The Big Four

The nations of the world have coalesced around four approaches to delivering health care:

• The Beveridge Model, wherein the government owns and operates health care. Cuba, England, Hong Kong, Italy, Spain, and the four Scandinavian countries all provide health care via the this model, which is named for the British reformer who designed the parameters of Britain's welfare state. Beveridge Model systems are characterized by their commitment to public health and primary care, as well as efficiency. Also known as single payer, the Beveridge Model is the embodiment of socialized medicine
• The Bismarck Model, wherein all residents of a country are required to have health insurance and insurance companies are required to sell it to them. France, Germany, and Switzerland and most countries of western Europe operate under this model (as does Japan), named for the German chancellor who designed it in the 19th Century. Insurance can be profit, non-profit, or both (depending on the country); individual or employer driven. In any case, the insurance and health systems of Bismarck countries are tightly regulated. Bismarck Model nations often have advanced systems of health information technology.
• The National Health Insurance Model, wherein each resident pays into a government run insurance program that compensates private-sector providers. As the sole insurer, the government has a powerful negotiating role with providers and pharmaceuticals. Canada, Taiwan, and South Korea provide national health insurance.
• The Out-of-Pocket Model, wherein access to health care depends on the individual ability to pay. All undeveloped, non-industrialized countries must resort to this approach, as they have neither the resources nor the infrastructure to adopt the Beveridge, Bismarck, or NHI models.

As you can tell, the United States has a bit of all four. VA health care is government-owned and -operated (Beveridge); most Americans get insurance through employment and will soon have it mandated (Bismarck); most Americans pay into Medicare (NHI); and the uninsured and underinsured look to their own devices (Out-of-Pocket).

HealthMatters will examine each of the first three models, covering their implementations in different countries and pointing out the tradeoffs that each country makes.

One Man's Agenda 1, Honest Debate 0

In his column today, New York Times columnist David Brooks writes:

But it should be possible to strengthen the safety net while modernizing some of the Great Society structures. Paul Ryan, a Republican, and Alice Rivlin, a Democrat, have come up with a Medicare reform plan in which new enrollees would receive a fixed contribution from the government, growing a bit faster than inflation. They would apply that money against the cost of health insurance. This would make Medicare a defined contribution program and save hundreds of billions. If Obama said he was open to thinking about this sort of fundamental reform, he'd generate tremendous excitement on the right.

Medicare inflation is a Titanic burden on the health care system and on the overall economy. It must be addressed, and one way to start is with an honest presentation and not an ingenuous sales job. Unfortunately, Mr Brooks' remarks are closer to the latter.

You may well believe that the Ryan plan is the best way to curb Medicare costs: It would likely save billions of dollars, would offer the benefits of portability, would force greater consumer involvement in health care choices, and would limit the health care role of government to that of financier. If you do advocate Rep Ryan's approach, then you also know that the vouchers are scheduled to take effect in 2021 based on 2010 dollars. You are also aware that while they are indeed indexed to a rate above general inflation, they are also indexed at a rate below the higher rate of medical inflation. The idea is to provide momentum to reign in Medicare costs, but it requires elders to increasingly bear the risks of success or failure. That is the actual crux of the question about the Ryan plan: We can save billions of dollars, but who bears the cost and the risk? And is the answer to that question acceptable? What are the alternatives? Many advocates of the Ryan plan are prepared to discuss these questions honestly, but unfortunately one of the leading columnists in the country is not.

If we're to accomplish anything, we must debate health care proposals based on their actual content, not on what sounds most inviting. Mr Brooks has failed to contribute to that debate.

At What Cost Is The Right to Know?

Gina Kolata writes in the New York Times that new tests have raised an ethical dilemma for physicians: Should they notify patients who do not have Alzheimer's that they are at risk for the disease?


Ms Kolata's article implies another dilemma as well: Should the tests be performed at all?  Should we be spending hundreds of thousands of dollars on procedures and tests for a condition that has no cure, that can eventually be diagnosed without the tests, and when not everyone who receives them descends into Alzheimer's? Americans and their physicians have become addicted to the latest diagnostic technology, and yet our healthy quality of life is no better -- and in many cases worse -- than the citizens of other wealthy economies. Our costs, though, are staggering -- nearly double those of some of the same countries.


