If you look at this chart, U.S. consumers apparently spend too much on everything. In short,
Actual Individual Consumption (AIC) per capita is more than 50% higher in the US than in the European Union as a whole!
This is among a number of arguments made by Mike Bird someone else. Pointer from Tyler Cowen.
Think of it as robbing Peter to pay Paul. Paul gets a subsidy for health insurance. Peter pays by being charged higher premiums for his own insurance and by funding Medicaid with taxes or by lending to the government.
According to the Democrats and their friends in the media, if you stop paying Paul, then you are “taking away his health care,” and that is unacceptable. If the Republicans concede that, as they appear to be doing, then they are left with tinkering around the edges by shifting around the Peter burdens (probably by using more borrowing) and by cutting the subsidies for future Pauls.
The thing about health care is that it is so expensive nowadays that robbing Peter to pay Paul involves really big bucks. So if Obamacare has moved the Overton Window to the point where robbing Peter to pay Paul is entrenched policy, then the government now owns a much bigger chunk of the economy.
Concerning the new official Republican House health care proposal, Michael Cannon writes,
The leadership bill therefore creates the potential, if not the certainty, of a series of crises that Congress will need address, and that will crowd out other GOP priorities, in late 2017 before the 2018 plan year begins, and again leading up to the 2018 elections. If Congress gets health reform wrong on its first try, health reform could consume most of President Trump’s first term. Pressure from Democrats, the media, and constituents could prevent Republicans from moving on to tax reform, infrastructure spending, or even Supreme Court nominees.
Avik Roy is more favorably disposed to the proposal, but with significant misgivings. I tend to agree with his “cons” and disagree with his “pros.”
The WaPo story on the proposal says
four key Republican senators, all from states that opted to expand Medicaid under the ACA, said they would oppose any new plan that would leave millions of Americans uninsured.
It would take a lot of nerve to say: Our plan is to hold households responsible for obtaining health insurance. Some households will “lose” coverage that was heavily subsidized by the government. But if you cannot stand up and say that, then you cannot change the direction of health care policy away from socialism.
As I wrote recently, the Overton Window has moved, so that responsibility for health insurance is strictly with the Federal government, not with the household. Along similar lines, Philip Klein writes,
Barring radical changes, Republicans will not be passing a bill that ushers in a new era of market-based healthcare. In reality, the GOP will either be passing legislation that rests on the same philosophical premise as Obamacare, or will pass nothing at all, and thus keep Obamacare itself in place.
After digesting these and other analyses, I am inclined to think that Obamacare will not be repealed and replaced during the Trump Administration. Instead, it will be repealed and replaced by the Democrats the next time they are in power. And the replacement will not look very market-friendly.
State and local governments and their governors associations, mayors associations, state legislatures, corrections commissioners, and more; big and small business lobbies; and, yes, nonprofit sector lawyer-lobbyists—all three federal proxies exert nonstop pressure in favor of federal policies that pay them to administer federal business, with as few strings attached as possible, and with lots of paperwork but little real accountability for performance and results.
Pointer from Tyler Cowen. DiLulio coins the phrase “proxy-administered state” to describe how government works today. It is hard to say which is more despair-inducing in the essay–the facts or the analysis.
I have said before that there are three forms of political economy:
1. Market economy: the private sector sets goals and owns the means of production
2. Socialist: the government sets goals and owns the means of production. Think of the public school system.
3. Corporatist (or Cronyist): the government sets goals and the private sector owns the means of production. Think of Freddie Mac and Fannie Mae back when they were owned by shareholders, or think of Obamacare. These are examples of the proxy-administered state.
Speaking of Obamacare, it seems increasingly clear that it has moved the Overton Window on health care policy. You are not allowed to substitute individual responsibility for Obamacare. Instead, you must come up with a “better” system. The ground rules for any new health care system now state that responsibility for your ability to obtain health insurance ultimately rests with the Federal government.
Timothy Taylor finds a report from the OECD. Taylor writes,
The report divides the evidence into three main categories: wasteful clinical care (care that either provides very low value or can even be counterproductive to health); operational waste (like paying excessively high prices or overusing expensive inputs like brand-name drugs); and governance-related waste (like ineffective or unnecessary administrative expenses)
Ten years ago, in Crisis of Abundance, I concluded that the main issue was the first: medical procedures with high costs and low benefits. Taylor lists these examples from the OECD report:
Imaging for low back pain.
