Health Care without Prices
What’s the difference between the U.S. health care system and the Soviet economy under communism? Very little, it turns out. Under both systems, decision makers face the same dilemma: without market prices to guide them, no one knows how to rationally allocate resources.
What brings this to mind is a post by Uwe Reinhardt the other day about the projected doctor shortage. How do we really know we are going to have a shortage? Reinhardt asks. Only a few years ago everyone was predicting a doctor surplus.
I’ve got a more basic question: if medical care is basically free at the point of delivery, don’t we always have a doctor shortage? If we are mainly paying for care with time and not money and if no one is measuring the time price of care, how can we ever know whether things are getting better or worse?
I’m back in the USSR
Hey, you don’t know how lucky you are
Here’s what Reinhardt writes:
The problem is that forecasting the future supply of and demand for any type of health professional is a highly complex and nuanced enterprise with wide margins of error…
Crucial in such forecasts is the assumption one makes about the average annual physician productivity in future years. That variable depends chiefly on two factors: the number of hours per year that physicians typically devote to patient care, and the degree to which physicians delegate to others tasks for which an M.D. degree is not required — for example, administrative tasks to clerks or business managers and certain medical tasks to physician assistants or nurse practitioners trained to perform tasks now performed by physicians.
The real problem is actually much greater than that.
Let’s turn to the Soviet Union for a moment. They had an economy in which all the important means of production were owned by the state. There were no real markets and therefore, no real prices. To pick a problem at random, suppose the authorities want to expand a railroad. How do they know whether to build the rail with platinum or steel? Without prices to signal the value of the alternative uses of these inputs, it’s impossible to know which choice is best.
Fifty years ago, Murray Rothbard, drawing on the earlier work of Ludwig von Mises, pointed out that this problem has no practical solution. In fact, the Soviet economy would have been in much worse shape, according to Rothbard, but for the fact that it could look to Western economies for guidance in making a lot of these decisions. (See Boettke)
Further, without real prices, there is no way to know the value of a nation’s output. That is, there is no basis for adding together apples and oranges and steel rails and steel beams to arrive at a grand total gross domestic product (GDP). In the early 1960s, many economists believed the Soviets had achieved high rates of economic growth — transforming a largely agrarian economy into an industrial economy in one generation. But if you don’t know what GDP is to begin with, how do you know how much it has increased? You don’t. And, as it turns out, almost everybody other than Rothbard was wrong in judging the Soviet claims of success.
The problem of the Soviet economy writ large is exactly the same problem we have in our health care system. Should we train one more doctor? Or would our money be better spent training a nurse or two? If we choose the doctor, should she be a primary care physician? Or an internist? Or some other specialist? How on earth would anybody ever know? No one in health care ever sees a real price. No patient. No doctor. No employee. No employer. In the absence of real prices, we have no way of knowing the marginal value of one more doctor, one more nurse, one more technician or one more anything.
There is a related issue. Just as the Soviet Union had no idea what its GDP was, we don’t know how much we are spending on health care. That’s why it’s absurd to keep repeating that we are spending twice as much as other developed countries. In fact, we don’t have any idea what any of these countries is really spending. But for the record, our use of real resources per capita (number of doctors, nurses, hospital beds etc.) is about average.
So I am in complete sympathy with Uwe’s general point. But I have no sympathy for his failure to realize the pain that is about to be caused by the Affordable Care Act (ObamaCare). (See his previous post.) The ACA, to remind you, will give people to right to demand a long list of preventive measures without copayment or deductible. The list is so long, that were doctors to deliver the full load, the average primary care physician would spend almost the entirety of every working day delivering screening tests and other procedures to healthy people with no time left to take care of people who are actually sick!
We don’t need real market prices to know that if you greatly expand demand for primary care and do nothing to increase supply, the time price for virtually every dimension of service will soar. When people react to these severe shortages by turning to concierge care, the rationing problem will become even worse for those who cannot afford the price of “first tier” medicine. And ironically, those in the second tier will primarily be the very people the Democratic supporters of ObamaCare thought they were trying to help.
The gap between those who believe all health care should be free at the point of service; and those who believe medical care should be a consumer good — except for catastrophic care above a high-deductible — could not be farther apart. Policy analysts tinker around the edges. But the lack of real prices due to of third-party payment is a real problem. Some people pay nothing at the point of service; others must pay the entire bill. Some people have access to negotiated prices, while others have to search for reasonable cash prices. Prices for the same service vary by a factor of 10 (or more) but many people don’t realize that fact. Even for those with insurance coverage, prices vary from one facility to the next.
This fact recently hit home when someone I know needed a CT scan and was horrified that the list price was $8,000. She would have to pay $2,500, because she hadn’t met her deductible. I told her the price should be closer to $500 (and after a little bit of searching I found it for $400 at a medical imaging center next door to her doctor). Now she’s very angry that she obtained two other minor services at a hospital conveniently located near her house and spent $500 more than she needed to. The services she received should have costs $200 rather than $700. She feels like she was ripped off. As a result, this hospital will have a hard time collecting (I used to work for another hospital owned by the parent company).
This is a very good post. Almost no one else looks at health care this way.
I like the Beatles.
Employed by a company that maintained staff model HMO’s, when I moved to a town where one existed I felt compeled to join as a matter of leadership. There care was good, but not what my family was used to…sitting in waiting rooms for the next available doc (sometimes “mine”, sometimes not)was a new experience. After a decent interval the HMO Medical Director recommended an in-network single practioner and we had a new PCP. 20 years later he is still my doc, although now a concierge practice.
I bore you with all this to make the point that there are and will be plenty of doctors, even primary care, for those who can pay. The shortage will be at the low end of the food chain. Pity the newly insured Medicaid member finding some one to accept him. And remember why HMOs faded into PPO’s and open access PPO’s: people simply did not like the dog food. Perhaps tastes will change once all there is to eat is the same old chow.
What doctor in their right mind would choose PCP? Specialize, and make life easier.
