Category Archives: Economics of Health Care

Manzi on the Oregon Medicaid Study

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Russ Roberts draws him out. Much of the focus is on the fact that almost half of the people who won the lottery to obtain Medicaid coverage then did not apply.

What that means, Manzi suggests, is that the group of people who obtained Medicaid coverage, rather than blow it off, may have been different from the control group that lost the lottery. That is, you don’t have two groups–winners and losers. You have three groups–losers of the lottery, winners who took coverage, and winners who did not take coverage. Manzi is saying that one cannot be sure that the winners who took coverage are comparable to the losers, which makes the results difficult to interpret.

Previously, Russ interviewed Austin Frakt on the study.

New Commanding Heights Watch

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Timothy Taylor writes,

there are clearly countries that spend less per student than you would expect given their level of per capita GDP, like Iceland, which is labelled, and Italy, which is the unlabelled point more-or-less under Spain. There are also countries that spend more per student than you would expect given their GDP, including Ireland, Canada, and especially the United States.

He is referring to higher education.

Returning to the Oregon Medicaid study, Tyler Cowen writes,

The key question here is how we should marginally revise our beliefs, or perhaps should have revised them all along (the results of this study are not actually so surprising, given other work on the efficacy of health insurance). For instance should we revise health care policy toward greater emphasis on catastrophic care, or how about toward public health measures, or maybe cash transfers? (I would say all three.) One might even use this study to revise our views on what should be included in the ACA mandate, yet I haven’t heard a peep on that topic. I am instead seeing a lot of efforts to distract our attention toward other questions.

Nick Schulz and I have referred to health care and education as the new commanding heights. That is, they are as important in the 21st century as steel and electric power were in the 20th. However, steel and electric power had major scale economies that lent themselves to top-down, bureaucratic management. Health care and education do not.

What I think this means that those who want to apply centralized, technocratic solutions in health care and education (“Obamacare,” “No Child Left Behind”) are on the wrong side of history. Perhaps my views are mistaken. But in any case, I wish that people were less emotionally invested in the technocratic approach, so that if it does prove to be dysfunctional they are able to back off.

The Null Hypothesis in Health Insurance

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is that, in the United States, better health insurance produces no difference in health outcomes. Recently, for example, Katharine Baicker, et al, found

This randomized, controlled study [in Oregon] showed that Medicaid coverage generated no significant improvements in measured physical health outcomes in the first 2 years, but it did increase use of health care services, raise rates of diabetes detection and management, lower rates of depression, and reduce financial strain.

Pointer from, well, everyone. All I can say is that this is really separating what David Brooks calls the “detached” from the “engaged.” The latter are making an all-out effort at what I call trying to close minds on your own side.

Somewhat detached commentary includes

Tyler Cowen, Ray Fisman, and Reihan Salam.

Robin Hanson has an even stronger version of the null hypothesis. His version says that differences in health care spending produce no difference in health care outcomes. He and I disagree about how to characterize this result. Let me try to explain how we differ. Let us stipulate that:

1. Some medical procedures improve health, but not in a way that shows up in statistics. For example, if you get your broken arm fixed, you are much better off than not getting it fixed, but this will probably not show up in measured statistics of health outcomes, including longevity.

2. Some medical procedures are a waste (futile care, unwanted care, treatments of non-existent ailments, treatments that do not work, and so on).

3. Some medical procedures have an adverse effect on health.

4. Some medical procedures improve health outcomes, but only with a low probability (e.g., precautionary screening).

5. Some medical procedures definitely improve health outcomes in a measurable way.

Note also, that most studies of medical spending are not controlled experiments. In observational studies, including cross-country comparisons, the results tend to be dominated by a 6th factor, namely that health outcomes are determined much more by individual genes and behavior than by medical intervention.

Robin and I agree that (5) is true. The question becomes, how does (5) wash out in the statistics on differences in spending? His view is that there has to be enough (3) to offset the (5). My view is that it is mostly that (1), (2), and (4) serve to dilute (5). If I am correct, then researchers should find some quantitative differences in health outcomes, but these differences will not be statistically significant. Out of (bad) habit, they will report this as “no difference in outcomes.” This makes it sound as if they have proven the null hypothesis, when they have merely failed to reject it.

Of course, in a large study (as this was), there may not be much difference between failing to reject the null and proving it. The confidence interval around zero could be small (if someone has access to the paper, you can let me know).

Unwanted Care

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Jonathan Rauch writes,

Unwanted treatment is American medicine’s dark continent. No one knows its extent, and few people want to talk about it. The U.S. medical system was built to treat anything that might be treatable, at any stage of life—even near the end, when there is no hope of a cure, and when the patient, if fully informed, might prefer quality time and relative normalcy to all-out intervention.

It is a good article on the challenges of reining in late-stage medical interventions.

