Ray Hanley’s Three Medicaid Fallacies

Ray Hanley

I see that Ray Hanley has responded to my Arkansas Business commentary on Medicaid expansion in Arkansas. Ray Hanley is a smart guy and a provocative writer, but his response demonstrates the extraordinary financial and intellectual weakness of the case for the “private option.” Notably, in my original article, I posed six questions that I believe that advocates of Medicaid expansion cannot satisfactorily answer; in his response, out of those six questions, Hanley addressed two. Even in just those two answers, though, I think Hanley makes multiple mistakes that are difficult to defend.
First, Hanley claims that the hundreds of millions in new obligations that we’re about to load onto Arkansas taxpayers will create economic growth that will increase tax revenue to the state. Unfortunately, experience demonstrates that this approach is fatally flawed. Recall the Obama Administration’s “stimulus package” — over $800 billion of federal spending that was designed to jumpstart the economy. Despite this alleged stimulus, we are now in the midst of the longest recession and weakest economic recovery since World War II.
The theory of Medicaid stimulus is a modern version of what economists call the “broken window” fallacy. That fallacy is the idea that, when a window gets broken, the resultant stimulus to the economy make us all better off: for instance, a glazier gets paid to replace the window, the pay the laborer receives then gets put back into the economy to buy other goods and services, and so forth. This fallacy is based on ignoring the fact that the window owner would be better off if the window had never been broken. Without a broken window, the window owner would be able to use the resources he or she owns productively, rather than using them to pay for window repair. Similarly, Medicaid expansion won’t create wealth or make us any more prosperous; all it will do is redirect resources that are already in the economy that could, otherwise, be used for a superior alternative. In short, defending Medicaid expansion on the ground that it will spur our economy is, conceptually, difficult or impossible to accomplish; the gains that it allegedly creates would be even greater without Medicaid expansion.
Second, Hanley claims that the private option is “projected to save the state $359 million” in hospital spending. This, too, is a red herring, because it is based on the theory that we should assume various spending obligations now in exchange for hypothetically reducing spending later. There’s nothing wrong with that idea inherently; the problem comes when the promised hypothetical savings never occur. There is good reason to be skeptical that promised future reductions in uncompensated care will occur as promised. For instance, earlier this year, the federal government announced that it was increasing uncompensated-care payments to hospitals by half a billion dollars. Other states regularly see (Arizona, for example) increases in uncompensated-care payments to hospitals, despite promises of future cuts that, mysteriously, never materialize — perhaps because Medicaid expansion doesn’t seem to lead to significant reductions in the rate of the uninsured. In fact, there is little or no reason to think that a politically powerful lobby, like the one we have for Arkansas hospitals, is just going to sit there and abandon a possible source of revenue when its lobbying power enables it to continue to extract funds from taxpayers. As a general matter, I think it’s an analytical mistake to depend on hypothetical spending cuts later that are purchased with actual spending increases now.
Third, and perhaps most importantly, Hanley takes issue with my statement about the scientific findings from the study of Medicaid use in Oregon – particularly my statement that the study “strongly suggests that there is no difference in actual, physical health outcomes between those covered by Medicaid and for those with no coverage at all.” Hanley takes issue with this by responding that expanding Medicaid “ ‘did increase use of health care services, raise rates of diabetes detection and management, lower rates of depression, and reduce financial strain,’ which [Hanley claims] are all very positive outcomes for health care consumers and the state.”
Here, Hanley is just wrong. (It’s worth noting that Hanley, for some reason, fails to mention many of the health indicators which the study found were unchanged by Medicaid, but that’s not the main reason why he’s wrong.) Those who are actually interested in what the Oregon experience demonstrates should go back to the immediately previous paragraph and read it just a bit more carefully than Hanley apparently did. If you bother to think about what you’re reading, you’ll discover some basic propositions.
1. Increased use of health care services is different from improved physical health outcomes.
Hanley’s argument is something like this: if you’re hungry, go to the grocery store, walk up and down the aisles, and look at all the things you could buy, because that will make you feel less hungry. Of course, nobody believes this about grocery stores, but putting it this way illuminates the problem with Hanley’s approach. It’s a matter of common sense that going to the grocery store and seeing what is for sale doesn’t make you feel less hungry; rather, what makes you less hungry is, ultimately, eating the food they have there! But this simple logic evades Hanley when he discusses health outcomes. Increased transactions with doctors and nurses, as such, isn’t a positive outcome for our citizens or our state, any more than increased visits to the grocery store will result in the ownership or consumption of more food. Only improved health outcomes qualify as a success here, not simply increased activity.
2. Increased rates of diabetes detection and management is different from improved physical health outcomes.
It’s important to realize that expansion in Oregon had no effect on the actual occurrence of diabetes. (More precisely, there was no effect on average glycated hemoglobin levels or the percentage of people with dangerously high levels of it.) Increased rates of diabetes detection and management is different from actually reducing the incidence of diabetes. To get away from all the jargon here, this means that, again, Medicaid didn’t improve physical health outcomes; it just juiced up the stats on treatment.
Hanley goes on to point out that there are some good consequences to expanding Medicaid that are unrelated to physical health outcomes, such as reducing financial strain. (Indeed, it’s my suspicion that the positive impact that Medicaid has on the incidence of depression is related to the reduction of worries about health disasters creating debt problems.) Those good consequences are unsurprising, given that Medicaid blocks people from paying for their own health care in many respects. But, again:
3. Reduced financial strain is different from improved physical health outcomes.
If what we’re trying to do is reduce financial strain, we’d be far better off cutting poor people checks and letting them spend the money the way they want. For instance, it would be much cheaper (and much more respectful to the interest that citizens have in a growing economy) to enact a catastrophic-injury health-insurance program for all Americans, rather than doubling down on the failed program we have now. And I don’t want to be dismissive about the positive effect of Medicaid on depression. Depression is a big problem. But if the only thing that Medicaid accomplishes is a reduction in depression and the easing of financial strain, I can design a program that addresses that for far less than a trillion dollars a year.
Obamacare was supposed to bend the cost curve, lower health insurance premiums, reduce the deficit, and produce extraordinary improvements in our health. Medicaid expansion was supposed to take care of these problems for the poorest of the poor. As Ross Douthat has noted, health care expansion was sold to us with the promise that it would save tens of thousands of American lives every year. Now we have to face the fact that there’s every reason to believe that those Obamacare promises will never be fulfilled.
If we’re not talking about matters of life and death, but instead we’re just talking about averting financial difficulties, then it makes no sense to pour billions of dollars into a dysfunctional health care bureaucracy. Instead, a better use for those funds would be to help people who are concerned about financial strain by giving them more money through tax policy, more options about what to do with it through a healthy and growing economy, and more reason to be unshackled by worries about catastrophic health-care expenses through a relatively cheap catastrophic insurance policy. I fear that defenses of Medicaid expansion like Hanley’s which ignore the actual, real-world effects of Medicaid are based less on evidence than on faith in a system that demonstrably does not work.

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