Dr. Reinhardt went for that, ‘it’s too complex; the margins are too big, and prone to error; it only applies to current legislation,’ argument again. Which is partially true, but incredibly frustrating. I feel like I should be throwing a tantrum and demanding an explanation as to WHY I can’t stay up late and watch scary movies.
This is a unique way of looking at health care. But once you lay it out, it makes perfect sense.
Transparency and prices solve much of the problem that we are facing. It is impossible for the policy makers to know the value of every minute of a doctors time much less the time of everyone else that is involved. Since the policy makers choose to be blind regarding real prices they must use an ancient type of divination to define value. To date they have failed miserably, but seem to have found a way to blame someone else.
With the demand for doctors, are the expectations for medical students going to be watered down. Are we going to start seeing future doctors with less experience and less education to fill the demand for medical care?
One place there are real prices is in the individual health insurance market. People pay a premium and get a certain amount of coverage. We can adjust our coverage choices to meet our financial abilities.
But the ACA will change that. It provides subsidized premiums to almost everybody, but who gets subsidized and by how much is strictly a political decision independent of any economics.
The Soviet system, based on Marxism, was based on a misconstruction of 19th Century thermodynamics, particularly the second law, that the Entropy of the Universe is increasing. That would ultimately lead to a “heat death” (warmer tod) of the Universe. Marx saw Capitalism as ultimately suffering a similar “heat death” (hence Kruschev’s kind offer to arrange for our interment). When the warmer tod of the Universe would occur, temperature and energy (akin to wealth in a Capitalist system), would be absolutely evenly distributed throughout the Universe. Unfortunately, the temperature would be 3 degrees Kelvin, only minimally above Absolute Zero at which no activity or motion would occur at all. So with Capitalism and Marxism. When the goal of absolutely equal distribution of wealth is achieved, all economic activity will cease. We have seen historically that societies that implement socialism stagnate economically. Per Marxist theory this is what is predicted to happen. Then we all become equal in both wealth or lack thereof and misery. Capitalism and free markets supply the information (prices, value, and productivity measures) that results in increasingly efficient use of resources and increasingly complex and efficient market systems. Blinding everyone to prices and values results in a stagnating system, an increase in Entropy. Then the old joke during the Soviet era comes into play, that workers pretend to work and the government pretends to pay them. Anyone trying to understand a Medicare EOB after a hospital stay and correlate it with the hospital bill will have some appreciation of that old Soviet joke.
A more pertinent thermodynamics, developed in the mid 20th century, is Ilya Prigogine’s “Thermodynamics of Dissipative Systems” (somewhat perjoratively named) that shows theoretically, with appropriate energy flux through a system, increasing adaptation, complexity, and efficiency occurs in the system. Applied to economic systems, Prigogine’s formulation predicts growth of productivity and wealth spontaneously(concords with Adam Smith) as long as an unbridled energy source is allowed to flow through the system, eg, animal spirits, human ingenuity and innovation.
Ewe Reinhardt et al need to stop propagating the errors of the 19th Century.
The ACA is a trainwreck piece of legislation.
Right on.
In a speech several years ago economics professor and former congressman Dick Armey described the Hayekian knowledge coordination function of “prices” this way:
“(Price is) the greatest information processing system in the world, more powerful than all the high tech computers. It can collect, sort, fragment, condense and deliver the right information to the right decision-maker at the right time for the right purpose to make the optimal choice. I may not know about the flood or the drought or the labor trouble. I don’t care or need to know, because all of that information is contained in a single data point: The price of tea (or whatever commodity) is up or down.”
I am not at all sympathetic with Uwe’s general point. We have created the problem out of thin air by destroying the market.
“The problem is that forecasting the future supply of and demand for any type of health professional is a highly complex and nuanced enterprise with wide margins of error…”
Look, let’s try something else that presumably is much easier to handle than “health professionals.” Let’s try the market for nails. I mean the kind of nails carpenters use to hold two pieces of wood together and so on, not the kind women glue on their fingers. What would happen if we stopped letting prices signal the market on how many of which kinds of nails to produce? We actually know the answer, because back in the 50s or 60s some economists in the US studied nail production in the Soviet Union. The Russkies never could get it right. How long should the nails be? What diameter? What kind of head? Annular or smooth body? Which alloy? Oh, not so simple, is it? The stories were that when the central command decided to measure output by number of nails, the Soviet factories turned out lots of wire brads. When the criterion switched to weight of the individual nail, output switched to railroad spikes.
At the same time the Soviets were having so much trouble, there were no shortages or surpluses of any kinds of nails in the United States. We could figure it all out, and they couldn’t. How would that be, when we didn’t even have a single official in Washington trying to tell nail produces what to do, and the Soviets had a whole bureaucracy dedicated to the project?
It’s all perfectly understandable to anyone who knows a little economics *and takes economics seriously.* The basic problem was that in the Soviet Union there was no way to measure what anyone wanted and no way to measure the value of what was produced, all because the price system had been destroyed. In the US, the prices did all the work. No bureaucrats needed.
It still works that way today with nails in the US. Does anyone know of any serious shortages of nails? Of any type? In any place in the US? Things also work well here for computers, refrigerators, washing machines, automobile tires, mechanical pencils, paper clips, ladies’ dresses, underwear, socks, shoe laces, cuts of beef, types of kale, Heinz’s 57 varieties of soup, books, motels, and on and on.
So why is health care such a (nearly unique) mess? You guessed it: government has ruined the health market pricing mechanism. You might even say it’s the exception that proves the rule – because deep down it’s no exception at all but merely a perversion. It used not to be that way. I remember when it wasn’t. We know what has changed in the intervening decades.
“…a highly complex and nuanced…” Nonsense.
This isn’t political ideology, and it isn’t even very hard. It is the stuff we teach in Econ 1. I wish that more of those who teach it took it seriously.
Let me make your day and stipulate for the record that, if government completely withdrew from health care, and private third-party payment as well, there would not be any shortage of any type of health care for more than a fleeting moment because prices would move up or down to make the quantity of health care (whatever it might be) in balance with the quantity supplied. I just looked that up in a micro-economic textbook, chapter 3. .
