Arnold Kling  

It's the Prices, Stupid

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Tyler Without Tyler... When Government Gets Desperate...

That was the title of a famous article claiming that U.S. Health care spending is high because provider charges are excessive. Now, Ezra Klein (pointer from Tyler Cowen) brandishes charts furnished by an insurance industry trade group that purport to show spectacular differences in prices for services between the U.S. and other countries. The international comparisons could depend on how one handles exchange rate conversions.

On the other hand, the charts include comparisons between reimbursement rates of private plans and reimbursement rates from Medicare, with staggering results that cannot be attributed to currency conversion issues. For example, according to the trade association's charts, an MRI scan typically is reimbursed for $1200 by a private plan, but Medicare pays only $500.

Even more intriguing, the physician fee for a routine baby delivery is $2384 for the typical private plan, but the cost is only $1601 for a patient on Medicare. For C-sections, the costs are $2618 and $1812, respectively.

If these data are correct, then health care would be a lot cheaper if all of us were on Medicare. Also, women would be better off waiting until age 65 to have babies.


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TrackBack URL: http://econlog.econlib.org/mt/mt-tb.cgi/2529
The author at Health Care BS in a related article titled Medicare’s Pregnancy Benefits writes:
    Ezra Klein with a health care datum is like a toddler with a loaded pistol. Nonetheless, Arnold Kling braves this typically clueless post and comes out with a couple of useful insights: The charts include comparisons between reimbursement rates of pr... [Tracked on November 2, 2009 9:14 PM]
COMMENTS (25 to date)
Thomas Sewell writes:

Non-medicare patients subsidize medicare patients, in much the same way they subsidize patients who don't pay at all.

If everyone was on medicare, health care may be cheaper, but most hospitals would also fail and close down, leading to a different final result.

I think a more interesting point would be that even with these kinds of discounts for specific procedures, the proposed public option in the current plans in Congress is still expected by the CBO to not cost less than private insurance plans.

rvman writes:

I'm sure the docs are suffering under the staggering load of under-compensated routine baby deliveries among Medicare recipients.

spencer writes:

How many women over 65 have babies.

One out of 100,000 ?

Why don't you try something that might actually be typical of a Medicare payment.

Milton Recht writes:

Medicare is not a market price. It is a government set price. Price controls create economic distortions in supply, demand, investment, etc. The fact that transactions take place at the price control price, Medicare rate, without looking at the market place distortions is misleading.

MRI machines are expensive and can cost in the millions. Since they use strong magnetism, special areas are constructed for them and specially trained technicians are needed to run the machines.

The proper economic question is does the Medicare price reimburse a MRI owner over the useful life of the machine for the purchase costs plus facilities cost plus all operating costs including staff salaries, electricity, repairs, etc., plus a return on investment for the use of that money as an investment in a MRI machine.

If the Medicare price per patient times the number of patients is below the fair reimbursement price, then if the Medicare rate were the only price, no one would buy new machines as the old ones disappeared, unless there is some other way to make up the shortfall.

One possible outcome to a shortfall is that the number of available machines in an area will be reduced to increase utilization rates of the remaining machines and wait times will increase. Old machines would continue in use well beyond their normal useful lives, and costs would be cut in rents (MRI machines would be located in the cheaper rent areas), MRI staff and staff salaries would be cut, etc to reduce expenses of operation as much as possible. Many other costs associated with MRI machines would also be reduced.

Another possibility is that MRI owners will look to other areas to subsidize the shortfall in the Medicare price. A likely response that immediately comer to mind is that MRIs are part of a patient diagnostic process and other patient treatment areas will cost more or occur more frequently to offset the Medicare MRI reimbursement shortfall, e.g., knee and back surgery. Another possibility as suggested by others is that non-Medicare patients will be charged more for the MRI to make up the shortfall.

People with detailed knowledge about MRI associated costs use can compute the price to charge to allow the purchase and operation of an MRI machine with a realistic wait time and reasonable return on the capital funds used. This number will allow the operation and replacement of an MRI machines under conditions acceptable to the medical profession and the public. If the price is acceptable to the market place, the machines will continue to be used and replaced.

The price that allows a fair return of investment is the relevant number. Price control numbers, and that is what the Medicare rates are, are not a relevant price, except to economists to analyze market place distortions. It would be very interesting to see what the patient price should be for a new MRI machine to cover all the associated expenses and achieve a fair return on the funds. I am sure that the number exists somewhere.

Thorfinn writes:

In the graph, Medicare is more expensive than every other system. Whatever the cause of America's higher health costs, not having a single payer system can't be the entire explanation.

I bet you'd get a similar picture if you graphed school fees, or lawyer fees, or what have you. Yet no one suggests that we should mimic Britain's education system or Germany's law code.

My guess is that it's hard to avoid spending a lot on human capital intensive activities as you get richer, unless you try NHS-style rationing.

Thomas Sewell writes:

Sorry, I thought that the cost shift from Medicare patients to private patients was pretty common knowledge.

