David R. Henderson  

Henderson on John Goodman's Priceless

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My review of health economist John Goodman's book, Priceless, is now out. I'm generally positive about the book, but I do have some major criticisms.

Some positive excerpts:

A dominant theme in health care reform is what Goodman calls "the engineering approach." This is the idea that all we need to do is figure out what works in health care and then have everyone do it. That engineering approach is an example of Hayek's "fatal conceit," the idea that government officials can design a plan better than the various plans that the market spontaneously creates. The ACA [Affordable Care Act] is chock full of such conceit. One instance in the new law is Accountable Care Organizations (ACOs) in which, as Goodman puts it, "a federal bureaucracy will virtually dictate the way medicine is practiced." He lays out the ways in which the ACA will muscle doctors into this federal straightjacket.

Goodman uses his understanding of how actual markets work to point out the flaws in the engineering approach. The basic flaw is that there's no single, specific solution to each problem in health care. He even gives a name to his critique: Goodman's Nonreplicability Theorem. He writes:

Scholars associated with the Brookings Institution identified ten of the best hospital regions in the country and then tried to identify common characteristics that could be replicated. There were almost none. Some regions had doctors on staff. Others paid fee-for-service. Some had electronic medical records. Others did not. A separate study of physicians' practices found the same thing.

Much positive change in the rest of the economy happens because of entrepreneurship, notes Goodman. Why should medical care be any different?


And:
Goodman also has some striking tables showing that, for some services, uninsured people in the United States get the same or more health care than people in singlepayer Canada. For example, 65 percent of uninsured American women aged 40 to 64 have had a mammogram within five years; in Canada, it's the same percent. Some 31 percent of uninsured American men have been tested for prostate cancer versus only 16 percent of Canadian men. Moreover, in Canada only 5 percent of women and 5 percent of men have ever had a colonoscopy, versus 30 percent of American women and 29 percent of American men.

These data, plus the fact that Canadians wait so long to see a doctor and to get surgery, help to make another point that Goodman discusses: the supposed "right to health care." When I hear people say that people have a right to health care, I take on the moral issue with moral reasoning, questioning whether health care is something that a person can truly have a moral right to. Goodman does it differently--and effectively. He points out that Canadians don't have a right to health care. How can you say it's a right if people aren't guaranteed to actually receive the health care service they need? The right to get in line for care, which is really all that Canadians are guaranteed, is not much of a right. And nothing in the Obamacare legislation makes health care into a right for Americans. Goodman writes, "[A] lot of knowledgeable people (not just conservative critics) predict that access to care is going to be more difficult for our most vulnerable populations." He argues that under the Massachusetts health care law adopted under then-governor Mitt Romney, which served as a template for the ACA, that has happened. "The waiting time to see a new family practice doctor in Boston," he writes, "is longer than in any other major U.S. city."


One major criticism:
Goodman's solution on the tax side is to make employers' contributions to their employees' health insurance taxable, but then to have the government give a $2,000 tax credit per person to be used toward health insurance. Families with many children would get huge tax credits. His plan has some additional complexities. For instance if people in a geographical area don't claim the whole tax credit, then the local government in that area would get the unused part of the credit as a block grant from the federal government to be used for indigent care. I'm skeptical about how well this would work. First, the local government doesn't have a strong incentive under Goodman's scheme to use the money well. Second, one can imagine a city government fighting a county government over who gets how much of the block grant. My own view is that a better way to end the distortion is simply to make all employer contributions to employees' health insurance taxable, but then make the change revenue-neutral by dropping marginal tax rates by a few percentage points.



COMMENTS (9 to date)
Ted Levy writes:

Forgive the self-plug, but on the alleged right to healthcare, you might enjoy:

http://www.thefreemanonline.org/features/do-we-really-want-a-right-to-health-care/

[faulty html fixed--Econlib Ed.]

Ted Levy writes:

Sorry...Don't quite see how your "Link" button works.

http://www.thefreemanonline.org/features/do-we-really-want-a-right-to-health-care/

[Ted: You can press the Link button and then just paste in the url in the box that should pop up. I've made the above url into a link for you, though.--Econlib Ed.]

Ken B writes:
The right to get in line ... is really all that Canadians are guaranteed
I am so going to steal this.

I really like the facts about the good care for the unisured in the USA. I can use them! I argue this (fruitlessly) with Canadians all the time. Health CARE is better here (USA). Canada does a bit better with spreading the risk of paying for health care. But even the indigent get care here. In Canada even the seriously ill often cannot get tests done immediately.

The ways Canada cuts health costs is worth noting. When I was in school the government decided health costs were "doctor driven". So they reduced the number of places in Ontario's medical schools! Fewer doctors, less cost. (And of course longer lines means more Canadians exercising that 'right to get in line'!)

Damien writes:

Ken B: as opposed to the AMA, which doesn't restrict the supply of doctors? The number of doctors graduating from US medical schools has remained flat since the 1980s. I haven't seen data for Ontario but, in Canada as a whole, the number of physicians per capita is about the same as in the US.

Tom West writes:

Health CARE is better here (USA). Canada does a bit better with spreading the risk of paying for health care.

You are correct, health-care in the US is as an aggregate better. However, outcomes are not a lot better, and per-capita costs are *considerably* higher.

As well, spreading the risk of paying for health-care is worth a *lot*. Say you abolished health insurance. For most people, costs would go *down*. Yes, quality of life would plummet, because most people without health insurance worry endlessly about being wiped out by some unexpected health problem.

I end up conversing with a lot of American self-employed - I am well aware how even the idea of having health-care available without personal cost is worth a huge amount where personal happiness is concerned.

