David R. Henderson  

Tyler's Triple on Health Care

Chauffered America, Strip Mall... The Longstanding Debate over N...

Hey, it's baseball playoff time and the article is in the New York Times and so of course I'm going to use a baseball metaphor. In his column today, Tyler Cowen addresses many of the problems with having government mandated and subsidized health insurance. The whole piece is, as Tyler would say of others' work, well worth reading. Here are some highlights:

. Marginal tax rates. Tyler points out what others have pointed out before--see, for example, Greg Mankiw's October 10 post--but something that hasn't got nearly enough attention. The phase-out of the subsidy over an income range imposes a steep marginal tax rate on additional income for people in that income range. And it's a large range. Which means that a substantial percentage of the population--he doesn't give an estimate but I would guess at least 20 percent of the population would face increases in marginal tax rates of about 20 percentage points. That's percentage points, not percent. This, in turn, means that the government's revenue from the income tax and from payroll taxes is likely to fall, perhaps by a lot. My impression is that the CBO, in its estimates, has not taken account of this effect.

. Tyler points out that once health insurance is mandated, many provider groups get busy pushing for the mandated version to cover their particular service. This, of course, drives up the price of health insurance.

. He also notes that it seems strange to mandate additional coverage if the goal is cost (he really means "expenditure") control.

So why a triple rather than a home run? Because, as the previous point indicates, Tyler confuses costs and expenditure. Expenditures on health care have risen substantially as a percent of GDP. Costs? Not so much. Indeed, with the introduction of a lot of new drugs, for some diseases costs, inflation-adjusted, have actually fallen by precluding the need for hospitalization.

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COMMENTS (5 to date)
Milton Recht writes:

"Not so much. Indeed, with the introduction of a lot of new drugs, for some diseases costs, inflation-adjusted, have actually fallen by precluding the need for hospitalization."

The transition to preventive medicine using drugs raises an interesting point that we may be misreading the signals in health care cost increases.

Medicare and most government programs are monitored on a cash basis accounting method. If a person will likely have a future high medical expense, such as hospitalization for a heart attack, that expense is not recognized until the actual event, the heart attack and treatment occur, sometimes many years into the future.

A switchover to an expensive heart attack preventive drug, such as a statin, increases the current costs but decreases future treatment and hospitalization costs.

There is an overlapping period where health care costs increase to reflect the expense of a disease as it occurs and the expense of a prevention measure, such as a drug that will prevent future occurrence of the disease. Annual health care costs will increase until the preventative effects of the drug (or other measure) lower the disease incidence in the at risk population.

On an actual costs basis it looks like health care costs are rising, but on an accrual costs basis, based on expected disease incidence, costs are declining.

As medicine switches to more preventative treatments, the current cost of prevention is added to the medical costs of those who will get the disease because they are beyond a preventative stage. Medical costs rise on a cash and actual outlay basis, but the unrecognized expected future costs of treating the disease decline.

Assuming that preventative treatments costs increase until they are equal to the disease treatment costs and the goal is quality of life and life expectancy improvements and not cost savings; the switchover to prevention increases current annual costs for the benefit of lowering future annual costs. In other words, prevention does not lower medical costs but improves health outcomes.

Medical costs look like they are increasing because medicine is in a transition period of switching to more prevention measures as oppose to disease treatment measures and medical costs do not incorporate the cost savings from the disease prevention. What we need is a budgeting process similar to most companies and government where they separate capital expenditures from operating expenses. We need to look at prevention measures as capital investments in cost saving measures, current treatment expenses as operating expenses and we need to accrue future treatment expenses.

If we redid the medical costs books on an accrual and capital investment basis, I think we would find that costs are not increasing as much on an inflation adjusted basis as we believe. The costs increases are a reflection of poor accounting during a period of introducing prevention methods and are actually investments to lower future medical costs and improve health outcomes.

David R. Henderson writes:

Well put.

Doc Merlin writes:

Also, one often overlooked aspect of employer mandates is that it has the same problem as minimum wage only it doesn't just affect the lowest end workers. It raises the fixed costs for hiring workers, so for most workers their salaries will go down and at the bottom end there will be increased unemployment. Also, unlike a minimum wage, this will rise with inflation, so its effects cannot be inflated away.

I expect if this passes NARU will rise significantly.

Jeremy Bell writes:

The health care system in the United States might not be the best but when compared to other countries’ health care system, we have the worlds best health care. Given the size and diversity of the population, America does a great job at keeping people healthy and alive. I think it is not fair to compare the small states of Europe with the best health care statistics when they are dealing with a faction of the population and space. Given this America’s health care system is really not flawed like many believed. Tyler’s triple brings up great points about the soon to be revamp health care system.
Marginal tax rates don’t seem to fit the bill. Why must upper level income people pay more to subsides and pay for other people’s health care. It should not be done. Additionally, why decrease the governments income tax from the marginal tax, it will only hurt other public services. Health care should be run like a business, if an expense makes the operation go under then get rid of it. As the total revenue goes up then they should cover more people. Furthermore, as mandated insurance is instated for companies, it will lower how many people can be hired because of the higher insurance premium. These point should be dealt with before the bill is passed.

R. Richard Schweitzer writes:

Why is there all this quasi-serious chit chat?

What is going on here is simply a political power-play at the long-running game of redistribution.

The difference here is that, having run out of assets and incomes that can be (safely politically) redistributed the game is to redistribute (not reduce, not "reform") costs and the related benefits of a major system of transactions by individual exchanges.

All power does NOT come out of the barrel of a gun!

R. Richard Schweitzer

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