Category Archives: Economics of Health Care

Health Care Costs Near the End of Life

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Timothy Taylor writes,

say for the sake of argument that such cases could be identified, and spending in this area could be reduced by half. If attainable, cuts of this size would be $70 billion in annual savings, which is certainly a substantial sum. But to keep it in perspective, total U.S. health care spending is in the neighborhood of $2.6 trillion. Thus, the potential gains from even fairly aggressive limits on end-of-life health care spending through Medicare is a little under 3% of total U.S. healthcare spending.

Read the whole post. Many people think that the share of health care spending in the last year of life is high and rising. In fact, it is fairly stable at about 7 percent of total health care spending (note that Taylor’s figures only include Medicare spending, not Medicaid or private spending).

It All Sounds So Simple

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Richard Thaler writes,

To me, the ideal health care delivery system would include…A fee for health rather than fee for service model. Doctors and hospitals should be paid for keeping their patients well. Paying them for doing more tests and surgeries creates bad incentives.

Pointer from Tyler Cowen and Mark Thoma.

When Thaler plays chess, does he think even one move ahead? I am sure that my readers do not need me to tell them how doctors would respond to a “fee for health” incentive system, do I?

To be fair, Thaler has some reasonable ideas in the column. But this particular gambit was so weak that he was “dead out of the opening” as far as I was concerned.

A Correct Prediction

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Sometimes, I make a good call. In an op-ed in 2006 on what was then the newly-enacted Massachusetts health plan, I wrote,

The problem of paying for health-care coverage, which politicians are declaring they have “solved,” is really just beginning. The only way to make zero-deductible health insurance available at low cost is with a large subsidy; how much will depend on negotiations with insurance companies. Only when the size of the necessary tax increase becomes clear will Massachusetts’s leaders learn the laws of arithmetic.

Now, we have this WSJ editorial:

Health care was 23% of the state fisc in 2000, and 25% in 2006, but it has climbed to 41% for 2013. On current trend it will roll past 50% around 2020—and that best case scenario assumes Mr. Patrick’s price controls work as planned. (They won’t.) In real terms the state’s annual health-care budget is 15% larger than it was in 2007, while transportation has plunged by 22%, public safety by 17% and education by 7%. Today Massachusetts spends less on roads, police and schools after adjusting for inflation than it did in 2007.

The editorial is about a proposal for a hefty tax increase proposed for Massachusetts.

Fake Chart?

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Many people have been commenting on a chart that shows annual per capital health care expenditures in the U.S. by age group. The chart seems to say that this figure is about $3500 until people reach their mid-50’s and then rises exponentially to about $30,000 in their 70’s and $45,000 in their 80’s.

Tyler Cowen is among those pointing to the striking chart, which is creating a frenzy in the health-care-wonkosphere.

At least two folks, Austin Frakt and Kevin Drum, are skeptical about these numbers. I am beyond skeptical. I call baloney sandwich.

Finding the most reliable data for 2010 takes two seconds. Just go to the trusty Medical Expenditure Panel Survey. The mean expenditure per person for people with expenses is $3866 for people under 65 and $10,274 for people 65 and over.

It takes another five minutes to generate your own table using MEPS. I wanted to break down the over 65 group into finer categories. So here are the means for each age group:

45-54: $4816
55-64: $6823
65-74: $9265
75-84: $10,175
85+: $11,233

Those are the facts, as best I can determine.

[Update: a number of bloggers have now backed away from the chart (see Tyler’s comment, posted below), on the grounds that it does not include private health care spending. But that makes it sound as though the problem is that the chart understates spending on the young, when in fact the problem is that it overstates spending on the old. The most charitable interpretation of how the chart emerged is that somewhere along the way somebody started with TOTAL spending on health care by people in a middle-age bracket (say, 45-54), multiplied this by the ratio of GOVERNMENT spending on people in a higher age bracket (say, 65-74) to GOVERNMENT spending on the middle-age bracket, and arrived at an alleged TOTAL spending figure for people in the higher age bracket. But really, trying to figure out how bogus numbers made it into a chart is a mug’s game. Regardless of how they got there, they are bogus.]

John Cochrane on Health Care

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A reader asked me to comment on Cochrane’s essay from October 18. The title of the essay was “After the ACA,” which might indicate that Cochrane mis-forecast the election. To make a long story short, I agree with his economic prescription but disagree with his political diagnosis for why we have what I call insulation instead of real health insurance. Cochrane’s explanation for the absence of the latter is:

Because law and regulation prevent it from emerging. Before ACA, the elephant in the room was the tax deduction and regulatory pressure for employer‐based group plans. This distortion killed the long‐term individual market and thus directly caused the pre‐existing conditions mess. Anyone who might get a job in the future will not buy long‐term insurance. Mandated coverage, tax deductibility of regular expenses if cloaked as “insurance,” prohibition of full rating, barriers to insurance across state lines – why buy long term insurance if you might move? – and a string of other regulations did the rest. Now, the ACA is the whale in the room: The kind of private health insurance I described is simply and explicitly illegal.