Mind you, prices then might ration the poor completely out of health care and make the poor just whither away in case of illness, and heaven only knows what kind of people would call themselves “doctor.”
But, yes, this would work.
Happy now?
I’ve watched over many years. For some inexplicable (?) reason, bright, young folks tend to go where the money is…ALWAYS!
Ray
John,
If we add 10+ million more covered patients to our current patient base, the assumption as documented in Canada and Massachusetts, the wait for non-urgent medical care lengthens substantially. The questions that you address peripherally are several: Does the longer wait increase suffering? The answer seems obvious. But does the prolonged morbidity increase costs? The increased costs by emergency room visits would suggest they do. But, as we all are aware, emergency room visits are notoriously more expensive since the often utilize the ‘shotgun approach’ to obtaining the correct diagnosis.
The other concern that you address is the costs generated from more screening exams and the further testing and possible therapy as a result of this added coverage to this additional patient load.
A great deal of supposition, but without some sort of market dynamics and affordable first dollar responsibility by the patients these costs are even more unpredictable.
Good article!
Rob Tenery, MD
Uwe,
What do we do about “the poor” in any other segment of the economy? We subsidize their needs. We do NOT destroy prices for 100% of the population so that the 15% that are poor don’t have to worry about it.
Healthcare is not an inalienable right like life,liberty and the pursuit of happiness. It is a commodity like food,clothing and shelter. Certainly each person needs a certain amount of each commodity as a right, because without this minimum there is no right to life. However, each person has the responsibility to pay for these commodities. Charity is provided when a person has the inability to provide for these commodities. All should be provided at least to a minimum standard to maintain life.
Health is unique in that each individual makes lifestyle choices that affects the amount of healthcare needed to maintain life. The individual has the responsibility to pay for that lifestyle.
Society should structure healthcare finance to comport with these principles.
Government in its charitable capacity should help the poor, but it should not provide a subsidy for expensive lifestyles like smoking, drugging or overeating.
The use of health savings accounts and cash to pay for routine care is the cost effective way to go. Government could fund these accounts for the poor.
Wow, great to know that we finally have agreement on the application of basic micro theory to an explanation of the health care shortages occur because government can’t get enough of price controls when it grabs control of people’s health care.
Common ground at last!
Why do we need a health care “system?” We do not have a auto “system” or a food “system.” Why do we need central control of our health care?
If government got out of the way and did not collect so much in taxes, most people would be able to access and pay directly for primary care– like they do for JiffyLube for their cars. Cash, check or credit card. Wise people would buy high deductible health insurance, and again, if government got out of the way with all its mandates, this would be very affordable. Leave insurance for the major medical events.
Before 1965, and the beginning of Medicaid, those who were unable to afford medical care could access it in free clinics, run by the hospitals and staffed by volunteers. No one was “entitled,” but they could get care. Today, the taxpayers pay dearly for a highly bureaucratic system that does not even pay the physicians a fraction of their overhead. Saying that ObamaCare will increase Medicaid payments to physicians is a cruel joke on the taxpayers. Medicaid already consumes 1/4-1/3 of the average state budget.
Doctors and patients are not widgets in an assembly line, and the loss of autonomy signals the loss of what makes us human. Americans value freedom. We need to retake responsibility for our own health and not expect some “system” to be there to pick up the pieces when we run the red lights. We need to look after our families and neighbors and be willing to help out. We do not need government to do it for us.
When is healthcare basically free at the point of provision anymore? When I was growing up, it basically was free under employer-supported insurance, and we did not suffer from a doctor shortage; but it is no longer basically “free” at the point of provision,
Further, the comment assumes that the only “costs” are fees paid at the point of provision. This does not account for the costs of time and travel. And even were there no copays, costs of time or travel, I would not WANT to go see the doctor every day, even though it was “free.” The idiocy of the argument is clear when one considers universal-coverage systems in other countries where there are no charges at the point of service, and in some cases where even some transportation costs are subsidized.
From a colleague
To Steven Goldstein:
Yours is a fine, clear statement of a particular ideological position on health care. I respect it, even if I do not share it to quite the extent you probably have in mind. Nor, I believe, would your view as yet be widely shared around the world, although your day may come.
In the meantime, thank you for your clarity — no weaseling or muddled thinking here as in quite a few comments on this blog.
I hope you won’t mind if I quote it in my written work.
Best,
Uwe
Dr, Reinhardt needs to read “I, Pencil.”
To Ewe Reinhardt
Can you please explain to me what it is that you disagree with and why?
I am already aware that my position is not popular. However, this does not explain
why it is incorrect.
To Steve Goldstein:
You have misread my comment.
I did not say that your position is incorrect, because I am not in the habit of saying that people who have a different ideological perspective on health care than mine are wrong. I notice that many other commentators on this blog have that habit.
Suppose we make a table and put into the first column brackets of disposable per capita income for families, say, in increments of $10,000. In the columns next to it we would write the dollar amount for each income bracket that families falling into that bracket should be asked to pay for their own health care before they receive any assistance in the form of public or private charity.
My hypothesis is that your and mine numbers would be substantially different — that mine would be much lower.
That’s all I meant.
Btw., I would have no idea from John Goodman’s eclectic commentary on this blog what he would write down.
I recall that not long ago he proposed to give every family $8,000 with which to buy health insurance and health care and use Medicaid as a fail safe insurer, for that $8,000. It blew my mind to the point that I wrote a blog post on it in the NYT.
The original question, I seem to recall, was whether or not there is going to be a doctor shortage and how to calculate how much that will be.
Well….calling in from the mean streets those of us stroll who match folks up with health insurance coverage, deal with difficult 3rd party payors, and coax providers who have endless problems with their billings, I would offer that this is hardly a complex problem.
The barriers to entry into the health care provider industry are steep. When those barriers become significantly more difficult to scale, and the potential rewards sufficiently less, well, rewarding, fewer folks will pursue this as a career option. Adding to these obstacles is a training system that has been acting as a guild for the past century by limiting the number of people it allows to be trained, aided by the ever escalating cost of this training.
