The third health care cost fallacy

Let's start with a correct claim:

The fiscal outlook is grimmer than before, therefore we should spend less on health care reform than I used to think.

I'm willing to make a comparable admission when it comes to tax cuts, so will you sign on to this claim about health care and revise your policy prescriptions accordingly?  (Unless of course your previous estimate had forecast the current revenue situation; Nouriel Roubini could claim this.)

If you do not sign on to this claim, you are committing the third health care cost fallacy.  Note also that your support for non-revenue-intensive means of health care reform might well go up, for related reasons.

You will find fallacies one and two here and here.  Might there be TANSTAAFL deniers who commit all three?

Addendum: Megan McArdle offers some related sentences to ponder:

Conversely, if there is some political or institutional barrier which is preventing you from controlling Medicare cost inflation, than that barrier probably is not going away merely because the program covers more people.  Indeed, to the extent that seniors themselves are the people blocking change (as they often are), adding more users makes it harder, not easier, to get things done.


By the way, some of you might claim that a poorer economy needs insurance more rather than less. Maybe so, but then are you consistent in calling for a shrinkage of the preferred program as things get better and economic growth proceeds?

So if we wait 20 years to control health care costs, and Medicare costs grow by 60 percent, the fiscal outlook will be even grimmer and we will need to spend even less on health care reform, right?

That's brilliant! I think you've found a way to eliminate the need for health care reform--just wait until the fiscal outlook is grim enough that we should spend no money on it.

Reducto - I think you miss the point; if the fiscal outlook is grim enough, the only viable reforms will include net reductions in health care spending.


The problem with the current system is not that we have a free market in healthcare, but that our market is far from free. The incentive systems are all screwed up. Patients have to go with the insurer that their employer mandates, regardless of how they are treated. Insurers try their best to avoid paying for medical procedures, but it's doctors who are harmed by this, not the patient. Doctors try to do as many procedures as possible, but it's the patient, not the insurer, that takes the fall.

Basically, you have the patient, the insurer, and the doctor. In every combination, A gets to decide how much B screws over C, rather than having his actions feed back on himself. No wonder the market is screwed up.

One way to fix this would be to have doctors bill by time, not procedure, and have insurance be an after-the-fact reimbursement of a percentage of the costs. If a doctor does too many procedures, they eat the costs and the patients go elsewhere. If the insurer fails to pay up on time, the patient picks another insurer. THAT's the way the free market is supposed to work.

The current policy direction is to tax medical benefits and increase medical spending in order to make health care affordable.

This problem points out the inherent inefficiency of trying to centrally plan health care. The government can't know what a 'reasonable' amount is to spend when it has to plan well in advance. Left to the market, health care spending will ebb and flow as the various economic forces act on the industry and consumers. This is a more preferable way to go.

Those of us who advocate a free market in health care (or as free as possible), need to address the perceived social and market failures that exist in the current system. Rather than just opposing the government's plan, you have to present a credible alternative that addresses the real problems.

It seems to me the primary market problem is that there is information asymmetry in health insurance, which leads to inefficient transactions and ultimately creates a 'lemon market' for health insurance. Insurers try to get around this by tying insurance to jobs in the hope that a job pool insurance program will represent a reasonably random cross section of the population that their actuaries can deal with. But that leaves out people who don't work in jobs that return enough value to warrant health care coverage, or people who are unemployed. They are forced to buy health coverage in an inefficient market.

The next problem is that the health care market is distorted by many outside forces - regulations, implicit subsidies in that hospitals are forced to treat critically ill or injured people regardless of their ability to pay, and the distortions that come from having huge swaths of the health care system funded and regulated by government in the form of Medicare and Medicaid.

So if you don't want government implementing single payer health care, how do you make a case for a less intrusive plan that meets the demand people have for better care? It's not an easy question.

One option I've been thinking about is for the government to provide catastrophic insurance, indexed to your income and/or net worth. For example, if you make $20,000/yr, the government might insure you for any health care expenses that exceed $2000/yr. If you make $100,000, the government might only cover expenses over $10,000/yr. The idea would be that no one would be bankrupted for life by sudden illness or injury, and that insurers would have their risk capped by government catastrophic insurance.

This would lower the impact of information asymmetry - insurers would no longer face the problem that taking on a bad risk could cost them millions of dollars. Therefore, the risk premium goes down, and the insurance market becomes more efficient. Everyone would still be responsible for paying for their own routine care and non-catastrophic care, but they could purchase gap insurance to cover them for that. Such insurance would be much cheaper and affordable for almost everyone. But prices would still work for common care, there would still be incentives to minimize use of the system, and there would still be competition for health care delivery.

A system like this works for dentistry in Canada. Routine dentistry is provided in a free market. Fillings, crowns, root canals, cleanings, etc. But major dental surgery is covered by the government health care plan. The result is that dental insurance is reasonably affordable and widely available, and yet dentists still compete in the marketplace for business, and people still have an incentive to take care of their teeth.

Overall health care spending is a lousy metric. The U.S. has one of the highest per-capita incomes in the world, and therefore it makes complete sense that they would spend more per capita on health care. They probably also spend more per capita on televisions, computers, designer clothes, and other luxury goods.

Other aggregate measures are also suspect. Overall life expectancy is only partially affected by health care. Lifestyle, genetics, eating habits, stress, and other aspects of life that may be different in America than elsewhere may make up the difference.

If you want measure health care outcomes, you need to compare the effects of actual diseases and illnesses. In other words, I don't care how old the average American lives, but I DO care what the survival rate is for a person who is diagnosed with breast cancer in the U.S. versus one who is diagnosed with breast cancer in the UK or Canada. I want to know what the wound infection rate is in American hospitals compared to Canadian and UK hospitals. I want to know how long it takes for a crippled elderly person to get a joint replacement, and how long it takes to get an MRI scan if I've slammed my head into a tree while skiing.

