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TennCare: What Happened

Part of the story those who favor some sort of government run health care repeat is that private health care is very costly. They point to the costs incurred by the U.S. compared to other countries such as Canada, the U.K., etc. They note that the U.S. pays much more per person but supposedly gets lower health care outcomes (measured rather dubiously via things like life expectancy).

The problem I have with this narrative, aside from the rather dubious reliance simply on published cost figures from these governments and the reliance on statistics like life expectancy, is the idea that government is suddenly going to be more efficient than the private sector. Government’s primary job is the creation of “red tape”. The idea that we can actually switch to the government and get less costs strains credulity past the breaking point.

Case in point: TennCare. TennCare is Tennessee’s attempt to expand health care to people who did not have health care. According to Wikipedia, TennCare moved 1.3 million people into its system including 500,000 people with pre-existing conditions. TennCare was to utilize managed care organizations to keep costs low while at the same time providing quality care. And for a few years it seemed to work. Costs declined, and more people were covered. Then costs started rising…and rising quickly. Governor Bredesen brought in an outside consulting firm to look at TennCare and its ballooning budget. They pronounced TennCare unsustainable and pointed out that unless something was done the program would consume up to 90% of the State’s budget. (Hmmmm, gee sounds like I’ve heard something like this before…) And keep in mind that a big part of the costs would be picked up by the Federal government.

The solution to this was to…limit access. Gee, where ever have I heard this before? Limits were put on the number of doctor’s visits, the number of prescriptions, and 160,000 people were moved out of TennCare (what happened to them, beats me).

So what happened? Government stepped in and costs spiraled out of control so much that it threatened to consume nearly the entire budget for the State. Benefits had to be rationed and/or reduced and no new enrollment. Where are the cost savings that were supposed to have materialized and made everything, if not wonderful, at least better?

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About Steve Verdon
Steve has a B.A. in Economics from the University of California, Los Angeles and attended graduate school at The George Washington University, leaving school shortly before staring work on his dissertation when his first child was born. He works in the energy industry and prior to that worked at the Bureau of Labor Statistics in the Division of Price Index and Number Research.

Comments

  1. Michael says:

    So what happened? Government stepped in and costs spiraled out of control so much that it threatened to consume nearly the entire budget for the State.

    Putting aside your immediate belief that Government must naturally decrease the efficiency of anything it touches, something had to actually _change_ in order for costs to “spiral out of control”.

    Government simply being present isn’t enough, Government had to _do_ something, could you kindly expand upon what that something way? As you said: “And for a few years it seemed to work. Costs declined, and more people were covered.”, so obviously TennCare was able to accomplish it’s goals in the short term, so what went wrong in the long term? Did something change the equation after a few years, or did the equation only work in the short term? Why?

    I’m sorry, but I need something more than “Government stepped in” as an explanation for the failure.

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  2. JKB says:

    Michael, Clearly you have never worked in government. Bureaucrats are rewarded for the size of their bureaucracy, so the natural tendency in government is to expand regardless of costs.

    But for a nice write up on the TennCare debacle, see this entry from a MD blogger written a couple of years ago. It outlines that the system drove doctors out of Tennessee and also that the politicians never saw a benefit they wouldn’t approve. The costs were initially contained in the mid nineties due to the expanding economy and the general control of costs in private healthcare during that period

    The question I have is: If the US goes to socialized medicine, where will the Canadians go for timely healthcare? I see a boon in clinc/spas in Mexico and Central America.

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  3. spencer says:

    The state of Tenn contracted with seven private for profit managed care organizations(MCO) to run TennCare. I’ve found numerous references to the point that major problems developed with these MCOs. But I could not find any specific listing of how these private, for profit MCOs failed.

    You are making a massive jump in reasoning that the failure of these MCOs was due to government actions.

    Maybe, but I do not know. Don’t you have any more evidence then this to support your allegations?

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  4. JKB says:

    I see the link I tried to include didn’t make it into my comment.

