Friday, November 13, 2009

Medical Care Follows Basic Economic Principles

Economic scholar Thomas Sowell published a book last December called Applied Economics: Thinking Beyond Stage One. He has allowed Investor’s Business Daily to publish the chapter on the economics of medical care. IBD broke it into a nine-part series (see lead page). The parts are:Sowell’s treatise is reasonably well written and lucid. It is geared at a level that could be understood by a moderately informed adult. I am quite disappointed that no bibliography or references were provided. Without this, it can appear that some references and examples were cherry picked and/or skewed. The article series includes many useful tidbits, including this conclusion:
“[M]isconceptions of the economic function of prices lead not only to price controls, with all their counterproductive consequences, but also to organized attempts by various institutions, laws and policies to get most of the costs reflected in prices paid by somebody else. For society as a whole, there is no somebody else.”
I must add that the attempt to obfuscate medical costs plays directly into the hands of the powerful. Both our current system and Washington’s proposed system destroy transparency in favor of obfuscation. If you’ve ever tried to make heads or tails of all of the billing and insurance paperwork that flows from a single hospital stay, you’ll know what I mean.

Those that benefit from such obfuscation include politicians, employers, insurance companies, and the medical industrial complex. When costs are hidden — when it looks like someone else is paying the bill or that you have to make sure you get your slice of the pie — you are more likely to see something as a ‘need’ that would simply be a desire (or even unwanted) otherwise.

Multiply that by all of the people in the system and you have a lot of people getting a lot of care that has diminished real value. But each extra procedure done brings money into the coffers of providers as well as the army of paperwork pushers in both private and public organizations.

Employers look like heroes because they appear to be generously giving employees benefits, when it has been demonstrated that all such benefits are merely in lieu of actual salary. Employees feel more tied to an employer for fear of losing medical insurance coverage.

Politicians get to look like heroes for saving the poor and the sick from horrible fates. Never mind the fact that most of these could be helped without skewing an entire sector of the economy. Moreover, when politicians look like heroes they ensure a continuing flow of calls for political salvation — a self-perpetuating stream of business. Perverse incentives, indeed.

We live in an age where many imagine that they can design methods that exceed the laws of economics. This differs from those that use airplanes, parachutes, and rockets to do things that can appear to defy the law of gravity. They are actually working within the constraints of the law. Rather, there are plenty around today that ignore the very existence of economic laws. They do so at the peril of those that willhave to live with the results of their experiments.


RD said...

Interesting articles, you weren't kidding when you said cherry picking however. They left out the uninsured rate for the 35-45 demographic.

They also make the faulty assumption that supplie and demand is fully functional as in most markets, in reality the demand for health care is set by the disease rate, increasing or decreasing price or supplie for a particular curative/treatment will not increase or decrease the rate at which that disease occurs.

They leave out the costs of adjacent market collateral damage in the form of the non-medical debt written off in medical bankruptcy's, Lost worker productivity, costs related to untreated commutable diseases, and the societal costs of death from untreated illness. Their is also the costs of late treated illness that would have been cheaper to treat earlier.

They completely ignore the administrative cost differences of the systems, In the US their are 4 administrative personal per doctor to handle insurance billing, the average hospital has 1 administrative person per hospital bed mostly for handling insurance billing.

In fact they write all cost differences off as "cost-shifts", which is wholly ridicules.

I also find it funny that they attack "third party payment" referring to government ran systems without ever acknowledging that privately ran insurance is also a third party payment system. They also don't site any example of an alternative to a third party payment model, Not to say that I have heard of any workable alternative to an insurance risk pool.

Oddly enough I thought that article on medical malpractice wasn't to bad, I like the idea of reforms that help the courts to make better decisions and to filter out bad cases without idiocy like award caps.

Is it just me or do they like picking on the brits? hehe

Scott Hinrichs said...

While bankruptcies were not discussed, almost all of the other factors you mention were discussed — some of them at length. Sowell explains that he picks on the Brits because their socialized system is more mature than many other countries' systems. Thus, it offers more of an idea of what to expect down the road.

Charles D said...

I'll start with the title and ask "Should Medical Care Follow Basic Economic Principles?" Obviously economics plays a role, but should economic principles drive the provision of medical care? IMHO, no it should not.

Medical care should follow basic medical principles and the economics should be adjusted to meet those needs, not the reverse.

RD said...

"Since governments get the resources used for medical care by taking those resources from the general population through taxation, there is no net reduction in the cost of maintaining health or curing sicknesses simply because the money is routed through political institutions and government bureaucracies, rather than being paid directly by patients to doctors."

Gross oversimplification. This argument relates to the third party payer nonsense the article was spouting about. Change the words political and government with corporate and corporation. Still an oversimplification but atleast one that reflects our current system.

"Artificially lower prices, created by government order rather than by supply and demand, encourage more use of goods or services, while discouraging the production of those same goods and services."

