Tough medicine

Photo by Frank Curran

As of April 12, 2006, Jonathan Gruber became the most influential economist in Massachusetts government. That was the day Gov. Mitt Romney signed a sweeping health care reform law that had Gruber’s distinct fingerprints on it. Of course, at the Faneuil Hall bill-signing ceremony the cameras focused on Romney and key legislative leaders-and on U.S. Senator Edward M. Kennedy, who flew in for the event. But it was Gruber, 41, a professor of economics at MIT, who had pushed from the beginning for a new state requirement that all residents of the Commonwealth carry health insurance.

In addition to this first-in-the-nation individual mandate, the law created a new state authority to oversee the re-making of the health care market, and Gruber was named one of 10 board members of the Commonwealth Health Insurance Connector Authority. So this MIT professor’s work in health care economics has already directly affected many thousands of lives in Massachusetts.

In the year since the enactment of the law, well more than 100,000 state residents have been newly covered by health insurance, either by expanded Medicaid or through the new Commonwealth Care plan, which offers subsidized insurance for those who make up to three times the federal poverty line level (up to about $60,000 for a family of four). By this July, all residents are legally required to carry health insurance, though Gruber says it won’t be worth looking at numbers until mid 2008 to see how close to universal coverage we are, since full compliance won’t happen without a good deal more publicity. Meanwhile, Gruber has been called in to advise other states—including California and Minnesota-to help them devise plans to expand health insurance coverage.

Gruber’s role in Massachusetts health care reform began without fanfare. After working in Washington in 1997 and 1998 as an economic policy advisor for the U.S. Treasury Department, Gruber returned to MIT, where he has been a professor since 1992, and developed a health care “micro-simulation model.” The idea was to build a computer program that would predict the results of various health care changes.

In 2001, during the Jane Swift administration, Massachusetts received a federal grant to look at ways of expanding health insurance coverage. Amy Lischko, then commissioner of the Division of Health Care Finance and Policy, hired Gruber to adapt his model to the Massachusetts market. “I worked on that for about a year-and-a-half, and then that became a report that just went into the ether, like many state reports do,” he recalls.

By early 2005, the Romney administration was beginning to look seriously at health care reform. Lischko and her boss, Health and Human Services Secretary Ron Preston, were charged with investigating whether universal health care coverage could work in Massachusetts—and how much it would cost to get there. They brought Gruber back to run the numbers.

An individual mandate was one of many ideas on the table. Such a mandate had been recommended by Urban Institute researchers in the Roadmap to Coverage reports of 2004 and 2005, produced in partnership with the Blue Cross Blue Shield Foundation. “I think probably my single biggest contribution to this debate was pointing out that a mandate was absolutely critical to making it work,” Gruber now says. Romney bought into the idea and made that the centerpiece of the reform.

As the politics of the new law played out on Beacon Hill, most of the controversy and news coverage turned out to be about the law’s assessment of $295 per worker per year on businesses that did not offer health insurance. Some business groups, as well as Romney, opposed the assessment as a new tax on employers. Romney ended up vetoing the fee, but the Legislature overrode the veto. In the meantime, there was little organized opposition to the individual mandate, and it sailed through without nearly as much comment.

How generous should health coverage be? If you cover everything, people use medical care excessively.

Gruber has been immersed in economics since his undergrad days at MIT in the late 1980s, and he obtained a doctorate in economics from Harvard before taking his post as an MIT professor. When we met in late February in his cluttered office on the third floor of the Sloan Building, with a view looking out on the Charles River, Gruber spoke about the recent advancement of his education—in learning the ways of Beacon Hill politics. What he finds puzzling is that state leaders in Massachusetts so infrequently make use of the intellectual resources “on the other side of the river”—i.e., at Harvard and MIT—and at the many other nearby colleges and universities. But he reports that he was “thoroughly impressed” with Romney. “As a lifelong Democrat,” he says, “I actually came out of the meeting a bit scared about this guy as a presidential candidate because I thought he was so impressive.”

