Arnold Kling  

Bernanke, Orszag, and Kling on Health Care

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An Attempt to Answer Bryan's Q... Distress, Moral Intuition, and...

Ben Bernanke, who I think of as center-right, says,


Per capita health-care spending in the United States has increased at a faster rate than per capita income for a number of decades. Should that trend continue, as many economists predict it will, the share of income devoted to paying for health care will rise relentlessly. A piece of wisdom attributed to the economist Herbert Stein holds that if something cannot go on forever, it will stop.

...From the economist's perspective, the question of whether we are spending too much on health care cannot ultimately be answered by looking at total expenditures relative to GDP or the federal budget. Rather, the question, whatever we spend, is whether we are getting our money's worth. In general, good information and appropriate incentives are necessary to allocate resources efficiently. In health care, the necessary information should include not only the clinical effectiveness of certain tests or courses of treatment but also their cost-effectiveness. As the regional comparison of health-care costs illustrates, cost-effective approaches may be at least as useful as more costly approaches in delivering good health outcomes.

Peter Orszag, who I think of as center-left, says,

The single most important factor influencing the federal government’s long-term fiscal balance is the rate of growth in health care costs, caused largely by rising health care costs per beneficiary.

...Providing more information on the “comparative effectiveness” of alternative medical treatments, and changing financial incentives that encourage providers to engage in expensive treatments and procedures may help shift professional norms to improve efficiency and restrain cost growth.

I find it difficult to discern a difference between the two. It would be hard to discern a difference with the first half ("diagnosis") of my book, Crisis of Abundance. That is the part that Jason Furman praised in a forum two years ago. Furman, who was recently named economic policy director for the Obama campaign, proceeded in the forum to condemn the second half of my book--its policy prescriptions.

The point is that economists are in fairly broad agreement that health care policy is unsustainable and that cost-effectiveness needs to be brought into the picture. My view is that the way to do that is to give consumers the means, the motive, and the opportunity to make decisions based on cost-effectiveness. Other economists tend to see a larger role for government in determining cost-effectiveness.


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COMMENTS (5 to date)
Lord writes:

It will take the government to provide either the means, motive, and opportunity, or determine the cost effectiveness. As much as I would like to believe the former would be easier, I seriously doubt it. Even while some may be capable of becoming their own physicians, most probably are not, and many certainly are not.

spencer writes:

You argue that the individual patients freedom to switch to another doctor or other health care supplier will force the system to improve as happens in other parts of the economy.
The greatest government provider of health care is Medicare. But the individual Medicare consumer is completely free to shift to another doctor or other health care provider at any time. For all practical purposes this means there Medicare already offers your proposed solution.

When your father first entered the hospital recently you blogged on many of the frustrations you encountered with the system. Yet I saw nothing in any of your blogs about your experiences of your even considering changing doctors or hospitals. Why not, you had that ability even though your father was covered by Medicare and you obviously were a more informed consumer then most patients.

I suspect I know your answer, and it will not support your argument against Medicare.

Dr. T writes:
...the question, whatever we spend, is whether we are getting our money's worth.
I do not believe this is correct in the health care market. People in the U.S. spend billions of dollars per year on worthless snake oils, nostrums, tonics, homeopathic waters, copper bracelets, magnet therapies, crystals, naturopaths, homeopaths, chiropractors (for non-spinal problems), therapeutic touch nurses, feng shui 'experts,' and acupuncturists. These expenditures have no medical value except for placebo effects and the slight lift in mood from believing that you took positive action on a health problem.

A significant proportion (25-50% by my estimate) of standard medical care also has very little value. A good example is when a physician prescribes an antibiotic for what is almost certainly a viral infection. The average person does not know enough to judge the value of medical care, which is a major reason why medical care costs so much. Economic theory needs to take medical ignorance into account before trying to predict trends or devise solutions.

My proposed solution has two parts. The first is restructuring health care business practices such that the majority of persons pay for routine care out-of-pocket. This would make people more sensitive to the costs of health care and more willing to question the value of the care. The second part of my solution is to encourage people to get expert second opinions about care. These could be from other practicing physicians and surgeons or from a new type of health care specialist whose expertise is in giving medical advice to lay persons. This would make people more educated about health care. Thus, we would have people more sensitive to cost and to value. (Well, I can dream, can't I?)

Z writes:

"cost-effectiveness needs to be brought into the picture." That can have broad implications when it comes to health care.

I am a physician, and there is rampant waste within medicine - bureaucratic, ineffective treatments, corruption. But, if you want to look at cost-effectiveness, what is the 'cost-effectiveness' of spending millions on a singe premature child that will never live a normal life (there are at least 10 kids in the ICU at the hospital here right now that fit this description). What about the billions in care for trauma patients that were involved in traumas while committing crimes, or doing other stupid things - it's not of much value to society to 'fix' these people at society's expense. What about the 80 year old with multiple cancers whose life we can prolong by one month - for $150,000 in care. Until someone is willing to let people die at the door of the hospital, directly through legislation, or indirectly through rationing, the American health care system will never become 'cost effective' and costs will continue to spiral out of control.

fundamentalist writes:

This issue is far more serious than just cost effectiveness. Health care spending is consumption. Increased consumption equals less savings and therefore lower investment. Lower investment translates into lower productivity, wages and standard of living.

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