Here's a recent study with fairly up-to-date numbers from 2006:
http://www.ahip.org/content/default.aspx?docid=25216

It concludes that without Medicare and Medicaid patients, private costs would be 15% lower overall, 18% lower for Hospital costs and 12% lower for Doctor costs.

GraniteViewpoint writes:

FYI...

According to statehealthFacts.org, around 16% of medicare recipients in the US are under 65. In West Virginia, it's 23 percent.

So although people assume everyone on medicare is over 65, depending on the state, there could be many younger people on medicare (probably on disability).

"Also, women would be better off waiting until age 65 to have babies."

Isn't a large part of the problem the fact that they wouldn't be better off either way, since they don't bear the actual costs of the procedures?

michael writes:

ZING! Kling jokes FTW.

SWH writes:

If we are interested in health care costs, we also have to talk about the number of MRIs taken and whether they are all needed. Within the course of 2 or 3 years, the various health care facilities in our town of about 120,000 people installed about 10-12 MRIs in total and boasted in expensive advertisements about them. You cant go to a doctor for a sore tooth or an ingrown toenail without the doc recommending an MRI. It seems that all diagnoses begin with an MRI. I wonder how much the cost of health care in our town has increased solely on this basis. This is Cadillac health care whether you need it or not.

David C writes:

I agree with the implied statement that price controls are most likely forcing health care to perform sub-optimally in many countries.

But even our Medicare rates are significantly above European levels. I doubt exchange rates explain all of it. I think the reason may have something to do with American doctors being paid 8 times what the average American makes.

http://gregmankiw.blogspot.com/2009/06/physicians-incomes-and-healthcare-costs.html

Maybe, particularly given how quickly the practice of medicine changes every year, licensing restrictions should be reduced.

Dr. T writes:

"Even more intriguing, the physician fee for a routine baby delivery is $2384 for the typical private plan, but the cost is only $1601 for a patient on Medicare."

I'll say it's intriguing! I've never seen any elderly women delivering babies much less having the costs covered by Medicare. There have been post-menopausal surrogate mothers, but they were in their 50s.
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Medicare reimbursement for a service or procedure often is less that the medical provider's costs. The provider has only two choices: accept the loss or drop all Medicare patients. Providers aren't allowed to pick and choose procedures based on the difference between Medicare reimbursements and actual costs. That is, an imaging facilty cannot say "We'll accept Medicare patients for CAT scans but not for MRI scans." Therefore, the comparison of Medicare reimbursements to insurer reimbursements is unfair. The losses due to Medicare under-reimbursement are made up for by raising the charges to other payors. This has been the case for decades. It is essentially an indirect tax on the non-Medicare population.

Arnie writes:

Spencer: I laughed too at the thought of Medicare paying for birthing services (though I am sure that they have), but I assume that Medicaid (perhaps what Arnold meant) pays at roughly the same rate as does Medicare.

MikeDC writes:

I think of Medicare pricing in the US as a classic example of price discrimination. (Most) suppliers are willing to take less from Medicare recipients just like various other price discriminators will take coupons (for razor blades), or sell cheaper advance tickets (for air travel).

But it'd be crazy to say the seller in some other market should only offer the coupon price, because, at that level, they'd supply less.* Remember price discrimination is a means of expanding demand for a product. Charging one low, govt controlled price expands demand without but prevents movement along the supply and demand curves.


* This isn't to say that reduced licensing wouldn't be effective. If we accomplish that, we effectively shift supply outward. My sense is in Europe we, again, see lower prices across the board, but they're controlled, so we end up with the scarcity problem being resolved with a shortage.

Blackadder writes:

My question is whether the listed prices are what doctors and hospitals are actually paid, or are the "sticker prices" before heavy discounting?

martin writes:

After looking at the price differences for a day in the hospital in France versus the United States I began to wonder how much a nurse gets paid in France. A very quick check shows that nurses in France make about half what they would make in the US.
Keep in mind that nurses are in short supply in the US even with the apparently generous wages being paid.


The Cupboard Is Bare writes:

"Also, women would be better off waiting until age 65 to have babies."

That was priceless. Only one problem. Since a woman's skin loses its elasticity as she grows older, do you think Medicare would cover tummy tucks? ;)

zc writes:

"show spectacular differences in prices for services between the U.S. and other countries"
Do they detail the spectacular difference in number of lawyers between the US and those countries? Think socialized medicine is a good thing, great, but make sure the lawyers are on board, too.

--If everyone paid coach, we would spend a whole lot less on travel. Yeah, and without people paying for first class, the airlines would offer less flights, and there would probably be less of them.

--If everyone paid for nose-bleed seats, we'd spend a lot less on sporting events. Yeah, and if big bucks individuals and corporations didn't shell out for box seats and suites, your team wouldn't have the top dollar players that you pay to go see (see various small market teams for evidence of this).

