Arnold Kling  

Health Care Rationing

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Mark Thoma reports that Paul Krugman writes,


the rise of medical technology ... makes ... medicine ... in which doctors call for every procedure that might be of medical benefit, increasingly expensive.

This is the position that I arrived at in my research on health care costs. That is, our health care spending is high because of the expenses involved in diagnosis and treatment, as we throw more technology (and also more specialists) at the problem.

Krugman continues,


So if costs are to be controlled, someone has to act as a referee on doctors' medical decisions. During the 1990's it seemed, briefly, as if private H.M.O.'s could play that role. But then there was a public backlash. It turns out that even in America, with its faith in the free market, people don't trust for-profit corporations to make decisions about their health.

The point about public backlash against HMO's is correct. However, I disagree with the suggestion that the American people resent health care rationing only when it is undertaken by the private sector. I suspect that the Americans who resent HMO's that hold down costs by denying potentially beneficial health care would be no happier with government doing the same thing.

An alternative, as Krugman points out, is to reduce the degree of insulation that consumers enjoy from health care costs. This would put consumers in the position of rationing their own health care. He criticizes this approach.


it's neither fair nor realistic to expect ordinary citizens to have enough medical expertise to make life-or-death decisions about their own treatment. A well-known experiment ... carried out by the RAND Corporation... found that when individuals pay a higher share of medical costs out of pocket, they cut back on necessary as well as unnecessary health spending.

This raises the question of what (or who) determines what is a necessary medical service. One could argue that if I choose to forego a medical service, then by definition that service is unnecessary for me.

Overall, although I disagree with Krugman's bias against the private sector and individual decision-making, I think that his latest column frames the issue much accurately than some of his previous efforts. Health care spending rises as expensive new forms of medical care are made available. To address this, we can either choose government rationing of health care services or a health care financing system under which individuals pay for a larger share of health care services out of pocket. Either approach would require a significant cultural shift from our current practice.


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TRACKBACKS (6 to date)
TrackBack URL: http://econlog.econlib.org/mt/mt-tb.cgi/416
The author at Life, Liberty and the Pursuit of ... in a related article titled Government Rationed Healthcare writes:
    What universe does Paul Krugman live in [Tracked on December 27, 2005 12:37 AM]
The author at btw.net Weblog in a related article titled Ok, this is a little over writes:
    TITLE: Ok, this is a little over URL: http://radio.weblogs.com/0115330/2005/12/27.html#a566 IP: 68.3.38.237 BLOG NAME: btw.net Weblog DATE: 12/27/2005 11:45:03 AM [Tracked on December 27, 2005 11:45 AM]
COMMENTS (19 to date)
spencer writes:
This raises the question of what (or who) determines what is a necessary medical service. One could argue that if I choose to forego a medical service, then by definition that service is unnecessary for me.

If I choose not to eat, eating becomes unnecessary for me.


You can do better then that.

Grzegorz writes:

PK states:
"It turns out that even in America, with its faith in the free market, people don't trust for-profit corporations to make decisions about their health."

Hmm, I wonder why?

I pay doctors, in good faith, to make educated decisions about my health. Introducing a middle-man/referee/judge (HMO) into this health evaluation process seems to muddy waters by possibly confusing the patient with conflicting information, raising the administrative cost of health care (middle-men/referees/judges must be paid), and I have to believe that treatment may be delayed; has anyone ever seen needless bureaucracy make a shrewd, insightful, and timely decision?

Of course, it's not whether you choose to eat, but what and how much to eat. Which is often the case with health care too.

If I didn't know better I'd say the person who wrote this, is completely ignorant of basic economics:

We're not going to have a system in which people pay for heart surgery out of their health savings accounts and save money by choosing cheaper procedures.

No kidding! What does he think the catastrophic insurance is for?

Or this:

Moreover, it's neither fair nor realistic to expect ordinary citizens to have enough medical expertise to make life-or-death decisions about their own treatment.

Again, that would be the same reason we don't slaughter our own cattle, build our own homes, or sew our own clothes. It hardly follows that that makes provision of food, clothing, and shelter a public responsibility.

Chris Rasch writes:

We're not going to have a system in which people pay for heart surgery out of their health savings accounts and save money by choosing cheaper procedures.

Actually, with the growth of medical tourism (1), many patients do indeed pay for heart surgery themselves (2):

One patient is Byron Bonnewell, who lives 12,000 miles away in Shreveport, La., where he owns and runs a campground for RVs. A year-and-a-half ago, he had a heart attack, and his doctor told him he really needed bypass surgery.

"They told me I was gonna die," says Bonnewell, who didn't have insurance.

He estimates he would have had to pay over $100,000 out of his own pocket for the operation he needed, a complicated quintuple bypass. And he says he actually decided not to do it: "I guess I figured I'd rather die with a little bit of money in my pocket than live poor."

