joinCityWatch.org :: Official City Watch news & reports online - After the Defeat of Measure Q: What Went Right?

by David R. Henderson,
an exclusive for City Watch

When the proponents of a tax increase for Natividad Hospital were making their case in the fall of 2003, many of them predicted that without that tax increase, Natividad would go out of business. The tax was defeated. Now here we are, almost two years later and Natividad is still in business. What went right?

Almost two years ago, the Monterey County government put a measure (Measure Q) on the ballot to impose a “temporary” ½ percentage point increase in the sales tax to fund its county-run hospital, Natividad. I say “temporary” because the tax would have lasted at least 10 years and there was no sunset clause, that is, the tax would have stayed in place unless the Monterey County supervisors voted to end it. Given that all of the supervisors had supported putting the tax increase on the ballot and had come out in favor of the tax increase, the odds that they or their successors would vote to end it were pretty low. In short, this was likely to be a permanent tax increase.

At the time, many advocates of the sales tax increase argued that without such an increase, Natividad would likely go out of business. In a November 11, 2003 debate on Measure Q, for example, in which tax foe Lawrence Samuels and I debated Natividad doctors Mark Tunzi and Melissa Larsen, Dr. Tunzi stated, “If Measure Q fails to pass, there’s a strong likelihood that Natividad will close.”

At that debate, Mr. Samuels and I expressed our skepticism about Tunzi’s claim. We pointed out that bureaucracies, even bloated ones like the one at Natividad, typically find ways of surviving with leaner budgets when they have to. We even suggested some ways to do so. One way we suggested was to limit services to legal residents of the United States. It made no sense to us to tax people in the United States to provide health care to other people living illegally in the United States. A second way was to charge co-payments so that people would take account of some of the cost they were imposing on taxpayers when they received public care. A third way was to update their notoriously outdated computer information system to make billing and prompt payment easier.

Now here we are, over 20 months since Measure Q failed to pass, and lo and behold, Natividad is still open. How did that happen? Well, from the available evidence it appears that we were right. Incentives work. If you don’t bail people out of their bad decisions, they make fewer bad decisions.

Specifically, here’s what we know. In writing this, I’m drawing heavily on two newspaper articles by Joe Livernois, a reporter at the Monterey Herald. Although his credibility is questionable when the issue is something on which he clearly has a viewpoint, what makes his articles credible is that the information he gives here undercuts his usual pro-tax, pro-government-spending viewpoint.

Here are some highlights from a news story Livernois wrote on November 21, 2004. The story was titled, “The Fraying Safety Net.” Livernois wrote, “Undocumented [his euphemism for “illegal”] immigrants are no longer eligible for the Medically Indigent Adult program,” that is, a program to subsidize health care. In other words, Natividad adopted our first suggestion. Moreover, as Livernois’s story makes clear, the doctors at Natividad were unhappy about that fact because it meant turning away people who needed care. That means it’s unlikely that Natividad would have adopted this policy had Measure Q passed.

In that same story, Livernois pointed out that Natividad had previously loosened its patient-eligibility standards so that it subsidized patients to an extent that federal law did not require. It has since tightened those standards. Now, wrote Livernoise, “patients are expected to participate in the cost of their care—at least partially.” Chad Chadwick, the hospital’s chief executive officer, states, “There is no free lunch to anyone who walks in the door anymore.” For surgeries, notes Livernois, patients must pay up to one third of the costs. In short, Natividad also adopted our second suggestion.

Now whether you think this is good or bad will depend on your philosophical viewpoint. Those who think that people have a right to force others to pay for their health care will think it’s bad. Those who think that simply being born doesn’t give you a right to have others pay for your health care will think it’s good. The move is a slight shift in the direction of requiring people to take responsibility for themselves. This is a radical concept in 2005 America, but it’s the main concept that made this country great and caused me to immigrate here from Canada.

And even if you don’t share my view of personal responsibility completely, there is another good aspect of this shift. Health economists have found that when people pay even a small percent of a medical bill, they are much more careful in choosing whether to get that medical care in the first place. As I point out in the chapter on health care in my book, The Joy of Freedom: An Economist Odyssey, it doesn’t make sense to take an expensive and valuable thing like health care and price it as if it’s cheap and worthless. Many people worry that people who have to pay for some percent of their care will go without important, preventative care. But the best evidence we have says that this is false. In the 1970s, the RAND Corporation ran an $80-million, multi-year experiment in which it gave health insurance with varying levels of co-payment rates to thousands of families and then tracked their medical expenditures and health status (see RAND Report). The researchers found little difference in health outcomes but huge differences in expenditures: those who had to pay a higher percent of their bills used less medical care. The RAND findings are consistent with the idea that those who paid a higher percent dropped the marginal visits to the doctor rather than the visits to deal with ailments or accidents that threatened life or substantially affected quality of life.

Then, in his June 5, 2005 article, “Natividad holding its own,” Livernois pointed out further progress. He wrote:

“At the same time, the hospital is installing a new information technology system that promises to be a vast improvement over the piecemeal computerized system blamed for many of the past inefficiencies at Natividad.”

In other words, Natividad is adopting our third suggestion.

And the results? Chadwick expected Natividad “to end the fiscal year this month [June] with about $5.4 million cash on hand.” Things went right! Our suggestions worked.

I should note that we also suggested privatizing Natividad so that a for-profit entity, with strong incentives to run the hospital efficiently, would take over. That suggestion has not been adopted. More’s the pity, as the British say.

David R. Henderson is a research fellow with the Hoover Institution and an associate professor of economics at the Graduate School of Business and Public Policy, Naval Postgraduate School. He was previously the senior economist for health policy with President Reagan’s Council of Economic Advisers. He is author of The Joy of Freedom: An Economist Odyssey, editor of The Fortune Encyclopedia of Economics, and co-author of the forthcoming book, Making Great Decisions in Business and Life (Chicago Park Press.) He has also written dozens of articles for Fortune, the Wall Street Journal, and Red Herring, and has appeared on The Jim Lehrer Newshour (PBS), The O’Reilly Factor (Fox News Channel), NPR, and CNN.

* Published July 22, 2005

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