Thursday, September 11, 2008

Healthcare Inflation in Action

There's been a real shift in how much things cost. In general, goods have become cheaper through advances in productivity, offshoring, logistics, and retail, while services dependent on on-site humans have become more expensive. Soon advanced economies will produce all agriculture and industrial goods with perhaps five percent of the workforce, with prices approaching marginal cost for non-branded items (the surplus for branded items will be largely captured in rich countries--see the smiley curve). Higher commodity prices are disturbing this picture a little, as could increased protectionism, but basically you will pay less for your next computer than your current one.

Services such as education and healthcare are an entirely different world, and their costs have been rapidly escalating as technology improves.  Soon the other 95% of the workforce will work in these sectors. You'll notice Democrats talking about this issue a lot.  It's been a little puzzling why these costs continue to rise even under quasi-market conditions (though elective surgery, such as for lasik, shows the usual technology lowering price phenomenon).

Well, I'm currently working at a healthcare clinic and I can see a proximate cause.  For a given procedure, there is a Medicare-approved amount.  My office bills about twice this (other offices do three times this) to the insurance company, with the notion that most will approve about the Medicare amount.  But sometimes you get a clueless company that will pay out the full price.   Patients paying out-of-pocket or with a deductible pay the full, artificially high, price. Eventually, the insurance companies notice that everyone is billing them a higher amount and raise the amount they're willing to cover.

There are two good ways to solve this problem, and the American medical system is unique in that it pursues neither. The first is good old government price rationing, as happens in European systems.  That is unlikely to be politically feasible in this country.  The government, as Medicare does here, regulates prices to clamp down on inflation.  There are severe costs to innovation under this system, which would probably not persist without the massive research that goes in America.  A variant of this involves insurance HMOs directly negotiating with doctors and refusing claims.  This held down health care inflation in the 90s but was very unpopular.

The second method is consumer directed healthcare.  This happens to a large extent in Singapore, which maintains an excellent privatized healthcare system.  You pay into a health savings accounts--of the sort Bush championed--with some government covered catastrophic insurance.  A famous RAND study, however, found that such deductibles force patients to cut back on all spending, not just the wasteful kind, but there were some failures in the design (many patients dropped out of the study).

Ultimately high costs for healthcare are not bad.  Much of the money goes towards life-preserving care or consumption in hospitals (big screen TVs), and advances in technology--though costly--have improved life expectancy.  I'm somewhat committed to the notion that medicine is unhealthy, so I'll also say that medcine is different from health, and on net behavior impacts health more than medicine does.  But the problem is that so much of spending, at the margin, is wasteful, and is directly responsible for stagnating wages.   A great Cato dialogue calls for heathcare spending to be cut in half, which seems about right.  These savings can come from the fact that healthcare spending, even measured by Medicare reimbursements, vary dramatically around the country with little impact on treatment, combined with bloated administrative costs and the fact that American doctors have bizzarely failed to update to advanced information systems.

I have little faith that anyone will seriously make healthcare less wasteful and more affordable.  As I've mentioned, McCain's plan to end preferential tax treatment for employer-provided insurance is laudible, though he has little else to say.  In the end, Democrats will control Congress and they need to figure out how to prevent healthcare from dominating the entire economy.  We've heard how Bush's ridiculously bloated Medicare bill is insufficiently generous, and how it'd be great if more people had health insurance, but not a whole lot on how to pay for it other than "we'll modernize things." I really like the bit on evidence-based medicine, since I like anything that begins with "evidence-based," and healthcare can use it more than most, but it'd also be great if I could spend the rest of my life not dishing out a fifth of my income on healthcare.  

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