Photo by Frank Curran

Gruber teaches health care economics and public finance courses at MIT. It’s hard to imagine that, with those two specialties, he will not be much in demand by policy-makers for many years to come. What follows is an edited transcript of our conversation.


CommonWealth: Let’s start by talking about life as an economist at MIT. Economists think about health care very differently than people like me do. What does it mean to “think like an economist”?

gruber: I think there’s a one-sentence answer: It means to think about trade-offs. And to be willing to recognize and deal with trade-offs in places where people feel uncomfortable doing so. The best example in health care is, how generous should health insurance coverage be? Many people think health insurance coverage should cover everything. You should go to the doctor for free. You should get whatever care you want. Economists for many years have recognized that the trade-off with that is that if you cover everything, people use medical care excessively—the so-called “moral hazard” problem. The right kind of insurance is something which makes people aware and cost-conscious about the care they’re using, so they use care appropriately, not excessively.

cw: I’ve seen people describe a younger generation of economists who are more involved in the practical world, not lost in mathematical theories that the rest of us find inaccessible. Do you see yourself as part of that?

gruber: I actually think you’ve got the generations backward. I think economists were much more practical in Paul Samuelson’s day than they are today. The typical economist [in the 1960s] was much broader, more involved in policy, more involved in the real world than the typical economist is today. What we’ve done now is fragment into a profession where many economists don’t touch the real world. But I view myself as following a tradition set by my much older colleagues many years ago, who went and served on the [U.S.] Council of Economic Advisers and did policy-relevant work. I would say the heyday of the power of the economist as policy-maker was the 1960s, when we thought we had figured out a way to solve the economy’s problems. John F. Kennedy relied enormously on economists like Arthur Burns and Paul Samuelson and Bob Solow and others. I think in the ’70s, when suddenly the economy wasn’t functioning well, that reflected badly on economists. We thought we had solved poverty. We thought we had solved the unemployment/inflation trade-off. When that turned out not to be true in the ’70s, I think economics drew back a little bit from policy advising and became more scientific, more dealing with esoteric theories. I think now it’s more of a mix of folks like myself, who are very much in the real world and very much about advising policy, and others who aren’t.

cw: With any big change there are winners and losers. And with the new Massachusetts health care law we have already heard some expressions of discontent. I’m thinking specifically of some people in small businesses and small nonprofits who have become alarmed about what happens when a lot more of their employees, who haven’t been taking the coverage they’ve offered, now decide to take it. The employer suddenly is saddled with hundreds of thousands of new dollars in health care costs.

gruber: That is a legitimate concern. It’s a hard thing to know how that’s going to play out, how to model that. Certainly there are employers where a very small share of their employees take the coverage, and they’ve essentially made their budgets based on that. Some of them may just stop offering health insurance. The way I think about this health reform is, [we’re] trying to fill the cracks in our health care system while minimizing the disruption to what’s working. But there’s going to be some disruption. There’s going to be some employers who stop offering [health insurance].

cw: It may make economic sense for some employers to pay that $295-per-worker assessment, rather than to pay for new health costs.

gruber: Absolutely. But you know what? You’re filling a big crack. There’s no way to do that without disturbing something on the edges. Think of the U.S. health care system as being like the deck of a ship. Most people are in deck chairs, and a bunch of people are wandering around looking for a deck chair. The question is, are you going to bring out some new chairs for the people who are wandering around, which is what Massachusetts is trying to do, or are you going to make everyone stand up and change around their chairs, which would be like moving to [a] single-payer [system]? Massachusetts is trying to bring out those new deck chairs without kicking too many people out of the chairs they’re already in. But you’re going to kick some people out of the chairs they’re in. There’s no question. Any reform is going to have that disruptive effect. The question is how big will it be? I don’t see it being huge.

cw: I think one of the most interesting things about watching politicians talk about health care is that you don’t see people generally “thinking like an economist.” You see a lot of people thinking ideologically, or thinking politically. I bring that up because I was interested to see, in a recent interview with ABC [News], that Romney, now running for president, made the following comments: “I don’t like the employer mandate in California, but it’s a valiant attempt to get more people covered. But further,” he said, “I do not want more incursion of the government into health insurance or into the health care field. We’ve got to get government out. We’ve got to allow the private market to work, and the best way to do that is to help people buy private policies they can afford.” What is the meaning of the statement “We’ve got to get government out”?

