Arnold Kling  

What Makes Health Care Different?

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What I Told the Liberaltarians... Medical Liability and Tort Ref...

First, read Robin and Bryan on the issue.

My thoughts:

1. I do not think that the economic differences between health care and other goods are as fundamental as the difference between the believers in Expertism and the believers in Masonomics. We can all agree that outcomes in health, education, energy, are different from what would ideally want. But the Left concludes that to get better outcomes we need Experts to fix the problem, using the power of government. The Masonomists believe that when markets fail, use markets, because solutions are arrived at not by centralized experts but by decentralized trial and error.

2. Nowhere in the developed world do you see individuals paying for a substantial share of health care out of pocket. This includes the United States, where, if you take into account private insurance and government spending, the proportion of health care expenses paid for by individuals is even lower than in Canada!

I think that (2) is an important empirical fact. It suggests to me that there is a natural human aversion to seeing people pay for their own health care. We have to take this into account in thinking about health care policy, because it creates a dilemma for conservatives. The economically "correct" approach of having people take on more of their own health care expenses (using variations on catastrophic insurance) is anything but conservative. On the contrary, free-market health care is radical and therefore inherently dangerous. That is why I would prefer more cautious experiments with my ideas (say, at a state level) than a wholesale adoption.

What explains people's aversion to having a commercial exchange with their doctors?

1. Paying for health care is like paying for sex. People want healing to come as a gift, and paying for it demeans its value.

2. People who need health care are suffering. When someone is suffering, to compound their suffering by demanding payment feels immoral. I have noted the similarities with usury--which was deemed morally repugnant because back in the day the borrower was likely somebody who was having trouble feeding his family, not somebody who was trying to develop a fancy shopping mall.

3. Robin's view is that health care is something we want to give to others. It isn't so much whether your terminally ill grandmother wants hip surgery or not. You want her to have the best quality of life possible in what little time remains. Robin would say that, even more important, you want to signal to her and to others that you want this.


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COMMENTS (20 to date)
E. Barandiaran writes:

Arnold, two comments.
First, on Expertism. There are false believers and true believers in expertise. False believers are usually American liberals (elsewhere socialists) and most true believers are welfare economists (about the latter ask Jim Buchanan).
Second, if you want to argue that there is a natural aversion to seeing people pay for their own health care, you should provide historical evidence of changes over a long period of time about it. In my lifetime, a period in which there has been radical changes in technology, I have not seen the sort of changes in attitudes that could support your position (your reference about usury fails to take note of how much repugnancy has declined in the past three or four centuries).

johnleemk writes:

Excellent points. Unfortunately this may be why the hackneyed argument used by healthcare economists, which Bryan criticised the other day, doesn't go away; people really really want free or subsidised healthcare, to a degree more than they want free food or "universal balloon ownership." In this case, the most meritorious approach may be to make like Singapore and figure out the best way for the market to provide subsidised healthcare.

I would also add that some features of modern healthcare innately make markets more difficult -- though far from impossible -- to function. Measuring results is a particularly difficult thing to do, so more often you're not paying for actual improvement in health or quality of life -- you're paying for the knowledge that you're doing everything which can be done. Hence point #3.

kebko writes:

Essentially, it's a problem of rationing. In most markets, prices work amazingly well at rationing goods, but we are very uncomfortable with that mechanism in health care. But, the other options for rationing (having the insurance company decide, having a government bureaucrat decide, using waiting times, etc.), are all just as unsatisfactory.

I think one way to ration healthcare which would be satisfactory would be to eliminate intellectual property protections on healthcare innovations. I would expect innovations to drop greatly, but prices should drop also. We would be rationing healthcare through opportunity costs, which most people find acceptable.
We could continue innovation through government R&D, which is not ideal, but it's a lot better than having government control over the whole market.

Eventually, medical care will mature to a point where new technology lowers costs instead of increasing them, and we'll be through the looking glass at that point.

English Professor writes:

I don't believe that any of Arnold's 3 points gets at the real issue, which is democratic ideology. The basic (often unstated) argument is this: everyone in a free society should have equal access to the available stock of health care. If the poor or the working class will have trouble paying, then it must be provided for them because their lives are of equal value with the lives of the better off. It's as simple as that. Economic arguments that demonstrate that universal coverage will have deleterious effects on the quality of health care are irrelevant. This is a "justice" issue.