Personal Saving and Public Policy

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1. Ezra Klein writes,

This is the other, perhaps more pressing, Social Security crisis: It’s not generous enough to counteract the sorry state of retirement savings nationwide. In a report for the New American Foundation, Michael Lind, Steven Hill, Robert Hiltonsmith and Joshua Freedman survey this data and conclude that the ongoing debate over how to cut Social Security is all wrong: We need to make Social Security much more generous.

They would keep today’s income-based Social Security program, but add a “Part B,” which would be a flat payout to all retirees. When parts A and B are combined, all retirees would be guaranteed 60 percent of their average working wage in retirement, with low earners seeing closer to 100 percent replacement. Part B would be pricey, adding almost a trillion dollars to Social Security’s costs in 2037, and the authors don’t have a clear proposal, much less a politically realistic plan, for how to pay for it. But not paying for it doesn’t mean those costs disappear: It either means living standards for seniors will tumble, or families will strain as they try to support older relatives.

When I read this, it came across to me as a poor use of economic language. Instead, I would have pointed out that if Baby Boomers are not saving enough for retirement, and someone suggests using transfer payments to give them more resources, then in order to know whether or not this is a good idea one needs to know where the resources will come from. Take any year, say, 2018. If you increase Baby Boomers’ consumption in that year, then either you have to decrease the consumption of other people who are alive that year or you have to diminish the rate of capital accumulation. Those are the costs that do not disappear in using transfers to solve the problem of Baby Boomers’ consumption needs in retirement. Perhaps this sounds picky. But as an economist I think that, particularly when one is writing for a lay audience, it is appropriate to employ the principles of scarcity and trade-offs.

2. Richard H. Thaler writes,

Payroll savings plans are vital because they are essentially the only way that middle-class Americans reliably save for retirement. Your grandmother probably knew that the best way to save is to put money aside before you have a chance to spend it. That approach has always worked — and is a core idea embedded in these plans.

…The Obama administration has proposed a simple solution to this problem: the automatic I.R.A. This plan, originally proposed by scholars at the Brookings Institution, would require any employer that doesn’t offer its own plan to enroll workers automatically into individual retirement accounts, with the option to opt out. The burden on employers would be tiny, and the benefit to workers could be life-changing.

Pointer from Mark Thoma.

I liked Thaler’s piece better. He sees the problem as one of encouraging people to provide for their own future consumption by deferring current consumption. If his suggestions were adopted and they work as intended, then there will be more capital in 2018 than otherwise, which would result in more output. Therefore, Thaler’s solution is consistent with economic principles.

As an aside, Klein covers another topic in his column, which is the cost of health care. He writes,

A key fact — perhaps the key fact — about American health care is that the prices we pay for the health care we consume are far, far higher than in any other country.

He recommends putting people age 55-65 on Medicare and negotiating down the compensation of health care providers.

Maybe I was in an uncharitable mood, but I was disturbed by the tone of the quoted sentence. In Crisis of Abundance, I spent a chapter talking about various narratives that have been used to explain health care spending in the United States. On page 25 I wrote,

The most awkward fact for the narrative that attributes high health care spending solely to prices is the finding by John Wennberg and his colleagues…by looking directly at utilization figures, it is clear that when it comes to explaining spending differences across regions it is not prices. Patients in high-spending regions see more physicians and undergo more procedures than patients in low-spending regions.

After surveying a lot of literature, I concluded that the most important narrative for explaining American health care spending is that we use a lot of what I dubbed “premium medicine.” I offered evidence that health care in the United States uses more physical and human capital, meaning medical equipment and specialists, than health care in other countries.

Klein is entitled to disagree with me, of course. But I cringed when he pronounced the over-pricing narrative as if it were a “fact.” In fact, there are many economists who doubt that we can have a free lunch by paying providers less for their services.

3. Turning back to Baby Boomers’ retirement, Reihan Salam writes,

In recent months, opponents of reducing the growth of Social Security benefits have been making the case that Social Security benefits should actually increase, to reflect the inadequacy of private retirement savings. A month, I wrote about Josh Barro’s call for an expanded Social Security program and how it might be reconciled with Andrew Biggs’ center-right vision for Social Security reform. Basically, Barro is open to expanding the public commitment to retirement security through a number of strategies, including mandatory savings accounts….

while policy intellectuals are thinking hard about Social Security’s future — another good example is the work of Charles Blahous and Jason Fichtner on how to make the Social Security payroll tax more work-friendly and fertility-neutral — there has has yet to emerge a consensus among Republican lawmakers on Social Security reform, hence the fact that the House Republican budget proposal didn’t tackle the issue head on. My sense is that there is a way to draw on the work of Biggs (the larger architecture), Barro (his idea of a new class of government securities linked to wage growth or GDP growth merits consideration), and Blahous and Fichtner (thinking through how we can connect their work on fertility-neutrality to the Stein tax reform agenda) to craft an attractive retirement security agenda that would actually prove more generous, when all elements including the mandatory savings element are taken together, than the current system while also proving more fiscally sustainable. Fundamentally, this would be a “conservative” reform, as it would improve work incentives and emphasize pre-funding.

Read the whole thing. Salam is my favorite policy wonk.

