Sometimes third-party payment *lowers* cost

by  Tyler Cowen in

Really. There is a new paper by Mark Duggan and Fiona Scott Morton — "The Effect of Medicare Part D on Pharmaceutical Prices and Utilization." — in the just-arrived issue of the American Economic Review.  

The point is that large buyer groups, structured incentives for patients to consume certain products, and formularies ("a mechanism that allows a buyer to identify a therapeutically similar treatment as a viable substitute for a patented treatment") all can help lower cost.  These institutions are cited as reasons why Medicare D has cost about twenty percent less than expected; the third party can institute these procedures more effectively than can individuals paying out of pocket, or so the data in this paper indicates.

Ideally much more of the health care sector should work this way, although usually it doesn't.

You'll find earlier versions of the paper here.  The references are also a good place to start for catching up on some of the major papers in health care economics over the last ten years.

How does Netflix receive your discs so early in the morning?

by  Tyler Cowen in

Someone from Netflix writes to me:

The post office doesn't scan any DVDs for us. The envelopes come to us from the post office in standard mail cages. The envelopes are opened and inspected (currently by hand) by the nearest Netflix hub starting extremely early in the morning. After inspection, they're scanned by a computer. It's not until the DVD is actually scanned that it's marked as returned.

Netflix has spent quite a bit of time hacking the USPS, as it were. They've found they have a much higher customer satisfaction rate, as well as being easier to get new customers, if one-way transit time is only 1 day. It's hard to achieve in most places, but in high density areas like the SF Bay Area it's very cost-effective.

The same correspondent references this article on related information, and more.

Further assorted links

by  Tyler Cowen in

1. Will the Obama mortgage plan help?

2. U. Chicago graffiti is nerdy.

3. Karaoke is dwindling, thank goodness.

4. Markets in everything: Stroop test on your toilet paper roll.

5. Will clearinghouses solve OTC problems?

6. Margaret Atwood discusses Twitter; very good link.

7. GJ: "Labor hoarding is so twentieth century."

8. Controversial brand name, from Germany.  I love this associated photo.

What is the biggest flaw in the labor theory of value?

by  Tyler Cowen in

Dan R., a loyal MR reader, poses this question:

I would be curious to know what you consider the biggest flaw in the labor theory of value to be. Also, would you say that it is disproven, unnecessarily bulky, or simply marginalized?

There is a simple model in which the labor theory of value is true.  If inputs are homogeneous and constant returns to scale hold, the proportions of labor input will indeed be proportional to price.  If not, labor inputs will be reallocated until this proportionality holds (Much ink has been spilled on whether this is what Smith, Ricardo, and others had in mind; it is one way of reading Smith's deer-beaver-hunting example.)

One problem is that we need labor, capital, and land for production, not just labor.  The so-called "transformation problem" tries to square this circle.  The simplest response, however, is to give up the labor theory of value.

Another problem is that inputs are heterogenous.  They have to be valued in dollar terms, and that requires imputation, a'la Friedrich Wieser, and that in turn requires information from the demand side.  Price determines cost of production at least as much as cost of production determines price.

Compared to Marshallian supply and demand scissors, the labor theory of value is at best awkward and most of the time it is wrong.  There are some economic sectors where constant returns to scale hold and thus demand has little influence over market price.  But those are special cases, even if some Cambridge-U.K. linked economists promote them as the main show. 

Addendum: David Henderson comments.

China diabetes fact of the day

by  Tyler Cowen in

It's not surprising to see China as "number one" in so many things, but I was surprised by the magnitude of this development:

According to the report, more than 92 million adults in China have diabetes, and nearly 150 million more are well on their way to developing it. The disease is more common in people with large waistlines and in those who live in cities, the report indicates.

"For every person in the world with HIV there are three people in China with diabetes," said David Whiting, an epidemiologist with the International Diabetes Federation, who was not involved in the research.

The Federation projected last year that some 435 million people would have diabetes by 2030. "With this new study, we're going to have to rerun our estimate," Whiting told Reuters Health.

The full story is here.

The extreme tension in Caplanian thought

by  Tyler Cowen in

Bryan writes:

Fortunately, the government can handle this problem without spending trillions or heavily regulating the insurance or medical industries.   All it needs to do is provide a means-tested subsidy to make private health insurance more affordable for those who need it most.  The subsidy should be based on income, wealth, chronic health status – and, given Balan's focus on the deserving poor – on past and current behavior.  People who engage in voluntary risky behaviors – smoking, drinking, over-eating, mountain-climbing, violence, etc. – should receive a smaller subsidy, or no subsidy at all.  The same goes for people who failed to buy long-term insurance when they were healthy and employed, then ran into health or financial troubles. 