On a radio program this morning I heard one commentator lamenting the fact that policy makers are promising guaranteed access to care while at the same time they rely on payment restrictions to providers as the only way of dealing with budgeting limitations. Should there be any surprise that the personal economic expectations of individuals contemplating medical school may dissuade them from that path?
Then, should one actually decide to embark on this path, they encounter greater and greater complications in non-medical regulatory matters as the years go by. From my side of the street, we call these situations “non-revenue producing” problems — something that individuals paying attention to their company checkbooks, try to avoid. We see this even now, as more docs exit the arena.
I’ll grant that determining reasonably exact estimates of numbers of future docs is a more complex calculus, but we might examine how analogs in other industries over the past couple of decades.
If we were to take certain segments of the IT industry as somewhat parallel examples, one of the answers to the shortage of operatives in the last couple of decades was the importation of talent from overseas — some of which came here under H1B visas, and some being foreign students that decided to stay. Sound the least bit familiar? Anybody… anybody? Can we replace our home grown under-count? I suggest that we will not be able to do that without the removal of the obstacles I’ve described.
Let me wrap up by raising an ancillary difficulty that will result from these policies. Stability. Even in the current environment, one complaint that seems to reside cheek-to-jowl with the shortage issue, is that of provider movement…as in the geographical variety. Many younger health care workers (ie. pharmacists, med techs, docs, etc) are following a life style of relocation every few years. Given their training levels, and almost guaranteed employability, there is little concern over staying in one place for very long. From my conversations, many of these moves are lateral, from a salary perspective, and are motivated by a modern day wanderlust. “Get a medical degree and see the world — thoughtfully paid for by someone else!” Shortages of employable operators is a question of sufficiency, and therefore, of access to care.
To Stan Ingman:
Have you ever heard of American exceptionalism? It works in health care as well as in all other areas of human endeavor.
It is true that Europeans and Canadians do not run to the doctor all day because health care is free at point of service. It is because of the other costs you mention, plus the fact that getting undressed, being hit with a little rubber hammer or having a needle stuck into your posterior are not viewed as intrinsically pleasant things in those countries.
But that is where Americans are different, you see. They do enjoy these things, which is why making health care free at point of service ere literally would mean that 100% of our GDP would be spent on health care.
“110% of GDP,” you may incredulously. Yes, 100%. 100% from our home grown GDP and 10% from China’s GDP lent to us.
So people on this blog are right.
I agree with Linda. Some common ground….at last.
Uwe, put away your dowser and start recognizing that government can help the poor without destroying the market place. I think that conclusion was written for all including lay people and diviners in a well published book in the mid 1940’s by a Nobel Prize winner in economics.
On the other hand maybe you agree with the above statement, but don’t believe in the market place. If that is so then some of your comments make more sense to me.
Prof Reinhardt:
If your argument held, then the poor would have been priced out of the market for food, clothing, and shelter long ago. Nothing of the kind has happened, because we have an extensive system of transfer payments that enabled them to purchase…food, clothing, and shelter in a competitive marketplace where resources are allocated, and supply and demand are coordinated by means of market prices.
By your comments here, you seem convinced that there is something inherently different about the material and labor inputs that must be coordinated and allocated in order to deliver medical care, which makes it impossible for the price system to function in the same fashion that it does in any other marketplace. Or do I misunderstand you?
Two related questions:
1. If an income-indexed voucher system works for food, clothing, shelter, and every other good or service purchased by those who are too poor to provide for their own needs, what evidence/arguments have convinced you that healthcare is altogether different, and an income-indexed voucher system would necessarily lead to the catastrophic exclusion of the poor from the market for healthcare?
2. It’s not clear whether you’ve familiarized yourself with the technical literature that establishes the necessity of market prices for coordinating supply and demand and allocating resources. Have you done so and rejected the arguments for technical reasons (if so, what are they…e.g. did you find the theoretical arguments advanced by the likes of Oskar Lange and Leonid Kantorovich compelling?), or simply dismissed them out of hand (if so – for what reasons).
Best Regards,
Yaj Reizarb
Uwe Reinhardt STILL has not produced a single compelling example of a significant market failure in health care (except communicable disease, which *I* brought up in a previous edition of this forum), much less the panoply of failures that would be needed to justify his preferred socialist alternative to a free market. He retreats to the tired, downright dishonest refuge of “the poor” without noting that most of us in this forum who favor the market *also* favor some kind of assistance for the poor. I have said I support that in my running debate with Uwe, so he knows that leaving it out is simply a debating trick to make me seem naive or hard-hearted. [PS: I actually have thought of another minor market failure: fluoridated water. It’s much cheaper to do it publicly than privately. I’m sure there are a few other examples to be found. Uwe hasn’t provided any.]
Uwe also has the unfortunate habit of describing insistence on scientific rigor as “ideological differences.” I do not favor the market over the government because of ideological or political preferences. I do so because I theory and I have evidence. What does Uwe have?
Uwe obviously thinks my economic conclusions are politically motivated. They aren’t. It’s actually the other way around. I am sure he would be very surprised to learn my political preferences and my personal political history. My overall views on economics probably would surprise him, too. I won’t reveal my political preferences, though, because I want Uwe to deal with my economic arguments on their own terms, as a true scientist should.
To Yaj Reizarb:
Evidently I have not familiarized myself with the technical literature that establishes the necessity of market prices for coordinating supply and demand and allocating resources. That is why I am infinitely thankful that you apprise me of it. I am always willing to learn from the master in these matters.
Now, if truth be told, I had labored under the impression that there is a difference between purchasing a can of Campbell soup and shopping for a diagnosis for some aches and pains or heart surgery or treatments for terminal cancer. Evidently, the bulk of the rest of the world has the same perception — or misperception as you would say — hence the heavy involvement of government in health care everywhere. (Let us not forget that it was Ronald Reagan who introduced Soviet pricing to US health care, as I have pointed out before on this blog.)
So may be the bulk of the rest of the world is wrong and you are right. Then, again, there is a non-trivial probability that it is the other way around.
