Kevin Drum thinks I have gone overboard
Just for the record, then: when I say “high healthcare costs,” what I mean is “lots of money flowing to heathcare entities.” I’m pretty sure that’s what everyone else means too. I know that Karl likes to be contrarian, but calling this a mere large-scale accounting issue is surely a little bit too Olympian even for him, isn’t it?
Let me see if I can make my point more clearly.
There are lots of ways more money could flow to health care entities:
- People could value health care services extremely highly and want to purchase more of them
- Moral Hazard could lead people to purchase health care through insurance that they do not value very much
- The regulatory system could cause people to purchase more health care than they would want
- The regulatory system could cause health care to be produced inefficiently
- Information asymmetries between patients and doctors could lead people to be misinformed about the value of health care and purchase more than they would want under perfect information
- The desire to signal that we care could cause us to purchase the most advanced forms of health care available, leading to an arms race in the production of advanced care
- Cartelization by health care providers could raises prices
- Health care entities may rent seek for higher payments from the government
- Health care entities may engage in outright fraud to increase payments from insurance carriers and consumers
While all of these things increase the amount of money flowing to health care entities they are very different issues, with different economic implications.
For example, I’m not sure if (1) is something anyone should be concerned about, nor would we even use the phrase high cost in other contexts. Lots more money is flowing to the makers of smartphones, but we don’t think usually think of high smartphone cost as something we are facing.
Indeed we commonly say that smartphone costs are falling. This is because the value proposition is increasing.
On the other hand (4) could just be a pure economic loss. If good treatments for example can’t pass FDA approval it might be the case that not a single person in America is better off and many people are worse off. As economists we might consider that pretty costly.
Lastly, its not immediately clear that (9) involves any measurable economic loss at all. If it is extremely easy for some types of fraud to be committed and it doesn’t alter incentives then it could more or less a pure transfer from the victim to the perpetrator.
This may strike people are morally wrong but its not economically inefficient and indeed without saying more its not clear that a consequentialist would consider this a problem worth fixing.
That is what I mean by saying we should focus on what the actual problems are rather than getting wrapped up in the accounting issue of how much money is flowing to health care entities.
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Sunday ~ April 22nd, 2012 at 8:47 am
Bill Ramsay
The list is very good but claiming 9 is efficient seems ridiculous.
Let’s say that one person (we can call him dr. Evil), corners the healthcare fraud market and thus personally receives all the money from the fraud. And let’s say that because he’s dr evil, his preference is to use his money to build the worlds largest bomb made out of gold. Now that will certainly stimulate the gold mining and TNT industries, but it’s hard to imagine that would provide more productive market signals to the economy than the buying preferences of the millions of people who now have less money as a result of the fraud (despite the instances of poor decision making like consuming mass quantities of jersey shore episodes).
Sunday ~ April 22nd, 2012 at 9:28 am
Karl Smith
This is why it is not clear. What if Dr. DoGood is the perpetrator and he wants to use the funds to ease the pain of poor children in Africa.
Sunday ~ April 22nd, 2012 at 8:59 am
Andy Harless
Not sure I agree with you that (1) is not a problem. By analogy, there are people who value cocaine extremely highly and want to purchase more of it even though they are already spending most of their income on it. We don’t regard that situation as a non-problem. I would suggest that life, provided it exceeds some low threshold of acceptable quality, is an addiction. People will spend nearly all their available resources to prolong their lives and to bring the quality up to that acceptable threshold and above. You might defend this behavior as rational and say that, in that case, we really should devote 99% of our productive resources to health care once the technology permits us to use them effectively. It seems to me that’s still a problem, although perhaps the problem is not with health care costs per se but with our insatiable desire for life and comfort. I guess, at the core, I believe either one of two things is the case: (1) the insatiable desire for life is irrational or (2) the world is really horrible, and the more we are able to spend on health care, the more we have to face how horrible the world is. Or perhaps both.