The reason these measures aren't used by government health care proponents is that in general, the U.S tends to come out on top on most of them.

Of course, it's (nearly) cost-free for me to give my opinions, as I don't live in the US. But it feels like 'health care reform' is not synonymous with 'more spending on health care'.

The US already spends, as I understand it, about 14% of GDP on health and surely part of the reform objective must be to reduce this through provision of public goods, public investment with a positive net present value and changing the incentive structures for both preventative and reactive care.

Of course, another aspect is to increase coverage which will undoubtedly increase costs, but it's entirely plausible that this will be more than offset by other savings.

Having said that, the question of "how much coverage to offer" is (nearly) orthogonal to the question of "how to offer coverage", and on the first question I certainly accept Tyler's point.

But back to the second question. If these cost savings are available already, why hasn't the private sector achieved them? Some reasonable answers:

  • Unpriced externalities currently provide incentives that distort efficient provision
  • Behavioural phenomena result in people erroneously calculating the future costs of ill health, and appropriate public action could partly correct this
  • The market is imperfect (because of externalities, asymmetric information or loss aversion) and thus central coordination of certain services or actions may provide more efficiency than a competitive market

These are no more than assertions, which are intuitively appealing but far from proven. But they all provide reasons why the third fallacy might not be a fallacy.


All I (and I think Tyler) are saying is that if we have less money, we can afford less money for health care reform. At some point we can afford no money for health care reform - unless we are going to cut existing spending in the process. Health care reform as currently proposed appears to involve a large increase in expenditure coupled with paying lip service to reducing costs.


If you are right that the current health care reform proposal is to spend more public money on health care and do nothing to effectively reduce health care costs (or at least health care cost increases) then the current plan is a failure. That's true even if you're operating under the putative fallacies Tyler describes. The argument you make reduces to: "We can't contain health care costs, so stop spending government money on health care." As someone who does not enrolled in a government sponsored health plan, but spends $17000/year on insurance. Your's (and I think Tyler's) alternative to the current plan doesn't improve the situation much. There may not be any such thing as a free lunch, but it's hard to believe I need to pay for a lunch I don't get--some cost containment seems very possible.

tangential, but i hear things like "handling a problem through a trip to the emergency room costs a lot more than handling it through other means"

is that really true or it just that a hospital can bill more for it?

The more I read these three fallacies articles, the weaker they seem. To review:

1. If health care costs are growing, then we don't need to worry about other spending.
2. Social Security is a tiny problem. Medicare is a terrible one, but the problem is not really Medicare; it's quickly rising health-care costs.
3. The fiscal outlook is grimmer than before, but we shouldn't spend less on health care reform than I used to think.

#1 is a strawman. More spending is usually justified as fiscal stimulus and even Martin Feldstein and N. Greg Mankiw concede the point.
#2 isn't a fallacy. Tyler doesn't even say that it is a fallacy. I think Tyler is trying to say that #2 isn't a valid response to wanting spending less on Medicare, which might be a fine point in an article with a different thesis.
#3 appeals to common sense, but it's not true that because you have less money you should spend less on every item in your budget. It also confuses reform with Medicare spending.

Not only is each point weak, but the very abbreviated discussion Tyler affords each point, combined with his abstruse prose style don't make much of an impression. Will any of his readers be able to reproduce his arguments outside of quoting them verbatim? Even quoted verbatim, can they be used to refute any real-world arguments about health care reform?

Is it just me, or does Tyler sound increasingly bitter about the possibility of health care reform? There's an anger to his recent posts that I haven't heard from him before. (He even used the s-word and called some TV stupid!)

Die EU-Kommission hat die geplante Verstaatlichung des angeschlagenen Immobilienfinanzierers Hypo Real Estate (HRE) genehmigt.

Eine Übernahme durch den staatlichen Rettungsfonds SoFFin werde den wirksamen Wettbewerb «weder im europäischen Wirtschaftsraum noch in einem wesentlichen Teil desselben» erheblich beeinträchtigen, teilte die Behörde am Freitag in Brüssel mit. Die Kommission verzichtet daher auf Auflagen. Zum ersten Mal in der aktuellen Finanzkrise sei die Verstaatlichung einer Bank bei der Kommission gemäß der EU-Fusionskontrollverordnung angemeldet worden.

Die Wettbewerbshüter nahmen besonders Überschneidungen zwischen der HRE und der Kreditanstalt für Wiederaufbau (KfW) unter die Lupe, da auch diese staatlich kontrolliert wird. Die HRE war im Zuge der Finanzkrise in eine existenzielle Notlage geraten. Bereits im Oktober hatte die EU-Kommission eine Rettungshilfe für die HRE in Form einer staatlichen Garantie von 35 Milliarden Euro genehmigt. Die EU-Kommission ist die oberste Wettbewerbsaufsicht der EU.

Der SoFFin wurde im Oktober vergangenen Jahres zur Stabilisierung des Finanzsystems in Deutschland eingerichtet. Mit dem Rettungsfonds können Anteile an einzelnen Finanzinstituten erworben werden. Der Fonds wird durch das Finanzministerium kontrolliert.

Tyler's claim is wrong. The correct claim is:

The fiscal outlook is grimmer than before, therefore we should spend less on health care than I used to think.

The amount we spend on reform is irrelevant. Only total costs (which include the cost of reform) matter. The open question is how to arrange the reform so that it decreases total costs.

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