Airs – Ian Lance Taylor

Medical Expenses

So why is health care so expensive in this country? This is a subject I don’t really know anything about, which gives me even more opportunity than usual to speculate freely and leap to broad conclusions.

Obviously a big chunk of it is profits taken by pharmaceutical companies, profits which would have much more justification if they spent a higher percentage of their income on actual research and development rather than on marketing. But that must be less than half of the overall cost.

Some of the health care spending is simply taken by the insurance companies, and by the extensive paperwork processing they require. I don’t think this is more than ten or fifteen percent, though.

What about the rest? Doctors are very well paid. Medical procedures generate extraordinary amounts of waste–I am regularly astonished by the amount of waste which is produced when I merely donate blood. Hospitals don’t actually collect money when they treat uninsured patients, so they have to charge more for everybody else. Medical machinery is very expensive–this is a version of the problem with pharmaceutical companies.

Can we reduce medical expenses? There are some obvious points of attack. We can tighten up drug patents considerably to cut pharmaceutical pricing. We can restrict drug marketing to cut their expenses; there will still be plenty of opportunity for wealth. We can fix the insurance problem. We can pay doctors less. We can unify health records and store them electronically, reducing duplicate tests and reducing paperwork costs.

Does it make sense to reduce expenses? Letting people become rich will encourage the best people to enter the health care field. Of course, this would be more convincing if the U.S. had the best health care in the world, which in general it does not, but it is certainly possible that wealthy people in the U.S. do have the best health care.

I don’t know the answers here. But it seems to me that more people need to be looking into this. Lots of people talk about reducing costs by moving to a single payer system, which certainly makes sense to me. But there is a lot more scope for cost reduction. Health care costs can not continue to grow without end, and therefore they will stop. We need to spend more time thinking about how to stop cost increases in ways that make sense.

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Ian Lance Taylor

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11 responses to “Medical Expenses”

  1. Ivan Avatar
    Ivan

    Hi,

    There are hundreds of thousands of doctors in other countries many of which would like emigrate here and make more money.

    Why not give visas and a license transfer for doctors coming from overseas from countries like India and China.

    The problem is the US doctors have a union and they want to keep out as many potential doctors as possible to keep prices high for their services.

    Ivan

  2. Ian Lance Taylor Avatar
    Ian Lance Taylor

    Thanks for the note.

    I don’t think U.S. doctors literally have a union. There are licensing requirements, which amount to the same thing.

    Also, while doctors are indeed well paid, I doubt their salaries amount to more than 5% or so of health care costs. And I’ve never heard that we have a general shortage of doctors. We have shortages in specific fields (e.g., people willing to perform abortions), and shortages in specific areas (e.g., inner cities and rural areas), but there is not a general shortage.

    So I’m not convinced that permitting more doctors to enter the country will have a significant effect on health care costs. Not that I’m opposed to the idea. I just don’t think it will make much difference to costs.

    We do have a shortage of nurses in the U.S. That shortage could be partially alleviated by permitting nurses to enter the country, and I think that would be a good idea. However, nurses are not particularly well paid, so that would have little effect on health care costs.

  3. MSimon Avatar
    MSimon

    The way it works:

    The rich get the most advanced treatment. This develops new procedures.

    Once the procedures are developed, they are cost reduced.

    As time goes on more and more people can afford them.

    Most of the problem with health care is that it is mostly third party payers. Thus the “auditing” of the players is not up close and personal.

  4. fche Avatar
    fche

    I wonder if there is a risk in mixing country level statistics like “total health care
    spending” and personal ones like “how much I (or my insurance company) had
    to spend for X” might lead one astray. For example,

    > Lots of people talk about reducing costs by moving to a single payer
    > system, which certainly makes sense to me.

    For a healthy individual, that scenario (arguendo) could decrease the former
    but increase the latter.

  5. Ian Lance Taylor Avatar
    Ian Lance Taylor

    Replying to fche:

    It’s certainly true that a single payer system would reduce costs for society while increasing costs for a healthy individual. But to judge properly, you have look at the entire lifespan. Somebody who is healthy until he or she dies in a car accident at age 30 should, considered alone, pay for health care a la carte. But, barring significant changes in health care practice, anybody who lives to the age of 75 is going to face significant health care expenses, which must be borne by somebody.

    One way to look at a single payer system is that it forces everybody into a single insurance pool, and thus permits the insurer to use valid statistics when computing premiums. That will inherently increase costs for some people–that is the nature of insurance. But if it works well, it should decrease costs over all.

  6. fche Avatar
    fche

    > anybody who lives to the age of 75 is going to face significant health care
    > expenses, which must be borne by somebody.

    (How about … by themselves?)

    OK, but then we are ditching insurance concepts like random risk pools.

    If instead we build a system that is explicitly tweaked to subsidize the
    old & sick, then we’re going to have to lose the presumption of lower cost
    (economic efficiency), and factors like governmental interference etc. come
    in too.

  7. Ian Lance Taylor Avatar
    Ian Lance Taylor

    > (How about … by themselves?)

    Tempting in a way, but we know it won’t happen. When somebody will die without medical care, we will give them medical care. Maybe not the very best medical care, but we will do something. To act any other way would be immoral.

    > If instead we build a system that is explicitly tweaked to subsidize the
    > old & sick, then we’re going to have to lose the presumption of lower cost
    > (economic efficiency), and factors like governmental interference etc. come
    > in too.