Les writes:

What makes medical care different is that we don't want to deny it to those who cannot afford it.

Everyone else can buy insurance for medical care.

That makes the solution simple and easy. Give vouchers for free basic HMO style medical care to the impoverished.

For the rest of us, do nothing. The market will take care of everything - so long as government does not interfere with market processes.

Thomas DeMeo writes:

The vast majority of consumers do not have the means to deal with the cost spikes or the randomness of their health needs. You can be poor and take a bus to work instead of buying a car, but you can't put off cancer for a couple of years while you save up for treatments.

These spikes also correlate with illness, which often means we are unable to earn money when we most need it.

Insurance serves to smooth out the expense and the risks.

Bryan Caplan writes:
Nowhere in the developed world do you see individuals paying for a substantial share of health care out of pocket.
What about Singapore, Arnold?
Dezakin writes:

The citystate where until recently chewing gum was illegal, there's a death penalty for drug offences, and a large problem with people urinating in elevators?

Dr. T writes:

"1. Paying for health care is like paying for sex. People want healing to come as a gift, and paying for it demeans its value."

This is untrue. Studies have shown that patients got better faster when they paid more for their medications. This may also be a factor in the success of specialists who cost more per visit and achieve better outcomes and faster recoveries than generalists. (Of course, much of that improvement is due to knowledge and experience, but some may be due to cost sensitivity.)

My own observations are that people who get free or nearly free health care take that care for granted. They are less likely to follow instructions, less likely to take medicines as prescribed, and more likely to return with complications.

People want free health care because illnesses can be expensive, and people don't budget for them. I was astonished to learn how many people live from paycheck to paycheck despite having solidly middle-class incomes. For them, a sudden $90 doctor bill and $80 pharmacy bill becomes a minor crisis. They want HMOs or Medicare-for-all so they won't have to worry about "unexpected" bills.

SWH writes:

I think Dr T is closest to the mark. In no other market is a customer as likely to be financially ruined for life, on pure chance, as in a health care market without distributed risk/cost. No matter how careful with money they might be, most Americans would go deep into debt to pay for even basic care for any of a variey of not so unlikely health events beyond their control. THAT is why we all are adverse to direct responsibility for health care costs. This wont change so long as we have the wonderful, gold plated, expensive, health care that we do.

We are all driving around in vehicles of life. In our present system, if our vehicle gets hit, it must be repaired in the Rolls Royce repair shop. The economics of this game will not change until we find a way to provide toyota and chevy repair shops. In many countries where they only repair "toyotas" and "chevys", health care is less expensive.....any just as good for the toyotas and chevys.

Casey writes:

"Eventually, medical care will mature to a point where new technology lowers costs instead of increasing them"

Ha, ha, ha!

So, in addition to some of the other great points above, this is one factor that 'Makes Health Care Different' to stay with the theme of the post. If you don't die of one thing, you'll die of another. If we prolong your life, especially your non-productive years (be they old age, or welfare dollar consuming lazy/chronic poor decision makers at any age), you'll likely incur additional medical costs. We're now able to cure a host of disease that would have, even just a few years ago, killed those who were afflicted with such conditions is short order. Now they live longer. Case in point -- if some 55 year old unemployed guy comes in with chest pain and we diagnose him with critical coronary stenosis and he gets a bypass, we saved his life (for something in the ballpark of $100k or more factoring in rehab and such). Now with heart disease covered, he goes on to develop prostate cancer, or color cancer at age 65, and racks up another $100k or so treating that illness. Rinse, wash, repeat times millions of Americans a year.

Healthcare isn't making widgets, it doesn't get 'cheaper' the better we get at treating illness and prolonging and improving life.

hacs writes:

A naive question about heath care (hc) treatments as hc-technologies which produce quality and quantity of life.

When a microchip is created in a laboratory, before the commercialization stage, it is reengineered ad nauseam until its cost and reliability are nearly efficient.

Does that process happen with the hc-technologies?

If not, why?

If yes, why are they so expensive?

kebko writes:

Casey,

Be careful. If your sharp reaction is due to a misunderstanding or a lack of understanding, it might make you look churlish.


hacs,

I think the answer to your question is that if for $10,000, you have a cure for my cancer that is 50% effective, but someone else comes up with something that is 70% effective, I would go with the new treatment, even if it cost $100,000. So, effectiveness trumps everything else, even if a lot of work is put into efficiency. Once things become nearly 100% effective, though, the effect changes.

