Category Archives: Economics of Health Care

Zero pushback

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That is what Tyler Cowen gives Atul Gawande when he says,

In the 1950s, we had no real FDA, and you had the opportunity to put out, to innovate in all kinds of ways, and that innovation capability gave us modern cardiac surgery and gave us steroids and antibiotics, but it also gave us frontal lobotomies, and it gave us the Tuskegee experiment and a variety of other things.

I thought that this comment of Gawande’s was pure demagoguery, and it should have received pushback.

The primary reason we abhor frontal lobotomies and the Tuskegee experiment is lack of patient consent. Patient consent is not the focus of the FDA at all. You do not need an FDA to enforce the patient’s right to consent. In fact, you can argue that the FDA acts contrary to patient consent, because it tells people what drugs they cannot have even if they are fully aware of the evidence regarding the risks of the drugs and the data on the drugs’ effectiveness.

CBO under attack

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Marc Short and Brian Blase write,

The CBO’s methodology, which favors mandates over choice and competition, is fundamentally flawed. As a result, its past predictions regarding health-care legislation have not borne much resemblance to reality. Its prediction about the Senate bill is unlikely to fare much better.

1. Note that both authors work in the Trump Administration.

2. Sherry Glied and others wrote,

This analysis finds that the CBO overestimated marketplace enrollment by 30 percent and marketplace costs by 28 percent, while it underestimated Medicaid enrollment by about 14 percent. Nonetheless, the CBO’s projections were closer to realized experience than were those of many other prominent forecasters.

I would not take the position that there is an obviously better model than what the CBO uses. The problem in the policy environment is that CBO estimates are treated as scientific truth. This misleads participants in the policy process into believing that predicting the outcomes of policy is a science. This in turn biases policy toward aggressive intervention.

The false belief in economic science imposes a real cost. Legislators and bureaucrats become overconfident in their ability to manage market processes.

Catherine Rampell takes the opposite point of view as mine.

Contrary to the predictions of economists everywhere, the HHS propaganda document claims that the Cruz amendment would cause insurance coverage to go up and premiums to fall. Astoundingly, even premiums for people in the Obamacare-compliant plans — which, again, economic theory suggests would get stuck with only the very sickest, most expensive Americans — would allegedly decline relative to current law. (Compare “2020 Current Law Enrollment Weighted Average” to “2020 Silver ACA Compliant” in the chart below.)

This is garbage, and exactly why we need nonpartisan scorekeepers like the CBO.

Rampell is right to attack the memo that she criticizes. But she is wrong to wish to anoint the CBO as a scientific umpire.

Suppose that the CBO were asked to “score” the employment effects of a minimum wage increase, and suppose that their most preferred model projected a large decrease in employment. Would the Catherine Rampells and the Mark Thomas be so eager to say that “this is exactly why we need a CBO”–in order to settle the argument about the minimum wage?

If the science is not definitive with respect to the employment effect of the minimum wage, then it is surely not definitive with respect to the insurance-market effect of allowing health insurance companies to offer less comprehensive policies with lowerpremiums. The CBO should not be the ultimate arbiter of contested economic analysis.

John Goodman on health legislation prospects

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He writes (email newsletter, I can’t find a web link),

This is a $3 trillion industry and basically all the special interests want to keep the basic structure of Obamacare. Each wants to get rid of its own Obamacare tax. But they want to keep the taxes on everyone else. That’s the main reason why the Obamacare revenues will stay in the system and there will be almost no federal health reform.

My takeaway is that the optimistic case for the bill is that it will allow the states to go in separate directions on health care, and perhaps in some states more market-oriented approaches will have an opportunity to succeed. The pessimistic case is that the health care system will remain a kludge, and the next time the Democrats are in power they will institute single payer.

But the single payer that we get will be much uglier than what other countries have, because of the power wielded by the provider interest groups. In fact, don’t be surprised if it turns out that the health insurance companies stay smack dab in the middle of our version of “single payer.”

Medicaid and Uncompensated Treatment

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Joshua D. Gottlieb and Mark Shepard write,

many of the benefits of Medicaid go to medical providers who would otherwise provide uncompensated or unpaid care to the same people. In the absence of insurance coverage, hospitals still provide emergency care and lots of providers get stuck with unpaid debt, which ultimately amounts to free care. The ability to declare bankruptcy can serve as an implicit form of high-deductible insurance. Since third parties absorb some of the costs of medical care for the uninsured, people without insurance face diminished economic risk from adverse health shocks. A recent study finds that the cost of uncompensated care roughly accounts for the shortfall of enrollee value for Medicaid below program costs.

Pointer from Alex Tabarrok. My comments:

1. There are links in the paragraph to papers that document the claims that the authors make. I have not read those papers thoroughly, so I may be off base in some of the rest of my comments.

2. My understanding is that giving poor people health insurance does not do very much to reduce their use of the emergency room as their primary care source. Reducing emergency room visits was the hope of Romneycare (arguably a model for Obamacare), and it was not realized.