gruber: If you tried to press him on it, my guess is what he’d say he means by that is “get the government out of the provision of insurance.” For example, if you look at the Massachusetts plan, below three times [the] poverty [line] it’s private managed-care organizations that are providing this care to [most] low-income people. They’re no longer getting Medicaid. They’re getting private insurance. Of course, the government is mandating them to buy it. So whether that’s the government “getting out” or not is semantics. But the valid notion is that we should let people choose more among private products. So below three times poverty, people now have a range of choices of these different managed-care organizations. They can choose different ones based on where their doctor is or what they like about the organization. I think that’s the notion of giving people more choice.

cw: Isn’t another big part of this the expansion of people covered by Medicaid at the lowest income levels?

gruber: Yeah, a little bit, but that’s not the biggest part of it. Commonwealth Care is much, much bigger.

cw: Which is subsidized.

gruber: Government subsidized. I am disappointed to the extent that Romney’s position is taken as him moving away from his accomplishment, because I think it’s an amazing accomplishment, and I think he deserves the credit. It really was a Nixon-goes-to-China moment—a real Republican taking leadership on a traditional Democratic area. I’m sorry to hear his comments make it seem like he’s backing off that.

cw: The way I interpret it is, he’s getting more in sync with the Republican electorate that wants to hear that language about government not having a heavy hand. And that brings me to something you mentioned earlier, this question of “moral hazard.” My sense is that on the conservative side of this discussion there is a very strong notion, promoted by some well-known economists, that one of the problems we face is people having too much health care, too much expensive care, and that what we need to do is make people pay for more of their own health care costs. So they’ll not use so much. I don’t identify you with that line of thinking.

gruber: No, actually I’m a strong advocate of that line of thinking. Economists think about insurance very differently than other people do. If you ask typical Americans what they mean by insurance, they’ll say, “Well, I pay something every month and I don’t have to pay anything else.” That’s medical pre-payment; that’s not insurance. If you look it up in the dictionary, what’s insurance? It’s protection against financial catastrophe. That’s not how Americans think about health care insurance. They want everything to be free once they’ve paid their insurance bill. Where economists are in health insurance is, we think people ought to pay more when they go to the doctor, as long as they’re protected against financial catastrophe. So to my mind the best health care plan—if we have no constraints of administratability—would be one where people pay a significant amount when they use medical care, up to an out-of-pocket limit which is indexed to income, so no one is bankrupted. No one pays more than 7 1/2 or 5 or 10 percent of income, whatever—that’s a political decision—but some out-of-pocket limits, indexed to income. And, I think that’s where, if five years ago I were talking about it, I would have stopped. I think what we’ve realized in the last five or six years is that there is also a case for subsidizing particular forms of cost-effective care. For example, making diabetes drugs free for diabetics. It’s not the traditional preventive care, necessarily. It’s really the chronic maintenance care that’s cost-effective. I think there’s still not a ton of evidence that the “well-child visit” is cost-effective. The real cost-effective [approach] is keeping the diabetic on his diabetes maintenance regime. So that’s where ultimately we’d go, and I’m very much in the economic mainstream on that. We think people should be paying more, as long as they’re financially protected, and especially if we can figure out some way to make incentives for appropriate medical care use.

cw: It brings to mind what I think is one of the most awful pieces of health care jargon that is kicked around, but maybe this is what you’re saying—that consumers have to “have more skin in the game.”