Sunday ~ April 22nd, 2012 at 9:29 am
Karl Smith
I like that addiction argument.
Sunday ~ April 22nd, 2012 at 9:04 am
Becky Hargrove
Maybe we were right to attempt pooling resources for healthcare, except that we didn’t get that much for our efforts – human skill being such a small part of money itself. As Megan indicated, institutions now gain by outsourcing our own skills, education and efforts for free to increase their survivability. That is a huge paradox to me (our ‘free’ gift to institutions) in that government strove to make all our efforts representable by money early in the 20th century. Maybe in the future we should focus on pooling shared healthcare skills, education and efforts instead of money so that 1) we actually have access to all that, and 2) all that has a better chance of being actually measured in total gains. Not to say that government should be left out, of course. Only that we know exactly the effort we would provide as a gift in skills (to individuals instead of institutions) and we would have a chance to make it our choice.
Sunday ~ April 22nd, 2012 at 9:20 am
Becky Hargrove
Karl, at least I’m not thinking of it in terms of an accounting issue! Megan did a lot to help with my own clarity.
Sunday ~ April 22nd, 2012 at 9:50 am
What Are Health Care Costs, Ctd « Modeled Behavior | Value for Health
[...] What Are Health Care Costs, Ctd « Modeled Behavior This entry was posted in Uncategorized and tagged cartelization, case, government, health, people, record, reddit, value for health, victim by admin. Bookmark the permalink. [...]
Sunday ~ April 22nd, 2012 at 11:45 am
BSEconomist
I don’t buy #9, but I’d be willing to concede the other 8 (although I agree that Andy Harless makes a good point concerning #1). I think I’ve figured out the source of disagreement though, even to the point of (very partially) conceding #9 (I’ll chalk this disagreement up to communication/ambiguity of language).
Here’s my thinking:
You would be right in a partial equilibrium setting that the distribution of rents is not even evidence for an inefficiency. But consider this classic example: Costco charges me an entry fee to buy its junk at price equal to marginal cost. The entry fee captures my entire surplus. So efficient right? This particular trade could be viewed as efficient, but economy-wide there is an inefficiency: overproduction of (for example) giant vats of mayonnaise. The real sticking point, then, is your assertion that #9 not alter incentives at all. It can’t NOT alter incentives somewhere in the system.
Nor does it matter for efficiency whether the distortion is “beneficial” or not (as in your Dr DoGood example… although you can certainly argue that efficiency need not be the goal). If we knew for certain that there was a beneficial distortion than we could treat the “fraud” as we would positive externalities. But we don’t, so we shouldn’t.
So here’s what I’ll concede: maybe “fraud” need not be an economic cost in and of itself… but it is always and everywhere evidence in favor of an economic cost somewhere. Hence, we should try to stamp it out (as efficiently as possible, of course).
One more thing. Going back to the Tricor example which began this thread, the economic costs induced are pretty clear (to me): the lawyers hired by Abbot labs to defend their monopoly and the patients who go without treatment because the drug is more expensive than it has to be.
Sunday ~ April 22nd, 2012 at 12:26 pm
Karl Smith Responds to Critics on Healthcare « BS Economist
[...] Smith responds to his critics regarding his contention that the higher (money) costs in healthcare do not increase [...]
Sunday ~ April 22nd, 2012 at 1:11 pm
Martin Schneider
The phrase “perfect information” seems to signal part of the difficulty you’re having here. “Perfect information” would imply that all parties would know the exact status of a cancer tumor at every stage along its progress. Under such circumstances, nobody would ever get health insurance until the moment before medical care is necessary.
Two points here: 1. All health insurance is some sort of hedge, a gamble that the small amount of money spent now is a better investment than the large amount of money that would bankrupt you if you ever did get sick. Absent the illness, that health insurance expenditure is money poorly spent, but nobody really thinks that is true because it is impossible to know with certainty who will get sick when, and what the costs of that will be. BTW this can be reframed as an argument that certain healthy people in their 20s are wise to avoid health insurance expenditures.