By the way, stimulated by your teaching, I spent some time watching poor people buy groceries with food stamps in our supermarket here. And you know what? Not one of these shoppers was asked for information on their health status.
For some reason, when one buys health insurance in the market for individually purchased health insurance, the insurers ask about health status. Not read in the technical literature on pricing health insurance, I have no idea why that is, but I am sure you can explain it to me. In the process you can also explain to me and all of us exactly how your subsidy scheme to the poor would be made operational, given that health insurers do care somehow about an applicant’s health status.
I feel there is so much to learn from you and am glad to have this opportunity to do so.
Prof. Reinhardt has a good sense of humor. I can only imagine the comments in one of his classes.
Maybe if the states received block grants for Medicaid there could be experiments with vouchers for primary care combined with a prepaid guaranteed issue catastrophic plan. Some combination of competitive bidding, reinsurance and government support could fund the insurance part. The poor would be paying “cash” for services and maybe the market would work.
Uwe’s main evidence appears to be that everyone else is doing it and Ronald Reagan did it as well.
Maybe we should all take drugs. It seems everyone else is doing it and President Obama has done it as well.
On Uwe’s second point I wonder if Uwe recognizes that when one buys insurance on their home the insurer looks at the ‘health’ status of the home. Thus I don’t know why he would be so surprised that the insurer looks at the health status of the one looking to be insured.
Is Uwe advocating that people be able to purchase fire insurance after their home burns down?
To David Lemire:
Actually I am a humorless German-born; but I do get some chuckles in class when I share with them some of the comments on this blog. Students call it “sooooo 19th century.”
It is hard to assess the merits of block grants to the sates for Medicaid without knowing more detail on it. At what rate would they grow over time? With the CPI? If so, what happens if health-care costs per capita rise much more rapidly, as they have, especially in the private insurance sector?
There also is the trade-off between local autonomy and the idea that we are a nation, not just a a bunch of individuals sharing a geography. This is not covered in most textbooks of economics, but it does engage the minds of people. In fact, it is an age old debate in this country.
In general, I would favor a workable system that engages market forces as much as possible in health care without violating certain ethical principles that nations seek to impose on their health system. As this blog shows, there is disagreement among Americans on what these ethical principles should be (and I’ll tell only you) textbooks in economics do not discuss these ethical principles when they describe the workings of supply and demand. Many people do not seem to realize that an allocation of scarce resources through free markets embodies a distinct distributional ethic that an individual may or may not share, and that a Pareto efficient allocation of resources among human beings may be morally repulsive to probably the majority in a society.
Of course, for a market to work properly, prices of the things being traded must be well defined and known ahead of transactions to all participants. This blog has never described how that could be brought about at the operational level, and I emphasize “operational.” What would the price lists for hospital care look like, for example, or for physician services?
To Al:
With all due respect, I do not believe your comment is on point.
One of my points is that even Republicans, who routinely profess allegiance to the free market, have not hesitated to use the regulatory power of government to control the health care sector. What are we to make of it?
Secondly, I was merely asking that if health insurers price their policies on an actuarially fair basis, what would an operational premium support system to poor individuals look like?
Answer that and you would be on point.
Prof Reinhardt:
I appreciate the effort that you put into your response, but wouldn’t it have been easier to simply address the question with a sincere answer? If I have insulted you with my questions, which it appears that I have, I apologize and I assure you that it was not my intention to do so. I’m aware of the general tenor of your work but not with the totality of your oeuvre so if you’ve addressed these questions elsewhere please let me know.
I’m a bit puzzled by the choice to mock my questions rather than address them (BTW bravo on that score – I’m actually kind of flattered), as a link to paper, blog post, etc where you or someone else has developed arguments that demonstrate that prices are, say, necessary but not sufficient for coordinating supply and demand when it comes to medical care. If you think that Arrow’s paper is the final word on that question, a simple comment to that effect would suffice.
I found the response particularly odd given that you are certainly aware that disability insurance, life insurance, etc are complex insurance products rife with information asymmetries and complicated by health-status variations – yet there is a robust and competitive market in each and mechanisms have emerged to help both buyers and sellers of these products surmount them (actuaries, agents, etc).
In the short term one can easily bridge the gap between an actuarily sound premium and what the applicant can afford to pay with transfer payments. In the longer term there are a variety of policies such as health-status insurance, Roth HSA’s coupled with high deductible plans, and income indexed transfers that can largely eliminate these gaps in the long term.
As flattering as I would find another couple of paragraphs of witty derision and contempt directed at me (I spend my days pondering some minutia related to the pathophysiology of severe malaria infections and find such missives directed at me to be a diverting change of pace), perhaps you’d be willing to consider a curt-but-sincere response (even a url will suffice!) instead.
Fondly,
Yaj Reizarb
-BTW, all of the above goes double for a link demonstrating that Reagan personally endorsed Hsaio’s RBRVS pricing scheme (Talk about 19th century – 18th, even! Labor-theory-of-value was a regression from the proto-marginalism evident in Scholastic price theory. Smith/Ricardo had Cantillon turning in his grave….). That would certainly be a fascinating deviation from the central tendencies of his thought.
Uwe, I truly do not understand this line of thinking. Just because other countries disagree doesn’t mean they are right or that they have even solved the problem. Now you are telling me that Republican politicians sometimes make political decisions that are wrong and that is an additional bit of evidence for your side of the argument. I can’t believe I am hearing these things from a professor of economics, but maybe I am hearing things wrong. I have to believe you to have better arguments than these to promote the abandonment of the market place in health care. Then again in another discussion you could not add to John Seater’s list of possible market failures that so far can easily be carved out from the market place. Help me and explain your abandonment of the market place, not by the poor example of others, but by fact and logic.
On your second point with regard to fair actuarial prices and what a premium support program could look like I could provide a multitude of ways to do that without much fuss or bother. An unsophisticated off the top of my head method would be targeted support based upon need to help with high deductible payments (that should last a period of years, say 3 years) and co pays. The government would only have to pay out if there was a need which they do today at much higher rates than necessary.