Imaging for headaches.
Antibiotics for upper respiratory tract infection.
Dual energy X-ray absorptiometry (used to measure bone mineral density).
Preoperative testing in low-risk patients (electrocardiography, stress electrocardiography, chest radiography).
Antipsychotics in older patients.
Artificial nutrition in patients with advanced dementia or advanced cancer.
Proton pump inhibitors in gastro-oesophageal reflux disease.
Urinary catheter placement.
Cardiac imaging in low-risk patients.
Induction of labour.
Cancer screening (cervical smear test, CA-125 antigen for ovarian cancer, prostate-specific antigen screening, mammography).
Caesarean section.
Note that cancer screening is on the list. Cancer screening is something of a sacred cow in the U.S. In fact, as I point out in my book, even something as widely advocated as colonoscopy to screen for colon cancer is likely to have a very high cost per life saved.
Taylor concludes:
In many cases, decisions about what medical care to receive and how to deliver that care fall into a gray area. It’s often not 100% clear whether a certain procedure was needed, or not needed; not 100% clear that an error was made, or whether a reasonable judgment call was made; or whether a certain administrative act is wasteful, or whether it is reasonable oversight that reduces the risk of poor care and holds down costs. But the report makes a persuasive case that a substantial share of health care spending, not just in the US but in all advanced economies, is not doing much to improve health.
This recalls what I wrote in Crisis of Abundance in chapter 3.
It is not true that health care is a black-and-white proposition in which services are either utterly necessary or else utterly unwarranted. . .Services that fall in the gray area are services that offer some benefits but which are not absolutely necessary.
To reduce the use of high-cost, low-benefit procedures, the parties paying for health care have to engage in rationing. If the patient is paying, then the patient will self-ration. If the government is paying, then the government will ration.
In 2012, Brown had coauthored a paper that examined every randomized clinical trial that compared stent implantation with more conservative forms of treatment, and he found that stents for stable patients prevent zero heart attacks and extend the lives of patients a grand total of not at all. In general, Brown says, “nobody that’s not having a heart attack needs a stent.” (Brown added that stents may improve chest pain in some patients, albeit fleetingly.) Nonetheless, hundreds of thousands of stable patients receive stents annually, and one in 50 will suffer a serious complication or die as a result of the implantation procedure.
Almost twenty years ago, Robin Hanson set out to explain some puzzling facts about health care. Most notably, “users are losers” (my phrase). That is, if you take similar populations with different levels of health care spending, outcomes tend to be the same. Note that the term “similar” precludes the explanation that the people undergoing more procedures were sicker to begin with.
Robin reasoned as follows:
1. We know that some medical procedures are effective and improve outcomes.
2. However, on average, similar populations that undergo more procedures do not have better outcomes.
3. Therefore, there must be some fairly common medical procedures that worsen outcomes (at least on average), and these tend to balance out the helpful procedures.
For many years, I have been referring to these procedures with adverse outcomes on average as Hansonian Medicine. My own book on health care policy took this issue quite seriously. I preferred to talk about procedures with high costs and low benefits, and Hansonian Medicine as strictly defined means procedures with negative benefits.
Why do we have Hansonian medicine? Epstein cites doctors who are not as well informed as they should be, the threat of lawsuits, and the opportunity to make money doing procedures.
Hanson himself had an intriguing theory, which is that you undergo unnecessary procedures because your friends and family want you to “do something” when you are not well. They show that they care by encouraging you to visit a doctor and to undergo procedures. I think that this is right, particularly in end-stage procedures, where it is often the relatives rather than the patient who demand futile care.
All this raises the question of what to do about procedures with high costs and low (or negative) benefits. The centralized solution is to come up with a way to tell doctors not to undertake these procedures. One challenge with that is there may be specific instances where a doctor knows that a procedure will work, even though in many other cases it does not. Another challenge is that friends and family were not be persuaded by a centralized agency (aka “death panel”).
The approach that I advocated was to reduce third-party payments and let the patients sort things out for themselves as best they can.
