Arnold Kling  

Health Care Policy Update

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Ezekiel Emanuel with a solution based on vouchers. I think we have to head in that direction. With vouchers, you can put a finite budget on government health care subsidies. With service reimbursement programs, like Medicare, you have an open-ended spending commmitment, with obvious results.

Speaking of those results, The Congressional Budget Office is all over the health care issue and its impact on the budget outlook.

Finally, the Dartmouth crowd thinks that we might get a free lunch out of what I call corporate-style health care.


Atlas research has shown that the best, most effective, efficient, and appropriate health care is delivered by systems such as the Geisinger Clinic, Mayo Clinic, and others. Were lower-performing, higher-cost, higher intensity hospitals and providers to adopt the practices of these high value integrated systems, costs would be greatly reduced. Most importantly, patients would receive better care.


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COMMENTS (15 to date)
z writes:

Mayo is successful for a number of reasons, most of which can't simple be duplicated by some management approach.
1. Lots of paying patients. Success is more easily achieved when your clientele pays for your services.
2. Little local indigent population (the flip side of #1, not many no-pay patients). Even been to Rochester? They have much less of the urban blight that lends itself to million dollar patients (gun shot wounds, teen mothers with complicated pregnancies, infectious diseases which cost millions to manage over a lifetime like Hep C and HIV).
3. Success breeds success. Mayo has a long history as a leading medical institution. So, it's easy for them to recruit great faculty, staff, and trainees. You can't replicated that at some crap urban hospital in a crappy area.
4. Corollary to #2 is solid employees across the board. In an urban setting, it's hard to find someone that will reliably show up for work and work hard while there for the pittance that many of the entry level positions in a health care setting command. (Ask any hospital exec in a big city, it's tough to find reliable secretaries, transporters, stock room personnel, etc). But Rochester is a small, safe, relatively affluent city stocked with, for lack of a more politically correct term - hard working white people. This serves as a draw for similarly minded people. Try duplicating that in urban Philadelphia.

The Dartmouth group does a great job at identifying statistal trends in health care, but they have always done a piss poor job of understand the fundamentals underlying those numbers.

Oh yeah, I'm a doctor at a big east coast hospital.

floccina writes:

I am still pushing my own alternative. Government provided insurance with huge deductibles. A family deductible would be equal to the family’s last year’s adjusted income – minus the poverty level for the size family. Then if people choose to buy insurance (pre paid healthcare) to cover the deductable that insurance could be could be highly taxed. We could also not allow the providers of prepaid healthcare to call what they provide insurance.

Hopeful my plan would cause most Americans to pay for their own healthcare directly putting pressure on prices and hopeful causing people to put pressure on politicians to allow lower cost medical care providers (e.g. by easing licensing requirements).

My plan might not work but I think that it would at least clarify the debate.

What do you think? Anybody?

Dan Weber writes:

Overtreated holds up the Mayo Clinic as an example of excellent care at reasonable cost. VHA has duplicated it rather successfully, some say even better.

Peter writes:

z, while there is some truth to what you say, it is also true that the Mayo Clinic does a great job with elderly patients in the ICU, spending much less than the East Coast or LA hospitals, and getting better results. I think the real model should be Kaiser, and if we all controlled our dollars, we would all probably be in those kinds of systems. I think that the VHA is closer to that system than to Mayo

Jacob Oost writes:

Can somebody explain to me why pretty much every economist has abandoned the idea of a free market health care system in favor of some kind of government-operated or government-subsidized system?

Is it because they just expect that provider costs can't come down? That cost disease will continue unabated?

Why so little talk about doing away with licensing, freeing up the industry from all of the red tape it's covered with, stuff like that? The only discussions, even among economists who are otherwise very much followers of Friedman and Hayek, are about what the government ought to be doing, rather than getting it's mitts off the industry.

Jonathan writes:

It would be better if the plan stopped at a voucher program, nothing more. Simplicity is always best, but of course, complexity is more fun, therefore the Emanuel plan also includes the Establishment of a "National Health Board" to set the standard benefits package.

We will differ to a board, presumably made up of political appointees, the majority of whom will have little expertise in anything related to healthcare but will be experts in the art of allocating funds.

z writes:

In response to, "...it is also true that the Mayo Clinic does a great job with elderly patients in the ICU, spending much less than the East Coast or LA hospitals, and getting better results." Ummm, not sure what your point is. They have great ICU's, and do a great job of taking care of said patient's at reasonable expense. I didn't say anything to imply otherwise. My point remains, they do a great job at a lower cost due to manifold reasons that can't be duplicated as some 'system'. You can name a pop-warner football team the Steelers, and give them the Pittsburgh Steelers playbook, but that doesn't mean they're NFL playoff material.

Agreed, if we were all in control of our dollars, or, more to my liking, if we all had to take responsibility for our medical expenditures, things would be much different and there would be much less wasteful spending. And that, professor Kling is simple economics. Nothing like government interference to distort a marketplace.

John Booke writes:

No plan will work unless physicians are forced to reduce fees. That won't happen because there are no pundits, experts, or politicians willing to openly chanllenge our politically and socially powerful medical doctors.

Jacob Oost writes:

You got that right John. Any lessening of red tape or privatizing licensing into certifications is seen as "lowering standards" for care. And that's exactly how they want it.