Secretary Sebelius: Insurance != Insurance (paging Ezra Klein)

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She is quoted saying,

At a White House briefing Tuesday, Health and Human Services Secretary Kathleen Sebelius said some of what passes for health insurance today is so skimpy it can’t be compared to the comprehensive coverage available under the law. “Some of these folks have very high catastrophic plans that don’t pay for anything unless you get hit by a bus,” she said. “They’re really mortgage protection, not health insurance.”

My differing views are here:

The health coverage most Americans have is what I call “insulation,” not insurance. Rather than insuring them against risk, most families’ health plans insulate them from paying for most health care bills, large and small.

I would like to know Ezra Klein’s take on this. Some possibilities:

1. He is alarmed that such an important person and the aides who prepared her talking points are clueless, and he will write a column along those lines.

2. He recognizes that she is clueless, but he thinks it is not an important story. If so, perhaps he will leave a comment here explaining why.

3. He recognizes that she is clueless and that this is an important story, but this is not the sort of thing he wants to call to the attention of Washington Post readers. (This is the least charitable possibility, so it does not really belong on this blog.)

4. He has received a background briefing that “clarifies” her remarks, and he will write a column along those lines.

5. He himself believes that catastrophic health insurance should not qualify as health insurance, and he will write a column along those lines.

A Higher Education Data Point

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From Dean Baker.

My colleague John Schmitt and former colleague Heather Boushey looked at this issue a couple of years ago. They noted that there was a far larger dispersion in the wages of men with college degrees than was the case with women. In fact, there was a substantial overlap between the distribution of wages of men without college degrees and men with college degrees.

The ev-psych story is that men tend to have wider variance in general. They dominate both the best jobs and the worst jobs. College may not affect this.

Pointer from Mark Thoma.

Health Care Spending and Demographics

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Joshua Gordon writes,

Nearly three-quarters of the spending increases in Medicare over the next two decades can be attributed to aging alone. And, as I will explain, the remaining increase in costs due to health care inflation will be very difficult to avoid because even that amount of projected growth is lower than anyone realistically believes we can sustainably achieve. Thus, the major problem in Medicare really is one of an aging population. In this case, the Medicare problem is no different than the Social Security problem.

Kudos to Mark Thoma for providing the pointer. The essay contradicts the world view of many of those with whom Thoma usually sides.

Hospital Charges

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Steven Brill has gotten the health-technocrats very excited. For example, Uwe Reinhardt writes,

hospitals are free to squeeze uninsured middle- and upper-middle-class patients for every penny of savings or assets they and their families may have. That’s despite the fact that the economic turf of these hospitals – for the most part so-called nonprofit hospitals

Pointer from Mark Thoma.

Solve the puzzle:

1. Itemized charges on hospital bills are very high. This is most obvious for items that you can buy yourself in a drugstore or supermarket.

2. Relative to these outrageous markups, profits at for-profit hospitals (and at “so-called nonprofit hospitals”) are not very high.

The explanation is that hospital costs are mostly overhead, meaning that they are not tied to billable services or events. The janitors who clean the halls and rooms once a day (or more)? Overhead. Record-keeping, billing, computer systems, communications? Overhead. Fancy medical equipment? Overhead. Nurses and other staff? For the most part, overhead.

Because most of the cost in hospitals is overhead (or fixed cost, in economic parlance), its allocation across billable items is arbitrary. That is why “tough negotiation” by Medicare does not really reduce overall health spending. Instead, it means that overhead costs have to be shifted somewhere else, including onto those who happen to be affluent but uninsured.

What would happen if we followed the prescription of Reinhardt and others, to force hospitals to bill everyone else at Medicare rates? Hospitals would either stop taking Medicare, drastically cut back on services (reduce janitorial service to once a week), or close altogether.

I am not saying that the business practices of doctors and hospitals are beyond reproach. But claiming that there is a free lunch in medical care from just paying providers a lot less money is unhealthy demagoguery.

How Overpaid are American Doctors?

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Kevin Drum writes,

The bottom line is that compared to other rich countries—all of which pay Medicare rates or less for medical services—American doctors are pretty well paid. The report also shows compensation as a ratio of the average wage in each country, and the story is similar (though GPs look a little closer to the OECD average when you compare their pay to average wages).

1. Why isn’t the focus on this latter ratio? If you were to draw an international comparison chart of wages not adjusted for the average wage in a country, most occupations in America are “overpaid.” That is what having relatively high productivity will do for you.

2. Has anyone compared hours worked by doctors across countries? I bet that American doctors work more hours. I also bet that if you cut their rate of pay, they will not continue to work more hours. That is, I think that the substitution effect will dominate the income effect. (If nothing else, the lower the rates that government pays doctors, the fewer patients that doctors will accept for whom they are paid government rates.)

3. I think that if there is an issue at all, it is limited to specialists. And that is because specialists produce more billable services. That problem is as severe in Medicare as it is outside of Medicare.

Overall, I am skeptical that experts in Washington can “fix” the pay of doctors.