Arnold Kling  

Blaming Health Care Producers

Outsourcing Muddles... Labor Market Puzzle...

Are health care suppliers to blame for high health care costs in the United States? Uwe Reinhardt and others say yes.

I am not convinced.

The basis of this claim is somewhat weak, however. In health care, it is difficult to measure output. In theory, you want to measure the impact that health care has on people's lives, but in practice this is difficult to quantify...

The Reinhardt paper tries to use different sorts of approximations to measure health care output. For example, they compare across countries the number of physician visits and the number of hospital admissions per capita, and they find that the United States does not rank especially high on these indicators...

Using inputs as a proxy for outputs is quite problematic, because of productivity differences. If you measured agricultural output by counting the number of farmers, then you would never guess that the United States is such a large food producer relative to other countries.

ore generally, I am concerned that Reinhardt's approach risks running afoul of the fallacy of indirect inference. Indirect inference means drawing a conclusion about something you have not observed based on what you have observed...

For example, suppose that you find that differences in years of schooling explain only 10 percent of differences in income. You might infer that the all of the other differences -- 90 percent -- must be due to innate ability. That would be an indirect inference, and it would be wrong. To give just one example of how you could be mistaken, it might be that a better measure of schooling -- which takes into account quality, for example -- explains 80 percent of the differences in income. (I'm not suggesting that 80 percent is the true figure, only that it is theoretically possible.)

Diagnosing high prices as the cause of high spending on the basis of imperfect measures of the quantity of services is an example of indirect inference. Such an inference is quite tenuous. In this context, it might be considered statistical malpractice.

For Discussion. What direct evidence is there of health care supplier overcharges that have a significant effect on overall health care spending?

Comments and Sharing

COMMENTS (8 to date)
Richard W Stewart writes:

My strongest personal experience comes from doctor salaries. In 2001 my Italian girlfriend finished her residency and looked for her first full time job as a radiologist. She had to choose between two job offers - $14,000 in Paris or $13,000 in Italy. Annually, not monthly. I suggested looking for work in the United States, but she would have had to pass the Test of English as a Foreign Language (TOEFL) and she was not prepared to do so. I found a potential job on the Internet for her, with a Mayo Clinic satellite in rural Wisconsin, paying $89,000 per year, plus bonuses. Notwithstanding my prejudice in favor of my girlfriend, I think she could have handled the Wisconsin position and would have learned her English on the fly.

I am of course against any government attempts to regulate physician pay. I am equally against allowing the AMA to continue restricting entry into the profession. American doctors claim to be the best in the world - let them prove it by subjecting them to real competition.

Bernard Yomtov writes:

Something is going on. The difference between $4600 and $2000 per capita is huge. I doubt there is a sensible case that this difference reflects the difference in quality of care, however you choose to measure that difficult concept.

Mike Everett writes:

How can one possibly identify an "overcharge" in a system in which prices are fixed by third-party payers using either tax revenues or tax-subsidized funding?

Lawrance George Lux writes:

There are a number of numerial evaluations which can be made, and American medicine fails the test. There is the issue of medical worker productivity, or how many Patients are handled per worker. There is the issue of total Capital investment per Patient utilized. There is the measure of total Cost of medical facility per Patient. There is the estimated number of medical procedures used per Patient, and how many Procedures are handled per medical worker per day. There are any number of effective evaluations which can be constructed, but conservative Economists choose to ignore such modeling.

This becomes an important issue only when American medical practice proves to be inferior to foreign medical practice, as it means We are spending health care dollars in excess and in the wrong place. lgl

Jim Linnane writes:

The demand for health care services exceeds the supply. Demand is fueled by third party coverage (moral hazard) and ever-higher standards of practice engendered by malpractice litigation. In other countries health care coverage is provided by a monopsonist purchaser that can set prices. the result is a perceived shortage of health care supply. In the US providers even have the state on their side in restricting supply in the face of ever-increasing demand. Local hospitals may be overcharging because they have captured state regulators and created oligarchies in their service areas. Physicians are probably price takers, but since third party payers will not cover any health service unless it is ordered by a physician, there is a huge demand for the services of physicians. The real crime in health care is lack of information and lack of price sensitivity on the part of consumers. The current presidential campaign seems to be focusing on brining the market to health care. Kerry, in a real break from his party's past, is proposing to have the government pay for catastrophic coverage. One assumes that Kerry's strategy would have the consumer bear responsibility for health care costs up to some threshhold, thereby reducing or eliminating moral hazard for at least the first $X thousand of expenditures. Similarly, Bush is more openly pushing MSAs. There is hope.

Bernard Yomtov writes:


Kerry's plan would cover 75% of "catastrophic" costs, defined as annual costs in excess of about $30K in 2006, rising to $50K. The exact calculation of the threshold is not clear.

So the individual, or insurance company, is responsible for costs below this amount, as well as for the uncovered 25%. The plan talks about this payment being a reimbursement to insurance companies, so it's not clear to me whether it would also apply to uninsured individuals.

John Thacker writes:

Well, first of all from the data, it's really not clear that a country would want to maximize the number of hospital visits and admissions per capita. If something can be treated on an outpatient basis, or with drug based therapy, that's usually better.


The difference between $2000 and $4600 could possibly be explained in a variety of ways, and it's important to have good data. Rationing through waiting lists and the such is of course one well-known way. Another way is how the US tends to have the latest in medical technology available much more quickly than other countries. Very new treatments tend to be extremely expensive. (Consider MRIs, or bone marrow transplants when first available.)

As another explanation, the US also has a higher GDP per capita than most countries. I suspect that demand for health care rises very rapidly with income. (As a counter explanation that negates part of that, the US does have a younger population than most OCED countries, something that should become only more true. One should generally expect smaller expenditures-- although also fewer visits-- due to that.)

John Thacker writes:

As a very side anecdotal note, if dental and orthodontic charges are included in health care, the American obsession with straight teeth certainly raises very slightly the average medical expenses compared to many other countries.

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