Any explanation of the form “administrative bloat” or “inefficiency” has to explain why non-bloated alternatives don’t pop up or become popular. I’m sure the CEO of Ford would love to just stop doing his job and approve every single funding request that passes his desk and pay for it by jacking up the price of cars, but at some point if he did that too much we’d all just buy Toyotas instead. Although there are some barriers to competition in the hospital market, there are fewer such barriers in the college, private school, and ambulatory clinic market. Why hasn’t competition discouraged administrative bloat here the same way it does in other industries?
1. At any given time, you will have sectors where demand is growing faster than productivity (think of health care and education) and other sectors where productivity is growing faster than demand (think of manufacturing). In the sectors where demand is growing faster than productivity, you have rising relative prices, or “cost disease.”
2. In health care and education, you also have a lot of government intervention, and government intervention almost always takes the form of subsidizing demand while restricting supply. Of course, that is going to cause relative prices to be higher, thereby exacerbating “cost disease.”
3. I would argue that there are plenty of barriers to competition in the college market. Accreditation is one such barrier. But there are natural incumbent advantages as well. You may be able to enter the market for high school graduates who are in no way prepared for college. But trying to enter the market at the level of a top 100 college is nearly impossible.
4. There are plenty of barriers in health care, also. Clinics are a good innovation, but the real expenses in health care are in chronic illnesses, and clinics do not compete to treat diabetes, Alzheimer’s, and so on.
5. It is in the nature of organizations for middle managers to try to build empires, adding to cost without necessarily creating value. In for-profit businesses, the owners have an incentive to check this, because the owners want to maximize profits. In non-profits, the natural checks operate only when revenues are not rising to cover the cost of expansion. Non-profits only worry about the bottom line when it threatens to go negative.
In short, some “cost disease” is natural. At any given time, some industries will have demand growing faster than productivity. However, much of it is artificial, as government subsidizes demand and restricts supply. Finally, some of it results from the fact that non-profits are less efficient than for-profit firms.
He writes,
That report found that the higher health care outlays in the United States–compared with Europe, Canada, Japan, and Australia–are due to the higher prices of health services. . .rather than to a greater use or higher quality of those services.
That is on p. 64 of his new book, Building the New American Economy. The report that he footnotes is this one from the Institute of Medicine.
I looked through the report, and I did not see the comparison to other countries to which Sachs refers. The report does have a table that allocates what it calls excess spending in the United States, which briefly looks like this:
| Category | Excess Cost |
|---|---|
| Unnecessary services | $210 billion |
| Inefficiently delivered services | $130 billion |
| Excess administrative costs | $190 billion |
| Prices that are too high | $105 billion |
| Missed prevention opportunities | $55 billion |
| Fraud | $75 billion |
I am not endorsing these numbers. My point is that the report’s analysis and recommendations differ considerably from the way that Sachs construed them.
I do not ordinarily write about books that I do not like. I was sent a review copy, and I would like to be charitable about it.
Sachs is not always wrong. He is willing to dispute mainstream economists, and I certainly do not hold that against him. But wading through this careless and dishonest book left me hoping that the Democrats stick with their mainstream economists.
The reward systems in universities, such as promotion and tenure, accrue from publication of findings that other researchers consider impressive. Academic culture renders influential peer recognition the dominant measure of success. The fact that the peer reviewers of papers submitted for publication are imbedded in the academic culture (as are many of those who review research grant applications) has assured the ascendancy of reductionism. It also ensures that the measure of value of a researcher’s work is not medical innovation, but publication in prestigious journals that, in turn, serve as the currency for obtaining research grant funding.
The essay has a rather innocous-sound title, “Removing Barriers to Medical Innovation.” In fact, it is a highly contrarian take on medical research.
What we are usually told is that the important research is done at universities using government funds, and the drug companies then appropriate this research for private profit. Those same drug companies waste more money on advertising than they spend on research. Stossel argues that the opposite is the case, and that the huge waste is in government-funded research. His description of the sociology of academic medical research sounds plausible, and some of it applies to academic economics as well.
Vermont is now taking steps to address problems that can arise from this opaque system, including rising health care costs. The state will soon implement an “all-payer” health care plan that requires Medicare, Medicaid, and private payers to reimburse health providers at the same rate, based on performance and patients’ recovery.
My prediction is that if this is implemented, health care costs will be higher than they would have been otherwise. Regulatory systems are made for gaming, and the more formulaic the system, the more effective the gaming.