But Bonnewell says his health was deteriorating quickly, when he read about Bumrungrad Hospital: "I was in my doctor's office one day having some tests done, and there was a copy of Business Week magazine there. And there was an article in Business Week magazine about Bumrungrad Hospital. And I came home and went on the Internet and made an appointment, and away I went to Thailand."

He made that appointment after he learned that the bypass would cost him about $12,000. He chose his cardiologist, Dr. Chad Wanishawad, after reading on the hospital’s Web site that he used to practice at the National Institutes of Health in Maryland.

(1) http://www.slate.com/id/2131601/
(2) http://www.cbsnews.com/stories/2005/04/21/60minutes/main689998_page2.shtml

James writes:

The question of what (or who) determines what is a necessary medical service is a simple one. The answer can be inferred from context by anyone willing to take the time to read the literature in favor of subsidized health care. If I want something and want someone else to be forced to cough up the cash to pay for it, it is a need. If that someone else doesn't want to pay, that's greed. Arranging the transfer is known alternately as a "social safety net" or "compassionate conservatism," depending on the affiliations of the person doing the talking.

Don Boudreaux writes:

I'm usually in unalloyed agreement with Arnold, but here I find that my evaluation of today's NYT column by Krugman is less favorable than Arnold's evaluation.

Krugman's framing of the issue is skewed and disingenuous. First, he suggests that that health-savings accounts are the only real privaate alternative to HMOs. Second, after failing to explain his assertion that health-savings accounts will be good only as tax shelters for rich people, he then says (rightly) that "insurance will always cover the really big expenses."

I suppose that what Krugman is driving at here is that some third-party payer will always be present (so why not the not-for-profit saints and solons who Krugman imagines working for Uncle Sam's health-care ministry).

But the problem is neither third-party payers per se, nor insurance paying "the really big expenses." The problem is that, for a variety of reasons, Americans today don't really have health insurance. Instead, we have pre-paid medical plans -- with one of those plans being a gigantic pool of taxpayers' money -- namely, the $350 billion Medicare budget.

Each American pays too little of his or her own health-care expenses out of his or her own pocket; so we overconsume. As we overconsume, we drive costs and prices higher.

Finally, Krugman later in this same column says flatly that "it's neither fair nor realistic to expect ordinary citizens to have enough medical expertise to make life-or-death decisions about their own treatment." Does Krugman suppose that proponents of less government involvement in health-care believe that MDs and nurses are superfluous -- that we are advocating self-treatment of illness? Or does he suppose that the unwashed are either too stupid to seek expert medical advice when they are ill?

Dewey Munson writes:

Y'all are kidding yourselves.

When the time comes everyone wants every possible treatment and wants the guy behind the tree to pay for it.

Insurance? Non-economists think insurance is a discount program.

I had a senior citizen (one of those who built this world) tell me that they should get their premiums back because they hadn't been sick.

Rick Gaber writes:
"So if costs are to be controlled, someone has to act as a referee on doctors' medical decisions." -- Krugman
"Every government intervention [in the marketplace] creates unintended consequences, which lead to a calls for further government interventions..." -- von Mises

THIS chart might afford a hint about some of the interventions which Krugman overlooks in order to call for further gummint intrusions (which he SOOOOO loves to do).

Jon writes:

Paul Krugman is partially correct: Most people's first choice for making decisions would be a private corporation that they could easily replace if they were unhappy; this does not exist in the medical insurance world. Because of this people would prefer the government over a for-profit entity that they could not replace.

Insurance is designed to spread out unpredictable costs. Most health costs are predictable by family history, genes, and current health, but we want to spread them out rather than let people with bad luck die.

The pure free market solution to health care for all but the rich works like this: When the cost of treating your illness exceeds what your family can pay, they take you home to die. This is what happens in China today.

You can argue that one can buy insurance, but no company can guarantee rates over the long term. Once you get sick or display a tendency to get sick, the policies you get offered will charge the expected cost of your treatment. Even with mandatory renewal laws, the companies can just siphon of the healthy people into new policies.

Robert writes:


THIS chart might afford a hint about some of the interventions which Krugman overlooks ...

None of the interventions marked on the chart produced any immediate change in the relative cost of medical services vs. general consumer prices. The decoupling of the two happened in the early 1980s, since which time consumer prices have experienced moderate inflation, while medical prices have experienced immoderate inflation.

One factor that I don't think get mentioned often enough is the role of federal R&D money. Over half the federal R&D budget is spent by the NIH. The government subsidizes the development of medical technology, but not its distribution. It should come as no surprise then if medical costs rise. The faster medical technology becomes obsolete, the less time it has to pay for itself, and so the cost of using it must rise.

James writes:

"The pure free market solution to health care for all but the rich works like this: When the cost of treating your illness exceeds what your family can pay, they take you home to die. This is what happens in China today."

Isn't that what happens in any system where the amount of money avaliable is finite?

Chris Bolts writes:
This raises the question of what (or who) determines what is a necessary medical service. One could argue that if I choose to forego a medical service, then by definition that service is unnecessary for me. If I choose not to eat, eating becomes unnecessary for me.