(Of course, the unemployment that goes with a health emergency wipes out a lot of Canadians as well, but in terms of overall happiness, Canadians seem to spend a lot less time worrying and unhappy than uninsured Americans, at least by personal experience.)

But even the indigent get care here. In Canada even the seriously ill often cannot get tests done immediately.

While the American indigent can get emergency care, there's a large swathe of the self-employed lower class who seem to be in trouble. One health emergency, and a functioning family unit is essentially wiped out.

As for emergency care, the indication seems to be that health outcomes are *very* similar for Canada and the USA. If you want to attack the Canadian heath system, I think you need to go after it for 'elective' quality of life care (knee and hip surgery wait times) and perhaps the psychological benefits of over testing, which, while expensive, may make patients feel happier. (That, and the freedom issue that if you have a bucket of money, you should be free to buy better health-care in Canada instead of going to the US.)

Now, outside of affiliation (my system is better therefor you should adopt it), I have to say that Canadians would be much worse off if America adopted our system. While I do have to say that I feel a bit sorry for the the fact that you have to pay such an extraordinary amount more for such marginal personal gains, I'd like it on the record that I *am* grateful for the public goods (medical research, etc.) that come out of your substantially higher costs.

Tom West, my Canadian friends tell me that if they think they're seriously in need of medical care they come down to the USA for it.

I know two people whose lives were saved thanks to the Mayo Clinic (where they were put on a payment plan they could afford). They were both put on waiting lists for tests in Ontario--one had stomach cancer.

As one of them said to me, 'They tell you it's free, but, you know what...you get what you pay for.'

Btw, what metric are you using for 'health outcomes'?

Shayne Cook writes:

Dr. Henderson:

A suggestion for improving Goodman's "solution" that you were critical of ...

No $2,000 - or any other fixed "per person" amount - tax credit or deductibility.

Alter tax code to make actual health care costs deductible for individuals only, whether those costs are recurring health insurance premiums or non-recurring actual outlays - with the following caveat...

Obviously, deductions only benefit folks who are taxpayers. To address that issue, change tax law such that the "actual cost" health care deduction extended to individuals described above is legally transferable, by contractual agreement.

The deduction transferability feature would provide significant incentive for third-parties - charities, other family members, business, financial sector, basically anyone, even hospitals - to provide health care funding for those individuals who require it, but do not have an income, or have low income.

Just a thought.

Tom West writes:

Tom West, my Canadian friends tell me that if they think they're seriously in need of medical care they come down to the USA for it.

Well, I've found the statistic before, but I don't have it with me now. Suffice it to say that medical tourism is really really small. (Given easy access to American health establishments, I assumed it was a percent or two, it was a magnitude of order smaller)

I know two people whose lives were saved thanks to the Mayo Clinic (where they were put on a payment plan they could afford). They were both put on waiting lists for tests in Ontario--one had stomach cancer.

I have no doubt that there are cases where American health-care outperforms Canadian health-care, after all, you get what you pay for. My case is that when you do comparisons between Canadian and American hospital outcomes based on patient survival rates of serious medical conditions like "x type of cancer" or heart attack, etc., etc., the rates tend to mildly favor American health-care with some favoring the Canadian - and there aren't any huge differences. (Mostly because hospitals learn from each other, adopting the best practices of each other).

The Mayo clinic no doubt provides excellent care. It is also the medical care provider of a miniscule portion of the American population.

As one of them said to me, 'They tell you it's free, but, you know what...you get what you pay for.'

Except it's not free, although the illusion does make Canadians happier :-). It also makes them prone to over-estimate the Canadian system. (I'm not a big fan of having people believe in the policies I do because they believe in magic pixie dust - the American health-care debate was atrocious for that on both sides.)

Anyway, the Canadian system is about 1/2 the cost of its American equivalent, allowing Canadians a much higher standard of living for their non-medical related life that cross border salary comparisons would imply. Moreover, it's a bit like comparing a Lexus to a Corolla. For double the price, the appointments are much nicer and you get a little bit safer drive, but it's substantially the same outcome: you get from A to B.

Sorry for the length of the post - the irrationality (or at least posturing) where health-care is concerned on both sides is astounding (the 'free' Canadian healthcare is particularly egregious). I tend to feel that if you can't point to at last a dozen reasons why your system is *inferior*, then you probably aren't particularly well informed. There are literally dozens of criteria that can be used in comparing systems providing a huge variety of utility functions. What should be differing is the utility functions, not obscuring the metrics, or more commonly, pretending that unfavorable metrics don't exist.

Jeff writes:

The striking thing about almost all proposed health care reforms is that they are either disguised (or not) price controls or they try to move the demand curve. The ones that make a bit of sense try to shift the curve to the left, but not all of the proposals make sense.

If you want to reduce the price of something, basic economics says you should either reduce the demand for that thing, or increase the supply. Nobody talks about doing the latter.

For many procedures, you can fly to India or Thailand, do the procedure and then fly back for much less than you would spend if you stayed here. Clearly, the supply curve in India and Thailand is well to the right of the US supply curve. The simplest way to move our supply curve to the right is to import a bunch of medical suppliers. Unfortunately, the cartel, err, the AMA, is preventing that.

To become a physician, you have to complete college, four years of medical school, and then spend three to seven years as a resident, usually at a hospital. The number of available medical school seats is controlled by the individual states, however, every state requires that medical schools be accredited by the doctors' union, err, the AMA. The doctors have not been shy about using this power to restrict competition.

However, keeping people out of American medical schools is not enough. To really restrict the supply of doctors, you also have to keep out foreigners. This is accomplished by requiring a US residency to practice here. The number of residencies is controlled by the Congress, which funds them. And of course the AMA heavily and effectively lobbies the Congress to keep those numbers down.

None of this should be news to anyone, but we rarely hear much about it.

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