So I take lower medical costs will increase the cancer rate according to him, In fact under a government ran system all disease rates will go up due to the low cost of treatment. And France would be a good rebuttal to the second half.

"Under government-paid medical care in Japan, patients also have shorter and more numerous visits than patients in the United States."

Japan in fact is has many private providers and more of its public is served by private providers then the public option.

"In Britain, a 12-year-old girl received a breast implant, paid for by the National Health Service."

Note how he used the singular "a breast implant", it's actually problematic health wise for a woman to have to lopsided a chest. you could chalk this one up to correcting a birth defect.

"When prices no longer ration, then something else has to ration, since the underlying scarcity does not go away just because the government controls prices or provides things free of charge to the users. One of the alternative ways of rationing is by waiting. While this is common with price controls on many things, waiting for medical care is a more serious problem."

Ignoring the fact that France has shorter wait times then the US for many things, Ignoring the shorter waits in Taiwan etc.. this argument may have volatility when used in reference to Britain and Canada. But I can point to plenty of health systems with lower wait times and higher quality and lower cost then ours, Sweden, Denmark, France, Taiwan.

"People can die from conditions that were initially not very serious, but which grow progressively worse while they are on waiting lists to receive medical care."

This is true, at the end of the infinite waiting list that is being uninsured in the US anyone could tell you this.

"Medical treatment in the United States has significantly higher costs per capita than in other countries, when costs are defined to exclude such things as lost pay and other uncounted costs of long waiting times for treatment — notably pain, debilitation and death while waiting. A will always appear more efficient than B if enough of the costs of A are left out."

He generalizes and doesn't really tell you how he is adding things together.

I couldn't find where he talked about administrative cost differences perhaps i missed the right article link?

I didn't find anything that would rebuttal my statements that supple and demand is nonfunctional in the medical care "market".

They pick on the brits because their system is a whole system takeover(NHS), its not single payer(Canada), or single payer with private opt out(France), or regulated as utility multi payer (Sweden, Denmark, Germany) all of which run better then a national health system.

Its about finding a better balance between private and public funding of health care, It needs to be universal while at the same time leaving room for private investment. The French system has an interesting nuance of private insurers that greatly increase the quality and speed of care, while still having the public dollars that make sure everyone is in the system.

Scott Hinrichs said...

I certainly do not hold that Sowell’s writings are above criticism. However, your claims certainly carry no more weight than his. And given his credentials and lengthy record, you should not be offended if I suggest that your claims probably carry far less weight than his.

Moreover, you demonstrate a willing ignorance of economic facts. You may deride economics as a social science all you want, but there do exist established economic facts. Denying these facts does not render them nonexistent. But even this should not be taken as harsh criticism, as you are in the good company of a great many economics PhDs in your denials.

I noted the absence of bibliography in Sowell’s online chapter on economics and medicine. But even if an extensive bibliography were provided, and your claims were also backed up with research, this would prove little, since any side to any argument can extract targeted supportive information.

You will probably not be surprised to learn that ideological claims touting the marvels of centralized political control of any economic sector find little enthusiasm among those that cherish liberty. Regardless of how wonderful coercive political control may seem to some, tyranny by any other name is yet tyranny. Shackles, no matter how softly padded, are still shackles.

Nor do I expect that the assertions of those that promote freedom will seem like anything more than pointless idealistic blather to those that earnestly believe that greater central political control will engender greater independence. These differences of philosophy are nothing new. They have been with us for millennia. So, I do not think that we will solve them here.

As I have noted in the past, we will simply have to agree to disagree. But at least we can do so civilly.

RD said...

We will like have to agree to disagree however...

"Moreover, you demonstrate a willing ignorance of economic facts."

Which ones? Most markets following the basis for supplie and demand, add in a bit of consumer price pressure and they run very efficiently.

Health care however has 2 HUGE distortions that no amount of economic libertarianism can explain its way out of.

First being that the Demand for a particular treatment or curative is set by the disease rate. no matter what you do to the supplie/price of a particular curative or treatment the rate at which any non-commutable disease occurs will remain unchanged.

Two the cost risk ratio, 90% of this nations health care spending is by 10% of the people. Meaning that you have a 1 in 10 chance is hitting the health care cost lotto. Few people can afford winning the health care lottery so they have to depend on health insurance to pool their risk with other people. And you already understand the problem of risk pools aka "third party payment".

Frankly we have the choice between unelected individuals in for profit corporations making care choices for us or unelected individuals in government agency's chosen by elected individuals making care choices for us.

Don't get me wrong I don't like either situation, But I have to look at reality. Politically regulation based approach's don't work in the United States. I don't have much long term hope for Obamacare as its a mostly Regulation based approach, sooner or later someone will decide that Guarantee issue, community rating, the individual mandate(if the courts don't get it first =p), and the tax's for the subsidy's are holding back business interests to much and repeal them(knowing the republicans probly without also repealing the subsidy medicare part d all over again in reverse).