Uwe, I am sorry to burden you with yet another response based upon your response to David Lemire. You wrote:
“I do get some chuckles in class when I share with them some of the comments on this blog. Students call it “sooooo 19th century.”
I may have met some of those students after they left the University to function in the real world. They sometimes sheepishly would reply that they must have been brain dead to swallow so much of that empty rhetoric when they were students
You continue” “I would favor a workable system that engages market forces as much as possible in health care without violating certain ethical principles that nations seek to impose on their health system.”
It seems possible you failed in that endeavor if you have embraced the idea of group ethics which are not appropriate ethics for a doctor at the bedside. Group ethics may aid you in promoting certain types of health care, but at times that type of ethic is downright immoral.
“So may be the bulk of the rest of the world is wrong and you are right. Then, again, there is a non-trivial probability that it is the other way around.”
This is an interesting statement given the prevalence of private health markets around the globe, not to mention the role that non-public transfers (e.g. bribes) play in securing access to nominally public assets.
It would seem that the emergencd/persistence of private markets for health insurance and medical care that rely upon market mechanisms, alongside public systems that rely upon bureaucratic mechanisms doesn’t exactly establish that market mechanisms are dispensible for coordinating supply and demand and allocating resources in this sector, much less that the “bulk of the rest of the world” has established bureaucratic substitutes that function so well as to render a private alternative superfluous.
By your comments you appear to have concluded otherwise. Perhaps you’ll take a moment to further elaborate on that point?
To Yaj Reizarb:
You asked someone who teaches economics: “It’s not clear whether you’ve familiarized yourself with the technical literature that establishes the necessity of market prices for coordinating supply and demand and allocating resources.”
I think that would be insulting, were it not risible.
And although it is easy to proclaim that the Second Theorem of Optimality applies to health care, even Arrow shrinks away from that proposition after having stated the conditions that must be met for the theorem to yield an optimal allocation of resources.
Indeed, I am surprised that everyone on this blog seems to assume that there is agreement in this country on what an optimal allocation of health care among Americans is, that is, what the optimal redistribution of purchasing power for health care would be, and how such a scheme should operate. I do not think so. Sop far we do not even have transparency of prices in the health care market. Some thought on how those should be revealed to consumers also might be helpful, not at the theoretical level, but at the practical level.
And I believe that it is relevant to observe that literally no developed nation in the world acts as it its citizens believed that laisser faire private markets, even under politically feasible redistribution of income, would produce an optimal allocation of real health care resources among citizens. To argue that all these nations and their citizens have it wrong strikes me as facile.
All that said, I do agree that one could enlist market forces more imaginatively and reduce government interference in our health system. I wold be the last to argue that what we now have is the best we can do.
But I do not like facile solutions, especially after having learned from my former colleague, Nobel Laureate Danny Kahneman and his disciples in psychology, that economists vastly overestimate the capacity of consumers to deal with purchases of complex contracts, especially when they entail uncertainties.
Prof Reinhart:
I appreciate your response. Here are a few brief final comments.
1. By “technical literature” I was referring specifically to the technical discourse that the participants in the “Socialist Calculation Debate,” generated. Hence the reference to Lange et al.
Most formal economics since Samuelson seems to have been conducted as though that literature doesn’t exist, or that Lange triumphed and the technical constraints on central planning that Hayek outlined in “The Use of Knowledge in Society” do not exist.
This state of affairs is puzzling to me, 1)given the centrality of this argument in the debate over central planning. That is,whether it is technically possible to construct synthetic, bureaucratically determined price substitutes that will enable planners to coordinate supply and demand and allocated resources as well as prices in a decentralized market economy and 2) the empirical record. In any event, if you are already familiar with this literature, bravo, but you are a member of a distinct minority in your profession.
I have other comments but I’ll withhold them for now and thank-you for your participation here.
To JayB:
I am of a vintage to have been exposed in graduate school to Oskar Lange’s work. I recall he was of Polish origin and sincerely thought that it was possible to make complete central planning work. It was one extreme, and useful to have. In practice, central planning produces results unacceptable to populations.
The other extreme, completely laisser faire private markets, produces results that are also not acceptable to populations, which is why political systems everywhere temper private markets.
We just witnessed it in China. After the market reform of 1978, much China’s health system literally was turned over to the mercies of private markets. Public hospitals lost their public subsidies and had to fend for themselves. The result was profit seeking by hospitals through the sale of drugs–especially a vast excess prescription of antibiotics. Physicians chose implantable medical devices not on the basis of clinical judgments, but on the basis of which manufacturer paid them most personally for using their devices. And vast numbers of Chinese lost insurance coverage and access to care. So now, quite predictably, we have health reform, because the free market could not be made to work.
Friedman and his disciples wanted to eliminate the FDA. I know of no country that allows the market for drugs operate without strict government supervision.
I argue that when no country allows free markets to run their health system, it tells you something.
You argue that this proves nothing, because they may all be wrong — they should just listen to the NCPA disciples.
No point arguing about that much more. Let’s just leave it at that.
To Uwe Reinhardt:
Thank you for your comments.
I agree with you that simply providing a health savings account and catastrophic insurance would be too expensive for many families.
We need to lower the cost of healthcare by improving the public health.
Health is not provided to a patient. Only healthcare is provided. Health maintenance is a partnership between patient and physician.
I would propose a two tiered system based not on income but on compliance.
Your comments on my proposal would be much appreciated. I would like to communicate with you privately because the blog does not allow room for detail.
My email address: txneuron@gmail.com. If you would be kind enough to send me
an email address. I will send you what I have in mind.
FYI I am not an ideologue. I am a physician and scientist. I am happy to view ANY idea. The question is whether the idea is one that improves or accomplishes the goal. To determine whether an idea is beneficial requires an experiment. The experiment must have predetermined measurable goals. Comparable controls are necessary. Currently, ideas to reform healthcare are adopted based on hypothesis only. Arguments for or against have no scientific basis.
Uwe, time and time again on this blog you have belittled the active participants that believe in the market place by changing their arguments to create a strawman. You make their argument into an all or non scenario for those that believe in a functioning health care market with the least amount of government involvement possible.
