Medical Highways
Have you ever thought about what our health care system has in common with our systems of public roads, thoroughfares and highways? In both cases the service is mainly free. Sure, toll roads are increasingly common and copays at the doctor’s office are too. But in both cases, the fee we pay is well below the true social cost of what we get in return. And most people pay nothing out-of-pocket when they use either of these services.
What difference does that make?
Ain’t Gonna Pay No Toll
Overconsumption
Economics teaches us that people tend to consume goods and services until their value at the margin is equal to the price they must pay. If the price is zero, we will consume a service until its marginal value to us approaches zero. A joyride in an automobile is viewed the same as a romp through the woods. But unlike the woods, the road really isn’t free.
Rationing by Waiting
In urban areas, there is no way we can supply all the road space or all the doctor services people want when their out-of-pocket cost is zero. So demand persistently exceeds supply in both cases and the service is rationed by waiting.
Many Americans like to think that our health care system is very different from Canada’s. In fact, it isn’t. In Canada, when you see a doctor it’s free. In America it’s almost free. In both countries we primarily pay with time, not money. The major difference is that Canada’s rationing problems are much worse than ours because of severe restrictions on supply — especially the supply of expensive technology.
The Cost of Rationing by Waiting
Rationing by waiting is expensive. In general, it doubles the cost of the service. Imagine a market in which doctors are selling their services for $200 an hour. Now suppose the government nationalizes the industry and makes their services available to patients for free. Since people cannot pay with money, they will pay with time; and the rationing price of an hour with a doctor will now be about $200 worth of patients’ time.
But the social cost of a doctor is not zero. In order to have doctors society had to give up about $200 (in this example) in other goods and services doctors would have produced had they not gone into medicine. [See the explanation in previous Alerts here and here.] So rationing by waiting doubles the cost: We now pay $200 in real resources (the opportunity cost of the doctor’s services), plus $200 in the value of the patient’s time.
[Suppose the government pays the doctor only $100 in salary. On paper, it looks as though we have reduced the money cost of care. Patients were once paying $200 and now the government pays only $100. Yet, as explained previously, this act shifts $100 of costs from patients/taxpayers to doctors. It does not lower true social costs.]
A similar principle applies to roads. People pay with taxes to build the road in the first place. If they must pay again with time (because of congestion) that increases the social cost of roads. Moreover, in addition to the time cost of travel, there are also pollution costs.
Rationing and Externalities
Almost everything we do affects other people. If I bid higher than you for a painting at an auction, my behavior clearly makes you worse off. Now suppose that we auction the painting by giving it to the person who’s willing to stand in line the longest. In this case, the longer I wait, the longer you must wait to get the painting. So my waiting not only affects you, it causes a use of real resources — my time and yours. These effects are called “externalities” because they are external to the market. And in this case they involve a waste of real resources because we are expending valuable time and not getting any new goods or services as a result.
Price Rationing
In the Netherlands, car taxes and road taxes will soon be a relic of the past. In their place, cars will be installed with a GPS system that will track the time and place of road use and travelers will be charged based on where, when and how long they use the roads. A toll tag system in place in Dallas and other major cities could accomplish the same result — at least on major thoroughfares. The system can read car tag numbers at high speeds and could be used, in principle, to establish different prices for different lanes at different times of day.
In health care, many argue that price rationing places an unfair burden on the poor. In fact, the burden on the poor is the other way around. Unable to use Medicaid money at walk-in clinics and primary care facilities, low-income families are forced to seek care at community health centers and hospital emergency rooms.
The ability to be able to bid resources away from other people is an important and liberating aspect of patient power.
Good post. Nobody’s paying any medical toll either.
Interesting connection. Something I had not thought about before.
You have a great way of explaining things.
The road pricing examples are intriguing, but wouldn’t it work much better if the roads were privatized? Otherwise, the politicians would consider it a revenue source, instead of market-driven resource allocation.
The most important thing I learn from your posts is that the health care system would be much better off if consumers were empowered. Or to use your words: “Patient Power.”
Re: Juan O::
… and consumers would have to be educated in what they are purchasing and what they are getting for their money. Only then can they make the discriminating choices consumers make in markets.
