Category Archives: Economics of Health Care

The Wedge Between Compensation and Wages

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Mark Warshawsky and Andrew Biggs write,

Most employers pay workers a combination of wages and benefits, the most important of which is health coverage. Economic theory says that when employers’ costs for benefits like health coverage rise, they will hold back on salary increases to keep total compensation costs in check. That’s exactly what seems to have happened: Bureau of Labor Statistics data show that from June 2004 to June 2014 compensation increased by 28% while employer health-insurance costs rose by 51%. Consequently, average wages grew by just 24%.

The kicker:

Health costs are a bigger share of total compensation for lower-wage workers, and so rising health costs hit their salaries the most. The result is higher income inequality.

I don’t think you can blame company-provided health insurance as a first-order cause. Suppose that there were no company-provided health insurance, and everyone instead bought health insurance on their own. In that case, more of the compensation of employees would have been in the form of wages and salaries. If health insurance in the individual market had gone up as rapidly as it has in the company-provided market, then this would have a stronger effect on the cost of living for low-income workers. So even if you did not have company-provided health insurance, you would still have the “wedge” between compensation and disposable income after health insurance.

As a second-order effect, you can argue that company-provided health insurance, and its tax exemption, push in the direction of raising health care costs. But that is not such a compelling argument.

I do think that it is increasingly misleading to speak of a single “cost of living,” when so much of the market basket consists of medical procedures and college expenses that not everyone undertakes. That is, I still believe that Calculating trends in the real wage is much harder than we realize, because every household has different tastes.

Related, from Timothy Taylor:

it’s also intriguing to note that since 1984, the share of income spent on luxuries is rising for each income group, and the share of income spent on necessities is falling for each income group.

He refers to a study by LaVaughn M. Henry.

Slowing Medical Innovation

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Scott W. Atlas has the bad news.

The CEO of one of the largest health-care companies in America recently told me that the device tax his company paid last year exceeded his company’s entire R&D budget. Already a long list of companies—including Boston Scientific , Stryker and Cook Medical—have announced job cuts and plans to open new centers for R&D, manufacturing and clinical trials overseas.

The bureaucrats at the Food and Drug Administration are also hindering medical-technology and drug development. According to a 2010 survey of more than 200 medical-device companies by medical professor and entrepreneur Josh Makower and his colleagues at Stanford University, delays of approvals for new medical devices are now far longer in the U.S. than in many other developed countries. In the European Union—not exactly known for cutting through red tape—it takes on average seven months to gain approval for low- to moderate-risk devices. In the U.S., FDA approval for similar devices takes on average 31 months.

The FDA is no longer safe and effective.

Tyler Cowen vs. Ezekiel Emanuel

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Tyler writes,

And to sound petty for a moment, I don’t want to pass away during the opening moments of a Carlsen-Caruana match, or before an NBA season has finished (well, it depends on the season), or before the final volumes of Knausgaard are translated into English. And this is a never-ending supply. The world is a fascinating place and I fully expect to appreciate it at the age of eighty, albeit with some faculties less sharp. What if the Fermi Paradox is resolved, or a good theory of quantum gravity developed? What else might be worth waiting for?

Off hand, I would say

1. Grandchildren
2. Medical progress to reverse degenerative illness

Worst News I’ve Read in a Long Time

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Ezekiel Emanuel writes,

Crimmins found that between 1998 and 2006, the loss of functional mobility in the elderly increased. In 1998, about 28 percent of American men 80 and older had a functional limitation; by 2006, that figure was nearly 42 percent. And for women the result was even worse: more than half of women 80 and older had a functional limitation. Crimmins’s conclusion: There was an “increase in the life expectancy with disease and a decrease in the years without disease. The same is true for functioning loss, an increase in expected years unable to function.”

Read the whole thing. I mean it. This is an excellent and important article. Pointer from Tyler Cowen.

The more optimistic view of aging is represented by Gregg Easterbrook.

In your comments, please spare me the snark about Emanuel, Obamacare, and death panels. Speak to the point of what happens to quality of life after age 75. We know many examples of people for whom it was good. But on average is Emanuel correct, and is he correct that we have seen in recent decades, if anything, a deterioration in the quality of life among the very old?

