Greg Mankiw mocks Team Obama’s endorsement of price controls on health care.

Very, very strange.  You would think that all those future Nobel-prize-winning economists working for the President would explain to him the history and economics of government price controls.  Imposing price controls certainly wasn’t President Nixon’s finest hour.

Maybe President Obama should instead follow in President Ford’s footsteps and start wearing a WHINE button on his lapel, forWhip Healthcare Inflation Now, Egad

Its not immediately clear to me that this isn’t a viable strategy, however.

If you believe that a large portion of the health care industry is rent dissipating then putting clamps on it might not be such a bad idea. That is, we spend lots of money on health care because we want to buy “the best care available” regardless of what that care is. However, this just encourages the creation of new therapies that we now have to buy in order to have “the best care available.”

Here is a though experiment that helps illustrate:

Your child is in the hospital and the doctor says that therapy X will cost $500K but will increase child’s chance of survival by 23%.  $500K is your life savings plus everything that you could borrow plus a little more you will have to get from friends and family. Maybe the church could help. Maybe . . .

For a millisecond perhaps you think that its not worth it. Your kid is still probably going to die. But, you push that feeling down. My God this is YOUR CHILD. Its worth it.

Now imagine the same situation but the doctor comes in and says the $500K treatment is going to increase your kid’s chance of survival by 17%. Do you say “Well I was almost on the fence at 23%, so I am going to let my kid go at 17%”

I am betting not.

What you are buying is “the best shot”, not any particular chance of survival. Thus, if I spend billions increasing the best shot only by a few percentage points you will buy my new treatment, even though the actual change in your family’s prospects are extremely small.

In many cases people will pay more just for uncertainty. Imagine the following: we have a treatment that we know is only effective in 5% of cases. That sounds pretty bleak. However, we have this brand new treatment that is not without risks. Yet, if it works could save 90% of patients. Many people would instinctively be willing to pay more for the second treatment.

However, the second treatment is new and risky. Its possible that it won’t help anyone. Its possible that it could make your child worse. However, the fact that you don’t have to admit to the bleak 5% odds makes the treatment enticing. Again, you are not buying life. You are buying a reprieve from thinking about the death of your child.

 

Its important to remember that this argument doesn’t suggest that all health care is useless. It doesn’t even suggest that all of the “latest care” is useless. Only that it is less useful than the price might suggest.

My Deaton and Muellbauer is a little rusty so, I’d have to spend some time looking through the actual economics of a rationed market.

Nonetheless this seems like a step towards dividing the baby in half.

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