Interesting, isn’t it, how information on health care outcomes has been “hidden” more and more over the years by, wait for it, providers of health care services and products, and perhaps not so coincidentally, by government.
Only in the last few years have we begun to see such data as hospital infection rates, and so on. But, there is still much that needs to be exposed and be made transparent. None of that will happen in a government run health care system.
Re: R Allan Jensen:
Transparency is rarely a problem when the producer/provider is competing based on price. After all, how can you compete on price if nobody knows what the price is?
The new road policy in the Netherlands is very interesting. It’s so rational. People pay for the road space they use, when they use it. Sounds efficent and fair.
I am wrestling with this sentence, John:
“Imagine a market in which doctors are selling their services for $200 an hour. Now suppose the government nationalizes the industry and makes their services available to patients for free. Since people cannot pay with money, they will pay with time; and the rationing price of an hour with a doctor will now be about $200 worth of patients’ time.”
I had always thought that the value of the patient’s time was the opportunity cost of that time. We can approximate it by the money at which the patient could sell that time in the market for his or her skill level.
But you, John, make the value of the patient’s time equal to the opportunity cost of the physician’s time.
What am I missing here?
Uwe Reinhardt
When that patient is in the waiting room, it really makes no difference they time is worth 200.00, 300.00 or less, they are taking up limited time and now the doctor gets 100.00 whether he isseeing the 300.00 an hour person or the 50.00 an hour person. Uwe Reinhard is missing the fact that the market is distorted due to price fixing and it affects everyone but assuredly it affects the high earner the most.
I didn’t think anyone other than me remembered Commander Cody McCall and ‘Convoy’. Actually, my kids do since I have it on a CD of songs I play on long drives. They even know some of the lines now.
Good post, as usual.
When rationing by time is the currency, some physicians will likely want cash instead. They will move to concierge services and accept an extra fee/payment from some who want faster services and a front of the line agreeement (I do this with my heating & airconditioning service).
This will create a 2 tier system with the lower income patients (or those with time to spare) at an even greater disadvantage than they would be under a system where all pay an equally fair price for the medical service.
The end result: no government can prevent those with more monetary resources from getting the services they are willing to pay for. Attempts by government to “equalize” all at a lower level will fail and hurt most the ones liberal politicans purport to help.
THe current health eforms are not about health or healthcare they are about redistribution of wealth. Government grants, subsidies, and favored contracts will increase those wanting more government. We are probably already at the tipping point of no return. 50% of the population can now politically steal financial and life rights from the financial minority. They know it and so do the politicians who rely on their votes to continue the destruction of the American dream – life, liberty, and the pursuit of happiness (through financial independence and freedom).
Richard writes:
“When that patient is in the waiting room, it really makes no difference they time is worth 200.00, 300.00 or less, they are taking up limited time and now the doctor gets 100.00 whether he isseeing the 300.00 an hour person or the 50.00 an hour person.”
This is an interesting point. Richard complains that the physician gets the same fee whether he or she sees a $300-an-hour person (presumably a high-value human being) or a $50-an-hour person (still not a worthless human, like someone who is unemployed, but still a lower value human being than the $300-an-hour star).
That is an interesting pricing proposal. The Sumerian King Hammurabi had that idea baked into his physician-fee code about 1,800 or so B.C. The physician’s fee was higher for a nobleman than for a commoner which in turn was higher than the fee for a slave. The malpractice penalties also were scaled by the socio-economic status of the patients, with higher penalties (cutting off the surgeon’s hand) for killing a nobleman and a much lower one (s slap on the wrist) for killing a slave. Perhaps we should have that kind of malpractice code here as well. What does Richard think?
What a fascinating blog site. I am learning more about America here every day!
Thank you, Richard.
What am I missing here? I ALWAYS pay. And pay. And pay. It’s never been free for me. I have insurance and my out-of-pockets are still in the thousands every year and I’m in pretty good health. Did I just get a bum deal? I can afford to see a doctor (and I have no idea how much an hour he’s charging me), only because I am not so ill that I can’t work to pay his bill. So if that ever happens, I’ve considered just going to the vet and getting euthanized so I won’t suffer.