You can do better then that.

I think you simplify the argument just a tad, spencer. Eating, as opposed to a medical service is a universal necessity. I'd say the same is probably true about a medical service. However, how much you eat is a preference, just as what is a necessary or unnecessary medical service is. Most will probably agree that getting chemo for cancer is necessity, but not all would agree that get a physical is.

Craig writes:

Left out of this discussion is the influence of tort lawyers who have, I think, contributed to the increase in the number of tests ordered by physicians for fear of being sued.

Admitted anecdote: I went to the emergency room last month because I feared I was having a stroke. I had numbness in both hands and feet and it was spreading to my face.

I headed to the hospital, my blood pressure was 210/160. The excellent staff brought it down quickly but I ended up spending 3 days there until all possible tests could be run. The doctors were quite candid that they were worried about being sued were I to check myself out and suffer a heart attack.

That's not to say that they weren't concerned but their concern was certainly heightened by their fear of a lawsuit. I do want to say that within 15 minutes of arrival, I was in a bed in Emergency with an IV and a nitro under my tongue.

Within an hour I'd had an EKG (at the bed,) a chest Xray, a CT scan, and my heart was being monitored continuously at the nurse's station by pretty impressive technology.

I don't know that my Canadian friends a scant mile away across the Niagara River would have received the excellent attention I got in a hospital in downtown Buffalo. I hope we can figure out how to maintain the excellent and timely care we get here with some commonsense about the cost.

I could have gone home the first night at a savings of some $5000 and the odds would have been with me. Fear of lawyers was the ultimate incentive to keep me there.

I think we should "play the odds" and cut the lawyers out of it.

Jon writes:

Craig writes:

.. The doctors were quite candid that they were worried about being sued were I to check myself out and suffer a heart attack.
...I could have gone home the first night at a savings of some $5000 and the odds would have been with me. Fear of lawyers was the ultimate incentive to keep me there.

Actually not, you could have checked yourself out of the hospital whenever you wanted; you would have been asked to acknowledge you were leaving the hospital "against medical advice" so you could not win a case against the doctors arising from your early departure.

Don't you want there to be a strong financial incentive for doctors to be thorough? Without fear of lawsuits what incentive does the doctor have to be thorough, except for the goodness of her heart, which economists are loath to trust.

James writes (first quoting me):

"The pure free market solution to health care for all but the rich works like this: When the cost of treating your illness exceeds what your family can pay, they take you home to die. This is what happens in China today."
and then responding:
Isn't that what happens in any system where the amount of money avaliable is finite?

Actually James,this is not what happens in most developed countries and they have "finite" amounts of money. What happens is the money is pulled from other usages to support healthcare via taxes, or mandatory insurance premiums. Many people may still fall through cracks in the system, especially in the US. 5% of your earnings goes to shrink the cracks for elderly via your and your employer's share of the medicare tax.

Robert writes:


"The pure free market solution to health care for all but the rich works like this: When the cost of treating your illness exceeds what your family can pay, they take you home to die ..."


Isn't that what happens in any system where the amount of money avaliable is finite?

No, because traditionally, there is only so much that can be done. There is a point where no suitable treatment exists, even if you could afford it. What has happened in the United States in the last generation is a proliferation of treatments to stave off this point of giving up. On average, life has become only marginally longer, but dying has become significantly more expensive.

Randy writes:

Robert,

Re; "What has happened in the United States in the last generation is a proliferation of treatments to stave off this point of giving up. On average, life has become only marginally longer, but dying has become significantly more expensive."

Exactly right.

Boiled down, the issue is not health care or insurance, but ethics. What do the young owe to the old? What do the old owe to the young? And is the decision for society - or family?

Roger M writes:

We should also consider the supply of healthcare services, not just the demand. If we free the demand side, but leave the supply side under the monopoly of the AMA, not much will change. HMOs tried working on the supply and doctors trashed them in the media until politicians destroyed HMOs. Somehow, we have to inject free markets into the supply side of the equation. One place to start would be the costs of a medical education, which are insane.

Fritz writes:

Income drives health care costs just like income drives safety features on cars. The aggregate problem, too many low and non-GDP producers being treated with high-end medical technology.

resigned writes:

Curious, I'm not an economist and never had an economics class--but naively, shouldn't the injection of baby boomers into the medical system act to lower the costs of existing treatments? I would guess that without artificial supports, then eventually prices would drop. The questions would be, how do make sure that accurate information is available to consumers, and how to cushion the initial blow. Also, I think that we live in a much more dynamic economy than in the past. A number of people will change jobs in their life times. This is the rational behind having 401K plans instead of pensions. For the company, it is better because they know their obligations, for us it is better because we are not tied to the company. However, the current health savings accounts don't seem sufficient for this because health care costs have been artificially inflated. Is there any good way of making large insurance pools for people without company paid insurance, so that they will be more attractive to insurance companies?

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