Category Archives: Economics of Health Care

Life expectancy slowdown

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Tyler Cowen cites a study that says that the rate at which life expectancy at birth (LEB) is increasing has slowed down. This does not surprise me.

Suppose that there are two outcomes. One outcome is that you live to a ripe old age. The other outcome is that you die within one year of birth. As the percentage of people who die early goes from 10 percent to 1 percent, average LEB goes up dramatically. As it goes from 1 percent to 0.1 percent, average LEB goes up more slowly. But I would not call that stagnation.

The Tyranny of Metrics

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The book by Jerry Muller will be out shortly. It makes a strong case against the over-use of quantitative measures to fix compensation. Education is one example.
If you believe the null hypothesis, then compensating teachers based on outcomes only introduces randomness into their pay.

Meanwhile, without referring to the book, in talking about health care and education, Megan McArdle writes,

So when we measure outputs, we are getting at best a very distorted picture of the value of the services provided. Modern industrial management is simply not designed for this sort of situation. If you feed human inputs into a machine system, you are quite likely to grind up the humans in the process.

Read the whole thing.

Centralized cost containment fails in health care

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Joseph R. Antos and James C. Capretta write,

Accountable Care Organizations were supposed to give hospitals and doctors incentives to become more efficient and cut Medicare costs, but they have yet to produce any overall savings. In 2016 only 56% of the 432 ACOs hit their benchmarks for reducing costs. Even worse, after taking into account their bonus payments, ACOs actually increased Medicare spending, by $216 million in 2015 and $39 million in 2016.

The theory was that if you give health care providers a new incentive system, then they will offer better quality care at lower cost. In practice, the most important incentive you give them is to game the system.

The piece as a whole points out that although health care spending growth has slowed in nominal terms, on an inflation-adjusted per capita basis, health care spending has picked up.

Health spending negatively correlated with health outcomes

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Tomoaki Katera writes,

life expectancy at age 40 for males in the 90th income percentile is 45.3 years whereas the corresponding indicator in the 10th income percentile is only 35.8. For comparison, according to the report from National Center for Health Statistics, if all cancer deaths were eliminated, life expectancy at birth would increase only by 3.2 years.

…inequality would seem to matter since it can create differences in access to medical services. Interestingly, however, when I compare average medical spending by income groups, low income individuals tend to spend more on healthcare than high income individuals in most ages. The second viewpoint is motivated by the income-health gradient. It is widely accepted that higher income individuals tend to be in much better health than lower income individuals even when they are young. Moreover, the gap widens as they age. Many papers in health economics point out that widening health disparities by income can potentially arise from differences in unhealthy behaviors.

Pointer from Tyler Cowen. In the paper, Katera argues that the lower life expectancy of lower-income individuals reflects differences in their behavior rather than differences in access to medical services. My thoughts:

1. This seems consistent with Hansonian medicine, in which on average the benefits of more health care spending are about zero. But it also could suggest a counter to the Hanson view. That is, it could be that at the margin everyone benefits from more health care spending, but because the people who spend more tend to be people who behave in unhealthy ways, the benefits of more spending are difficult to tease out from the data. It is like trying to measure the relationship between policing and crime. If areas with a lot of crime tend to require more police, then a simple correlation analysis might suggest that adding police does not help to reduce crime.

2. Katera’s findings are not politically correct. I am on the record as saying that academic economics is headed toward a state in which findings like this will make one almost unemployable. Imagine trying to get Katera hired in a sociology department. Katera’s experience as a job candidate will be help to indicate how far along we are on this path.

Killer health care policy, thanks to David Cutler

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Ankur Gupta and others write,

These findings support the possibility that the Hospital Readmissions Reduction Program has had the unintended consequence of increased mortality in patients hospitalized with heart failure.

I found the article after seeing a reference in a WSJ editorial.

One of the conceits of David Cutler and health care economists who share his outlook is that technocrats can improve health care quality and lower cost by setting national standards and creating incentives for health care providers to meet those standards. But when you manage remotely, you do not necessarily manage well.

You think that high readmission rates are an indicator of inefficiency, so you tell hospitals to lower their readmission rates. They do so, and you get the “unintended consequence of increased mortality.” In your technocratic wisdom, you kill people.

Many years ago, when I heard Cutler speak on pay for performance (P4P) in health care, I was appalled.

During the Q&A at the event, I compared government trying to implement P4P in health care to trying to implement government P4P for middle management. After all, middle management in America’s big corporations and other organizations is also “hit or miss.” Yet nobody thinks that a big project to have government pay bonuses to good middle managers at Intel or General Motors would solve the problem. Even government itself does not attempt to determine the pay of individual managers in such a centralized fashion. We don’t think that people in Washington know more about your performance than the people who work most closely with you. My guess is that, using a program designed and implemented in Washington, we have about the same ability to affect the correlation between compensation and quality in medicine as we would in middle management.

Ray Dalio’s data points

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The essay is on inequality, but there are interesting statistics scattered throughout. For example,

While many of the major causes of death have been flat or falling over the last 15 years, deaths from drugs and alcohol more than offset it among the bottom 60%. And the rise in drug-related deaths is not happening across the world—the phenomenon is unique to the US.

Pointer from John Mauldin.

I could swear that when I first looked at Dalio’s piece, he had more tables with more statistics, including death rates that are preventable with health interventions (higher for the U.S.) Those tables, which are in the appendix, do not show up in the version of Chrome on my laptop. Ah, there they are. They show up fine on the Microsoft browser and on Chrome on my tablet. They appear to be graphics. If you don’t see a table called “Health Care Performance Measures Across Developed Nations,” try a different browser. Those tables are a big reason that I am sending you to his essay.