Apparently your argument doesn’t rest on logic or fact rather the temperament of the author, you, who has a position he is unable to defend.
The American experience led to a nation of people that chose not to have King’s etc., but a Constitutional Republic. Everyone else had the former. Your argument to look at Europe would have been an argument against an American type of Constitutional government. I think your apparent desire to continue the monarchy is wrong. 🙂 ” Let’s just leave it at that “.
Dr. Goldstein, I too believe that health care ought to be tiered, with the greatest amount of market forces in place. 300,000,000 people making choices of lifestyle, medical care, and insurance would be a good start. The government ought not mandate what an insurance plan must cover or what deductible is allowed. Government intervention only makes insurance more costly and unaffordable.
Being free to choose a primary care physician who can be one’s physician for many years, will establish a relationship with a coach who knows the patient and can help him navigate the “system.” Paying cash for primary care eliminates the costly middle man for the majority of encounters. If patients care what things cost, the physician can find where to access tests and medications at the lowest prices. Insurance ought to be reserved for the major medical events.
Subsidiarity is a key component to any rational system. When a family cannot pay its bills, the extended family can help–eg. grandparents, parents. The greater community can get involved– churches, synagogues, towns. Those closest to the problem should be the first to help. Community hospitals were started to meet the needs of local communities. All health care is local. Insurance, when accessed for major medical events, is best at reining in excessive hospital charges.
For those without families, there could be non-government free clinics that have proven to provide good care at the lowest costs. These are popular charities that good people like to support.
We do not need more government intervention. We need less. Government does not provide medical care. It just meddles, coerces, restricts and underpays for services it promises to provide, while charging the taxpayer more than he can afford.
Dr. Reinhardt is correct in saying that telling people they are “covered” and can thus access the care they believe they need, will consume 110% of our GDP. That is why the only rational system is for every health care consumer to care what things cost.
Ok, Al, let’s just leave it at that. We’ve milked this cow to all her sweetness, I think.
If you sincerely believe that I favor monarchy, you are welcome to the thought. (Although I am fond of British monarchy, which allows one to view Prime Ministers as regular human beings. Here, in the US, we elevate the President to something akin to a monarch. Consequently Presidents quickly lapse into behaving like a monarch, starting with the inauguration party, purchased for them by special interest groups. The Brits don’t do that, as you know. One prime minister leaves 10 Downing Street and the other one moves in, with little fanfare.)
“If you sincerely believe that I favor monarchy, you are welcome to the thought. ”
Uwe, that was a fanciful remark demonstrated by the smiley face following it. The remark was to point out the fallacy of your argument, just because all European nations had a King that shouldn’t make one believe that a King is best. We proved that with our Constitutional Republic and the success this nation had.
You of course are correct that we elevate our President to a higher level than he deserves as a servant of the people, and the Congress as well. Government is continuously trying to usurp the individual rights of its people and at the same time destroying the Constitution. Join me in restoring the rights of the individual over his own health care without so much interference by the federal authorities. End the ACA and burdensome involvement by our government while not forgetting the needs of those less fortunate.
Have a good weekend and make sure your diet conforms to federal guidelines. 😉
Al
Al:
Because you seem to be a nice guy, I wrote a health-reform plan just for you. About John Goodman I am not so sure. He’d have to give me 20 push-ups to be admitted to my scheme.
Here’s the link: http://economix.blogs.nytimes.com/2012/06/29/health-care-solidarity-vs-rugged-individualism/
Even Alieta Eck should like it!
Have a good weekend yourself. I am off to Europe to recharge my batteries.
Best,
Uwe
Isn’t Uwe confusing what governing individuals will do to maintain their positions of governance as a sign of market failures?
Appearing to provide cheaper or broader access to healthcare is an efficient means for governing individuals to maintain their power. It covers a wide segment of the population. It covers the middle group of citizens as opposed to just the rich or poor. It appears to lower an individual’s out of pocket expense for medical care, while increasing the less obviouysly connected social costs, e.g wait times, rationing, use of older equipment, higher taxes and and slower economic growth. It allows a politician to boast of the good done, while using tear jerking anecdotes of some person near death receiving government health care. It helps those in power to stay in power independent of the reality of market failure.
When Uwe and others talk of market failure, they often cite some profits as the ethical problem. Recently, the US Attorney prosecuted someone who illegally brokered an organ transplant, paying a individual to donate his organ while receiving more money from the person getting the transplant. While organ brokering is clearly against US law, the US attorney’s arguments were that in addition the broker was immoral and unethical because he made a PROFIT.
Even in the new health care law, there are limitations on insurance company profits. Turning healthcare into a utility, like the electric, phone or cable company, will not improve it. Clearly, there will be market failures if politicians and media view profit making as an immoral activity.
To Milton Recht:
You write: “When Uwe and others talk of market failure, they often cite some profits as the ethical problem.”
So, I challenge you to find a citation in which I describe “profits” as a sign of market failure.
Uwe
I read the following as your suggestion of market failure.
September 29, 2009, Economix, “In next week’s post, I intend to explore how the add-ons for marketing, administration and profits on top of expected outlays for health care to set the insurance premiums can be astonishingly high for individually sold policies. Up to half the premium can go for these non-medical items. It is the reason why that market urgently needs to reformed.”
Isn’t it a typical response of yours. When you studied NJ healthcare for Corzine(?), you cited at least one hospital that was charging patients too much because it had too big an endowment.
You have said that insurance profits should be judged by premiums paid in versus benefits paid out. It ignores other business costs, business risks, competition, return on capital, stock price, etc. It is not how an accountant would judge profitability. Insurance is not a charity. It is a sold product competing for the buyer’s dollars, subject to market supply and demand forces and household budget constraints. To judge otherwise, is to implicitly believe the market is not functioning and profit measures are not producing desirable outcomes, i.e market failure.
To Milton:
First of all I am flattered that you partake of my teachings on Economix. I take it as a sign for hope.
Second, however, your citation does not make the grade.
