Arnold Kling

Kling and Mankiw on Health Care

Arnold Kling
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I talk for an hour with Russ Roberts, here. I'd love to hear your comments. Don't forget to vote for econtalk in the podcast awards.

Finally, Greg Mankiw raises some issues with health care statistics.

1. International comparisons of longevity are distorted by things like homicide rates and low-birth-weight infants.

2. The number of uninsured is boosted by: illegal immigrants; people eligible for Medicaid who have not signed up; and people earning over $50 K per year

3. Increasing expenditures on health care is not necessarily a bad thing.

Before I started delving into health care economics, I was thinking along similar lines, all of which tend to defend America's health care system. But I wound up in a different place, because of two facts. The first fact is that most of the "surge" in health care spending in the past 30 years has been in procedures involving specialists and high-tech medical equipment. The second fact is that comparisons of groups of people receiving different levels of these types of services almost always show no difference in outcomes. This leads me to believe that we make extravagant use of medical procedures with high costs and low benefits. We are, in Shannon Brownlee's term, overtreated.

We might be healthier if we spent less money on health care.

UPDATE: I prefer Clive Crook's piece (link may not work at some later date, because of the way they over-write his columns at National Journal) to Mankiw's.

I don't want to be in the position of defending America's health care system. The position I want to take is against demagoguery, whether it comes from politicians or pundits. The demagogues say that we can continue to insulate people from costs using employer-provided health insurance and Medicare, plus insulate more people through "universal coverage," and afford it all.

You remind the demagogues that Medicare and employer-provided health insurance are both unraveling on the financial end. They say, "Oh, right. We have to cut costs."

But cutting costs means changing health care as we know it, in order to reduce the extravagant use of medical procedures with high costs and low benefits. That means either drastically reducing individual choice (by having government dictate which procedures can be done) or drastically increasing individual responsibility (my approach). What the demagogues won't tell you is that they are forcing us down the path of government rationing, when some of us might not like that so much.

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The author at amcgltd in a related article titled Healthcare Discussion writes:
    Arnold Kling's latest discussion of the economics of health care: ... The demagogues say that we can continue to insulate people from costs using employer-provided health insurance and Medicare, plus insulate more people through "universal coverage," ... [Tracked on November 5, 2007 3:29 PM]
COMMENTS (15 to date)
Josh H writes:

But aren't these two separate questions? One is whether the US or countries with more government health care are doing a better job. The other is whether the US can do a better job than it's doing now.

Punditus Maximus writes:

I . . . guess. I mean, one of my hobbies is studying health care, I've got multiple family members in the business, and I consider myself overall a fairly well-educated guy.

But many of my health care decisions, in retrospect, just weren't the right ones at all -- and many of them were extremely difficult to make, even with the information I had. And I have consistently foregone treatment for some of my chronic conditions due to cost concerns.

Yes, we are going to need government rationing. But that's so far superior to our current system, which has rationing based on luck, aggravation and deception, that I have to be in favor of it.

Stan writes:

We all need to be reminded that we are judging outcomes based on the current policy environment. That is, the environment where the U.S. has a somewhat free market health care system that leads in innovation. Other countries are basically free riding on our innovation.

We can say that, yes, in the short run government health care would be preferable. But if we look at the long run, without the U.S. as the lead innovator, and location of huge profit incentive, will the outcome of government rationing be preferable? I doubt it.

This doesn't even take into account the moral/ethical question....

Brian Goff writes:

Way too little attention is devoted to point #3 -- increasing HC expenditures is not necessarily a bad thing. For me, take out the "necessarily," and you have the most important but forgotten point in the whole debate. I make this point in Chapter 4 of my 1999 book, Spoiled Rotten. When did we convince ourselves that HC expenditures are the equivalent of pollution so that less is better.

No doubt, 3rd party payments induce more expenditures than would otherwise be made -- the high cost-low benefit issue. Private insurance has some methods to limit the most extravagant and unproven expenditures but such methods don't eliminate the high cost-low benefit outcomes.

My answer is so what? We are an unbelievably rich society and HC is a luxury good, so why shouldn't we spend a lot of money to keep grandma, uncle Bob, or young Susie alive for 18 more months? Do we really want to start targeting reductions in spending -- to what aggregate end? So expenditures shares on other luxuries such as on i-phones or no-limit poker can grow even faster? Is our objective to artificially constrain ourselves to the same choices faced by economically-limited societies?

General Specific writes:

"That means either drastically reducing individual choice (by having government dictate which procedures can be done) or drastically increasing individual responsibility (my approach)."

The phrase "increasing individual responsibility" sounds good, but what does it mean in practice? Doesn't it imply rationing based upon ability to pay?

An honest and open discussion of the health care problem should include specific mention of those procedures which will likely be reduced in the future--in order to increase coverage, improve health, while minimizing or reducing expenses.

I'm not hearing that. Yet. The price mechanism is a means of rationing, pricing some consumers out of the market--by choice or inability to pay. Let's start talking about the specific tradeoffs individuals will have to make in the "individual responsibility" realm.

Barkley Rosser writes:

You are probably right that high use of costly high tech methods is the most important cost driver, along with intensive efforts to save people at the end of life. However, two others, which suggest a possible left-right political deal, are the excessive paperwork used by our private insurance system and the high costs of malpractice insurance.

