Archive for August 20th, 2009

Health Care Microeconomics

When Susie was living in Oceanside, the local hospital was located at – I’m not making this up – One Healthy Way.   Evidently the Democrats had already implemented their health care plans.

Of course, there are many healthy ways, but the only way to get all of them going at once is to put decision-making power in the hands of actual consumers.  In the latest Atlantic, David Goldhill takes a close look at the perverse economic incentives currently embedded in our health care system, incentives that create all sorts of inefficiencies.  In this case, “inefficiencies” can mean longer waits for worse care at higher prices.  Virtually all of these distortions originate from a house of cards of government policies, each policy intended to fix the problems that the previous ones created, all the while making things steadily less stable.

It’s a brilliant piece, really, applying basic supply-and-demand economics and marketplace dynamics to the pieces of this system, and showing how they explain what’s wrong, and why our health care and insurance are costing us so much.

As with housing, directing so much of society’s resources to health care is stimulating the provision of vastly more care. Along the way, it’s also distorting demand, raising prices, and making us all poorer by crowding out other, possibly more beneficial, uses for the resources now air-dropped onto the island of health care.

Starting with insurance,virtually everything we do in health policy prevents prices from finding their own levels, providers and consumers from adjusting to dynamic market forces, confuses prices with costs, discourages cost competition, and then punishes people for responding to the incentives that policy creates.  Fundamentally, the problem is an unwillingness to confront actual costs and to pay for what we use.  We expect insurance to cover routine expenses, which ought not be insurable events.  Medicare gets away paying less than cost for services that are only available because someone else picks up the difference.  We’re recklessly borrowing from our future.   The patient is rarely the customer, and when he tries to be cost-conscious, hospitals won’t let him.

Every distortion we complain about has some weird incentive behind it.  Insurance costs so much because we expect it to pay for too much.  We have to restrain hospitals from buying new equipment because we subsidize it.  We prevent specialty facilities from competing with hospitals because we overpay for some services and underpay for others.  And the hospitals’ objections to competition mirror those of the railroads 100 years ago.  Britain right now is suffering through the Conrail of public health.  He doesn’t specifically address the growing wait-times for specialists, but there’s probably a perfectly good awful policy behind that, too.

Goldhill also comes up with reasonable estimates of how much the current bogeymen actually cost us.  You could take the entire insurance industry profit for 2009 and pay for America’s medical care for 4 days.  Think about that.  The “excess profit” that insurance-company-haters rail about amounts to 1% of our health spending.  IT efficiencies would probably improve service, but would also return about 3% of actual costs.

Goldhill proposes shifting the decision-making and purchasing back to the actual patient.  You pay for routine expenses out of income.  You pay for big expenses out of savings and credit.  And a single, government-run policy would backstop against catastrophe.

It shouldn’t be a surprise that, in an article full of what should be commonplace economic observations, the one false note is political.  A government-run catastrophic health plan would be under constant political pressure to carve out exceptions to favored groups and to lower the ceiling for everyone.   Competing catastrophic plans would be able to experiment with coverage amounts and price points.

Still, this is the kind of rigorous application of basic economics that’s been missing from the debate, and especially missing from any Democrat proposals on the table right now.

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Civil Society Subsumed

A couple of weeks ago, the Mercatus Center noticed that Brad Pitt’s non-profit was seeking stimulus money for its mission to help rebuild New Orleans:

The Make It Right Foundation (profiled here on ABC’s 20/20) — as well as dozens if not hundreds of other local initiatives and non-profits — have done incredible work in rebuilding the Gulf Coast after Hurricane Katrina. But much of this success is due to their independence from large government bureaucracies. Stimulus funding has the potential to act as what Jane Jacobs called “cataclysmic money.” There is a real danger that if social entrepreneurs and non-profits like Pitt’s become dependent upon federal funds, they will in effect become arms of the federal government. This would have a dangerous effect on civil society, and reduce our resilience to disasters and shocks, whether natural or economic.  (emphasis added -ed.)

Well, the news is that this has pretty much already happened with lots of non-profits.  Many derive the overwhelming portion of their income from Medicare/Medicaid, or from state government grants and purchases of their services.  Here in Colorado, for instance, Jewish Family Services reported in 2007 that roughly $2.5 million of $7 million in contributions, or 36%, came from government grants.  Compare this with something like the Gathering Place, a drop-in shelter for homeless women, which received no direct government aid, and whose government purchases amounted to less than 10% of total income.  No wonder organizations like JFS were lined up around the block to support Referendum C.

The degree to which these non-profits have become courtiers, to which they’ve essentially outsourced their fundraising operations to governments and a couple of lobbyists, is probably largely unknown to the public.  It’s a whole new dependency class.  If these guys get their way, there will soon be another effort to raise taxes, this time in the middle of a recession.  And once again, the government-dependent non-profits will be complaining about how their critical services are about to be cut.

As Arnold Kling has pointed out, the ability to exit is ultimately more important than the ability to vote.  The reason these non-profits are more responsive in the first place is that failure has consequences in their ability to fundraise.

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