I was not focusing on profits at all, but on the very low MLRs of health insurers assembled under the banner of the Council for Affordable Health Insurance (I think that is the name). They petitioned the NAIC pleading for a minimum MLR of 55%, not the 80% in the ACA. If you are proud of that achievement of the market, you are welcome to the thought. I find it pathetic. In fact, I am on the way to Germany to address some 1,000 private health insurance employees and brokers there. I can just hear the laughter in the hall when I tell them that there are Americans judging MLRs of 55% reasonable.
As to your vague citation to the report of the Commission I chaired, I have no idea what you are talking about. It is known that I look askance at the rampant price discrimination practiced by hospitals and their habit to charge the highest prices to uninsured patients. The driver of a local car service told me that he was charged $1,280 for an emergency room visit with his 3 year old, who had pus oozing out of his eyes. They did one test and prescribed him some cream—that was it. Again, you can take pride, if you wish, at this handiwork of the Invisible Hand. I don’t.
Uwe, thank you for such a compliment, but don’t shortchange yourself. You are just as nice as me. I will review your scheme later today or tomorrow and then maybe comment. I just wanted to make sure that I wished you a bon voyage before you left for Europe to recharge your batteries. That will be good as I noticed by your answers that your lights seem to have dimmed. Perhaps on your return with batteries spewing out electrons you can shine a little light on the questions yet unanswered.
Best.
Al
PS Among other things you made a logic error in your reply to Milton R.
Marcia:
For anyone looking for “operators” with “rigging training,” you found the sweet spot here!
Rigging facts and theories is what this blog is all about.
Hire John Goodman. He’s cheap. Me, I’m a union man with a tort lawyer on retainer.
Best,
Uwe
Sidney:
Here you come with your spelling regulations! You probably from the Ivy league.
Heck, we’re Libertarians here and we spell as we like. Ain’t nobody telling us how to write what we feels.
Best,
Uwe (some on this blog spell it Ewe. They are free to do so).
Prof. Reinhardt,
Despite your protestations, you do so have a sense of humor. Knowing cites are demanded of anyone claiming a position for you, I cite this series of posts. Have a good vacation!
Sidney:
I am doing some Talmudic exercises trying to figure out what you mean by “and I in finding it very bothersome to inform the truth.”
I should have thought that the truth would inform us, but the other way around puzzles me.
Then again, perhaps what you say is what this blog does.
Best,
Uwe
In the spirit of this mornings fun, it seems to me that some of the posts are written in a language other than English and run through a (perhaps second rate) translation app.
Could explain a lot.
Yes, David. Maybe the commentators really wish to express practical Keynesian thoughts but in translation it comes out as utopian Libertarian fantasy.
You on to something here.
Uwe
uh, I meant the grammar, not the philosophy, being a card carrying Libertarian myself.
Prof Reinhardt:
I know I pledged to leave things at that, but I’ve found myself back in the lab waiting for a PCR reaction to run to completion and a gut full of coffee so I thought I’d add a few thoughts.
I appreciate your persistence here, and am learning a great deal from your comments.
1. “I argue that when no country allows free markets to run their health system, it tells you something.
You argue that this proves nothing, because they may all be wrong..”
I thought we were discussing something rather less dramatic than this grand dichotomy, e.g. how to administer transfer benefits disbursed by the government to attenuate the effect that income disparities have on access to medical care.
My argument is that the ostensible beneficiaries of such transfers will be better off with income-indexed vouchers that allow them access to all vendors in a competitive marketplace. I believe that’s what Goodmans and others here are advocating as well.
As far as I understand it, your position is that all persons, but particularly those dependent on transfers to secure acess to medical care, will be better off in a centrally administered system with bureaucratically determined prices and less personal discretion over when, where, and how they are cared for. If I’ve misunderstood you – I welcome a correction.
2. Does knowing who Lange was really qualify as a working knowledge of the technical discourse exchanged during the “Socialist Calculation Debate”? If so – interesting. More on that in a moment.
3. Prior to my participation in dialogues such as this one, I had assumed that professional economists treated the technical requirements for perfect markets (prefectly rational actors, perfect competition, perfect information) as arbitrary theoretical constraints designed to render the computational exercises at the heart of DSGE models tractable – not as essential features of real markets.
It is slowly dawning on me that often not only are they treated as such, there is actually an entire body of economic thought in which the failure of real markets to comport with the arbitrary constraints imposed on these theoretical models isn’t viewed as an oppotrunity to re-examine the validity of the models or consider their limitations, but is rather used to justify corrective interventions to mitigate deviations from the model.
In welfare economics, and in its health-economics subfield the the map-territory disctinction seems to be far less significant than I am accustomed to. I had assumed that the conceptual and methodological caution embedded in sciences with an empirical basis and which advance by recursive empirical hypothesis testing was rather more universal than it actually is. Informal commentary from highly respected figures in the field such as yourself have been highly edifying in this regard.
4. The author’s point “The Use of Knowledge in Society” (which effectively concluded the Socialist Calculation Debate) was that there are spatio-temporal and conceptual limits on the capacity of any body of planners which makes it impossible for them to construct synthetic price-substitutes that would enable them to coordinate supply and demand as efficiently as market prices.
A planner can no more integrate all of the information required to do so in real time than NASA can surmount the limitations imposed by the speed of light to communicate with a Mars-rover in real-time.
This is why all centrally planned economies collapse due to compounding coordination and rescource allocation failures, and why all systems of price controls in market economies inevitably result in shortages or surpluses, and why variants on central planning/price-controls like “All Payer” pricing will ultimately fail, with the failure-velocity determined by the size, scope, and rigour with which they are applied to existing market processes.
I believe everything posted was actually very logical.
However, think on this, what if you added a little information?
I ain’t suggesting your content isn’t solid, however what
if you added a title that grabbed people’s attention? I mean Health Care without Prices | John Goodman’s Health Policy Blog | NCPA.
org is a little boring. You could look at Yahoo’s home page and watch how they create news headlines to get viewers to open the links. You might add a video or a pic or two to get readers excited about everything’ve written.
In my opinion, it might bring your blog a little livelier.
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