gruber: Yeah, I never understood that one. Is that a dermatologist reference? I think the point is there’s better and worse ways to do that. Take, for instance, health savings accounts, which I actually don’t like. The problem with a high deductible is that you’ve got no coverage until you’ve spent a lot of money. So that doesn’t work for a low-income family. What you really need is something where you pay ideally the co-insurance rate, where you pay 20 percent or 25 percent or 30 percent of your cost. That keeps you price-sensitive all the way until you’ve hit that income limit. And that would be more “skin in the game,” I guess, to use that term. I think the people on the left have been—there’s a big uproar against the moral hazard argument. I think it is absolutely wrong that moral hazard isn’t a concern. It’s also absolutely right that if you solve moral hazard it’s not going to make that much of a dent in health care costs. It’s the right thing to do. It will make a dent in health care costs, and it also helps the financial budgeting of our reform, but it’s not the long-run solution of controlling health care costs. So I think that’s where people on the right go too far, saying we just do this and all of a sudden that will solve all our problems. That’s wrong.

cw: And you’ve been critical of the president’s approach that tax credits can be one way of solving this.

Why hold [universal] coverage hostage to the fact that we haven’t yet figured out how to control costs?

gruber: This most recent budget proposal [from President Bush] is much more interesting. But his traditional approach for the last six years has been, let’s just give people tax credits. I’m a big critic of that because I think that’s just throwing good money after bad. There’s nowhere for them to take the credits. The non-group market doesn’t function. And so you can’t just give people money and say go into this crappy market. That’s not an answer.

cw: We’ve come full circle in Massachusetts in terms of our governor’s sentiment. I was at a conference about a year ago put on by [the advocacy group] Health Care For All in which then-candidate Deval Patrick spoke, and someone asked him where he stood on single-payer solutions. And Patrick said, “I do think that single-payer is the direction we’re heading.” Which was a statement of sentiment, not meaning that he’s going to move us in that direction in Massachusetts. But I wanted to ask you, because you mentioned the approach of people on the left, about your analysis of what you hear a lot on the other side of the spectrum, [from economist and New York Times columnist] Paul Krugman, [or] here in Massachusetts [from Harvard School of Public Health professor] Marcia Angell. Recently, [Angell] wrote in the Globe, “It’s time to stop tinkering at the margins. ‘Medicare For All’ is the only reform that has a prayer of providing universal coverage while containing costs.”

gruber: I think that the reason the Massachusetts bill is succeeding—or, hopefully, will succeed—where Clinton health care reform failed is that, essentially, it punts on the issue of cost control. And you know what? I think that’s OK, for two reasons. First of all, we know how to cover the uninsured. I can tell you six different ways to cover the uninsured. [But] we don’t actually know how to control costs in an effective way yet. The science hasn’t caught up on cost control to where it is on coverage. So why hold coverage hostage to the fact that we haven’t yet figured out how to control costs? Second, it seems to me that coverage is something that states can effectively do, but cost control has to be a federal initiative. I think of the Massachusetts plan as either universal incrementalism or incremental universalism. But it’s much more than incrementalism, it’s the minimum way to get to universal coverage. It comes back to my deck-chair analogy. What Krugman wants is to make everyone stand up, to bring in a whole new set of deck chairs, and have everyone sit down again. You just stir up all this animosity—because maybe there are a few splinters in these deck chairs, but by and large people are comfortable. Yeah, we wish health insurance was cheaper, but by and large if you work at a place like MIT, you’re happy. I get a form every year, I choose, I say, “Gee, that’s awfully expensive,” but I choose. And then it’s out of my mind. It comes out of my paycheck. I don’t even think about it. So you’ve got to ask yourself, is it really going to work to make people who are basically satisfied stand up and shuffle around these deck chairs? I just think it’s not going to happen in the American political system to do that. You may call [the Massachusetts law] incrementalism, but at the end of the day, if it gets to universal coverage, who cares what you call it? Now, is Massachusetts going to help with cost control? Well, I think it will a little bit because once everybody is covered, it’s easier then to address cost control. But I think cost control is something we just don’t know how to do yet.

cw: Well, that is a huge part. You also teach public finance. And so, as soon as someone says, “Medicare for all,” you have to move into a serious discussion about what the public treasury can bear. And part of that is a discussion about the rising costs of health care in the United States. Even though, as you say, we for the time being punted on that, it is important for economists to begin to tell us what’s going on with health care inflation. I know that you must have looked at, just this last week, a study that came out by the McKinsey Global Institute. They had an explanation. I read the Washington Post column on it, not the report. But their explanation, I gather, is that, to simplify, doctors in America are paid extremely well. Hospitals make a lot of money. Drug companies make a lot of money. The people that the system is working for now, which happen to be very powerful interests, are doing quite well, according to this report. And that’s why we can’t control costs.

