Arnold Kling  

Mark Bils on Health Care Prices

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In this interview, he says,


If you had a certain condition and you had $10,000 to get treated at today's health prices, or $10,000 to get treated at 1960s prices with 1960s technology, I don't think it's so obvious that people would want to go back in time to get their important health conditions dealt with. In that sense, you say, I don't know if there's inflation. It's pretty hard to say that there's been a lot of inflation over the long haul in healthcare.

The thing that struck us was that you would see much faster inflation for healthcare expenditures, but also much faster real increases in people buying more and more [healthcare services]. We still haven't been able to explain this.

Read the whole thing. Pointer from Timothy Taylor whose blog is a good one to check regularly or put into your RSS reader.

I think that Bils is right in that the tendency will be to over-estimate pure price inflation in health care. Still, it is not such a mystery how demand could rise as prices are rising. When third-party payments have increased to 90 percent of personal health care expenditures, the law of demand (quantity demand falls as prices rise) is not going to work so well.

Health care raises major issues of measurement. Do you look only at tangible outcomes? That leaves out all of the intangible issues. Even if having oral surgery under anesthetic did nothing to improve tangible outcomes relative to not having anesthetic, my guess is that consumers would place a high value on anesthetic.

With most goods and services, we do not ask statisticians to evaluate the outcome. We instead use revealed preference--that is, we look at what consumers are willing to pay. (The Bils interview has much more on the pitfalls of distinguishing price changes from changes in perceived value.) With health care, we have the problem that it is the insurance companies doing the paying.


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COMMENTS (4 to date)
Various writes:

Exactly. One of the problems with a system such as healthcare, is that the inefficiencies created by the price fixing payment system are so numerous and pervasive. It is very hard to put your finger on exactly where the inefficiencies are and the relative contribution of each. Also, the very nature of the fixed pricing system often incentivizes providers to muddy the relative contributions of price versus quantity. When you're a provider, most of your profits come from a relatively concentrated number of procedures and products. Why make the sources of these profits transparent to outsiders? I personally think that there is a good deal of inflation coming from the pricing of goods and services as opposed to the quantity, but good luck trying to prove that.

Probably one good way to evaluate healthcare is through analogy. One could compare healthcare expenditures over time to, say, expenditures on dentistry and air fares. The first is really just a type of healthcare expenditure, but one where true private pay is the dominant payor. The second is an example of a market transitioning from price fixing to market prices (i.e., the opposite direction of the U.S. healthcare system). On that subject, a third analogy would be to look at expenditures on long-term care. Technology for L-T Care has evolved little over time, and the quantity should be relatively easy to measure (bed days), so it should be much easier to break out the quantity versus price (i.e., inflation) parts of the equation.

I think a comparison of the expenditure trends during the past 25 years in these 4 segments (general HC, dentistry, L-T Care and airlines) as well as the relative contributions from changes in quantity versus price (i.e., inflation) would be very insightful.

Sean writes:
I think a comparison of the expenditure trends during the past 25 years in these 4 segments (general HC, dentistry, L-T Care and airlines) as well as the relative contributions from changes in quantity versus price (i.e., inflation) would be very insightful.
The cosmetic surgery industry is a useful example to look at. I had eye lasik surgery for $4,000 back in 2000. My daughter had one for $1400 in 2010, on a lot more advanced machine.

I don't have the numbers, but more people had lasik surgery in 2010 than in 2000.

jacob silverman writes:

As to your first half sentence: right away you are taking two very different things and putting them together. What does "having" or possessing $10/000 and having "a certain condition" have to do with each other? And not only that, we are able to time travel... But we do not want to! "I don't think...[you] would want to..." Well, the fact is you can't time travel, because time travel does not exist --- so, what's the point? Anyways, Um----Lauren invited me onto the blog, so be aware now that this is the kind of thing you are going to get from me.

Oh, one more comment: not everything is as miraculous and instantanious as, for example, "point-and-click" and "cut and paste"!

Haasdrubal writes:
When third-party payments have increased to 90 percent of personal health care expenditures, the law of demand (quantity demand falls as prices rise) is not going to work so well.

Do you know of any studies that look at the changes in marginal cost to consumers for health care? Health insurance costs are skyrocketing, but that's a sunk cost. Copays and deductibles are certainly increasing, but (I'm guessing) at a much lower rate. It would be interesting to see how well the law of demand works when you look at what consumers are actually paying on the margin, rather than the total cost of a procedure.

Actually, health insurance and health care would be a great teaching example for thinking at the margin and ignoring sunk costs.

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