    Here is the URL
    http://www.rangelmd.com/2005/06/failing-socialized-health-insurance.html

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  5. Michael says:

    From JKB’s link:

    Then two unfortunate things happened. The economy dramatically slowed (the internet bubble burst followed by 9/11) and the managed health care system unraveled. Yet, Americans continued to consume health care at record rates and combined with expensive advancements in medical science this resulted in huge increases in health care costs.

    So of the things that are blamed for dooming TennCare, none of them involved government actions. The problem was that the environment that made TennCare successful went away. Kind of like tax cuts being good when you have a surplus, but bad when you have a deficit. The TennCare program performed exactly as it was designed in the situation it was designed for, the problem was that the situation changed, so TennCare had to make changes.

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  6. Dave Schuler says:

    Back around the time I started blogging I began writing a post on this very subject which I never completed. Perhaps I’ve got the links around somewhere.

    The failure of TennCare is a wonderful object lesson for healthcare reformers. TennCAre achieved its objectives: it reduced the usage of relatively expensive emergency room services in favor of relatively less expensive primary care services. That was successful. The problem was that they couldn’t control costs.

    There are all sorts of possible explanations for this. Hardcore national health advocates claim (without much basis that I’ve seen) that the reason was that such a plan can’t be implemented by the states—only by the federal government.

    My own take was that there wasn’t enough excess capacity among primary care providers actually to reduce costs in the face of general increases in the cost of health care (in other words, PCP’s were a little less expensive but not a lot less expensive).

    But what I think is undeniable is that rising costs eroded political support for TennCare even if continuing it made economic sense. Tennesseans seemed to be more willing to pay higher health insurance premiums (for their own health care) than they were to pay for somebody else’s healthcare.

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  7. Dave Schuler says:

    So of the things that are blamed for dooming TennCare, none of them involved government actions.

    Not quite, Michael. TennCare was government action, consequently any of its secondary effects are the secondary effects of government action.

    Again, that’s not quite my take. I think that the failure of TennCare was, partially, TennCare but the real problem was that the saving weren’t enough to make up for generally rising costs and rising costs eroded political support.

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  8. whipoorwill says:

    Government’s primary job is the creation of “red tape”. The idea that we can actually switch to the government and get less costs strains credulity past the breaking point.

    I’m not sure the Competitive Enterprise Institute is an independent source of info on the real cost of a single payer health care system [such as the medicare model]. Most studies on the subject say medicare admin costs are around 2 to 5% with private sector admin costs at 20 to 25%. Even if the ratio is too generous toward the government, it is indisputable that Medicare is an efficient government program.

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  9. Dave Schuler says:

    Most studies on the subject say

    Could you please support this with some citations, whipoorwill? To show my heart’s in the right place, the study most commonly cited suggests that U. S. administrative costs are around 31% and Canada’s around 16-17%. I’d certainly like to see a study showing the low level of costs you’re suggesting and why that will be applicable to the situation in the U. S.

    On a not completely unrelated subject, are you familiar with the fallacious Appeal to Authority?

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  10. Tano says:

    Dave writes,
    “U. S. administrative costs are around 31% and Canada’s around 16-17%.”

    and from the report he links to:

    “Canada’s national health insurance
    program had overhead of 1.3 percent; the overhead among Canada’s private insurers
    was higher than that in the United States (13.2 percent vs. 11.7 percent). ”

    How is this possible in the Verdonian worldview?

    “The problem I have with this narrative, aside from the rather dubious reliance simply on published cost figures from these governments and the reliance on statistics like life expectancy, is the idea that government is suddenly going to be more efficient than the private sector.”

    Translation: The problem Steve has with this reality is that it conflicts with his ideology.

    Private companies are not magically more efficient merely because they are private (as anyone who as ever worked in the private sector would readily understand). One might expect that, over time, in a highly competitive market, those companies that are more efficient will dominate. But the private marketplace as a whole will be much less efficient than its dominant components, even in this best of situations. And the fragmentation of the market itself introduces inefficiencies.

    The Social Security Administration, including Medicare, has long been a very well-managed and efficient bureacracy. This is so, even if your ideology tells you that somehow such a thing is impossible.