gruber: Well, but there’s a difference. That’s very important. Everything you mentioned—doctors being paid well, hospitals paid well, you left administrative costs off the list—

cw: Insurers are making money—

gruber: Those are all what you might call “level effects.” So let’s say I could tomorrow lower the cost of health care by 10 percent. That’d be pretty good. A year from now we’d be right back where we are because health care costs are going up at 10 percent a year. So who cares? At the end of the day, it’s the growth that matters, and that’s not about doctor pay, that’s not about hospital pay, that’s about technology. That’s about the fact that health care is getting better and better, and more expensive as it does so. [Harvard Medical School professor Joe Newhouse] had a great quote about this a number of years ago. He said, “Nobody wants to buy 1950s health care at 1950s prices.” Health care is just great today, and it’s unbelievably expensive. Yes, it is easy to look back and say, I could probably lower health care costs by a few percentage points of GDP by paying doctors less, the hospitals less, et cetera. But going forward, it’s hard to know what things to cut out. It’s hard to say, yeah, that drug we shouldn’t pay for. This back surgery we shouldn’t pay for, or whatever. When I say we haven’t figured out how to do it, [I mean that] we have not yet figured out a way to effectively ration care, which is what has to happen. The only way to control costs in the long run is rationing. There’s no middle ground. There’s no third way. Right now we ration implicitly by having uninsured people. The ultimate system, if we really want to control cost, has to move to explicit rationing. I don’t mean necessarily saying, “We’ll pay for this surgery and not that surgery.” But ultimately what it means is—and [this is] where Paul Krugman is just wrong and other people are wrong—we need to have two-tier health care in America. What ultimately we need to do is to have society say, look, this is a basic level of coverage that everyone needs to have.

cw: That prevents against catastrophic [costs and] bankruptcy.

gruber: Exactly. It prevents bankruptcy and encourages chronic-care management. And then if you want to buy more—it’s America, go for it. We let you have the biggest screen TV you want, the biggest car you want, you should get the best health care you want. But the government shouldn’t be in the business of subsidizing that. And that’s ultimately where we need to be. But the “Medicare for all” people say no, everybody should have generous insurance. And that we can’t afford.

cw: Two-tier health coverage sounds elitist. It sounds like the wealthy get a much better plan.

gruber: We have it already. It’s just implicit. Right now we have 47 million with no coverage and 200-plus million people with too much coverage. And this big gap in the middle. It’s a crazy system. We need to move to something where everybody has a basic level, and the American way is to let rich people have more of stuff. I see no reason why health care should be different. That’s very antithetical to the left, and I consider myself a good voting Democrat, and I realize that’s very controversial. But, ultimately, if you want to do cost control, you have to do that. That’s why I say we’re not ready for cost control yet, because we’re not ready to deal with the rationing that will be involved in cost control. If we really want costs to be significantly lower 50 years from now, that’s ultimately about rationing, ultimately about saying to people, “You can’t have this health care cost”—or at least that the government will not pay for this health care stuff you want.

cw: There’s a confusion in my mind when you talk about one of the things driving the expensiveness being technology. I’m sure economists have a way of thinking about this, but in other sectors, technology succeeds in bringing costs down.

