Bryan Caplan  

What the Veterinary Medicine Piece Really Said

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Both Tyler and Megan are excited by a recent piece by Andrew Biggs that supposedly "seriously undercuts one of the major conservative arguments about health care:  that the main problem is consumers who don't bear their own costs."  Biggs' shows that spending on veterinary medicine has been growing at roughly the same pace as human medicine.  Does this mean that third-party payment isn't a problem after all?

Hardly.  If you read Biggs' full piece, he makes a crucial distinction between excessive spending and fast spending growth - and he still blames government for excessive spending:

[W]e spend hundreds of times more on ourselves than on our pets. The main reason for this is obvious: we value our own lives and those of our families more than we do our pets or other animals. At the same time, however, veterinary care is one of the few areas of health where we are directly confronted with difficult decisions regarding the costs and benefits of additional treatments. As the famed RAND health experiment showed, out-of-pocket costs can significantly affect the level of health spending without changing health outcomes.

This again highlights that the real issue with healthcare may not be the rate of growth but the level of health spending--and the fact that so much of it seems to be wasteful. This distinction is important because it shapes our policy priorities. The level of spending has different causes than the rate of growth of spending, among them our healthcare system's structural incentives to overspend. Rather than attempting merely to temper cost growth, plans that remove incentives for overspending, improve consumer choice, or pay doctors based on quality rather than quantity of service could reduce the overall level of spending.

Biggs' implicit point, I think, is that economic theory never predicted that third-party payment would lead to high spending growth; the standard prediction, rather, is simply excessive spending at every point in time.  You can see this point if you compare veterinary and human medicine.  But you can see it just as well if you compare e.g. American and Singaporean medicine.  Health care spending is rising everywhere.  But it still costs four times as much as a percent of GDP in the U.S. than it does in cost-conscious Singapore.


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TRACKBACKS (1 to date)
TrackBack URL: http://econlog.econlib.org/mt/mt-tb.cgi/2067
The author at Enemy of the State in a related article titled Humans vs Pets writes:
    [...]So to conclude, it is misleading to compare human health care with pet health care and claim that is proof that humans bear the costs because the rate of spending is in line with that of pets. The structure of both systems are entirely different. ... [Tracked on July 14, 2009 4:31 PM]
COMMENTS (5 to date)
Charlie writes:

Bryan,

It seems your just kicking the argument down the road. When I read the post, I immediately thought of Robin Hanson and the Rand experiment also, does medical spending make pets healthier at the margin?

If it doesn't make pets healthier at the margin, then it is evidence ending third party payments may not curb wasteful spending. If pet spending on medical care is much more than human spending, the argument runs the other way.

Charlie

Ernieboy writes:

Why not compare per capita growth in health care spending to per animal growth in vet services. At least control for differences in growth rates for the two populations. I don't have the numbers, but my guess is animals have grown faster than people.

Arthur_500 writes:

Supply and demand continue to define the arguments and encompass the effect of third-party payers. When there is defined source of revenue it creates a floor. I can't sell my services for $100/ hour if my clients can only pay $25/ hour. However if I know that a third-party payer will supply the cash then I will certainly demand it.
Look at litigation as a clear example of the creation of artificial floors. If I want to sue someone I will certainly seek the limits of their insurance coverage. If the person being sued works for someone such as a business or even better a government then there is no limit to what I can sue as they have Deep Pockets.

Veterinary care indeed places individuals in a position of determining what the price of life means to them. Is that test really necessary? Is euthanasia appropriate? And yet when we look at our own lives we want everything that can be supplied as long as we don't have to pay for it.

Mike Rulle writes:

Analyzing one's own behavior is just one data point. But it is truly an excellent one. We understand the emotions and feelings of the decision making process. We can do fairly reasonable "what if" analysis. We can compare one set of behaviors under certain circumstances with other behaviors under other circumstances. We can trace how our behaviors change through time. While no person is a perfect observer of self, there is far more accurate information about oneself than there is of any group of individuals in artificially constructed experiments.

I also think we are each very similar to each other. So while it is still one data point, it can help us reach conclusions.

Therefore! How can anyone think that 3rd party payment does not lead to higher health care expenditures? Even if the "cat and dog" study were to imply otherwise, I would conclude it was wrong. But this is so obvious. If one pays a fixed price "up front" for a "year's worth of goods or services", one is intuitively "incentivised" to acquire as much of that good as possible; as long as its marginal cost (even counting time spent) is lower than the perceived marginal benefit.

In health care, the marginal benefit can be very high, even if the test procedure is itself almost worthless. If it has even a .5% chance of finding something that some other test you already took did not, the "expected value" can be perceived as very high. The marginal cost in many 3rd party payment plans is virtually zero.

Buckland writes:

Meh.

It's hard to get excited about first derivative arguments when the comparable functions are of such different magnitudes.

Since the overall size of one market is approximately 200X the other, meaningful comparisons are the exclusive domain of academics and those who have the ability to waste other peoples money.

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