Another thing to consider is that the utility of money will not be the same for every patient. For an impoverished patient, a copay amounting to $5 per hour may be a more-than-sufficient incentive to avoid overconsumption. For a wealthy hypochondriac, $500 per hour may not be enough.
In other words, it’s not enough to base the patient’s opportunity cost on his or her hourly wage.
Bart I:
For economists to do their thing — especially their welfare economics and applying their notion of “efficiency” –they must assume that the marginal utility of money is the same for everyone across the entire income distribution.
I explain that to my students in a handout entitled “How Economists Bastardized Jeremy Bentham and Became Shills for the Rich.” I also explain it in a paper entitled “Can Efficiency in Health Care be Left to the Market?” published in the Journal of Health Policy, Politics and Law.
If you e-mail me at reinhard@princeton.edu I’ll be happy to send these to you.
Let’s face it: We economists are charlatans when it comes to defining and applying the concept of efficiency. I’ll debate asnyone — Joh Goodman included — anywhere on this point. Love to do it, because I love to win debates.
As to Janet Fiedler: Welcome to the “best health system in the world!” Enjoy!
Uwe Reinhardt
Just to be clear, I wasn’t suggesting any sort of interpersonal comparison of utilities, or maximization of aggregate utilities. Only that individuals would begin to self-ration at different cost levels, not directly related to their wage rates.
I’m not sure what to think of the idea that economists equate money to utility.
I like this. We over consume, but we have unlimted care available to us no matter where we seek care or at what price if we have insurance. When we look in the mirror we see our primary care doctor and must become accountable for our actions ie obesity.
We need to have higher deductibles and everyone should pay something.
Only people who have never taken care of patients, have little idea of what medicine is, have never worked in non-US advanced country medical systems, could even engage in a dialogue as above.
I have done all the above, and can speak with the authority of experience.
For anyone interested in a dose of reality, read on:
1-The most ludicrous counter-example to our current system above is how wonderful the free market works in plastic (cosmetic) surgery. Of course it does. 99% of the people who have it, “want” it, but do not “need” it. Nor will it matter if you have it today, or 3 weeks from now. So, sure, one can shop around, listen to friends tell you about “their surgeon”, look at others’ results, and make some informed choices like you would if you were buying another computer. Beauty, after all, is in the eye of the beholder.
When a patient comes in with pus draining from a wound, with crushing chest pain, with hallucinations, gasping for breath, with a tender abdomen…sorry,beauty at the point is in the eye of the evaluation and treatment. No one is going to sit around asking if a particular scanner is more or less expensive than the one across the street, or in the next town.
Also, not only are patients not able to make judgments about the best care, physicians are often not able to do it either. There are so many variables, that only results of carefully controlled, randomized trials can be trusted. Does this hospital or this doctor do a better job at treating infected wounds? Well, tell me that all infected wounds are the same, and I might be able to answer that question. But, they are not–and how Mrs Smith fared with a particular doctor at a particular hospital will not necessarily have probative value for Mrs Jones—only hundreds of Smiths and Joneses, from carefully controlled trials can provide answers.
2. The reason there are delays, say in the UK, compared to the US, in getting elective (but necessary) treatment is that they put in about half the amount of money per patient population as we do, and still have better statistics (but that is another issue). Double the amount per patient in the UK so it is what we spend, and delays would disappear (or get to the level they are in the US–it still took me, a physician himself, 3 months to get a GI-specialist appointment, but there was no rush for the necessary but not acute problem.
3. The high costs in our system are driven by two major factors: culture and payment structure. I’ll address culture here, and payment structure in the next bullet. Culture has to do with expectations, and also our general belief in free markets (in the sense of “if you can buy it, you should have it”). Consequently, we have proliferated the purchase of very expensive equipment that in turn drives increased use (to justify and pay for it). When I started practice, for example, there were 5 MRIs in my city. The UK–where MRI was invented–had 3 in the entire country.
The expectations–which I share, by the way–is that if there is something wrong, I want the best available techniques of finding out what it is, and fixing it. Period. Other countries’ cultures do not have the same expectation. That drives use.
