“Consumer-driven” health care

…the US isn’t even close to being the leader in consumer-driven medicine, if by that you mean cost-sharing and purchasing decisions; in the rich world, that would almost certainly be Switzerland, where consumers patients not only pay heavily out of pocket, but purchase their own insurance, as both Kaiser and Cato will tell you.

That’s from Megan McArdle, with a good chart at the link.  Krugman decries the “patient as consumer” model, but oddly he once wrote a whole column praising the Swiss health care system:

…a Swiss-style system of universal coverage would be a vast improvement on what we have now [pre-ACA, at the time]. And we already know that such systems work.

Niklas Blanchard had an excellent post, “Sometimes Patients are Consumers…”  And Will Wilkinson comments.

Even in a system such as the French, actual health care decisions are very often driven by choosing individuals, even if government ends up paying the bill.


Perhaps the biggest problem with the US health care system is that we don't have one. We have at least four. Just about any single model is better than the jumble we have now.

"Perhaps the biggest problem with the US health care system is that we don’t have one. We have at least four. Just about any single model is better than the jumble we have now."

Unfortunately, that makeshift model permeates through a lot of US markets.

Krugman contradicting himself. There's a first.

Before you jump all over Krugman, read what he wrote:

Finally, the third route to universal coverage relies on private insurance companies, using a combination of regulation and subsidies to ensure that everyone is covered. Switzerland offers the clearest example: everyone is required to buy insurance, insurers can’t discriminate based on medical history or pre-existing conditions, and lower-income citizens get government help in paying for their policies.

Question: Is this what is really being proposed for Medicare? No it's not. The fiasco being proposed does not stager the voucher to income, does not prohibit health history discrimination etc.

What's ironic is that the Obama program has something for everyone. If you really think 'consumer driven' voucher-ized health care is the answer then it's in there. That's mostly how the non-poor but lacking health insurance are covered. You go the test case there, if that works better at controlling costs than Medicare then expand it to the Medicare population. If Medicare works better then expand it down to the non-covered population instead. The motto 'first do no harm' seems better reflected in what we got with Obama than Ryan.

She writes "...and far too little testing that could distinguish sub-populations which benefit most from a given drug". Can nothing be done about the curse of sub-populationism in America?

I spent a good part of the past six years prior to retirement working on this very issue. It's is really quite difficult and we are at the stage where we do understand who will have adverse reactions to certain classes of drugs (liver and kidney toxicity) but it is a very small subset. We also know for a small number of oncology drugs how to identify the patients who will respond. Unfortunately the most intractable diseases (neurological & muscular, some degenerative and some not) we haven't much of a clue yet. For example almost all mental illnesses are diagnosed subjectively and we don't have any type of objective diagnosis (such as neural imaging) that can tell us about the disease and potential treatment. We are still a number of years away from this.

I agree with you that this would be a great thing, but it's not really a driver of health care costs. Consider two drugs versus a single disease that afflicts 1 million people. The first drug 'cures' 50%, but there's no way to know which 500,000 will be cured. The second drug also cures 50%, but a relatively costless test will determine with perfect accuracy which persons will be cured.

Say the value of an individual person being cured is $1,000 (assume it's not a dramatically horrible disease but still nasty enough to be worth stopping).

Drug A: It's total value is 500,000 cures * $1,000 = $500 Million. But it will take a million doses because everyone must take the drug to find out who will be cured. It's value per dose produced would then not be more than $500.

Drug B: Same as above but since we know exactly which patients will be cured the value per dose will be $1,000.

Clearly if a drug company or society could choose which drug to invent, B would be the better choice. However society is better off in either case. Drug A does improves our lot by a net $500 per patient.

Saying we need to know which drugs work best on which subgroups is really no different IMO than saying we need to discover better drugs or better procedures or cold fusion or cars that fly burning only garbage.....yes yes yes all good things that are great to the degree that we can do them but our 'problem' isn't so much that we can't do that.

(fair balance, I work at a drug company but don't speak only for myself).

India is a very large and extremely consumer driven medical system.

What percentage of the population has actual coverage?

Interesting question and I'm sure a very difficult one to answer; so I'm not going to directly answer it. But, here are a few facets of the Indian medical system.

1. At the lowest level, you have govt run hospitals and clinics. In cities they tend to be better staffed than in rural areas, but they are still quite inadequate. They are only used by people who cannot afford treatment at private clinics and hospitals. The wait times are long and the facilities are decrepit. The docs are sufficiently qualified, but they are not western trained. In rural areas, many clinics tend to be "abandoned" by their doctors.

2. Then you have charitable or semi-charitable organizations like Narayana Hridalaya, Sankara Eye Foundation, which provide decent and specific medical care at subsidized costs (typically charging higher fees to their affluent clients). The Bill and Melinda Gates foundation also carries out a lot of charitable medical work and is the biggest factor in driving out polio in many indigent parts of India.

3. Govt employees tend to get medical cost reimbursement (not the same as insurance).

4. Private sector employees can go for medical insurance, though they are bedeviled by the same issues as in the US. Courts tend to side with consumers against insurers.

5. Cost of prescription medicine is kept low through govt subsidies. Until recently, pharmaceutical companies were only allowed to patent the chemical process of manufacturing a drug molecule and not the molecule itself. (My understanding is that has changed now, under pressure from western pharmaceutical companies. There was huge outcry against this in African countries since it affected the supply of AIDS drugs.) Many pharmaceutical companies reverse engineer drugs discovered in western countries and later sell them as generics in western markets, as per the local western jurisdictions. Some Indian pharmaceuticals have been acquired recently by Israeli and Japanese (generic) drug makers.