First, I am worried about a governmental process which first judges the "deservingness" of each poor person before setting the proper subsidy.  Do they videotape your life as you go along, or do they convene a Job-like trial when you submit receipts for reimbursement?

Second, causality is so often difficult to determine in medicine.  Say a poor guy had a heart attack but he ate grilled meats for thirty years.  Was that irresponsible behavior or not?

Third, and most of all, Bryan loves to stress the heritability of intelligence, income, and even life expectancy, among other variables.  But how can your parents be your fault? 

This is a fundamental tension in Caplanian thought, namely the desire to promote intuitions of both meritocracy/desert and facts about heritability.  Bryan can't have it both ways.

You can leave your comments on this post here.

How mandate penalties will be enforced

by  Tyler Cowen in

From the Joint Committee on Taxation:

The penalty is assessed through the Code and accounted for as an additional amount of Federal tax owed. However, it is not subject to the enforcement provisions of subtitle F of the Code. The use of liens and seizures otherwise authorized for collection of taxes does not apply to the collection of this penalty. Non-compliance with the personal responsibility requirement to have health coverage is not subject to criminal or civil penalties under the Code and interest does not accrue for failure to pay such assessments in a timely manner.

There is much more discussion here and I thank Joe Kristan for the pointer.  Megan McArdle adds comment.  Maybe the legal issues here are not yet clear, but so far it is not looking good.

Ahem!

Leave your comments here.

Is the mandate penalty large enough?

by  Tyler Cowen in

Reihan offers some discussion.  He also links to the Massachusetts page on penalties, for instance:

2009 tax penalties for adults above 300% of the federal poverty level are based on 1/2 the cost of the lowest-priced Commonwealth Choice plan.  They are:

  • $52 each month or $624 for an entire year for individuals aged 18-26.
  • $89 each month or $1068 for the year for individuals 27 or older.

Those are higher penalties than for the Obama plan, which doesn't go up to $695 for a few years (update: Austin Frakt offers more numbers here).  Still, media coverage may be a bigger issue than the size of the fee.  If national media run stories about people who avoid the mandate and prosper, the practice could spread.  Massachusetts media have not had the same power or influence.  Keep in mind also that "right-wing media" may promote this point for political reasons.

Plenty of people cheat on their taxes.  Plenty of people lied on their mortgage applications.  That all said, I don't know how people will react on this one.

How about businesses?  John Cassidy offers what seems to be the clincher:

Take a medium-sized firm that employs a hundred people earning $40,000 each–a private security firm based in Atlanta, say–and currently offers them health-care insurance worth $10,000 a year, of which the employees pay $2,500. This employer’s annual health-care costs are $750,000 (a hundred times $7,500). In the reformed system, the firm’s workers, if they didn’t have insurance, would be eligible for generous subsidies to buy private insurance. For example, a married forty-year-old security guard whose wife stayed home to raise two kids could enroll in a non-group plan for less than $1,400 a year, according to the Kaiser Health Reform Subsidy Calculator. (The subsidy from the government would be $8,058.)

In a situation like this, the firm has a strong financial incentive to junk its group coverage and dump its workers onto the taxpayer-subsidized plan. Under the new law, firms with more than fifty workers that don’t offer coverage would have to pay an annual fine of $2,000 for every worker they employ, excepting the first thirty. In this case, the security firm would incur a fine of $140,000 (seventy times two), but it would save $610,000 a year on health-care costs. If you owned this firm, what would you do? Unless you are unusually public spirited, you would take advantage of the free money that the government is giving out. Since your employees would see their own health-care contributions fall by more than $1,100 a year, or almost half, they would be unlikely to complain. And even if they did, you would be saving so much money you afford to buy their agreement with a pay raise of, say, $2,000 a year, and still come out well ahead.

This implies the current version of the plan won't work without stronger penalties.  In principle, I understand that it can be advantageous to dump many more people onto the exchanges, but not if so many of them end up getting such large subsidies.  Cassidy adds:

Even if the government tried to impose additional sanctions on such firms, I doubt it would work. The dollar sums involved are so large that firms would try to game the system, by, for example, shutting down, reincorporating under a different name, and hiring back their employees without coverage. They might not even need to go to such lengths. Firms that pay modest wages have high rates of turnover. By simply refusing to offer coverage to new employees, they could pretty quickly convert most of their employees into non-covered workers.

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