3. Uncompensated care is an alternative to Medicaid as a subsidy for poor people. However, I doubt that the authors are correct to imply that Medicaid is a transfer to health care providers. My guess is that health care providers, especially hospitals, shift the cost of uncompensated care to other patients. Note that the marginal cost of hospital treatment tends to be low relative to overhead cost, so that the prices charged to paying patients are always a huge markup over marginal cost (e.g., the $16 charge for a small carton of ordinary orange juice).

4. If I am correct about cost shifting, then increasing the share of poor people with insurance should enable hospitals to hold down prices. I doubt that we have seen much of an effect like this.

5. I have thought that uncompensated care is a relatively small part of overhead expense at most hospitals. But perhaps if I were on top of the literature my thinking would be different.

6. An alternative to Medicaid would be to have the government provide substantial funding to charitable organizations that provide health care to poor people. Perhaps if there were many charitable organizations in competition with one another, the best of them might find ways to get health care providers and their patients to utilize treatment more efficiently.

Douglas Holtz-Eakin on the health care bill

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He writes,

the CBO is required to compare the BCRA with current law. For Medicaid, that means it must assume that the financially unsustainable entitlement will continue to swell to cover about 5 million more people, accounting for the bulk of the remaining 7 million uninsured. Not likely. For the individual ACA markets, it means the CBO assumes that enrollment rises by 30 percent over the next 10 years — a sharp contrast to the reality of insurer after insurer walking away.

Some remarks:

1. I have not been following the health care bill at all. Of all the commentators on it, I trust Holtz-Eakin the most. He is for the bill.

2. If the Republicans do not fix Obamacare, then the Democrats will. That means single-payer. That is another reason to be in favor of the bill.

3. My longstanding analysis of health care remains: as individuals, we wish for unlimited access to medical services without having to pay for them. But the more people who are granted our wish, the more that health care spending will soar. What we need is not more people to be granted our wish, but fewer people granted our wish. But pity the politician who runs on the platform of granting fewer people their wish.

4. The libertarian approach to health care is to have people make their own decisions and trade-offs about health care. The bleeding-heart libertarian approach is to give poor people and people with chronic conditions subsidies, but still let individuals make their own decisions and trade-offs. I am not convinced that there are many Americans who want to make choices and trade-offs when it comes to health care. When it comes down to it, they would rather have government make those decisions for them.

5. The CBO’s role in this has been a disgrace. The model that they use to predict consumer insurance choices way over-states the sensitivity to mandates, so it over-estimated how many people would choose Obamacare and it over-estimates how many people will “lose” (i.e., choose not to obtain) insurance without the mandate. The CBO should not be in the business of making this sort of forecast in the first place. The CBO should not be “scoring” the effects of policy, such as the effect of the stimulus on employment. The CBO should be restricted to making budget forecasts and nothing else. When it tries to forecast any other policy impacts, it ends up harming the decision-making process. Holtz-Eakin, a former CBO director, might not agree with me on this point.

Hansonian Schooling?

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A commenter writes,

The most difficult part of this worldview for me to reconcile has been to convince myself that the subset of negative-impact health interventions can have a large enough magnitude of an effect to counteract the health interventions that have a strong evidence base of a positive effect.

…

do you think that some educational interventions have a negative impact, and thus offset positive effects elsewhere? If so, what is the nature of those negative-effect interventions?

1. The commenter does not cite Robin Hanson, so I must make sure that readers are familiar with this paper.

2. I think that in both health care and education, other factors affect outcomes a great deal.

3. In the case of health care, individual genes and behavior, along with public health and cultural trends, are very important. Health care providers work on very small margins. Sometimes they make things better, and sometimes they make things worse. To justify the huge resources that we spend on health care, I think you have to value the occasional benefits very highly and assume that those resources could not be used more effectively on individual and collective efforts aimed at prevention.

4. In the case of education, individual genes and behavior, along with the overall cultural environment, are very important. Educators work on very small margins. Sometimes they make things better, and sometimes they make things worse.

5. Do the interventions that make things work exactly offset those that make things better? I think not. I am optimistic that health care providers and educators do more good than harm. But I think that interventions work on small margins, so that the average benefits turn out to be insignificant relative to the costs.

Yuval Levin on the CBO

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He writes,

Rather than produce stark hard-number projections behind a heavy veil, the CBO and JCT could act more as developers and stewards of an open public model, available online to anyone with sufficient technical prowess to use it. The two agencies, with outside help, would create and maintain the model, and would decide on a set of official economic assumptions and policy expectations to be used in modeling for formal budget-process purposes. Anyone could “score” any policy proposal using those official assumptions and could also use the model with other assumptions to project a proposal’s consequences under alternative circumstances.

I do not think that any fix of the Congressional Budget Office or Joint Committee on Taxation gets at the problem.

Alan Blinder once pointed out what he called Murphy’s Law of economic policy. That is when economists agree on something and are confident about it, nobody listens. But when economists are engaged in speculation and biased argument, they get attention.