2. The subject of healthcare costs combines unlike expenditures. Costs derived from healthy people paying for health insurance or even getting preventative care like checkups seem to be totally different from costs incurred in battling serious illness or injury. Insofar as healthcare costs are high because insufficient percentages of citizens are shielded from economic disaster because of a loose health insurance system, then this is a considerable economic cost as well as a severe human cost that begins to make society a far harsher and worse place than it should be etc.
I would posit that the pro-Obama, pro-ACA, pro-health care reform argument hinges on the social good that universal coverage would bring as compared to our current 90% coverage or whatever it is. If that advocate cannot make the argument work in those terms, it is a poor argument and deserves to be defeated. I personally think the argument is strong and deserves victory. It’s important to note that high health care costs (17% of GDP or whatever) are not IN THEMSELVES a compelling argument in favor of health care — it is, strictly speaking, possible that that is the correct level of expenditures given our wealth and health and diversity. Such figures are generally deployed as emotional rhetoric to batter health care reform opponents into submission. Having said that, in a world of imperfect information and even considerable disagreement as to the meaning of basic economic trends, figures that high are a SIGNAL as to a potential problem. In this case our high health care expenditures coupled with low levels of health care coverage in western comparison are a strong indicator that a system similar to the Canadian, Swedish, German, Japanese etc. would yield considerable benefits. In that context, waving away the meaning of health care costs might at best, rank academicism, and at worst, actively harmful BS.
Monday ~ April 23rd, 2012 at 4:49 am
J.V. Dubois
interesting article, however I have two disagreements:
1) This can be actually a huge problem even if health care is not akin to addiction. Rising prices due to a higher demand are generally considered pecuniary externality. Most of the time this does not bother us since we generally assume that markets will offset the impact exactly in a sense you imnply – consumers of the good (health care) are worse off however producers are better off. So it is just redistribution
However there is one very important thing to consider and that is to thing through if the pecuniary externality cannot move some participants out of market. Imagine this example – we find a way how to process food into a biofuel. You could argue that this has no wellfare implications – producers off food are better off on expense of people who buy the food to just to eat it. Only – what if there are people who suddenly cannot afford to buy the food (they are pushed out of the market) and they die of starvation? Now it is not about prefferences (I buy less sheltering services so that I can afford more food to eat) and simple redistribution with no wellfare consequences. It is now about life-and-death situation. Exactly as in the health-care industry when rising healthcare costs can push many people out of the market – and from now on their voice will not be heard in the decisions of what to invent next in the healthcare industry. I would consider it as a very real externality not just a pecuniary one.
2) Your point number 9 seems pretty theoretical to me. It is because I have very hard time thinking about fraud that does not work via some of the previously mentioned channels – most often via “information asymmetry” also known as “lying”.
Thursday ~ May 3rd, 2012 at 2:58 pm
Andrew D. Todd
Medical treatment involves pain. It’s not a consumer good. As Alexandre Dumas Pere, in The Three Musketeers, had the character Athos say, as an argument for committing a serious crime, “I don’t believe an executioner makes you suffer more, cutting off your head, than a surgeon does, cutting off your leg, and we risk that now.” You don’t rationally choose to consume medical treatment, so much as you find yourself in a position of desperation where you don’t have much choice.
You might want to look at Friedrich Durrenmatt, _The Quarry_ (1961), in which he discusses the points of similarity between supposedly well-meaning doctors and Nazi torturers. If you are a candidate for extensive and expensive treatment, you are generally in no condition to over-ride the doctor’s decisions. Pain pills addle your intellect, and even more, your will or resolve. Major medical treatment is for practical purposes an emergency service, and major medical treatment accounts for the vast majority of health-care expenditures.
Now, doctors may have economic incentives, but these are completely different from those of the patient.