El Presidente writes:

I think the notion that medicare spending is open-ended doesn't quite articulate the real nature of it. It is not infinite, but rather indefinite. There is an end, but it is not artificially imposed by a legislative budget constraint. It is imposed by our desire for other things; the opportunity cost of Medicare, so to speak. If we want to tighten the budget constraint, let's make an argument for doing so.

I wonder why we are more concerned with the price than with the quantity, the level of demand (disease). A budget constraint is fine, so long as it produces less disease or better health, not merely less medical care. If we focus on the most efficient means of preventing and combatting disease or promoting good health, then expenditures should naturally decrease. Shouldn't they?

El Presidente writes:

John Booke,

No plan will work unless physicians are forced to reduce fees. That won't happen because there are no pundits, experts, or politicians willing to openly chanllenge our politically and socially powerful medical doctors.

What about insurers? Should they be forced to reduce their premiums and copays? By how much?

Jacob Oost writes:

Uh, insurance fees are largely determined by provider fees. Of course, in our health care industry we have a perverse relationship between insurers and providers, in that providers stretch the elasticity of demand as far as they can for their own benefit, and the reason they can stretch it pretty far is because most Americans have decided that health insurance is something they *must* have.

And that's without even going into the effect government-subsidized care has on provider prices.

Anyway, my basic point is that greater price competition between providers (which, as long as the providers are oligopolistic because of the licensing laws, regulations, etc. probably won't happen) would lead to lower premiums. No need to force them, competition would bring it down, provided provider costs went down first.

El Presidente writes:

Uh, insurance fees are largely determined by provider fees.

Really? If so many people are insured, then the lion's share of a doctor's clients will be paying by way of insurance.

As you put it,

[M]ost Americans have decided that health insurance is something they *must* have.

Since there are fewer insurers than doctors, pricing power lies with the insurers more than the doctors. That is, because so many patients are insured and each insurer represents more customers than each doctor, insurers have more leverage and can force payments to doctors down, as they have for some time now. This is why new medical professionals are increasingly coming to the US from other nations. The cost of becoming a health care worker is cheaper there while the wage is higher here.

Why not subsidize medical school in the US more instead? That way the opportunity cost of becoming a doctor here would decrease, more institutions would train more of them, and the price of physicians' services would decline. This wouldn't require eliminating licensure as a quality control mechanism, and it would increase the affordability of care. Just an idea.

Jacob Oost writes:

Well, you are correct in saying that insurers affect provider prices, because they can only charge so high for premiums, which means they can only pay out so much to providers, but the problem is that the elasticity of demand for workers productive enough to merit employer-paid insurance has been stretched to the max, which raises prices for the uninsured. And as I said, this is all to say nothing of the arguably worse effect of government-subsidized care. The government commits to paying for a certain level of service more often than it commits to paying a dollar amount, so it commits to buy service at whatever the cost, and providers raise prices. Same thing happens with universities' tuitions and government financial aid.

The reason I don't advocate subsidizing medical school is for several reasons. The big one is that vocational training isn't a public good, it is a private good, and thus best handled by the market. Subsidize it, and it will either cost too much or too little, attracting too many or too few future doctors. Also, I think the government has already screwed up the higher education system enough with financial aid, guaranteeing some form of aid to even the least-productive, highest-risk, most-likely-to-wind-up-working-at-McDonald's-cuz-they-got-a-philosophy-degree applicants.

Take any industry that's all screwed up and I guarantee you it's an industry where prices are artificially set or manipulated through non-market forces (often due to the government).

Not to mention I don't think that licensure automatically guarantees quality control. In fact I'd even argue that they have nothing to do with eachother, it's really about constricting supply. Now, certification (in which people are certified as having met a certain standard of quality BUT non-certified people are allowed to work in that profession as well) meets the same alleged quality-control needs of licensure but without the supply restrictions.

JT Russell writes:

There was a time when, if you wanted to become a physician, the bankrolling required more than the velleity of simply making the making the choice and the financing appears.
Then in the 1950’s and 1960’s the (then) HEW came up with what seemed a simple solution to the health care conundrum: financial aid to medical schools. They planned to flood the market with new MD’s and so cause increased competition to lower the cost factor attributable to doctors’ incomes.
In the mid 1970’s I was a dinner guest of a brilliant couple of Washington health apparatchiks. He was (among other things) guiding the nascent EPSDT program. And she (the sister of one of the Brookings Institution’s leading economists) was eventually to become the Director of the National Center for Health Statistics. In short, not only were they broadly wired into the beltway health establishment, they had their hands on the steering wheel.
Another guest that evening was the wife of a health economist who had recently been jilted by her co-researcher husband. And she was getting back at him by blabbing about the results of their latest findings, before they had been published: financial support of medical education was having the opposite effect on health costs than they had anticipated!
Although the money given to Medical Schools had worked to increase the supply of physicians, there hadn’t been the expected depressive influence on doc’s incomes. They had found that wherever there were new MD graduates, they would produce medical care and make a handsome income while doing it. The equation was more docs=more procedures and higher medical costs—not lower fees.
By producing more Docs, Washington had increased the supply of costly medical care providers who continued to command a great return on the investment the government had made in their education.
There was amused consternation around the dinner table. Medical Economics had not responded to the “Law” of supply and demand. “Well, maybe we’ll do better with this new entity, The HMO.”

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