6. Many doctors graduate from govt colleges, where their tuition costs are heavily subsidized. Malpractice insurance is pretty much unheard of in India. This prevents the doctors from passing on the costs to patients. (As per "Glenn Beck", an average Indian doctor makes about $5000 while an american doctor makes about $150000 ... http://www.youtube.com/watch?v=A7NUQZiWl6w)

7. Many of the good private hospitals (WockHardt, Fortis) are staffed by doctors who have worked in western countries, including US, UK and Australia. This in turn has promoted medical tourism. However, many of these hospitals are beyond the reach of the lower middle class Indians, although the Indian govt does mandate that a certain fraction of beds be reserved for the poor. However, medical tourism consists not only of patients from richer countries, but also from the poorer countries (including Pakistan).

I think 'consumer driven' health care is a great idea, but that's provided it really is consumer driven and it's really health care. What I think is a valid concern is that it degenerates into a game of how to con the sick people into signing away their coverage in exchange for trinkets. The end result of that is either a situation where 'voucherized' Medicare leaves some sick people being denied very basic care while other Medicare patients are enjoying accupuncture and theraputic massages or a case where exactly that happens but political pressure ensures the sick are taken care of anyway while Medicare also pays for some 'lucky duck's' massages, all for higher costs to the taxpayer than what was before the 'savings from privitization' which seems to be what happened with Medicare Advantage.

Tyler, the key paragraph of McArdle's post is this
"This semantic moralizing takes away from what I do think is the core argument between the partisans of the "Peoples' Budget" and the advocates of Ryan's Medicare voucher plan: whether consumers patients, or a central committee (IPAB) should be in charge of deciding what to do with limited health care resources. "

Also, in his column in today's WP, R. Samuelson says this about fiscal reform:
"We should be asking basic questions:
1. How big a government do we want? For four decades, federal spending has averaged 21 percent of gross domestic product. An aging population and high health costs mean that average spending, as a share of GDP, will rise by a third or more in the next 10 to 15 years if today’s programs simply continue.
2. Who deserves government subsidies and how much? About 55 percent of spending goes to individuals, including the elderly, veterans, farmers, students, the disabled and the poor.
3. How much, if at all, should social spending be allowed to squeeze national defense?
4. If taxes rise, how much and on whom? Which taxes would least hurt economic growth?"

I'm glad that at least McArdle and Samuelson are trying to focus the discussion on the critical issues that any reform proposal must address directly and clearly. I hope that in future posts on health care and fiscal reforms you follow their lead.

In reading McArdle, it should be kept in mind that while Americans are listed as paying a much smaller percent of medical costs "out of pocket," we pay more than any other country by a long shot, so Americans are much higher on the list in terms of what they actually pay "out of pocket." Also, does this "out of pocket" include paying for health insurance premia? I doubt it, as figures on the percent of US health care publicly provided still have it at less than 50%, if not by much. So, there is about 30% that is beign paid privately, but somehow not "out of pocket." I suspect that this is in the form of private health insurance premia.

If McArdle wishes to make a point, it would help if she was both clearer and got her facts straight. And, indeed, as noted by one commenter, but not her, Switzerland does have government as the insurer of last resort.

Great catch. Its true, I wouldn't mind paying 100% out-of-pocket if I was getting dental care in India! Even a complicated root canal costs only $100 at the dentists!

In addition, according to the Kaiser article, the Swiss system features a limit on how much cost any individual will pay during a year. So there is catatrophic coverage in the mandatory, sometimes subsidized, policies.

The issue is that people may be health care consumers (i.e. value maximizers) for routine procedures and elective surgeries. However, most people end up being health maximizers for when they truly get sick.

No one is going to go around and comparison shop ERs for best value for the money when they get a brain aneurism. To the extent that anyone thinks about where to go, it's to the best facility regardless of cost within reason. Medical ethics would more or less demand this anyway - I think people would be very offended by the notion that poor people would get shunted off to a second-rate ER where they had a high chance to die when they got hurt while the rich received gold-standard ER treatment. This same calculus applies for end of life sicknesses as well; it turns out that money has no value if you end up dead so the marginal utility of better treatment only has to be slight (and, in fact, less than marginal benefit) for widespread adoption.

It is true that China and India have very large and consumer driven health care systems. However, at least in China (a place with which I am very familiar), heath care shocks are one of the biggest obstacles from escaping (and entering into) poverty. Chinese poor struggle to save in any significant amount and savings are easily wiped out by a single health event. Libertarians like to talk about the locus of control being properly located in the individual, but it's hard to argue that in a place like China, where you can't even get picked up in an ambulance without pre-paying for the ride, that many poor are poor due to losing the health care lottery.

And it is not just France along with Switzerland. Germany and the Netherlands and quite a few other countries have mixed private-public insurance systems in which everybody gets covered, but there is plenty of consumer choice, irrespective of this supposed percent paid "out of pocket." By and large these are generally viewed as the best functioning systems in the world, with the French one often getting rated as the tops.

Honestly... there's just something about the Anglo-sphere... we suck at universal coverage (and I'm not saying that tongue in cheek)

Not that I would bother reading the drivel McArdle writes, but I hope she pointed out that Switzerland basically uses the ACA plan the Democrats enacted. You know - the one that she rails against as being essentially a plague o' locusts o'er the land; the death o' all first born; a rain o' frogs and blood?

Christ, what an idiot. And you guys actually LINK to her.

Switzerland does not use 'basically the ACA'
And the drivel started at "L2P'


You have hit on exactly why Friedrich Hayek supported national health insurance in The Road to Serfdom, a fact often overlooked by people waving his works around while opposing same.