The Case for Replacing the FDA, Continued

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Beth Simone Noveck writes,

A study completed by the Boston Consulting Group points to a significant rise in the number of drugs and complex devices approved in the EU long before the United States. As devices get more complex, the United States is likely to fall further behind. Although the FDA does not issue clear data on backlogs or processing times, research points to shortcomings in our current system when it comes to researching and approving complex devices. This has broad implications for the quality of health care that Americans receive. In 2010, for example, the medical device company Biosensors International shut down its operations in California due to the time and expense associated with getting FDA approval for a cardiac stent. That device is available globally, including in Mexico and Canada.

She discusses a solution in which the FDA expands its pool of experts. I don’t think that this gets at the problem.

What I am Trying To Read

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Casey Mulligan’s Side Effects, about the labor market effects of Obamacare. I suggested the title, after hearing him talk on the subject.

One snippet:

the ACA is still the third largest marginal tax rate hike during the seventy years.

I am finding it a tough slog. Part of it is that the e-book is not my preferred format for absorbing numerical and mathematical analysis. Part of the problem is that health care law is complex, which makes the economic analysis difficult.

What We Know About Health Care Waste Isn’t True?

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Louise Shiner writes,

geographic variation in health spending does not provide a useful way to examine the inefficiencies of our health system. States where Medicare spending is high are very different in multiple dimensions from states where Medicare spending is low, and thus it is difficult to isolate the effects of differences in health spending intensity from the effects of the differences in the underlying state characteristics. I show, for example, that previous findings about the relationships between health spending, the share of physicians who are general practitioners, and quality, are likely the result of omitted factors rather than the result of causal relationships

Russ Roberts often asks whether any empirical work in economics changes one’s mind. I would say that the Dartmouth studies changed my mind about health care spending in the U.S., convincing me that much of it is “wasted” (I prefer “spent on procedures with high costs and low benefits”). However, there have always been those who doubted the validity of those studies, and this appears to be a particularly strong critique.

On the other hand, see Austin Frakt’s overview of the literature.

Health Policy Proposals

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From a RAND paper.

The first five options would decrease costs and risks of inventing new products or
obtaining regulatory approval for products that would advance our two policy goals.

1. enabling more creativity in funding basic science
2. offering prizes for inventions
3. buying out patents
4. establishing a public interest investment fund
5. expediting FDA review.

The last five options would increase the market rewards for inventing products
that would advance our two policy goals. These options are
1. reforming Medicare payment policies
2. reforming Medicare coverage policies
3. coordinating FDA approval and CMS coverage processes
4. increasing demand for products that decrease spending
5. producing more and more-timely technology assessments.

Pointer from Timothy Taylor, who comments

I confess that as I look over their list of policy recommendations, I’m not sure they suffice to overcome the incentives currently built into the U.S. healthcare system.

Health Care Innovation

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I review the book by Jonathan Bush and Stephen Baker. An excerpt:

Bush argues that for most medical services, flagship research hospitals are high-cost providers. He believes that in a rational marketplace, the leading hospitals would have to specialize in particular areas of expertise. A hospital with unique skills at treating a certain type of cancer might attract patients from all over the United States with that cancer. However, it would not treat local patients for ailments that are more common and more easily treated. Instead, those cases would be handled by smaller community hospitals or clinics.

Callie Gable on Avikcare

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She writes,

Roy’s plan changes the structure of Obamacare’s subsidies by benchmarking them to a high-deductible plan with a health-savings account — providing a powerful incentive for people to move into consumer-driven health plans. The HSA would be funded in part (depending on income level) by federal subsidies, which would roll over from year to year, giving consumers incentives to stay healthy and to make cost effective health-care decisions when they do need care.

The difference between subsidizing Singapore-style health insurance and mandating Obama-style health insurance is significant.

This is even more significant:

Medicare eligibility age would increase by four months every year until the program is totally phased out, to be replaced by putting seniors on the reformed exchanges.

Actually, with longevity increasing by 3 months per year, I am not sure that Medicare would phase out as rapidly as they think. And any step-up in anti-aging innovation could mean that longevity increases faster than 4 months per year. Still, better to be raising the age of eligibility gradually than not at all.