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  11. Dave Schuler says:

    Again, we need to make sure we are comparing apples to apples in comparing costs. It’s not quite as simple as you’re suggesting, Tano.

    Note that I favor going to a single-payer system (or a multiple payer system in which costs are brought down to those of a single-payer system, I’m not particular) but only as part of a more comprehensive solution that is fiscally responsible. I think that serious increases in the supply of healthcare will be necessary to do that but I’m open to other approaches.

    Fiat pricing isn’t one of those approaches. That will just create shortages.

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  12. whipoorwill says:

    Dave Shuler

    I can offer this link for now, it’s kind of late.

    On a not completely unrelated subject, are you familiar with the fallacious Appeal to Authority?

    Here’s some advice, If you think someone doesn’t know what their talking about, just say so straight up without links to cryptic websites.

    I never claimed to be an expert, but I do have some common sense. The current system we have is totally insane. Ask any doctor how much time they spend on admin costs and they will nearly always say a lot. Same is true for many patients dealing with HMO’s and Insurance companies.

    Ask most patient’s who use medicare and they will tell you they love it. Sometimes empirical evidence is the way to go, Dave.

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  13. Steve Verdon says:

    Government simply being present isn’t enough, Government had to _do_ something, could you kindly expand upon what that something way?

    See that curly thing at the end of your sentence there Michael? It is called a question mark. Note I used it at the end of my post as well. How can I expand on the very thing I’m asking a question about?

    Spencer,

    You are making a massive jump in reasoning that the failure of these MCOs was due to government actions.

    The government chose those MCOs didn’t they? That is an action. Maybe that was it, government chose badly. But it still puts the lie to the claims by those on the Left. That is government getting involved in health care will solve the problem.

    Tano,

    Private companies are not magically more efficient merely because they are private (as anyone who as ever worked in the private sector would readily understand).

    No magic at all. I’m pretty sure I’ve told you this before, but I’ll try once more. Profit maximization implies cost minimization. Hence profit maximizing firms don’t usually let costs runaway. Government’s objective is different, hence you can’t claim cost minimization.

    Further, as Dave points out we want to make sure we are comparing items that are comparable. For example, how is spending on office workers determined for Canada? If something is outsourced by some Canadian government office how is that cost recorded vs. something that may not be outsourced here in the U.S.?

    And you are once again making my point. If government can “magically” reduce costs how come it didn’t work for TennCare? How come we got precisely the opposite result?

    Whipoorwill,

    I never claimed to be an expert, but I do have some common sense. The current system we have is totally insane.

    Of course it is, neither Dave nor I defend the current situation. I’ve written in several places that the current situation is completely unsustainable.

    However, that being said, our system is sort of similar to France’s system in that it is a hybrid system of public and private. And guess what? The French system is also unsustainable. There were recent protests over the government’s announcement that more market like mechanisms were needed in the health care sector.

    Ask most patient’s who use medicare and they will tell you they love it. Sometimes empirical evidence is the way to go, Dave.

    Sure, I’d love it is my premiums were cut in half too. In fact, I’d accept some reduction in quality as well given such a savings. Empirical evidence without engaging your brain isn’t all that helpful.

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  14. Michael says:

    Steve,

    Government stepped in and costs spiraled out of control so much that it threatened to consume nearly the entire budget for the State.

    See that point at the end of your sentence? That’s called a period, and is not used to terminate a question, but rather a statement. You wrote said statement in what seemed a response to your own question of “So what happened?”.

    No magic at all. I’m pretty sure I’ve told you this before, but I’ll try once more. Profit maximization implies cost minimization. Hence profit maximizing firms don’t usually let costs runaway.

    And what mechanism will profit maximizing firms use to control costs? I can tell you what my current profit maximizing firm does, it caps coverage or denies it outright, not exactly the ideal solution for consumers. For insurance companies, unlike most other companies, their customers are also their biggest expenses, so when they need to cut costs, where do you think they’ll look first?

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