Tyler once linked to a great article on health care economics. He also quoted a great response to the 'health maximizers' issue from the article:

In one of his (typical) vitriolic posts of the last two weeks, Krugman makes an excellent point. Owing to some sort of foolish patriotic reflex, Americans often argue from the starting point that "we have the best [x] in the world" rather than looking at what actually exists on other parts of the globe and seeing if there are things that we should be copying.

Krugman is exactly right on this point. In areas where the United States' policies are extremely messed up, we can start by identifying an enviable situation in a foreign country and just trying, in good faith, to copy that policy as closely as possible.

Not only is this method commonsensical, it seems like an extremely robust method for improving policy around the world.

Think about the sinkhole of misery that is (the majority of) Subsaharan Africa. One would think that it should be easy to create policy in Africa. If almost every nation in the world outside your continent is doing better than you, then there's no secret in what you need to do to succeed. Just find a better place and study what it is about the place you need to copy. Now, of course, you probably can't turn Zaire into Switzerland overnight, but you need to figure out whom/where to take advice from and what the most fundamental (first) steps are to take in order to create the type of environment that exists in your (actually existing) "goal society."

Bottom line: In the overwhelming majority of cases, policy should be made by copying other nations' best practices. I suspect the reason this doesn't happen is due to blind nationalism.

Below the bottom line: We, the U.S., should slavishly follow Swiss-style healthcare.

This needs some Burke in the mix. Different countries do develop differently and institutions become 'locked in' over time. In the US, for example, employer provided health insurance is the norm for many working age adults and has a large amount of 'lock in'. While that may not seem like the most logical way to do things if starting from scratch, the fact is we aren't starting from scratch in the US.

Look at it this way, suppose someone proves that the British way of driving on the left side of the road was th emost optimal. That still wouldn't necessarily merit the massive cost in terms of spending, training and accidends incurred for the US to suddenly switch all roads and cars over to the UK system.

By your logic not only should the US slavishly follow the Swiss system but so should all other countries....after all even a modest gain is a gain. But the US isn't Zaire and what makes the Swiss system 'work' may not necessarily translate here as well as one would think. Again this is an advantage IMO of the ACA. It doens't go too far in any one direction. If the Swiss system is really perfect, the private health exchanges will generate amazing innovations and lower prices. If that's the case then they will expand rapidly and politicans will fight each other to bring voucherized health to everyone they can find. If it doesn't, well the only people we are 'trying' it on are people without coverage today. Gears can still be shifted to a 'universal Medicare' system or something else if people want. On both the left and right I think people underestimate the value of a plan that doesn't lock us too much in any particular style of health care reform.

There are also other factors...

For example, we train our doctors for many more years in the US than most other countries. Our doctors borrow for their education. Both of which increase costs.

Barkley Rosser: these things may be important about the health care system, but they aren't important to Krugman's specific claim, which is that we have the most consumer-driven health care system, and also the highest costs. The percentage of costs that is borne directly by consumers is actually pretty low here, and many other countries have more direct decision-making about at least secondary insurance, which makes it hard to argue--as I think Krugman does by implcation--that a consumer-driven model has either failed to control costs, or even (by implication) driven them higher, in the US. Most of the costs in the US are not controlled by consumers even indirectly.

Private insurance is a side issue; it isn't that big a market, which is really part of the point the CDHC people are making. The actual figures on out-of-pocket expenditures better support the contention of the consumer-driven health care folks that cost insulation is driving the US experience than Krugman's contention, though I wouldn't say these figures were a slam dunk for consumer-driven heatlh care either. But the RAND studies and similar have shown pretty impressive results.

Megan, All the data is here: http://www.oecd.org/document/16/0,3343,en_2649_34631_2085200_1_1_1_1,00.html I don't know if this was your source and at any rate, it has been updated. The key thing is to compare oranges with oranges and not with apples. The best direct comparison to the Swiss system is The Netherlands which also has a mandate for all of the citizens to purchase PRIVATE health insurance. If you look at the Dutch experience, not only are their per person out of pocket costs lower (your website) but their per capita expenditures are almost 15% lower than Switzerland. There are a lot of different approaches within the EU (and elsewhere) that deliver quality health care for less than we collectively pay per capita in the US.

Baffled. Does out-of-pocket costs always equal consumer driven? And if you maintain that that is desirable, why not as a form of public policy mandate that every American must spend more out of pocket than the Swiss do? Or do we not want more "consumer driven" by this odd definition.

Isn't the Swiss health care system highly regulated and isn't insurance mandated? If that's the case, do not these factors, at a minimum, impinge on the consumer and how she/he spends their money? Does this not suggest that the Swiss consumer may have all sorts of limits on its consumption? And if the point is that we want more power to the consumers and the Swiss have the most "consumer-driven" health care consumer, does it not logically follow that we should consider adopting the Swiss model?

Or shall we... just never mind, the implications aren't the point (which is a bit troubling if this is about public policy).

Private insurance is a side issue

This certainly isn't including private insurance in the the form of health benefits from your job.

In theory, aren't the health benefits you're getting from your employer technically being paid out of your pocket? In economic theory at least, workers are accepting lower wages from employers in exchange for those employers providing them with health benefits. In that sense, strictly, most Americans are paying quite a bit OOP for their health coverage and the true cost insulation is thinner than it first appears.

The exception is Medicare which, costing seniors a relatively smallish co-pay and 'premiums' that are only a portion of their Social Security checks should, theoretically, see higher costs per patient than all private health coverage in the US. Yet it doesn't?!

It comes out of your pocket, but unless you're the head of HR, you don't have any control over it. You don't choose deductibles, coverage levels, etc. So while the incidence of the expenditure is certainly on the consumer, it's not in any sense "consumer driven". Taxes also come out of your paycheck, but Medicare isnt' consumer driven because of that.

