Category Archives: Economics of Health Care

Why Regulate Medical Treatments for Efficacy?

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Recently, someone sent me a draft paper on this topic. My reaction is this.

1. I think that the default position of economists would be that while government may have a legitimate role in keeping unsafe drugs off the market, the best approach for dealing with ineffective drugs would be to help promote and disseminate research.

2. This default position is badly compromised, however, by the prevalence of third-party payments for medical treatment. Both government insurance programs and private insurance companies want clear guidance for when they can deny payment for a treatment. That implies that official government determination of the efficacy of treatments is going to be welcomed both by government programs and by private insurance companies. That in turn makes it difficult to extricate the FDA from ruling on efficacy.

Medicaid, Obamacare, and Bootleggers

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The abstract of a paper by Amy Finkelstein, Nathaniel Hendren, and Erzo F.P. Luttmer reads,

We develop a set of frameworks for valuing Medicaid and apply them to welfare analysis of the Oregon Health Insurance Experiment, a Medicaid expansion for low-income, uninsured adults that occurred via random assignment. Our baseline estimates of Medicaid’s welfare benefit to recipients per dollar of government spending range from about $0.2 to $0.4, depending on the framework, with at least two-fifths – and as much as four-fifths – of the value of Medicaid coming from a transfer component, as opposed to its ability to move resources across states of the world. In addition, we estimate that Medicaid generates a substantial transfer, of about $0.6 per dollar of government spending, to the providers of implicit insurance for the low-income uninsured. The economic incidence of these transfers is critical for assessing the social value of providing Medicaid to low-income adults relative to alternative redistributive policies.

In plain English, this says that most of the benefit in Medicaid goes to the supply side, not to the recipients. The recipients would be better off with cash. I am sure that the same holds true for food stamps, housing subsidies, mortgage subsidies, and so on.

In the Public Choice theory of regulation, the theory of Bootleggers and Baptists holds that regulation is supported by naive do-gooders (the Baptists) and private interests (the Bootleggers). But non-cash assistance programs also fit that model. The naive do-gooders want to subsidize food or health insurance or housing for the poor. These Baptists are cheerfully joined (and ultimately the policies are dominated) by the Bootleggeres, which in this case are the suppliers of food or health insurance or what have you.

Did you see how much the stock prices of health insurance companies and hospitals shot up after the Supreme Court refused to strike down the Obamacare subsidies for states without exchanges?

Is Futile Care the Issue in Health Costs?

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Timothy Taylor writes,

The gains from reducing costs of end-of-life care shouldn’t be overstated. The proportion of Medicare spending that goes to end-of-life care has been roughly the same for the last few decades at about 25%. This regularity suggests that while overall health care costs have been rising, end-of-life care is not an increasing part of that overall issue. Intriguingly, Aldridge and Kelley report: “Medicare expenditures in the last year of life decrease with age, especially for those aged 85 or older … This is in large part because the intensity of medical care in the last year of life decreases with increasing age.” Indeed, older adults as a group are a minority of those with the highest health care costs in any given year

Read the whole thing. His Aldridge-Kelly citation is to a report of the sort that only Tim Taylor seems to dig up.

John Goodman on Health Care Reform

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His latest book is now available.

Offering a fixed-sum tax credit for its purchase (in place of tax exemptions for employer-provided insurance and tax deductions for the self-employed and for Obamacare subsidies in the exchanges) would eliminate the perverse incentives in the current system and allow people to make their own choices between health
insurance and other goods and services without financial penalty.

Harry Truman said, “I never gave ’em hell. I just told the truth and they thought it was hell.”

Goodman applies economic logic to health care, and people think it’s hell.

Question from a Reader (Health Care Costs and Wages)

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I feel as though I am constantly reading articles regarding the stagnant wages of American (and in particular middle class/poor) workers. However I have also seen numerous articles regarding massive annual growth rates in healthcare spending. It is my understanding that most Americans receive their healthcare through their employer (with the employer typically picking up the majority of of the costs). This creates something of a logical disconnect for me, so my question is this:
1. Do most statistics/reports of stagnant wages not take into account employer benefits such as healthcare (or employee 410k matching etc.)? Thereby painting a picture of stagnant wages when in actuality total compensation (wages + benefits) has not been stagnant?
2. Or do they take that into account, and non-benefit wage growth has actually been less than inflation, which taking into account an assumed high singe digit, low double digit growth rate in employee benefits, results in stagnant total wage/compensation?