4. Payment structure is an even worse driver of high costs. The “fee for service” system of payments for doctors encourages (through free market forces by the way) increased use of procedures and tests. The hospital reimbursement system encourages both hospitalization (for brief periods) and use of multiple specialist consultants within the hospital. So, a patient goes to an ER attached to a hospital. The default position is admission, full work-up and then get them out quickly. Full work-ups are not always appropriate, especially in elderly patients, but the system/culture encourages it.
5. Contrary to popular belief, drugs actually comprise a small percentage of total patient care, about 10%. But, drugs are a large percentage of out-of-pocket expenses. Thus, combining all care into one cost, the system could save money, even with expensive drugs, so long as they worked very well, ameliorating conditions that would otherwise take a lot of other care.
6. With the exception of a small percentage of malingerers, and the truly ill “munchausen’s syndrome” patients who scam their way into procedures, most people have much more pleasant things to do than visit their doctors or get admitted to the hospital. Hence, the notion that “overuse” on the part of patients is the big problem is ridiculous. Inefficient use? Yes. Poorly structured payment systems encouraging overuse? Yes. But, patients showing up because they have nothing better to do and it’s free? I don’t want a healthcare system designed with the primary focus of avoiding those costs.
7. There is no incentive in the present system to engage in preventative medicine. Insurance companies don’t pay for it because you are likely to become some other company’s insured in the future so why should company #1 pay to reduce company #2’s expenses? Market forces do not work in that setting, indeed they have a counterproductive outcome as each insurance company is doing its best to do what it tells its shareholders it does, maximize its profits.
In some system in which the savings from prevention can be realized, prevention could play another major role in lowering costs.
The point of all this is that the healthcare system is not a toll road. People are not computers or cell phones or quiche. We take insurance because medical care is so catastrophic that we are “willing” to pool our risk–we know that, say, 190,000 people will get colon cancer this year–but we don’t know WHICH 190,000 will, and so we are all “willing” to share risk annually so, when it is our turn to need it, the money is there to pay for it.
Insurance companies have turned that actuarial analysis on its head–they have tried to figure out who NOT to insure, so that all our premiums can go to their bottom line. That is precisely the OPPOSITE point of insurance.
I happen to agree that taking costs down to zero is a bad idea, but for a different reason. That is political. Once something is zero, it is hard to charge anything for it. That would eliminate many future options for change.
While the economists are debating macroeconomics until my head spins, I and other physicians go merrily on helping individual people in need, day and night.
No matter how you spin it, Medicine is practiced one patient at a time.
Let’s be clear that it is physicians and hospitals who foot much of the bill for the uninsured. And yet, we will be worse off over-all when Reform pays us to care for them.
Getting paid for what we do, not what we don’t do (salary, capitation) makes sense and maintains productivity.
People can’t afford lawyers. I hope the economists will attack them after they are finished impeding the work of the best educated medical corps. in the world.
Uwe Reinhardt does not understand what goes on in a doctor’s office. A $300.00 an hour person is a patient with a disease that is complex, takes more time and effort, and resources to treat. A $50.00 an hour person is someone with something simple.
Here’s how it works, Uwe. You have a doctor spending 10 hours in the office, let’s say. When medical care is almost free to the person consuming it, a lot of people with trivial complaints come flooding in. I have seen this occur and accelerate over the last 27 years. These people do not need a physician’s time, but they want it, anyway, because it’s FREEEE to THEM, and maybe they want a work excuse, or they had a family fight, or they are used to getting medical care for almost nothing. The physician has to waste time with these people, the worried well, the malingerers, the non-sick obsessives. Meanwhile, people who really need the physician, and that the physician also needs to see in order to pay overhead, continuing medical education, MALPRACTICE INSURANCE to STAVE OFF THE LAWYERS, utilities, FORCED DOWN YOUR THROAT HEALTH INFORMATION TECHNOLOGY,medical licenses, medical fees and taxes, like the “Neurological Injury Compensation” fee that I have to pay for every kid with a neurologic problem in Florida, though I had nothing to do with their problems, and no non-physicians have to pay it…the list goes on and on. So, physicians go bankrupt, or flee into some other line of work, or get out of Medicare and Medicaid. I say if the government types and you, Uwe, know so much about medical practice, why don’t you go to medical school and do the actual work? i can sure as Hell run the nation a lot better than your friends.