Thursday, February 6, 2014

Is health care “different”? yes and no...

The following was dropped in the editing process from my Independent Review article or my Cato Journal article on health care/insurance.
I can understand why my three "starting points" were cut-- in the interest of space trade-offs within a journal. For economists, these are examples of "re-creating the wheel"-- and thus, not a good choice for inclusion in a journal article. But for the unwashed, these are important points to make. (They are a frequent part of my public presentations or at least the Q&A afterwards.)
So, I'll publish them myself! ;-)
Below is "starting point" #2. Follow this link for #1 and this link for #3. 

Is health care “different” from other services—or is it “just” a service? And if health care is special, what are the implications of treating health care differently—e.g., as a “right”?

There is one sense in which health care is different. It belongs in a category of goods and services that are necessary for survival—at some threshold level. Above some higher threshold, health quality is important for a “decent” standard of living, the dignity of the human person, and extending one’s earning power. So, the issue is not simply health for its own sake, but its connection to other elements of life and one’s ability to pay for health care in a market system.

Particularly beyond this second threshold, health quality joins most other goods and services—a level of health which is not essential, but desirable in varying degrees.[1] Thus, there are aspects of health care which are highly inelastic and others which are more elastic—a theme to which we will return later.

Note also that the market is able to handle other important and intimate services—e.g., food, clothing, and shelter; child care and elder care; financial credit and planning, education, and veterinary care. So, the claim that health care is different has more emotional and rhetorical appeal than objective usefulness.

There is another sense in which health care is clearly the same as any other good or service. Independent of its inelasticity, its production and distribution will follow the laws of supply and demand. We may wish that this were not the case. But individuals will still behave in their self-interests within the market/government context in which they find themselves. It may be uncomfortable to talk in economic terms about vital organs or adoption, but the fact of the matter is that their “production and distribution” are also decided within markets.[2]

Some people like to describe health care as a “right”. There are political or social rights—e.g., freedom of speech and religion—which impose, at most, modest costs on others if I decide to exercise those rights. If I worship at a church or read poetry out loud on a street corner, my activities are minimally intrusive on others. But so-called economic rights immediately imply a responsibility for someone else to pay for my “rights”—by force if necessary.[3] If you have a right to health care, then the government or other parties can take my money so that you can exercise that right.

Of course, these are quite different scenarios—even though the two categories are often conflated. And even if one has a right to health care, how far would that extend—a survival threshold, a “decent standard of living” threshold, or some (other) arbitrary standard? Who decides and what are the philosophical and practical implications of that choice and who makes it? These difficult questions are generally unanswered and even unasked.

Another distinction is inequalities caused by lifestyle choices, as opposed to those connected to income and social class. Although each is a function of individual decisions to some extent, lifestyle choices are those over which one has more control—and so, those differences could be considered “fair” or at least fairer (Fleurbaey and Schokkaert, 2009). Does my supposed right to health care depend on what I’ve done to help or harm my own health?

Mellor and Milyo (2002) examine the effect of income inequality on individual health status for both the general population and those individuals in poverty. They find no consistent association between income inequality and individual health status.

In any case, the wealthy can afford more of all things. Should this ability include health care and health insurance? To the extent that prices are not allowed to ration, consumers and service providers will be less focused on prices and incentives. One would hope that the subsequent non-price rationing would be enlightened—determined by some sort of “reasonable” cost/benefit analysis undertaken by those with strong knowledge and pure motives. But it would be naïve to expect either condition to be universal or even regular.

In a word, someone has to say there are things for which “we” will not pay. Health care is a scarce resource and it must be rationed in some way—whether by bureaucratic fiat, health management organizations, money prices, or some combination.

Finally, note that (well-constructed) insurance provides the possibility of an escape from these dilemmas. Coverage for low-probability catastrophic events and even a threshold of “decent” health care can be underwritten by relatively inexpensive insurance. Later, we will see why this is not the case—and how we can get there.

3.) Health care spending vs. outcomes

Why is U.S. health care spending so high, while certain health outcomes seem so low (relative to other developed countries)?