There is a measure of wage growth that includes the cost of fringe benefits, such as health insurance. This is called compensation per hour. There is also a measure that does not include fringe benefits, which is just called wages. Because health care spending has soared, the “fringe” benefits can amount to quite a lot. Thus, the two measures have diverged, with compensation going up more than wages.

Suppose that my salary is $50,000 a year and the employer contributes $15,000 to my health insurance. The good news for me is that the health insurance benefits are not taxed. The bad news is that I might value the health insurance at much less than $15,000.

So do workers value health insurance at something like its dollar cost, or do they not? This becomes very interesting when you try to calculate a real wage, which is the nominal wage adjusted for price changes. If you look at wages excluding fringe benefits, then you are taking soaring health care costs out of the numerator. If you then use the Consumer Price Index to convert from a nominal wage to a real wage, you are including soaring health care costs in the denominator. That strikes me as an overly pessimistic way to calculate real wages.

If workers care about health care expenses, then you should look at their total compensation. If they do not care about health care expenses, then you should use a price index that just includes those goods and services that they do care about.

I have to say that when this issues is discussed in the press and in blogs, what you see is at best lacking in nuance and at worst a deliberate attempt to manipulate data to create a distorted point of view. I should add that if somebody insists on not including fringe benefits in their calculations, you might ask them why then one should consider employer-provided health insurance a good thing.

Sentences I Might Have Written

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from Megan McArdle:

1950s health care isn’t expensive; this same regimen would be a bargain at today’s prices. What’s expensive is things that didn’t exist in 1950. You can say that “health care” has gotten more expensive—or you can say that the declining cost of other things has allowed us to pour a lot more resources into exciting new health products that give us both longer and healthier lives.

In Crisis of Abundance, I wrote,

The American middle class can still afford the wonderful health care that was available in 1975–easily. . .as a thought experiment, a return to 1975 health care standards would completely resolve what is commonly described as America’s health care crisis.

You know, that book was written 10 years ago (it came out in 2006), and at the time I said it would have a shelf life of ten years, meaning that I thought that it would still accurately describe the issues for another decade. In fact, it is looking like it will be valid for another ten years. I would say that the majority of popular books on politics and economics expire much more quickly.

Four forces watch: In addition to the New Commanding Heights, McArdle’s essay also touches on the Demographic Divide.

while the college educated class seems to have found a new equilibrium of stable and happy later marriages, marriage is collapsing among the majority who do not have a college degree, leaving millions of children in unstable family situations where fathers are often absent from the home, and their attention and financial resources are divided between multiple children with multiple women.

Other sentences are reminiscent of The Reality of the Real Wage. There, I recycled a bit from my book.

My guess is that if you could find a health insurance policy today that only covered diagnostic procedures and treatments that were available in 1958, the cost of that policy would not be much higher than it was then. Much of the additional spending goes for MRIs and other advanced medical equipment, as well as for health care professionals with more extensive specialization and training than what was available 50 years ago.

I recommend McArdle’s entire essay. Brink Lindsey adds more statistics, such as

In 2011, 87 percent of kids who had at least one parent with a college degree were living with both their parents. For the children of high school dropouts and high school grads, the corresponding figures were 53 and 47 percent, respectively.

Finally, on this same topic, a reviewer (Francis Fukuyama) of an about-to-be-released Robert Putnam book writes,

One of the most sobering graphs in Our Kids shows that while the proportion of young children from college-educated backgrounds living in single-parent families has declined to well under 10 per cent, the number has risen steadily for the working class and now stands at close to 70 per cent.

Pointer from Tyler Cowen.

Lifted from the Comments

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1. On medical innovation.

The third party payment system seriously distorts the incentives. I worked as both a consultant and then an investment banker in the healthcare sector for 12 years, and this element of the business drove me bonkers. In my experience, the companies that succeeded are the ones who successfully gamed Medicare, Medicaid and other third party payors. True innovation had little to do with their success. The exception were those sectors of the healthcare that were dominated by private payors (e.g., cosmetic surgery, dentistry, etc.).

There are four major stakeholders: patients, providers (clinicians), facilities (hospitals), and payers. They have different objectives, criteria, and decision processes. Getting material innovations imbedded requires concurrence from at least a couple and often three or four of the stakeholders. Coming up with innovations that (1) work, (2) have evidence of the type that the different stakeholders respond to, (3) have an economic model that keeps all stakeholders at least whole if not better off is really hard.