gruber: Health care is a wonderful sector. You’ve got cost-increasing technologies instead of cost-reducing technologies. Look at what technology is doing in computers. The problem I want to solve is not that different from the one I wanted to solve 20 years ago, I can just solve it faster. OK. But in health care I’m treating things I couldn’t treat 20 years ago. It’s a different problem we’re solving. Now, some would say, look, you’re creating problems. Some would say, you’re creating problems and then solving them. That’s true, and that’s where rationing would come in. A great example is back surgery. The available evidence suggests that for back pain, if you compare those who get back surgery with those who don’t—[that is, those] who do medical management, which is a ton cheaper—about a year from now they’ll be in the same place. But the ones with surgery will get there a lot quicker. So should government be subsidizing people to get back surgery? Or at the end of the day should we say, look, if you’re rich and want to get better quicker, we’ll let you do that? Why should the government be in the business of doing something which ultimately won’t affect your health? [Back surgery is] just something that lets you [feel better] a bit quicker. Now I’d love for people to feel better quicker, but it comes back to “what’s an economist”? In a world of infinite resources, give everyone back surgery. But given limited resources, let’s set up a system where we do the medical management necessary to get people’s backs better, but let’s not have the government subsidize people having back surgery, which is just about getting better quicker.

cw: As you say, thinking like an economist means thinking about the trade-offs.

gruber: That’s the key.

cw: And when I hear people talk about “Medicare for all,” I like the idea sentimentally, and yet at the same time I’m tuned in to these discussions, at the national level especially, about the rising cost of Medicaid for the federal budget, and Medicare and Social Security, and the Baby Boomer generation aging, and you always hear these warnings that in 10, 20 years we are looking at potential fiscal calamity.

gruber: Based on what we’ve promised to pay out and what we’ve promised to impose in taxes, we’re about $75 trillion short over the long run. That’s a lot of money. We’d have to double income [tax rates] forever to cover that. It’s a huge problem, and the problem of Medicare for all is that it’s about moving the deck chairs around. You’re going to have to levy huge new taxes. Now, the answer people give, which is exactly right, is that you’re lowering the overall cost of health care in the system, but you’re doing it in a way that makes explicit what is now implicit. I don’t see that MIT is lowering my paycheck every week because I’ve got health insurance. But if instead we say that MIT can’t give you health insurance, you’re going to get it through the government, we’re going to tax you to pay for that, I see that. If we could start over, I think Medicare for all would not be crazy. One thing I don’t like about it is, I don’t want everybody to have one health insurance package. I’d like to give a choice. I’d like there to be tiers. But the basic notion of getting away from the employers that provide our health insurance to a new system where basically there are kinds of pools, and people have many choices, I’m all for that. I just think, politically, the costs of getting there are such that you’ll just kill health reform if that’s what you hold out for.

cw: The other background question is whether we’ve pretty much gotten close to the ceiling in tax burden [in the U.S.], especially on middle-class families.

gruber: I think that the tax burden’s actually sort of historically low. I’m talking total federal tax burden. Largely, that’s because we’ve cut taxes a ton on the rich. It’s probably pretty constant in the middle. I don’t think that’s the issue, but I think just to fulfill the obligations we have now—forget Medicare for all, just Medicare for the elderly and Medicaid for who’s eligible for it—right there you’ve got to have a huge increase in taxes over the long run. Or you’ve got to cut the benefits. I think the right answer has to be some combination of the two. We’re on a fiscally unsustainable path, and the right answer can’t just be to raise taxes. The right answer also can’t just be to keep taxes flat and cut benefits. I see no coherent argument for not using both tools. You have two tools at your disposal, which is the level of generosity of benefits and the level of taxation. You probably want to involve both. The left says just raise taxes, and the right says just cut benefits, and neither is right. We’ve got to involve both in reforming these programs.

cw: And to do that requires a very strong hand on the part of government.

gruber: Yes.

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Dave Denison

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cw: Do you find that scary?

gruber: No. I think in some sense you need a strong hand. The hand’s been too weak in terms of entitlement reform. It’s just too politically painful to take on these third-rail issues like Social Security. To my mind, a huge issue which does not get enough attention is the $200 billion we spend every year subsidizing employer-provided health insurance. The third-biggest health program in America has no name. It is the tax subsidies to employer-provided health insurance. At MIT right now, if they pay me in wages, I pay taxes on it. If they pay me in health insurance, I don’t pay taxes on it. That tax subsidy, that exclusion of health insurance from taxation, is $200 billion a year. We could be doing a lot better things with that money than giving a rich guy like me a big tax break. We need a stronger hand in government, because we’ve put in place these things which are running away. We need a strong hand to catch them.