Medicare is an interesting case. It's reimbursements are functionally set by law at below the lowest private reimbursement, which obviously saves a lot of money. But it's not sustainable nationwide, because especially for hospital services, many of those reimbursements are set below the average cost per patient of the hospital. (i.e., they're not enough to cover overhead plus treatment). And Medicare actually has a very high out-of-pocket component, though some of that's supposed to change in 2014; hence "medigap" policies.

In the very short run you have no control over such things but in the long run you do. You can opt for a job without health insurnace but higher wages, for instance. Even just the demand for more cash would shift the HR department towards a lower premium, higher deductible plan. Yet we see the opposite, when people are able to vote on a plan (such as via union representation), they seem to want more comprehensive plans even if they come at the expense of cash wages. On one level this doesn't make economic sense. A hundred fifty years ago towns had 'company stores' where the employer supplied housing, food, and household goods. Workers were economically savy enough to chaf against that, desiring cash to buy their own stuff rather than stuff directly. Why is this exceptional? It can only be because workers know employers can make $1 buy more coverage than the individual buying private coverage on the market.

But it’s not sustainable nationwide, because especially for hospital services, many of those reimbursements are set below the average cost per patient of the hospital. (i.e., they’re not enough to cover overhead plus treatment).

Then why do hospitals take Medicare or even exist? Is Medicare a loss leader? Does the hospital take your mom in for a Medicare funded hip replacement in hopes you'll have a baby therer?

The cost of your employer-provided healthcare that you don't see is definitely not an out-of-pocket cost. It is the cost for the things that you do not pay out of pocket. OOP definitely means things not covered by your employers insurance.

Also, as Medicare and Medicaid payments have been trimmed, health care providers receive less and less and attempt to recoup more from those with private insurance. In a sense Medicare is riding on the back of private insurance.

Isn't the "inflation" that we see in health care expenses really driven by the dollars pumped into the system? If less money is pumped in (e.g., by the Ryan plan), doesn't that mean that certain expensive procedures won't occur, because the demand will not be there? Alternatively, the cost of procedures will tend to decline to expand the market, as has happened with elective corrective eye surgery.

In the end, there is no magic solution. Sure, you can attempt to stick someone else with the bill (aka 'taxing the rich') or you can let 'em know, sorry you are too old or too sick for us to spend a lot of money (aka 'death panels').

I don't think there's really 'inflation' in the health care system. Rember inflation is paying more for the same product. You can't easily compare a 'night in the hospital' today compared to, say, 1995. The hospital of 1995 didn't have the knowledge and stuff that the hospital of 2011. It's not the same product as, say, a twinkee or glass of milk.

As for the Ryan plan, Megan is asserting that Medicare only pays enough to cover the variable and a portion of the fixed cost per patient. If that is correct then draining money out of the system will make things worse.

Consider a 'hospital' that consists of an MRI machine that has a huge fixed cost that it must pay every year as well as a variable cost in the form of electricity, technician time, supplies etc. If you have less Medicare money, then that 'fixed cost' must be divided over a smaller base making it even more expensive.

The 'solution' to the problem as Megan describes it is consolidation. Instead of two hospitals with two MRI's serving 100 patients a month, consolidate to one big hospital with one MRI that serves 200 patients a month. Now Medicare's 'low' reimbursement suddenly becomes profitable because the fixed cost is being covered by 200 rather than 100 patients. This is not at all strange for any other industry, for example there are fewer mobile phone companies today than there were in 1999.

Huh? Here you're saying the opposite of what you said in your post and the opposite of the point that was made about the Swiss system. Out of pocket and consumer control isn't the same thing, it sounds like your saying and I would have thought was the case so how come you suggest otherwise and don't suggest to Professor Cowan that this chart doesn't say much about "consumer-driven" markets.? Really befuddled. Thanks.


You missed my point - there was a reason that I put quotation marks around "inflation". Since the introduction of Medicare in the 1960's, more and more money has been diverted into healthcare, as the government became more involved in the health market, and reduced the taxpayers' ability to buy other things. The tax favored, 'invisible" nature of employer-sponsored health plans, coupled with more treatments covered by third parties has also worked to direct more money into the purchase of healthcare.

Imagine if I decided to divert more of my household income toward the purchase of a car (and less to other things). Instead of the Honda Civic I had been driving, I now have a BMW 3. No inflation, just more real resources, allowing me to buy a more sophisticated car. As I have noticed with cars and also with wine, after a certain level, the marginal increase in utility declines. If I once again decided to go on a Civic car budget, I would lose the exhiliratiion of driving the BMW for the pedestrian Civic, but I would still have a fine car. I suspect that if the dollars being pumped into healthcare were reduced, we would lose some of the high cost, sophisticated procedures, but would still have pretty good care.

I don't see why percentage of costs borne by the average patient is the right measure of how "consumer-driven" the system is.

The variance is much more important, I think. In Switzerland that's going to be vastly lower than in the US, because the mandatory policies contain upper limits on patient costs.

It's complicated. A really large hospital bill in the US is going to be mostly forgiven or bankrupted in 95% of cases. It's the medium-to-low bills that consumers could have some effect on.

Indeed it is complicated. Which is why the 30% figure really doesn't tell us a lot.

Besides, isn't it the really large bills, the near end-of-life stuff, that drive up our costs so much? That's where you're going to hit the out-of-pocket limit under the Swiss system regardless of your choices.

Here's a question for you and Tyler: Would you like to see the Swiss system adopted in the US? Bear in mind that it has many of ACA's features, including mandatory insurance, premium subsidies for the low-income (and remember that Switzerland has much les income inequality than the US), and no individual underwriting.


1) I said nothing about Krugman and do not care what he said.