First, recall that health care and health are not the same. All things equal, more health care should lead to more health. But all things aren’t equal.

Cutler (1995) observes that higher national income will reasonably result in a higher percentage spent on health care—and presents regression results to back up the theory. So, wealthier countries are more likely to spend a higher percentage of their GDP on health.

Cutler also notes that the impact of increased spending on the insured is not effective—not a particularly surprising result, given that health insurance is so strongly subsidized and the price of heavily-insured care is artificially low for the insured. After all, how many people will pay attention to price and cost if someone else is picking up the bill?

Another consideration is the manner in which health outcome statistics are defined. For example, the United States is more liberal in accounting for pre-mature births. Since “premies” are more likely to die, this increases infant mortality and lowers life expectancy. A broader critique of these statistics comes from Whitman (2008) who critiques a World Health Organization report (2000) and its implicit assumptions: “some of them are logically incoherent, some characterized by substantial uncertainty, and some rooted in ideological beliefs and values that not everyone shares”.

Whitman also takes the WHO report to task because it makes no reference to variance in lifestyle choices between countries: “The WHO approach holds health systems responsible not just for treating lung cancer, but for preventing smoking in the first place; not just for treating heart disease, but for getting people to exercise and lay off the fatty foods.” Of course, such problems are largely beyond the control of a health care system and such an analysis is clearly inferior in that it ignores individual and cultural preferences—as well as the inherent trade-offs between health and other economic goods.

Lifestyle choices are important, but systematically ignored in these discussions. Proponents of more government intervention point to European countries with heavier government involvement and better health outcome statistics. But Singapore has considerably less government involvement in health care—with one-fifth of U.S. expenditures per capita and one-fourth in terms of GDP (Weber, 2008). Clearly, the level of government involvement is not the primary explanation.[4]

It’s worth noting that one would expect government intervention to be relatively effective within a smaller, more homogeneous population. But neither of those characteristics describe America. If one wants more government activism on that basis, then advocacy of small, local, and state experiments makes far more sense than leaping into one, grand, risky, federal experiment.

One other difference has received a lot of attention: differences in Medicare spending by region. The assumption is that medical decisions are driven by “cultural” factors of a sort—that doctors and patients grow accustomed to levels of health care not found in other areas of the country. Moreover, these higher spending levels do not seem to be correlated with better health outcomes. For example, Wennberg et. al. (2002) find that rates of illness do not explain differences in spending across regions.

Taken at face value, this calls for decreased Medicare spending in those regions—an opportunity to reduce expenditures without compromising health care. Again, this is consistent with Cutler’s (1995) observation that the impact of spending on the insured is not correlated with outcomes. Rettenmaier and Saving (2009a) note that this is “one of the leading rationales for reform” in Medicare. But this factoid could be more easily used to motivate less rather than more government involvement—with Medicare in particular and health care in general.

They observe that “some of the variation in Medicare spending can be linked to a state’s income, demographics, health market conditions and the population’s underlying health risks”. They also acknowledge that “there remains some persistent variation that has often been attributed to differences in the way health care is practiced”. But they find that “the same pattern of regional variation observed for Medicare spending does not necessary hold when other measures are used.”

They also investigate the percentage of uninsureds as an explanatory variable. “As expected, a higher uninsured rate is associated with lower state health care spending in the non-Medicare/Medicaid population. In contrast, a higher percent of the population with no insurance resulted in higher Medicare spending per enrollee, indicating cost shifting to Medicare.”

In any case, this debate underlines the importance of closely equating care with costs—restoring “price tags” to health care. This can only be accomplished through market-based incentives. 

[1] In the classroom, I ask my students about the number of close substitutes for water and its elasticity. They often reply that it is highly inelastic, since they’re thinking about the most essential uses of water. But then I ask them about other uses of water—from showers and toilets to washing cars and watering lawns. The substitutes here? Not smelling as good; not flushing as often; dirty cars; and brown lawns.

[2] For an illustrative use of “harsh” economic language in other, delicate areas where economic analysis is often eschewed or even condemned, see: Schansberg (1999).

[3] Note that a moral responsibility to provide X does not imply any given person’s right to receive X from another person.


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