Complicating factors include:
* Key parts are highly local & fragmented (providers and facilities)
* Heavy regulatory overhang (FDA is one of many constraints)
* Low margins in some sectors means higher barriers to change (don’t rock the boat, esp given the high % of stable-ish gov’t payers)
* Little data to measure & compare real functional outcomes (vs. process outcomes like infection or readmission)
* The science is hard. Cancer is a hundred little diseases depending on what processes break, even within a disease site (e.g., breast). ‘Curing’ one doesn’t touch the other 99. (And it’s hard to prove that you ‘cured’ that one)

In a fully open market environment, we might make progress on some of these issues. In the current one? It’ll be slow.

2. On how to study

I think I’ve mentioned this book here before, but a few years ago, I stumbled across ‘How to Study and Teaching How to Study’ by F.M. McMurry (1909). I certainly wish I’d been taught or found this book when I was student. To me, his 8 factors of studying are very useful in having a formula to punch through material that doesn’t come easy…One thing is for sure, McMurry’s opening paragraphs on the various study techniques of his fellow students when he was a boy could have been written yesterday about high school or even college students today.

On the topic of motivation, McMurry says that people will study intensively when they really need to learn something. His example is an Eskimo who needs to learn how to build an igloo in order to have shelter.

Michael Mandel’s Question About Health Care Innovation

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At this event, he asked why we do not see any of the signs of an innovation boom in health care that we saw with personal computers and the Internet. No spectacular new companies. No surge in demand for life sciences knowhow comparable to the surge in demand for computer programming skills. As he wrote last year, he believes that the FDA’s requirement that new treatments be more efficacious than old ones has the effect of stifling disruptive innovation, in which new products first gain traction on the basis of lower price rather than better quality.

Others at the panel pointed out that it may not be the FDA that dictates the innovation pattern. It may be the fact that third party payments dominate American health care. Patients who are not paying for their own health care are not going to provide a market for radically cheaper treatments. And insurance companies are not going to want to pay for radically better treatments that cost a lot. So the only innovations that survive are incremental ones.

However, I want to go back to the original question of why we do not see an innovation boom. My thoughts:

1. My guess is that we have not yet reached a point where all the pieces are in place to produce an innovation boom. Remember that it took several decades to go from the invention of the transistor to the appearance of the personal computer.

2. We do not have an institutional breeding ground for biotech innovation. No equivalent of Bell Labs, or Xerox PARC or the Homebrew Computer Club.

3. Someone in the audience asked a provocative question about whether some other country provides a role model, which country provides a role model for health care innovation? If you thought that the only roadblocks were American customs and regulations, health care innovation would take place in other countries.

Health Spending: Individual vs. Aggregate

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From an NYT article on Obamacare,

“I’m always curious when I read this ‘good news’ that health costs are moderating, because my health care costs go up significantly each year, and I think that’s a common experience,” said Mark Rukavina, president of Community Health Advisors in Massachusetts.

While much of the focus in the past has been on keeping premiums manageable, “premiums now tell only a part of the story,” Mr. Rukavina said, adding: “A big part of the way they’ve kept premiums down is to shift costs to patients in the form of co-pays and deductibles and other types of out-of-pocket expenses. And that can leave patients very vulnerable.”

Pointer from Tyler Cowen.

I find that the simplest way to explain health care policy is to say that as individuals what we want is unlimited access to medical services without having to pay for them. To the extent that we have our way, the overall spending on health care in the economy will be very high. To limit overall spending, either (a) we have to pay more as individuals, so that we ration ourselves, or (b) our access to services must be rationed by others (insurance companies or the government).

The article consists of people complaining about either being limited in terms of access or having to pay more out of pocket. But that is not news. Again, we know that as individuals we want unlimited access without having to pay for services. You could easily have an improvement in health care policy that is experienced negatively by individuals.

Tax the Big Non-profits?

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From the WSJ.

A recent budget plan by Republican Gov. Paul LePage calling for an overhaul of individual, corporate and sales taxes also would make Maine the first state in the nation to require colleges, hospitals and other large charities to go on the property-tax rolls in their municipalities.

I think this is a good idea. What is happening is that these New Commanding Heights enterprises are taking over the nation’s largest cities. That reflects in part the tax distortion.

If you have never encountered my skeptical take on non-profits, you should read this. Even if you are already familiar with my views, it’s an essay worth re-reading.