will be paid for, or whether more controversial matters like abortion,
gender reassignment, and the like will be paid for.
We saw this in a way during the health maintenance organization
boom of the early 1990s. For a period, HMOs were quite aggressive in
trying to ration care based on their assessments of the efficacy of
various health treatments. So-called "managed care" did what
it was supposed to do: the only decade since World War II that did not
see health care costs increase more rapidly than general cost of living
was the 1990s. But the system was untenable because political leaders
could not stomach the stories of people harmed when denied care. In
addition, choice was not robust among providers, and poor individuals
were not given subsidies to purchase insurance. Without a flourishing
market and with tragic (but perhaps rational) cases making the nightly
news, the system became political and therefore died. Costs have
therefore continued to skyrocket, as the system is not designed to
deliver efficient care. The Independent Payment Advisory Board is the
purported silver bullet, but it is likely doomed by politics, and
probably unreliable regardless.
When we vote with our feet and our wallets, our preferences can be
satisfied, so long as there is choice and we are not imposing costs on
others through our choices. When, instead, matters are decided by
experts or politicians, mistakes can be made and made in ways that
necessarily are coercive. This coercion does not admit easy exit, as one
can exit an insurance policy, especially if done at the federal level.
The central lesson is that centralized power over complex matters risks
making larger mistakes than decentralized power, admits less innovation,
provides for less tailored satisfaction of preferences, and generates
greater political conflict. Ironically, those risks may undermine the
important work that government must do to improve the world we live in.
READINGS
* Exig Voice, and Loyalty: Responses to Decline in Firms,
Organizations, and States, by Albert O. Hirschman. Harvard University
Press, 1970.
* Expert Political Judgment: How Good Is It? How Can We Know? by
Philip Tetlock. Princeton University Press, 2005.
* "How Germany Is Reining in Health Care Costs: An Interview
with Franz Knieps," McKinsey Quartet 3. February 2010.
* "The Independent Payment Advisory Board: PPACA's Anti
Constitutional and Authoritarian Super-Legislature," by Diane Cohen
and Michael Cannon. Cato Policy Anal3,sisNo. 700, June 14, 2012.
* "Valuing Laws as Local Amenities," by Anup Malani.
Harvard Law Review, Vol. 121 (2008).
M. TODD HENDERSON iS professor of law and Aaron Director Teaching
Scholar at the University of Chicago Law School. This article is taken
from Henderson's paper "Voice and Exit in Health Care
Policy," Pathology Case Reviews, Vol. 17, No. 4 (July/August 2012).