2) Some of your numbers are not reliable. I checked the OECD data and no numbers are given there for Greece on percent of health spending out of pocket, which you show as over 40%. The same data set has public spending as percent of total on health in Greece as slightly over 60%. It is about 59% in Switzerland.

3) The only OECD countries with public spending on health as less than 50% are Mexico and the US, both just over 46%.

4) If one looks at the actual amount of out of pocket spending on health rather than the percentage, only Switzerland exceeds the US, but as noted by others, Switzerland is not necessarily all that great on final medical outcomes, even if it does better than the US.

Tyler Cowen doesn't have accuracy in writing as his policy.

"he once wrote a whole column praising the Swiss health care system:"

The Swiss option was the third of three health care plans that Krugman discussed in that column. Hardly a whole column.

And the praise was faint:

"So where does Obamacare fit into all this? Basically, it’s a plan to Swissify America, using regulation and subsidies to ensure universal coverage.

If we were starting from scratch we probably wouldn’t have chosen this route. True “socialized medicine” would undoubtedly cost less, and a straightforward extension of Medicare-type coverage to all Americans would probably be cheaper than a Swiss-style system. That’s why I and others believe that a true public option competing with private insurers is extremely important: otherwise, rising costs could all too easily undermine the whole effort.

But a Swiss-style system of universal coverage would be a vast improvement on what we have now. And we already know that such systems work."

Indeed, there's certainly a nasty straing of Krugman Derangement Syndrome out there. Perhaps it's Nobel/NYT Column/TV Pundit envy? You nailed it nicely. Krugman wrote that the Swiss system was good but not his preferred option....his preferred option being essentially the Medicare system. There's nothing inconsistent about Krugman being happy with the Obama program that moves currently uninsured people into a Swiss-like system but very unhappy with the Ryan proposal to turn Medicare into a sub-par Swiss-ish system.

A big issue here is the aggravating assumption that we always do what's in our best interest. Aside from issues that no one has perfect information, perfect expertise – PhDs and MDs in every area and sub-area – and all the time in the world to do extensive analyses, there's the issue of not having perfect self-discipline.

The bigger issue with medical care is not people going to the doctor too much, but going too little. Many people really don't like going to the doctor and getting tests and treatments and maybe hearing bad news, already they would go less than the optimal amount for them even if it were 100% free. Up the co-pays and you just make the problem worse not better.

Not that it matters to libretario Cowen.

Laughable. Evidence please. There is enormous waste in the form of unnecessary treatment.

This isn't odd at all. This is from the same Krugman column: "If we were starting from scratch we probably wouldn’t have chosen this route. True “socialized medicine” would undoubtedly cost less, and a straightforward extension of Medicare-type coverage to all Americans would probably be cheaper than a Swiss-style system."

Is it possible that Krugman can simultaneously see the Swiss system as a major improvement yet disagree that consumer choice is a particularly efficient way to control costs? I think you're reading way too much into "such systems work." By "work" he means "work better than what we've got now," which is true and why he ultimately supported the public-option-free ACA despite it being far from ideal.

I think that the patient-as-consumer model w/ universal coverage and a defined minimum benefit is a lot better than how we currently hide costs (by linking care to employment) and provide limitless benefits, but I'd much prefer national healthcare and, to a lesser extent, single-payer.

Is it possible that Krugman can simultaneously see the Swiss system as a major improvement yet disagree that consumer choice is a particularly efficient way to control costs?

Yes, if he thought the status quo at the time he was writing (pre-PPACA) was really, really lousy. Which he did.

"Even in a system such as the French, actual health care decisions are very often driven by choosing individuals, even if government ends up paying the bill."

Seriously, Tyler, I think you need to take a look at your employer-provided, tax-subsidized insurance policy. Because in other parts of America health care decisions are often driven by choosing individuals rather than human resources / preferred-provider collusion. For instance my father, who's on Medicare, is actually pretty darn discriminating about which doctor or which hospital he goes to for his government-bill-paying healthcare.

(Except, of course, for emergency-room visits -- when he broke his leg in a restaurant parking log several years ago you'd be... well... shocked at how irresponsible he was about which emergency room he was transported to! Instead of calling ahead to all the ERs within a 25-mile radius to negotiate fees and assess quality of care he recklessly and ill-informed-consumer-ly based his decision on an entirely arbitrary and economically inefficient basis of proximity! If you can imagine that! And really, if he'd scheduled the failure of his pacemaker a little more carefully he could have saved Medicare another bundle! Inconsiderate I tell you!)

At any rate, as I was saying, when he's not screaming in agony with a fractured leg he's actually pretty darn discriminating when it comes to choosing which healthcare providers and procedures he does and doesn't want.

Oddly, he doesn't exercise these choices in France or Switzerland, he lives in rural Tennessee.

You might also be surprised that even though my mother only lived in France for half a year after graduation (she lived in England the other half) and even though that was right after the War, she nevertheless made a number of very careful decisions regarding the treatment she sought for her arthritic shoulder, electing for shoulder replacement only after exploring all other options.

And oddly, even though both my mother and father are Medicare recipients they've nevertheless written living wills that indicate their choice of which procedures they wish to receive and which they wish to decline in end-of-life situations.

Anyway, it sounds like you're stuck with private-employer-provided, preferred-provider-constrained healthcare instead of government-provided Medicare and so you may have no experience whatsoever with choosing what healthcare you wish to consume. If you make it to age 65 (never a sure thing when all you've got is by-the-numbers plans) you may be pleasantly surprised (or, if you're not used to choices, possibly shocked) at the wide range of medical services available to you.

Heck, even with my pay-through-the-nose individual insurance plan my family and I get to exercise a lot of choice.