Mike writes:

It seems to me that a very easy solution to the health care problem that preserves choice and eliminates the problem of health insurance availability for low income people is to give everyone a voucher to pay for a minimum mandated high deductible, high co-pay catastrophic health care package perhaps funded through a value added tax. This would be very expensive but most of the higher taxes would be recouped by the voucher (which would apply to most people who are already covered by employer paid insurance).

Then eliminate the tax deductibility of health care insurance but allow full deductibility for health care expenditures. These two would be approximately offsetting. Thus, government would be providing an indirect subsidy for every day expenditures via the tax deduction and full coverage for catastrophic health care. If employers want to provide insulation insurance to their employees or if the employees want to suppliment their voucher with expensive upgrades they are free to but must pay for it without tax subsidies. In effect they are prepaying for health care through their insurance but they aren't sending the bill to everyone else.

Note that this is strictly a health care financing solution. I feel strongly that provision of health care must be private sector oriented since you must have incentives to succeed as well as have the weeding out of those institutions who fail. Government run health care has no protection to society from failed service providers. A failed government supplied service becomes interest group protected resulting in poor services and higher taxes to enable and protect the failed institutions.

ed writes:

I'd like to read more supporting the idea that eliminating the excessive "transaction cost" features of private insurance (billing, negotiating, litigating, etc.) are small enough to be called "rounding error."

Punditus Maximus writes:

My understanding is that malpractice costs rose recently due to collective poor investment decisions of the insurance companies, rather than any change in the underlying costs.

Further, malpractice insurance costs are a tiny percentage of overall medical costs, about 3% of doctors' gross income.

There is no grand bargain to be had, because the notion of reducing medical costs via removing a patient's remedy against incompetence is absurd from start to finish.

Rick Stewart writes:

I am a 57 year old male. I pay $204 per month for a zero co-pay $5,000 annual deductible health insurance policy from Blue Cross/Shield. I've never 'collected' a penny because, thankfully, I've never needed more than $5,000 in medical care in a single year. I consider each health care dollar I spend wisely, since I have to write a check for it.

At the Federal minimum wage of $5.85 per hour I would have to work about 35 hours a month (excluding taxes, a fair assumption at minimum wages) to pay for my health insurance. This approximates to working an extra day each weekend, perhaps a Friday night shift at a fast food restaurant, work I understand is easy to find.

Everyone in America can 'afford' health insurance. The idea that it needs to come from your employer, or the government, just doesn't make mathematical sense. Personal responsibility means going to work on Friday night, and using your wages to buy health insurance.

ed writes:

Of course, that insurance doesn't buy you anything at all unless you need more than $5,000 in care. If you need that, you might be too sick to go to work.

Still, a good comment to put things in perspective.

Punditus Maximus writes:

If you make the Federal minimum wage, your posited $5,000 deductable comes out to approximately 1/3 of your annual salary, assuming 45 or so hour weeks.

That's not a reasonable deductable for a person or family in that situation, so their premia are going to be nontrivially higher.

spencer writes:

I basically agree with your analysis of the problems with US health-care.

The solution is simple. Tell your 60 year old mother that was just diagnosed with cancer that there is nothing we can do about it.

Are you ready to accept this solution?

That is what the British do.

Punditus Maximus writes:

Spencer -- as versus now, when the insurance company refuses to fund treatment instead? If you even have insurance?

Brennan writes:

Following is a comment to the Econtalk podcast, but I am posting here as well.

First an aside and then a longer post on an issue touched on in the podcast. The aside: Arnold Kling stated that health care costs appear to be excessive compared to health outcomes given that longevity in the United States is the same as in other countries that spend less. Longevity is not the only measure of health outcomes. Many other goods are purchased as well (e.g., time/convenience and the ability to remain active).

Now the main point. I have always thought that auto mechanics are a good analogy to doctors when thinking of solutions to one of the possible sources of market failure in health care: the suppliers of the goods (the doctors and auto mechanics) effectively demand the goods (by instructing the patients/car owners as to which tests and treatments should be provided). I was glad to hear the podcast discuss this issue, but don't think it went far enough (although Russ Roberts almost came back to it at the end with a discussion of car insurance for oil changes).

Russ Roberts indicated that the way he solves this problem is to find a car mechanic he really trusts. The transaction costs to that solution are fairly high, and the market has found another (and I think better) solution. The car makers have internalized the cost of repairs, and the consumer pays for that cost in the price of the car. My experience is that vehicle warranties (on both new cars and used "certified" cars and used cars purchased through the national vendors) have become much more comprehensive and extended warranties are much cheaper and more comprehensive (I used to never purchase them, but have with my last two cars). At least one car maker I know of (BMW) has even internalized the routine maintenance (oil changes) given that the failure to obtain that maintenance may cause more costly warranty claims.

Perhaps the pervasiveness of third party payment systems is due to the high transaction costs of educating medical consumers or finding trustworthy doctors and providers. The internet may reduce some of those costs, but my guess is that most consumers only do the research after obtaining a diagnosis (and not research on whether or when to obtain tests and care in the absence of a diagnosis).

Ultimately this analogy would suggest that HMOs (providers who both provide care and take on the insurance risk) as being the best solution to the transaction costs of finding trustworthy providers. And yet, my experience (I am an attorney who works with employers on their benefit plans, including medical plans) is that HMOs have dramatically declined in popularity (to the point that many employers do not offer them as an option). What's going on here? Is the analogy wrong? Interested in the thoughts of others on this point.

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