John Fembup writes:

I wonder how anyone can confidently assert that "X is the solution" when it is so difficult to find even one roomful of people who agree on the problem in the first place. It's the seven blind swamis raised to the nth power.

This string of comments illustrates what I'm saying - and I don't mean to suggest that anyone's perspective is "wrong". Lots of intelligent comments, most suggesting different things because people just see things differently, value different things, and naturally demand different things in their "solutions".

In the present situation, acting because "we gotta do something, now", legislating a plan that is largely unread, undebated, unpriced, and not understood, might be just about the most dangerous path the nation could follow.

Moses led the Israelites out of the wilderness after 40 years. OK, health issues are complex. But, still . . . I just don't see us getting out of this wilderness any time soon - with or without the administration's plan (whatever it may really be).

Joe Cushing writes:

I find it interesting that you compare paying for health care to paying for sex. You could extend this to companionship or love. In most parts of the world, including America, most men pay for sex and companionship in indirect ways. Most women recieve payment. This is true even when women earn their own money. None of us like to think of it this way.

hacs writes:

Again, a naive question about heath care (hc) treatments as hc-technologies which produce quality and quantity of life.

Why are some criteria about efficiency of cost and reliability of hc-technologies not considered by FDA, AHRQ, etc., before they authorize those hc-technologies (not only effectiveness)?

Casey writes:

"Why are some criteria about efficiency of cost and reliability of hc-technologies not considered by FDA, etc"

Because our society and politicians are averse to addressing the question of 'Is it worth $100k to add a few years to the life of [an obese smoker alcoholic drug-user who has never worked in their life, a 92 year old lady, the premature new born that will never live a healthy and productive life but we can keep alive with numerous medical devices for years]?'

"I'm sorry, based on our calculations, we cannot provide your mom with this treatment because it's not cost effective in her case." How would that conversation go over in the media?

And, what exactly, is your point?

"Casey, Be careful. If your sharp reaction is due to a misunderstanding or a lack of understanding, it might make you look churlish." I didn't mis- or not understand any part of what I responded to. I'd be interested to know why you think I did. You response is about as valuable as "If a really big meteor hits the earth, it might turn you into a crisp."

Dick White writes:

I don't know if this is factual but let's say that (1) the truly indigent continue to have access to Emergency Room delivered health care, (2) that such care continues to be time consuming for the patient (large opportunity costs) and (3) reasonably effective immigration programs are established. Would we then still have a "health care crisis"? Of course health care costs will increase but that's attributable to our demand for the care and we're prepared to pay for what we demand.

gnat writes:

1. “I do not think that the economic differences between health care and other goods are as fundamental as the difference between the believers in Expertism and the believers in Masonomics.”

The main difference I see between Masonics and non Masonics is that when markets fail the later ask ‘why did the market fail’? ‘Can we alter institutions to eliminate the failure’? With Masonomics the goal seems to be (in your words) “markets fail trust the markets”. The difference is in ends and means. For non Masonics, the market is the means, for Masonics the ends. Masonics never trouble themselves with the lack of market coordination relating to the organization of the market, the complexity and non transparency of the product and service, the fact that the market does not generate options that can be easily understood. For example, healthcare providers are organized in stove pipe fashion by specialty rather than by my healthcare outcome. The result is each test, specialists, etc has overhead costs and is poorely coordinated with other specialists. Also, healthcare involves predictable routine events and unpredictable events. Chronic or unexpected random illnesses become predictable once the risks are known. Risk adverse consumers should be able to insure against these illnesses. The current insurance industry is poorly structured. In all the healthcare discussion I have not seen any that bothers to ask how the market can be made to work.

2. “Nowhere in the developed world do you see individuals paying for a substantial share of health care out of pocket.”