So what's with this "even in a system such as the French, actual health care decisions are very often driven by choosing individuals, even if government ends up paying the bill" business?


Anyone who brings up emergency rooms when arguing about consumer choice is a moron.

Not true.

Some of them are just dishonest partisans.

Of course! Just as anyone who imagines the lions share of medical spending is controllable by managing the portion that's consumer-discretionary is also a moron.

I agree I should have addressed the difference in this comment. Instead I dug into it consumer choice further down (see shoulder surgery vs. forehead implants.) I regret the error.


If there is one area where libertarian philosophy makes me uncomfortable it is health care. It is not that the reasoning is unconvincing, quite the contrary. But it is just that the resultant conclusions are hard to make palatable and make me uncomfortable.

Doh! I left out the most important part!

Despite considerable discrimination in the consumption of Medicare on my parent's part, and consumption of paid-out-of-my-pocket private insurance on my part, my dad still needed a pacemaker, he still needed his broken leg set, my mom still needed some kind of shoulder surgery, my daughter still needed treatment for walking pneumonia this winter, my son and I both still need medication to manage asthma.

And while we made our choices, and to some extent deferred treatment as long as possible (in my mom's shoulder-replacement case) those choices really affected our total spending by several percentage points. I can shop around for a slight discount on asthma medicine if I try really hard but my son can't do without it and my quality of life would be very much lower without it.

Paul Ryan, Megan McArdle, and possibly some of your commenter's answers would be to say "$%!#% off and drown in your own flem if you can't pull your weight, middle-class scum." Call me a self-serving rebel here but I'd prefer a more systemic approach with a greater chance of actually controlling costs rather than a hopscotch income-lottery-based one. Something like, oh, say, the Affordable Healthcare Act.


May I ask a basic question amongst whatever economists there are here. What makes higher out of pocket expenses more "consumer-driven"? I thought consumer driven meant more responsive to consumers not how high their out of pocket expenses are. Does that mean that in countries with trade barriers, that if individuals pay more for a particular good than consumers in another country, that product is more "consumer-driven?"

I think this is an important question.

In theory out of pocket prices make the consumer more aware of the costs. To use an easy example, when someone goes to the supermarket, they look at the prices and will opt sometimes for a lower quality cut of meat in order to save money. If someone else were paying the bill, or a large portion of it, they would simply buy the best quality always and supermarkets could compete not on lowering prices but by always upping quality.

In health there was a major experiment by the Rand Corporation that ran from 1971 to 1982 (see http://www.rand.org/pubs/research_briefs/RB9174/index1.html). It found that higher levels of co-pays caused patients to make fewer doctor and hospital visits. However, I think the following needs to be kept in mind:

1. If you look at the graphs, you'll notice that the most dramatic falls in visits/spending comes with introducing modest co-pays. A plan that pays for everything versus a plan that pays for 75% makes for a big different in spending, but upping the co-pay even more results in smaller amounts of savings. That's why almost all insurance plans today impose some type of co-pay, even if it's just a $10 per doctor's visit.

2. Disturbingly, patients cut out 'necessary' procedures as much as they did 'optional' ones when subjected to higher copays. Two possible explanations: a. Maybe consumers are really good at picking out that some procedures that are labelled 'necessary' are really optional. b. Maybe consumers aren't really all that good and cut out procedures based on whether or not their doctors really pressure them on a procedure.

3. Medical care in the 70's to early 80's was radically different. Today I think there's a lot of procedures you can't cut because when you need them they are not optional (if you're having a heart attack, you need a hospital now!) but there are a lot of procedures that are economically easy to cut because they are inexpensive in the short run but lead to emergancy procedures. There are, for example, many drugs that help control blood pressure, blood sugar levels and other things that can technically be 'skipped' without a person doubling over. But skipping today would be penny wise and pound foolish as later on expensive procedures are needed to handle things that could have been prevented or at least delayed.

Appreciate the response. You're more addressing the effects of price on consumers. Interesting findings.

I'm asking more of a definitional question, namely what makes "out-of-pocket" expenses without any reference whatsoever to consumer control "consumer-driven"? You could have a system in which there's but one plan, but three procedures available, and the out of pocket expenses are exhorbitant. Not a great plan, but unless your comparing oranges to oranges (i.e. all health care systems in the world are set up similarly and provide equal consumer control over all expenses) the statistic Megan cites isn't particularly relevant. This is partly why its so odd that on the one hand she and by implication Cowan, are arguing that being "consumer-driven" is a good thing in trying to address our health care challenges, cites Switzerland as the most "consumer-driven," yet is hardly a fan of the Swiss system which involves, as I understand it, mandates and national insurance.

I think "out of pocket" would be defined as it sounds. The easiest def. would be the person who pays entirely with his own spending money. You walk into Wal-Mart and buy a bottle of Advil, that's out of pocket spending. You walk into an urgent care center and see the price of a walk in is $100 and you hand in a $100 bill. There are people who pay like this not only for trivial things but serious expenses. Cosmetic surgery, for example, is often paid for in cash and not on insurance. There are people though who are paying cash for operations like heart transplants, though.

A notch removed from this would be plans like Health Savings Accounts. There you maybe pay a fee to get the 'network' services of an insurance company but otherwise you put money in a tax-free savings account and draw from it as you use medical services. The idea here is that you will save money by doing serious comparision shopping, you will ask for prices before making appointments, when the doc says try this drug you'll ask if there's a generic available and if not you'll use the internet to price the lowest possible price etc. At this level there probably is a good chunck of savings that could be tapped because people often don't think too much about these things. But what Megan and others often overlook in my opinion is that this is already moving away from true 'out of pocket'-ness. By having tax preferred status for this money you're basically saying a person in the 25% tax bracket has to earn $133.33 to go out and spend $100 for a night on the town but only $100 to visit an urgent care center and get that odd rash looked at. Like it or not the gov't is already subsidizing medical spending so what's really the difference between you getting a 25% subsidy to spend money on your own care (and you price compare the different services) versus you getting a 25% subsidy to buy an insurance policy and trust their managers to do a wise job driving good bargains with doctors and hospitals while not cutting out procedures and drugs you really need?