    I don’t know whether a single payer system is the right answer. But, if it is, it is not the case of explicitly tweaking the system to subsidize the old and sick. The point of a single payer system is that everybody goes into the same insurance pool. Everybody pay premiums which are based on their expected future expenditures (in a governmental based single payer system, these premiums take the form of taxes, but single payer is not inherently run by the government). The very great majority of us do in fact become old and/or sick. Therefore, our premiums are set accordingly. By doing so we are not subsidizing the old and sick, although they will receive most of the benefits at any given time. We are paying a fee which will cover our future health care.

  8. fche Avatar
    fche

    > The point of a single payer system is that everybody goes into the same insurance pool.
    > Everybody pay premiums which are based on their expected future expenditures

    Such a scheme (forced lifelong savings program combined with a forced homogenous insurance pool) has some odd properties:

    * Unless it is run with greater mathematical honesty than contemporary government entitlement programs, there will be a temptation for political reasons to turn it into a Ponzi scheme like so many others – where future generations are made to pay more than current ones. This is especially cruel with an overall aging population.

    * Not only can’t there be a way out for healthy people (for then the subsidy effect would not work), but there also can’t be an easy way out for sick but wealthy people either (for political reasons – the rest of the population would moan about how the “rich” are getting better service, despite being forced to pay all their lives).

    * It generates anti-incentives to try to stay healthy; to use the medical system sparingly (“I already paid – of course I’ll go to Emergency for my flu.”). That in turn spirals the costs upwards – check out Canada’s federal/provincial budget allocations.

    * Other market distortions of a single payer scheme; no reason for competition between hospitals (since the fees need to be standardized — or do you envision the equivalent of transferable school vouchers?).

    It’s socialism – well-intentioned as always, but in practice rarely works out for long.

  9. Ian Lance Taylor Avatar
    Ian Lance Taylor

    Your points are well taken. But I also think they can be addressed.

    > * Unless it is run with greater mathematical honesty than contemporary
    > government entitlement programs, there will be a temptation for political reasons
    > to turn it into a Ponzi scheme like so many others – where future generations are
    > made to pay more than current ones. This is especially cruel with an overall aging
    > population.

    There is no special reason that it has to be run by the government. It needs to be enabled by the government. But it can be a private for-profit company, like the electrical utilities or Fannie Mae, or it can be a private non-profit organization, like (in practice) the Post Office. Sure, there is plenty of scope of corruption and inefficiency. But it’s not like we don’t have that today. The question is not whether it would be perfect–of course it wouldn’t–but whether it would be an improvement.

    > * Not only can’t there be a way out for healthy people (for then the subsidy effect
    > would not work), but there also can’t be an easy way out for sick but wealthy
    > people either (for political reasons – the rest of the population would moan about
    > how the “rich” are getting better service, despite being forced to pay all their lives).

    If that were true, then people in the U.S. would moan about the rich all the time. In point of fact, the rich always get better service, and they even pay taxes at a lower rate (although they do pay more actual cash). Hardly anybody cares. Wealthy people in the U.S. would certainly be able to purchase better health care under any imaginable scheme–if nothing else, they would just go off-shore, so why not keep them in the country.

    > * It generates anti-incentives to try to stay healthy; to use the medical system
    > sparingly (”I already paid – of course I’ll go to Emergency for my flu.”). That in turn
    > spirals the costs upwards – check out Canada’s federal/provincial budget
    > allocations.

    Every medical visit would have a co-payment, just like today. And there would presumably be a deductible, just like today. And there would be some scheme to refund the money to the very poor, like the earned income tax credit. I don’t see any reason to give up the good lessons learned from HMOs, while abandoning the bad ones.

    > * Other market distortions of a single payer scheme; no reason for competition
    > between hospitals (since the fees need to be standardized — or do you envision
    > the equivalent of transferable school vouchers?).

    I agree that the fees would need to be standardized, but so what? A hospital which can provide good care at lower cost will make put more money into the pockets of its owners. And the fees would be set to permit some profit, so hospitals would still want as many patients as they could handle well. I see plenty of room for competition.

    > It’s socialism – well-intentioned as always, but in practice rarely works out for long.

    I’m not sure exactly what you mean by “socialism” here, but I doubt that I see anything wrong with it. I think most people would agree that we run our police and fire departments following socialist principles, and they seem to work well enough. As far as I’m concerned, dogma is irrelevant; all that matters is results.

  10. fche Avatar
    fche

    > There is no special reason that it has to be run by the government.
    > It needs to be enabled by the government.

    The moment statute gives monopoly, forced membership, and taxation
    powers to this sort of organization, it’s as good as government.

    > As far as I’m concerned, dogma is irrelevant; all that matters is results.

    Fair enough. Thing is, there is evidence that the socialized medicine like
    you’re describing does not actually have good results in the long run, at
    least from what I have read and personally observe (living under one such
    system). It’s expensive and the service is worse (by some measures). We
    can argue about which measures to use, but then we’re back to ideology.

  11. Ian Lance Taylor Avatar
    Ian Lance Taylor

    By most measures I’ve seen, the Canadian health care system costs less and provides better care than the U.S. system. I’m sure the Canadian system is far from perfect. But it seems that if the U.S. were to switch to the Canadian system, that would by itself be an improvement for the majority of U.S. citizens. Not that I’m recommending that by any means. But the current U.S. system is really quite bad for anybody who is not wealthy, and this shows pretty clearly in shorter life-span and higher infant mortality rates.

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