This statement is at best confused. First, it is well known in industries I have been associated with that consumers prefer flat rate predictable prices/expenses to unpredictable ones. This is what most insurance plans do, they provide prepayment and generally have caps and copays. You do not distinguish between these flat rate prepay plans and per unit pricing that you obviously prefer. The high expenses associated with a healthcare event suggests that consumers will always prefer flat rate. Second, you would rather the individual make the choice of taking the salary or buying healthcare. Today, the employer offers various plans—including generally a HSA plan—and does not get to keep income paid in compensation. The problem is most employees suffer “time discontinuity”—they undervalue future benefits relative to present benefits.

shayne writes:

Several valid points are listed here, but like the points made in the overall national debate are only superficially developed.

First: I would argue that Dr. Kling's item 2 above ("Nowhere in the developed world do you see individuals paying for a substantial share of health care out of pocket. ..." is entirely wrong and wrong-headed. The Medicare deduction from my payroll check is out of my pocket. The health insurance premium paid by my employer is deferred income that is out of my pocket. ALL health care expenditure, in one way or the other is out of my pocket in the sense that it is diverted to the health care industry in lieu of other uses. A central issue is that it is not only out of my pocket, it is out of my control.

Second: 'kebko' is right (along with others) that this is ultimately a rationing problem. Either government regulation or market forces will impose the rationing. Unfortunately, the rationing phenomena is being discussed only in a national/societal context - not on an individual or even family unit basis. I am perfectly content handling my own rationing for health care as well as for other consumption. This goes to Dr. Kling's reference to item 3 above on Robin Hanson's perspective of "something we want to give others". I would quickly add, "as long as someone else is paying for it." I wonder how many people would actually pay for the hip surgery for their terminally ill grandmother, absent government or insurance subsidy.

Third: Government (taxpayer) subsidy is only discussed in terms of some guaranteed government payment outflows to the health care service providers. Where is the discussion of adjusting individual/family-unit savings and and health care expenditure control by adjusting the current tax codes? (see below)

A recommended Health Care Reform approach that's NOT being discussed:
Adjust the tax codes to incentivize individuals (and/or immediate family units) to make their own decisions on rationing health care.
1.) Make 100% of income diverted to a "health" savings account - up to a max limit of $10,000 to $20,000, to cover a high insurance deductible - fully deductible from income taxes. (similar in concept to diverted 401K retirement income.)
2.) Make 100% of catastrophic health insurance premiums paid during a year fully deductible from individual income taxes, subject to some reasonable limit. (deductibility shifted from business to individuals.)
3.) Make 100% of actual "out of pocket", or out-of-savings account (#1), expenditures fully deductible from individual income taxes - limited to the annual insurance deductible limit established for #1 above. (similar to allowed no-penalty draws/loans from 401K for certain expenditures.)
4.) All or part of the above applicable to immediate family members as well as the wage-earning individual. (to help with family decisions regarding "grandma's hip surgery.")
5.) An absolute fixed annual taxpayer outlay to medical service providers for the poor. (similar, but far smaller scope, to the current reimbursement system established to cover the "mandate" service providers have to provide "stabilizing care" for those who cannot pay.)

The recommendations above have several merits that may not be immediately obvious:
a.) Government is largely removed from the health care decision process, except for the extremely poor, and the decisions are shifted to individuals, family units and providers, where they should be.
b.) Government (taxpayer) mandated subsidy outlay to service providers for the extremely poor "stabilization mandate" are small, fixed and guaranteed - assuring at least a nominal flow of income to service providers to service the mandate. Those service providers can (and should) resort to charities or other voluntary means to enhance their reimbursements for service to the poor.
c.) Government's potential tax revenue loss due to the changes is limited by virtue of the health savings account and insurance premium tax deductibility limits stipulated above.
d.) The "pre-existing conditions" insurability problem is addressed by establishing a relatively high (and possibly adjustable) level of tax deductibility for catastrophic insurance premiums (see 2 above and e. below), and bringing charity (voluntary outlays) for those with such conditions into play for reimbursement for service providers.
e.) True competition is restored to the health care insurance and health care provider industries. Competition will reduce premiums for catastrophic overage of basically healthy people/families, can adjust up or down for lifestyle choices (smoking, obesity, rugby playing, or even "premium care policies", etc.) - well within premium tax deductibility limits, and adjust to high levels for known conditions. Much like auto insurance premiums are adjusted for known risk factors.
f.) Businesses of all sizes are relieved of the burden of providing employee health insurance. But they have the option of providing "premium policies" or other cash payroll incentives to attract employees.

What "problem" have I missed?

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