Outside of that you have insurance which almost always requires you to pay something against medical care from a token $10 per doctors visit to a more biting figure like '20% of costs' which can still be a fortune if you have a huge medical problem. I think Megan would define the $10 or 20% co-pays as OOP and what your insurance pays as non-OOP. I think, though, that what you pay to have the insurance either in the form of lower wages or writing a check out of your checking account directly should also count.

To clarify (not sure you got my point).

The issue as framed by McCardle is the power of the individual consumer to affect the market. She's saying that Krugman is dismissing the power of the individual consumer to shape his/her own destiny in determining health care spending. She criticizes a point he makes about suggesting that the U.S. consumer is the most powerful in the world. Her criticism? That the U.S. consumer is not the most powerful. Rather that would be the Swiss citizen. The evidence? That the Swiss citizen shoulders a higher burden of health care spending that the American consumer. My question, who said that the percentage shouldering of the burden is synonymous with consumer power?

Just because a Swiss citizen pays x% doesn't mean that they have more control over what that money gets spent on than someone in another country who shoulders a smaller burden..

This is part of the reason why there's a giant crater in McCarde's argument. Because if she's saying one should wish for more power to the consumer, and arguing that a particular country has the most powerful consumers, it would follow logically that we would wish to design our system after that country (or make it a good model for us). But the Swiss system which is a national insurance insurance system, as I understand, and probably has lots of particular rules is not the direction she would advocate (at least not based on what she's written before on this topic).

You'll notice below that she responds to someone that she was addressing the amount of "cost sharing" of the Swiss consumer. Sorry but "cost-sharing" and "consumer-driven" is not the same thing and particularly in the way she phrased the initial critique of Krugman, much of the potency of her original post if not almost all of it would dissipate for her to argue that a system that involves more "cost-sharing" would be good (as opposed to her point that its about consumer power, whatever amount the consumer shoulders).

Make sense?

Its not a question of "out of pocket" but a question of "consumer power." She conflates the two. They're not the same. The Swiss may have very restrictive laws that influence their out of pocket expenses. Yet those expenses could still be very high as a percentage of their spending. You'll note below that she backs off the term "consumer-driven" to "cost-sharing." If you read her original post and replaced "consumer-driven" with "cost-sharing" the bulk of its bite would disappear (and she wouldn't have bothered as this framing is the whole point).

I think I see your point, although I'll have to read her post carefully. "Consumer power" seems like an odd concept to define in any way that you could measure it. When a consumer buys insurance that has a very low co-payment, how do we know that isn't them exercising 'power'? To me it seems quite rational. A consumer does not trust herself to cut back on the least effective medical treatments. She would rather pay an insurance company that has experts on staff and data mining capacity to pre-limit her selection for cost savings. She can then concentrate her 'health shopping' on using the list of network doctors and approved benefits to find the ones that will give her the best possible health benefits. Meanwhile down the street Mr. Know-it-All thinks he's a one-man medical team based on his eccentric medicla theories. When he uses doctors, he pays full price and fully OOP. On paper it may seem like the 2nd person is exercising great 'consumer power' even though the first woman is getting much more effective bang for her buck.

Yep, sounds like we're closer to the same page. And add to your example a comparison not between plans but between countries with very different rules, markets, norms, and so on. Without addressing the specifics of the two countries setups, how does one know that the Swiss consumer isn't very weak because of whatever setup that's unique to Switzerland. Just because they are weak doesn't mean that the percentage they pay isn't high. That may seem odd in this country but the Swiss system and culture and norms they live by could be very different than ours. Anyway...

I believe the US is just looking at it like good ole Henry Ford watch others that are doing it better, then use that model. Give it time, and help create that.

Tyler will surely have seen this from health-policy wonk Ezra Klein but commenters might not have:

If viewing patients as consumers works, and the Swiss are the best at it, then you’d presumably expect to see some large advantages to the Swiss system when you compare it to other European health-care systems. But you don’t. In fact, the Swiss system is the second-most expensive in the world. They spend $3,000 less per capita than we do, but more than anyone else does. And they don’t have a reputation for better outcomes, either. That the two most expensive health-care systems in the world are also the two with the most cost sharing seems to be a point for single-payer systems, not a point against them.

Megan McArdle may see it as well, but having found some statistic or another to prove her point she won't be interested in revisiting it.

The good news? Krugman's right: even adopting the second-least-cost-effective healthcare system in the western world would still pour $3,000 less down a rat hole than we're pouring here. Great metric if that's where you want to go but... not exactly a ringing endorsement for consumer-driven healthcare.


I ought to add that, of course, there are some real savings in the current, if grossly inefficient, American healthcare system that could be attributed to consumer-driven choice. For instance, I'm pretty sure that more people would get prosthetic Klingon foreheads put on their real foreheads if it was covered by some kind of universal-healthcare system than currently do so when they have to pay 100% of the cost themselves. But on the other hand I'm pretty positive that if like my father you need a malfunctioning pacemaker dealt with or you break your leg in a restaurant parking lot you're extremely unlikely to either a) make a "consumer-driven" healthcare decision or b) make efficient economic choices for treatment. Instead you're going to be beelined to the closest ER and only deal with the bill once you regain consciousness and/or coherence. Somewhere in the middle there are things like my mom's shoulder replacement, which really boiled down to a question of how long could she withstand the pain without narcotics. (Answer for anyone who's ever had a shoulder injury: a surprisingly long time.) Given that prosthetic-forehead replacements cost surprisingly little compared to heart or upper-leg surgery, we should expect to see slight declines in low-cost but also low-utility procedures but not much reduction in expensive but, you know, actual necessary care.