Moreover, whether by design or economic imperative, the United States has chosen to invest in secondary and tertiary care at the expense of primary care and public health. At some point, dollars spent on specialty care negatively impact the savings and improved health from the preventive medicine made possible by primary care and public health policy. Is the detection of a predisposition to early Alzheimer's worth that?

That patients should live with uncertainty is a frightening thing. But so are the crushing health and economic burdens of overtreatment and inadequate investments in primary care and public health.

More on the lunacy of the Basel Accords

I was looking at the preferred asset classes under the Basel Accords in my previous post on why central banks are so determined to stave off a government default, and realised that every single asset class that is given less than a 100 percent credit risk weighting is now tainted by widespread default, scandals or bailouts.

The credit risk weightings mean that instead of reserving the standard 8 percent of capital in respect of a debt, the bank can cut that by the weighting applied to the asset class. Effectively, the reduction in credit risk weighting operates as a powerful subsidy to the borrowers and equally powerful incentive to over-leveraging the lenders.

As a baseline, all financial, consumer and corporate debt must be reserved at a credit rating of 100 percent of 8 percent, unless explicitly discounted. A weighting of 50 percent, for example, means that instead of holding $8 reserves on a loan of $100, the bank only needs to hold $4 of reserves. A zero weighting means they lend $100, but hold no reserves at all.

Mortgages get a credit risk weighting of 50 percent, and we all know how well the mortgage market is performing. Mortgages and mortgage backed securities became the largest asset classes globally in a matter of years thanks to the credit weighting subsidy and securitisation. If I recall correctly, our present long crisis started with the collapse of the sub-prime market and now all categories of US mortgages are impaired by the ongoing mess with MERS and fraudulent or missing documentation. Borrowing short to lend long brought down Northern Rock in the UK and many other over-leveraged mortgage banks.

Interbank debt gets a credit risk weighting of 20 percent. We've seen from the collapse of interbank lending that banks do not trust each other. At the same time, inter-bank exposures and credit derivatives mean that financial institutions are massively dependent on each other, such that bailouts are justified as essential to prevent systemic collapse. If Too-Big-To-Fail is predicated on the systemic impact of a bank's failure on other banks, it would seem that the 20 percent inter-bank risk weighting was and is unsound.

Government agency debt gets a risk weighting of 10 percent. Looking at Fannie and Freddie, and the serial scandals and bailouts they have occasioned over the past decade, it is hard to see how such a subsidy can be justified.

Finally, sovereign debt of Zone A states is zero weighted - no reserves required at all. Zone A includes any country in the EEA, full members of the OECD, or states that have concluded special lending arrangements with the IMF except that any state that reschedules its debt is excluded from Zone A status for five years.

So the current financial crisis started with bad mortgage debt, spread to bad bank debt, carried over into bad agency debt, and now encompasses bad sovereign debt. Each of these categories was given preferential capital weighting under the Basel Accords, and now all are open sores on the financial system and the stability of excessively indebted governments.

Not only did the Basel weightings encourage poor risk assessment, they directly contributed to the inadequate capitalisation of banks for the risks they assumed.

And yet, have you heard any regulator take responsibility for regulatory failures yet? I haven't. In fact, I've seen no historic analysis of capital requirements, deregulation of credit markets, securitisation, derivatives, demutualisation, or any of the other regulatory policy innovations which should reasonably be matters for review in assessing the causes of the current crisis.

As the bankers and regulators do not seem keen to be reflective about their own policies and conduct, it's hard to imagine that they can craft constructive reforms to make the system safer or more efficient in future.

I've downloaded the draft Basel Accord III, released this week, for leisure reading. Sadly, I'm trending to the view that all harmonised regulation is likely to end in disaster as it precludes independent judgement and sensible challenge to orthodoxy. Once something has been agreed by a big enough committee, it becomes impossible to question whether it makes sense. Ultimately the unintended consequences of incentives and distortions mean it won't make sense, but by then it's far too late to change course and break from the herd.