Hansonian medical checkups

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Toshiaki Iizuka, Katsuhiko Nishiyama, Brian Chen, and Karen Eggleston write,

despite the significant increase in medical care utilization at the borderline threshold, we find no evidence that the additional care improves health outcomes. This is true both for intermediate health measures and for predicted risks of mortality and serious complications. Thus, we find no evidence that DM-related medical care is cost-effective around this threshold. The results hold both in the shortrun (one year after a checkup) as well as in the medium-run (three years after a checkup). These results suggest that the threshold may need to be reexamined from the perspective of cost-effectiveness.

DM is diabetes mellitus.

Health insurance vs. health care assurance

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In a comment, Tim Worstall wrote,

Assurance is a means of, possibly tax privileged, saving for high probability events. Insurance is a method of, well, not saving but providing for, low probability and expensive events. Fire insurance for a house is insurance, burial insurance, given the low probability of being lost at sea, is actually burial assurance.

Health care is both. That appalling cancer that the new drug is $475k for, the scraping up off the road and 12 months in ICU as a result are both low probability events. Insurance is the right model here – and we’ve got it, catastrophic insurance.

What ails US health care more than anything else is that things which are assurance – annual blood tests, contraception for the majority of a woman’s fertile life, shots for the kids, are dealt with through an insurance, not assurance, model.

I don’t say this is all of it, but splitting out the two would help. Catastrophic, even government run (as Brad Delong has suggested) insurance plus those medical savings accounts for the assurance. Will never happen of course but it would help.

I believe that is the Singapore model, but sadly its prospects here are quite dim.

Mis-education of health care economics

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Responding to a post by John Cochrane, on his own blog Greg Mankiw refers readers to this piece that Mankiw claims to provide readers with education on the economics of health care.

various features of this market complicate the analysis of their interactions. In particular:
1. Third parties—insurers, governments, and unwitting bystanders—often have an interest in healthcare outcomes.
2. Patients often don’t know what they need and cannot evaluate the treatment they are getting.
3. Healthcare providers are often paid not by the patients but by private or government health insurance.
4. The rules established by these insurers, more than market prices, determine the allocation of resources.
5. In light of the foregoing four points, the invisible hand can’t work its magic, and so the allocation of resources in the healthcare market can end up highly inefficient.

There is much more at the link. In my opinion, the ideas are a fair representation of where the profession stands on health care, and these ideas do more harm than good.

1. I agree with the Grumpy One (Cochrane) that in terms of economics health care is not much different from other goods and services. Health care does not fit the model of perfect competition, but almost nothing does fit that model. Yes, it is hard to be an informed consumer in health care. It is also hard to be an informed consumer of economics textbooks, and yet nobody insists that the economics textbook market requires extensive government intervention to avert disaster.

Almost nothing in the real world obeys the textbook model of perfect competition. I have argued that what makes health care different are cultural factors. In fact, if you look at Mankiw’s list of complicating factors, three of the four relate to the use of third parties to pay for health care, which is entirely a cultural phenomenon.

There is nothing intrinsic to health care that makes it impossible for buyers to pay sellers directly. It is a cultural choice. Even for very large health care expenses, insurance could be structured like auto insurance, where the insurance company writes you a check based on an estimate of the “damage,” and you can then shop for either a more or less expensive treatment. (I am leaving out the case where you arrive at the emergency room unconscious. That is an event where third party involvement is necessary, but it accounts for a tiny fraction of health care spending.)

The basic cultural point I make is that each of us individually would like unrestricted access to medical services without having to pay for them. This is not sustainable for the nation as a whole. Health care policy that leans left will lead to government restrictions on access to medical services. Health care policy that leans right will lead to people choosing to forego some medical services because they do not wish to pay for their cost.

2. Mankiw views health care regulation as a cost-benefit trade-off between “too much” (inefficient) or “too little” (consumers not protected). In fact, health care regulation should be viewed through a public choice lens as an example of Subsidize Demand, Restrict Supply.

3. Mankiw offers pertinent facts about health care spending, but he neglects the important fact that we spend a huge amount on medical services with high costs and low benefits. That is one of the main themes of my book Crisis of Abundance. A related theme of that book is that much of our spending is on treatments and diagnostic procedures that did not exist forty years ago.

4. Mankiw discusses health insurance as if it were like car insurance or fire insurance. But what is really important is how it is not like those other types of insurance. With classic insurance, people rarely make claims, they make claims only for large, disastrous losses, and the premiums are low. What Americans think of as “good health insurance” is the opposite on all counts. I call it “insulation” rather than insurance, because it insulates people from having to make even small-dollar payments.

I really do not wish to make this a personal attack on Greg Mankiw. His job as a textbook writer is to represent the center of the profession, and he is doing so. The problem I have is with the center of the profession. And as you know, I fear that things will get worse rather than better in this regard.

Americans are super-rich

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Tyler Cowen writes,

Consumption in the U.S., per capita, measures about 50 percent higher than in the European Union. American individuals command more resources than people in countries such as Norway or Luxembourg, which have higher per capita GDP. The same American consumption advantage is evident if you look at dwelling space per person or the number of appliances in a typical home.

He says to look at total U.S. health care spending relative to the size of our economy in this context. If you put GDP in the denominator, we look like an outlier. But if you put consumer spending in the denominator, it looks fairly normal.

And yes, I too have cited the Random Critical Analysis piece.