You obviously have no understanding whatsoever of how markets bring down costs.

Also, the graph shows that France has the same out-of-pocket as the U.S. Greece has the most cost sharing according to the graph, not the U.S.

I didn't say the Swiss system was like, the most awesome thing either; I said it featured more cost sharing than our system.

No you didn't say it featured more cost-sharing but that it was more "consumer-driven" (the topic of your post and central issue of contention with Krugman). You conflate cost with control. Don't know what makes them, ipso facto, the same thing in this case. But if you believe they are and clearly feel that consumer driven is the way to go, the Swiss system should be the most attractive to you (all based on your own criteria).

"To compete in the market for compulsory health insurance, a Swiss health insurer must be registered with the Swiss Federal Office of Public Health, which regulates health insurance under the 1994 statute. The insurers were not allowed to earn profits from the mandated benefit package, although they have always been able to profit from the sale of actuarially priced supplementary benefits (mainly superior amenities).

Regulations require "a 25-year-old and an 80-year-old individual pay a given insurer the same premium for the same type of policy..Overall, then, the Swiss health system is a variant of the highly government-regulated social insurance systems of Europe..that rely on ostensibly private, nonprofit health insurers that also are subject to uniform fee schedules and myriad government regulations."[3]

This is a very important part of workable 'consumer driven' health that I think Megan & co. miss. There's really only a handful of ways an insurance company can generate value:

a. It can negotiate with doctors and hospitals, using its buying power to demand lower rates in exchange for offering steady business to 'in network' providers.

b. It can data mine in order to determine 'what works' and act as a type of 'counter sales rep' pushing things that are lower cost against doctors and hospitals that push higher cost products.

c. It can game the population that it covers so that only the healthy are in its 'pool' leaving the sick in other people's pools. It can do this directly (pricing people with 'sick profiles' higher so they go somewhere else) or indirectly (offering lots of trivial goodies like aromatherapy....which sounds great to people who have no major health problems but would not be a priority for, say, a woman whose had breast cancer 7 years ago and had it come back twice).

Now note that of the above things, c is probably the easiest to do followed by a and b is really hard. The regulation is meant to close off c as an option for insurnace companies to compete on and that's why many like employer provided coverage....companies essentially tell the insurance company that all employees have to be covered at the same rate. The next easiest option, b, is not horrible but it does subvert the whole idea of 'consumer choice'. The most effect insurance company will be one that's huge, a 'Wal-Mart' of insurance which covers so many patients that no hospital or doctor could think of giving up that massive amount of business. But then you're talking about a market with only a few big players, not a lot of choice. That leaves b as the last choice for the insurance company but the first choice for society.

So consumer choice is fine provided the regulations are set up so that b is the result. I suspect, though, that schemes like the Ryan plan would result in what I said before, big con games designed to get people who need coverage to sign it away in exchange for trinkets.

I think the idea of consumer-driven health care is nuts. Health care is really two things: chronic maintenance and prevention, which is low cost and low yield, and treatment of major illness, which is high cost and can be high yield. Yes, some of the former prevents or forestalls the latter, but, since immortality is impossible, eventually everyone will get a major illness. Putting consumer choice into the former, which is basically low cost is unlikely to save money, i.e. do you want a generic or name-brand cholesterol medicine or should we do a throat culture or see how it goes. Putting consumer choice into the latter is impossible, as care is very specialized and commonly urgent. Think pneumonia or a heart attack or a stroke or a bleeding episode. If you want to control costs, what we need is to tackle the most expensive illnesses first, see where the costs are, and do research to see if less costly therapies provide a similar benefit. In my opinion, the only way to consumer driven decision making could save money is to allow people to make bad decisions and die or become disabled without medical rescue, and that ain't happening, no how, no way.

Ahh. Yet another commenter who "doesn't undersatnd how markets drive down costs." Of course consumers are going to look for the best deal on bypass operations and the like. All they have to do is study the Surgical Averages of the MD's, then get price quotes, and presto.

I understand there are even hobbyists, called surgeometricians, who dig deeper into the published stats to get a clearer picture.

If there were one article I'd reccommend on the American healthcare system right now it would be this one: Healthcare Crisis a Crisis of Artificial Scarcity. http://c4ss.org/wp-content/uploads/2010/03/C4SS-The-Healthcare-Crisis-A-Crisis-of-Artificial-Scarcity-by-Kevin-A.-Carson.pdf

It really examines the source of the high costs of healthcare rather than the usual comparisons of different provision models.

Thanks for the link.

Best explanation for high health care costs in America I have seen.

I like your post. :-)

Sigh. I recently cited Tyler Cowen as an example of a smart and honest conservative thinker. I'll go serve my detention now.

He used to be that. As he ages he's getting crankier and dogmatic.

Maybe we should just give people the government's central committee wisdom for free as a public good. When you have to make a medical decision, you (or your doctor) plug all the details into some useful .gov website and it responds with a "totally worth it, go for it!" or a "probably not worth it, a lot of money for a small change of very little more time which itself is likely to be painful and incapacitating."

All this information, the basis for all these hypothetical decisions, wants to be free, right?

In my opinion, health care is really consumer-driven because the people needs health services and products. But wouldn't it be ideal if health care is made affordable and accessible by the government? Couldn't the government make the people's lives better by taking care of the health care program without dictating what a person can be or cannot be treated with?

Comments for this post are closed