My thoughts:

1. Nowhere do we observe the Cochrane (or Kling) health insurance system, or anything close to it. This suggests that something other than anomalous U.S. regulations are at work.

2. Health care is something that people love to have others pay for. Insert obligatory Robin Hanson reference.

3. Very few people understand insurance in general. Most people seem to be more loss averse than risk averse. They will buy extended warranties on cheap goods but ignore risks of catastrophic events, such as floods.

4. All around the developed world, third-party payment dominates direct consumer payment for health care. Perhaps consumers feel that if they are spared the need to take out their credit cards then it is easier sustain the belief (illusion?) that their doctors really care about them.

5. All else equal, doctors prefer being paid by someone other than the patient. They prefer to be thought of as offering the “gift of healing.” Of course they do want to get paid.

It turns out, much to doctors’ dismay, that all else is not equal. Third party payers impose all sorts of unpleasant paperwork and regulation. But you won’t see many doctors lobby for consumer-paid health care as the solution. They seem to view paperwork and regulation as an evil plot foisted on them for no apparent reason, without recognizing that it as an intrinsic result of introducing a third party into the payment process.

Cochrane goes on to discuss health care supply. Again, I agree with his prescription, which is to allow for vigorous competition. But he seems to regard health care regulation as an evil plot foisted on society, without recognizing that it may emerge naturally.

Competition is a trial-and-error process. In health care, we equate consumer protection with prevention of error, creating a trade-off between consumer protection and competition. Our choice along this trade-off is affected by the problem of “the seen and the unseen.” Health care errors have concentrated, direct impact on identifiable patients. Competition has diffuse benefits that show up indirectly in an ill-defined broader population. I think it is very difficult to convince people to trade off consumer protection for competition. And, of course, incumbents in the health care industry will do their best to persuade people not to make that trade-off.

While I think Cochrane’s essay will appeal to those who are already inclined to agree with him, others are unlikely to be persuaded. Incidentally, I had the same reaction to John Goodman’s book, Priceless.

Neither Cochrane nor Goodman addresses the arguments for intervention that derive from Arrow and Stiglitz. Arrow focuses on asymmetric information between consumers and doctors, which appears to justify consumer protection. Stiglitz focuses on asymmetric information between consumers and insurance companies, which appears to justify mandated health insurance.

Both the Arrow argument and the Stiglitz argument have merit in theory. My own view is that other forms of “market failure” are more important in practice. The “seen and the unseen” problem that I alluded to earlier means that, contra Arrow, we have too much consumer protection in medicine, not too little.

As I suggested earlier, the health insurance market suffers from the fact that consumers choose on the basis of loss aversion rather than risk aversion. Moreover, contra Stiglitz, there is that evidence relatively healthy people, rather than opting out of health insurance, are more likely to pay for it. This reflects the fact that the personality characteristic of conscientiousness drives both health and the propensity to obtain insurance. As a result, health insurance companies are treated to favorable selection, not adverse selection.

Having said that, I do not think it is Arrow and Stiglitz that libertarians need to overcome. I think we need to understand the deep-seated cultural beliefs that pertain to health care and either adapt our recommendations to those beliefs or try to change them.

The Political Economy of Health Care

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Yuval Levin writes,

the health care debate forces us to weigh health against other national priorities — and, as we have seen, this is something our political system and our kind of regime are exceedingly ill-suited to do. Attempts to confront this problem always seem to turn into efforts to spend yet more on health. The Patient Protection and Affordable Care Act enacted in 2010, colloquially known as Obamacare, was first sold (and perhaps genuinely intended) as a way of “bending the cost curve down,” as President Obama liked to say back then. Even as originally intended, it would have tried to do so in a way that was very unlikely to work, as it would have relied on federal regulation to induce greater efficiency in the health sector. But as it made its way through the political system, the bill became simply a means of expanding public entitlements to health coverage, and so of increasing costs rather than lowering them.

When it comes to dealing with trade-offs, markets work relentlessly and governments fail relentlessly. It is reasonable to suggest that you do not like the way that markets resolve trade-offs. It is less reasonable to suggest that government therefore is the solution.

The Left’s Post-Election Self-Examination?

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Brad DeLong writes,

Massachusetts has been walking down this exchange-and-public-program-expansion road for six years now, since Mitt Romney signed RomneyCare. Massachusetts has been vacuuming up doctors and nurses from Costa Rica and elsewhere and still has been finding that the cost of treating your state population is higher when 97% are insured than it was when 88% were insured. And there aren’t enough loose doctors and nurses in the rest of the world for the ACA to vacuum up enough of them to meet the needs of not 1 state but 50 states.

…What is your guess as to what will happen if the ACA works for access, works for quality, works for coverage–but the extra health-care workforce needed isn’t there, and the lines start to get longer?

Pointer from Tyler Cowen.

Until the election, this sort of question had only been asked by conservative economists.

Perhaps this is an early example of the pattern of self-examination that I thought might take place after the election. When it comes to their policy portfolios, the Republicans will be second-guessing themselves in terms of political positioning. Meanwhile, the Democrats may be second-guessing themselves in terms of feasibility.