The Phantom Industrial Policy of the Beltway’s Favorite Health Cost Cutters

By Frank Pasquale

Posted on August 12, 2016


A few weeks ago, I spoke on artificial intelligence in health care at the AI Now Conference. I focused on the distinction between substitutive automation (which replaces human labor with software or robots) and complementary automation (which deploys technology to assist, accelerate, or improve humans’ work). I developed three cases where complementary automation ought to be preferred: where it produces better outcomes; in sensitive areas like targeting persons for mental health interventions; and to improve data gathering. Law and policy (ranging from licensure rules to reimbursement regs) could help assure that the health care sector pursued complementary automation where appropriate, rather than chasing the well-hyped narrative of robot doctors and nurses.


The pushback was predictable. Even if complementary automation is better now, shouldn’t our policy reward firms that try to eliminate ever more labor costs? Doesn’t *everyone* agree that the US spends too much on health care—and isn’t technology the best way of reducing that spending? Let me try to address each of these views, boiling down some perspectives from a longer, academic article.


A Policy at War with Itself


There is a troubling tension at the heart of US labor policy on health care and automation. Numerous high-level officials express grave concerns about the “rise of the robots,” since software is taking over more jobs once done by humans. They also tend to lament growth in health care jobs as a problem. In an economy where automation is pervasive, one would think they would be thankful for new positions at hospitals, nursing homes, and EHR vendors. But they remain conflicted, anxious about maintaining some arbitrary cap on health spending.


Politico reporter Dan Diamond encapsulated this conflict in his recent article, “Obamacare: The Secret Jobs Program”—and he leaves no uncertainty about which side he thinks is right:


[Venture capitalist Bob] Kocher and colleague Zeke Emanuel wanted reforms that would increase efficiency and tamp down the [health] sector’s growth [as they tried to influence the development of the ACA]. But “people on the jobs team were saying we need more middle-class jobs and the best place to create them was in health care,” Kocher says. “And after we lost 7 million jobs [in the recession], that argument was winning.”…


Employment in the health insurance industry…jumped nearly 9% from 2012 to 2013 as millions of Americans became newly insured. Based on job numbers, no sector is healthier than health care. But is that what the American economy needs? Experts say that many health care jobs are an explicit drag on growth, and the higher the cost of health care, the less money invested elsewhere. The rising cost of health care is a top-three issue for CEOs; it’s often cited as a reason for why U.S. manufacturers are less competitive with their overseas rivals. . . .[P]eer countries like Switzerland spend one-third less on health care as a share of GDP and 50% more on social services — like disability benefits and supportive housing — that experts increasingly say are linked with good health.


Unfortunately, this faithful recitation of Beltway conventional wisdom is lacking in rigor. Let’s take Diamond’s point on manufacturing first. If CEOs were serious about shedding health costs, they’d back something like the Sanders plan for single payer, or a Jacob Hacker-style public option. Virtually none do. Moreover, from a macroeconomic perspective, why should it matter if our economy accelerates toward automation (thanks to the high cost of providing health care for labor), and employs people who once worked in manufacturing in the health sector? Is there something intrinsically more rewarding about working an assembly line, rather than providing physical therapy?


Diamond’s second point—on “disability benefits and supportive housing” being crowded out thanks to health care—is what I call the “Nirvana Fallacy of Health Sector Shrinkage.” Ask Diamond, or prominent cost cutters like Don Berwick or Katherine Baicker, what we should spend on instead of health care, and you’ll get a range of answers: housing and food from Baicker (here); education and infrastructure from Berwick (who’s also mooted a 15% cap on GDP allocated to health care); military buildup from others. But none of them has specified a convincing mechanism whereby cost cutting in health care actually results in the spending they want. Public spending may just as easily go to tax cuts for the wealthy, or “homeland security,” or Iraq War II. And freed-up private spending may merely bid up the price of real estate.


But no matter how thin the evidence, the Beltway’s favorite cost cutters persist in believing that reductions in health care costs will somehow lead to increases in the kind of spending they want. Health cost cuts are the Big Rock Candy Mountain of this strange cousin of expansionary austerity theory.


The Industrial Policy Behind Health Sector Shrinkage


An industrial policy should have two sides: a positive program for what the economy needs (proposing ways of directing more public and private investment toward those needs), and a negative program directing public and private investment away from useless or wasteful activities. Diamond, Baicker, and Berwick have a negative view on health care, but they lack a coherent positive vision. They offer us a phantom industrial policy: detailed plans to shrink the health sector without any convincing conditionality assuring better reallocation of funds.


Of course, the Beltway’s favorite health economists would never directly cop to offering an industrial policy—that’s the realm of heterodox thinkers like Ha Joon Chang and Mariana Mazzucato. They instead prefer to isolate the health sector as pathological because of its purportedly unique regulatory intensity and subsidies. But is the housing sector all that different, once we consider the “submerged state?” Finance? Food? Education? It’s hard to find a neutral rationale for shrinking health alone as a sector. But that’s exactly what this phantom industrial policy does: rather than merely proposing to reallocate health spending from wasteful to useful projects, it aims to shrink the sector as a whole.


The Beltway’s favorite cost cutters’ approach would be troubling enough if we enjoyed a relatively stable economy with clear routes to stable employment for middle class workers—or if health care needs over the next few decades were likely to be stable or declining. But neither condition holds. The aging of the baby boomers will create extraordinary demand for care. This is hard work that society should fairly compensate. At the same time, automation threatens to replace millions of extant jobs for those making less than $20 an hour:

Image: Pasquale_Automation-by-Wage-1-(1).bmp

The situation suggests a natural match: between distressed or underemployed workers (now being replaced by self-driving cars, self-check-out kiosks, and other robotics), and emerging jobs in the health sector (for home health aides, health coaches, hospice nurses, phlebotomists, and many other positions). Those jobs in health care can only emerge if policymakers value the hard work now done (and remaining to be done) for the sick and disabled. As Princeton/NYU economist William J. Baumol observed in 2012:


[I]f improvements to health care . . . are hindered by the illusion that we cannot afford them, we will all be forced to suffer from self-inflicted wounds. The very definition of rising productivity ensures that the future will offer us a cornucopia of desirable services and abundant products. The main threat to this happy prospect is the illusion that society cannot afford them, with resulting political developments—such as calls for reduced governmental revenues entwined with demands that budgets always be in balance—that deny these benefits to our descendants.


Diamond and elite health economists contribute to the “illusion that we cannot afford” progress by smuggling an ideology of austerity into ostensibly neutral discussions about the size of the health care sector. They need to offer a positive industrial policy on where health spending should be going.



Chart Credit: From CEA Chair Jason Furman’s talk of July 7, 2016 at the AINow Conference in New York City.


The preceding is republished on TAP with permission by its author, University of Maryland law professor Frank Pasquale. “The Phantom Industrial Policy of the Beltway’s Favorite Health Cost Cutters” was originally published July 16, 2016 on Concurring Opinions.