When it comes to “scoring” health bills for their effect on the proportion of the population with health insurance, the CBO is engaged in speculation, and Levin points out a form of bias.

It is by this point basically a quirk of the CBO model that it judges the mandate to be exceedingly effective — far more effective than the evidence of the past few years would suggest.

If your model tells you that a lot of people purchased health insurance because of the mandate, then it will predict that a lot of people will decline health insurance without it. And, of course, the press will report this as people “losing” their health insurance.

On the other hand, when the CBO puts out its reasonable forecasts that entitlement spending is not sustainable, pundits tell us not to take those seriously. But as far as I can tell, those forecasts are still on track.

Matching GoFundMe Health Care

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Tyler Cowen writes,

It turns out we value health care for others more in rhetoric than in reality.

As a thought experiment, imagine that government support for health care consisted of a matching grant for GoFundMe solicitations, up to half the cost of a procedure. So, if you want other people to pay for your medical procedure, you use GoFundMe. If you can get enough money to pay for half the procedure, the taxpayers will fund the rest.

This changes the model from one of getting insurance company approval for a procedure to one of getting peer approval. Think about the pros and cons of this.

A Provocative Health Care Proposal

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Karl Denninger proposes legislation, including

No government funded program or government billed invoice will be paid for medical treatment where a lifestyle change will provide a substantially equivalent or superior benefit that the customer refuses to implement. The poster child for this is Type II diabetes, where cessation of eating carbohydrates and PUFA oils, with the exception of moderate amounts of whole green vegetables (such as broccoli) will immediately, in nearly all sufferers, return their blood sugar to near normal or normal levels. The government currently spends about 25% of Medicare and Medicaid dollars on this one condition alone and virtually all of it is spent on people who can make this lifestyle change with that outcome but refuse. If you’re one of the few exceptions and it doesn’t work in your case you have the burden of proof. Nobody has the right to light their own house on fire on purpose and then claim FEMA benefits for same. This one change alone will cut somewhere between $350 and $400 billion a year out of Federal Spending and, if implemented by private health plans as well, likely at least as much in the private sector. That’s more than three quarters of a trillion dollars a year that is literally flushed down the toilet due to people being pigheaded and refusing to do things that would not only save the money but also save their limbs, eyesight and ultimately their life.

Pointer from Glenn Reynolds. This is not representative of the entire post. Most of his proposals are intended to bring about more market-based decision-making. Denninger especially wants to improve transparency and eliminate price discrimination in medical billing.

There are many industries in which fixed costs are high relative to marginal costs. Charging everyone the same price would mean either that the price is too low to cover average cost or it is too high relative to marginal cost. Price discrimination can actually be helpful in some cases. In fact, charging lower drug prices in Europe and Canada may actually help lower costs of selling drugs in America, because foreign buyers help to cover the fixed costs of developing drugs. So I disagree with Denninger that ending cross-border price discrimination for drugs would necessarily make us better off.

On the other hand, for hospitals and doctors, price discrimination is not used to find the people most willing to pay but instead is used to punish people with the least negotiating leverage. So there I tend to agree with Denninger.

Overall, I come back to the cultural roots of our health care mess. One of the points in that post is

Americans, and especially health care providers, do not want to think of health care as a commodity. The providers want to be paid, but they do not want to think of themselves as selling their services, so the payment comes from third parties and the price is hidden to consumers.

I believe that helps explain why pricing is opaque in health care, and why Denninger’s attempt to bring market discipline would not be well received, even by patients

Here is another of his proposals that I think would run into cultural problems:

All surgical providers of any sort must publish de-identified procedure counts and account for all complications and outcomes, updated no less often than monthly. Consumers must be able to shop not only on price, but also on outcomes.

The doctor is not supposed to be fallible. This sort of reporting would draw attention to the fallibility of doctors, making them and their patients unhappy.

Losing health insurance that you do not want

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Tyler Cowen writes,

many of the poor do not value health insurance nearly as much as many planners feel they ought to, in large part because they are already getting some health care.

He quotes from the abstract of a paper by Amy Finkelstein, Nathaniel Hendren, and Mark Shepard. They conclude that most low-income people would not choose to pay for health insurance if they had to. My thoughts:

1. I would be careful about concluding that people do not value health insurance based on their preferences when their incomes are low. Perhaps if you raised their incomes a lot, they would value health insurance more highly.

2. Almost 15 years ago, I wrote an essay called Health Insurance Do-nots. I recommend it as relevant to the current discussion.

3. While people with low incomes get above-board subsidies for health insurance, many people with high incomes get subsidies, also. Government workers, for example. Or people who get employer-provided health insurance, which is subsidized through the tax system.

4. If my wife and I could be assured of paying the same price for medical services that our insurance company pays, we would be much better off self-insuring than getting our Obamacare insurance. If you cumulate over 5 years, we would have to incur well over $100,000 in medical procedures in order to make back our premiums/deductibles under Obamacare. And note that we separately pay for our own long-term care insurance, which addresses the biggest health-related financial risk that we face.