Sheldon Richman writes:

Arnold, I thought your bottom line was going to be that the medical guild (with control over supply through state licensing and med-school accreditation) gouges the public, a situation aggravated by Medicare's under-reimbursement and cost-shifting. Yet the doctors are not vilified as the insurance and pharmaceutical companies are.

mdb writes:

For medicare costs you have to add 13.5% to each procedure. If Attorney General Holder is to be believed, medicare fraud is a $60 billion dollar a year problem. Medicare had a $442 billion dollar budget in FY2009. So while medicare may pay less, how many of those operations and births are legitimate costs?


Bob Knaus writes:

There is an easy way to compare medical costs in the US and abroad that does not depend on exchange rates... compare the insurance rates, using a US-based carrier with dollar-based policies.

Seven Corners (www.sevencorners.com) specializes in US-style health insurance coverage for expats, travelers, missionaries, mariners, and others who spend most of their time abroad. The key to their policies is that if you spend more than 6 months in the US or Canada per year, they cancel you.

Apparently treatment abroad is much cheaper in dollar terms, because their premiums are much cheaper than comparable US policies for individuals and small businesses. As a 47 year old male, my annual premium for their Reside Prime with $5,000 deductible would be $869 for worldwide coverage, or $643 if I choose not to receive treatment in the US or Canada.

Compare that to any individually available plan for full-time US residents!

zc writes:

Bob,

"There is an easy way to compare medical costs in the US and abroad that does not depend on exchange rates".

Yeah, and it costs more to buy milk or Domino's pizza in Hawaii, that doesn't mean the milk or pizza is bad.

Pretty much everyone agrees that medical care costs more here, the question that matters is 'Why'?
-The money we spend to advance the sciences (R&D) allows the rest of the world to be free riders.
-Lawyers and malpractice awards and hence, costs, higher here than elsewhere.
-Treating a bunch of dirtbag low, lifes at taxpayer expense (direct, or indirect in the form of higher prices for paying patients), instead of letting them die in the streets like they do in other places.
-Excessive regulation and bureaucratic requirements, incurring cost with little or no benefit.

David C writes:

zc,

If the other countries have patent protections too, don't those other countries help companies make back their money on R&D too?

Why is it that you believe malpractice is a root cause of higher prices in America despite the lack of evidence? Read Atul Gawande's work in the New Yorker.

Which countries from Ezra Klein's list refuse to treat the homeless in hospitals? I assume that's who you were referring to when you wrote: "dirtbag low lifes".

Don't those other countries have medical regulations too? Which regulations are you specifically referring to?

zc writes:

In response:

If the other countries have patent protections too, don't those other countries help companies make back their money on R&D too?
1. Often they don't respect patent protection.
2. It's not all about patents. You can't patent the research that shows that 'X' is the appropriate way to treat 'Y' -- but if sure saves you a ton of money is someone else spends the millions to do the research to figure that out, and you can employ it for the benefit.

Why is it that you believe malpractice is a root cause of higher prices in America despite the lack of evidence? Read Atul Gawande's work in the New Yorker.
1. It's not the root cause, but it is a cause. Ask any physician, they'll all tell you they've ordered extra tests to rule out things they know aren't there, but they have to rule of the 1-in-a-million case that would cost them several million to miss. The incentives are simple economics. Apparently that escapses you in your line of work.
2. The problem is multifactorial. It's not all about malpractice, but the threat of such results in billions in unneccessary spending annually.
3. Gawande's article -- if you think that's the whole story of medicine in America, well, arguing with you isn't worth anyone's time.

Which countries from Ezra Klein's list refuse to treat the homeless in hospitals? I assume that's who you were referring to when you wrote: "dirtbag low lifes".
1. Spend any significant amount of time in an urban ER and get back to me. How many times should we spend several thousand dollars every time a drunk gets drunk and falls on his head, and has chest pain, too. I've seen 15 in 3 months.

Don't those other countries have medical regulations too? Which regulations are you specifically referring to?
Sure, they've got regulations, but they're less stringent than those in the US. Just one example, see the FDA, which prohibits the use to numerous drugs and devices that have been used in Europe and elsewhere for years or even decades to good result. See JCAHO. The list goes on and on.


You obviously have no medical background. As such, your limited opinions on the matter are about as those of most politicians weighing in on the matter. Consider yourself in good company.

David C writes:

1) Which other countries don't respect patent protection? Are they a major market?
1b)Since your second comment applies to all countries, I fail to see how it explains anything about the differences between Europe and America.

2) Once again, there's zero significant correlation between higher malpractice suits and higher medical costs. Almost everybody freaks out over problems in their jobs that aren't really there. Lots of teachers like to complain about paperwork, that doesn't mean they have a lot of it.

3) Since you haven't named any, and didn't seem to understand my point, I assume you agree with me that all major developed countries treat the homeless and these costs get passed on to other consumers. Therefore, this doesn't explain the difference between Europe and America.

4) Complete agreement on the strange mannerisms of the FDA. As far as JCAHO goes, I've already replied to this blog with my thoughts on licensing restrictions.

5) And yes, I do work in the medical industry.

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