Category: Medicine

The economic value of teeth

Looks and height matter for economic outcomes, so why not teeth?

Healthy teeth are a vital and visible component of general well-being, but there is little systematic evidence to demonstrate any impact on the labor market.  In this paper, we examine the effect of oral health on labor market outcomes by exploiting variation in access to fluoridated water during childhood.  The politics surrounding the adoption of water fluoridation by local water districts suggests exposure to fluoride during childhood is exogenous to other factors affecting earnings. We find that children who grew up in communities with fluoridated water earn approximately 3% more as adults than children who did not.  The effect is larger for women than men, and is almost exclusively concentrated amongst those from families of low socioeconomic status.  Of the channels explored, we find that occupational sorting explains 14-23% of the effect, suggesting consumer and employer discrimination are the likely driving factors.

That is by Sherry Glied and Matthew Neidell; here is the paper on-line, note their findings are preliminary not final.  Teeth seem to matter less for rich people because they have later chances to cover up — using money of course — for bad childhood teeth.  The poor apparently remain stuck with their teeth problems.  You might think that childhood exposure to fluoride is just proxying for quality of county and thus county human capital in some way, but the fluoride/earnings correlation seems to hold up even when variables are used to adjust for county quality.  Can you dissent from a paper that writes:

…the anecdotes described above suggest that people who lack teeth may have trouble finding jobs.

I thank a loyal MR reader for the pointer.

Addendum: Here is Caplan (and Blinder) on the economics of teeth.

Helping the bottom billion

Kevin, a soon-to-be loyal MR reader, asks:

What single intervention would do the
most to improve the health of people living on less than $1 a

Experts answer here.  The first guy asked says give them cash.  One woman, whom I believe is a practitioner of living on a dollar a day, responds: "Improve the house, which is small and untidy." 

What I found noteworthy is how many plausible but quite distinct answers there were.  While I disagree with Jeff Sachs on many issues, I think he is right to stress just how many different problems have to be overcome for sustainable development to occur.

Your thoughts?

Big news on pharmaceutical prizes

Senator Bernie Sanders, the first self-described socialist ever to be elected to the Senate, has introduced a bill that I might actually sign on to, The Medical Innovation Prize Fund Act of 2007In essence, the prize fund would pay pharmaceutical companies to release their patent rights to the public domain. 

The level of funding for medical innovation prizes would start at
$80 billion per year, and increase with the growth in GDP….

Under the Sanders
proposal, the patent system would still be used, but the patent owners
would no longer be given monopoly rights to control the manufacturing
and sale of products.  Instead, patents would be used to establish who
"owns" the right to the cash rewards given for new inventions.  Drugs
developed without patents would also be eligible for the prizes.

I like that the funding amounts are serious and would be available to non-patented products (innovations without property rights are underfunded).  I worry about corruption and funding directed according to political pressure.  I would be reassured if the system were clearly voluntary – that is, pharmaceutical manufacturers should have the option of the patent or the prize.  Clearly an option will increase profits for the pharmaceutical firms but medical innovation has many beneficial returns not captured by the pharmaceutical companies  so I am not worried about bigger transfers.

Most importantly, a prize fund would make clear the tradeoff between pharmaceutical revenues and R&D and it would reduce the pressure for price controls which I think are a serious threat to future medical innovation.

Thanks to Ben Krohmal for the pointer.

Single-payer systems aren’t so egalitarian, part II

…[compared to the United States] income plays a larger role in buffering children’s health from the
effects of chronic conditions in England.  We find no evidence that the
British National Health Service, with its focus on free services and
equal access, prevents the association between health and income from
becoming more pronounced as children grow older.

Here is the paper.  Of course equity is not the only argument for single payer systems.  Here is part I of the series, concerning Canada and the (possible) continuation of the health-income gradient there.  Many of you were skeptical about the reported result, but here is further evidence.  Most of all, the determinants of health are not well understood; that is itself a sobering fact no matter what your policy point of view.

Was RAND wrong?

No, not Ayn Rand, the RAND experiment on health care.  The RAND experiment randomly assigned people to different health plans and one of the big findings was that cost sharing reduced use of health care but had little effect on health outcomes.  My colleague, Robin Hanson, likes to use this as a club to argue that we should cut medical spending in half

Even randomized experiments have problems, however, and it turns out that there was a lot of attrition in the RAND experiment.  A Healthy Blog quotes from a new paper in the October 2007 issue of the Journal of Health Politics, Policy
and Law, by Dr. John Nyman of the University of Minnesota (alas not online).

Of the various responses to cost sharing that were observed in the
participants of the RAND HIE, by far the strongest and most dramatic was in the
relative number of RAND participants who voluntarily dropped out of the study
over the course of the experiment. Of the 1,294 adult participants who were
randomly assigned to the free plan, 5 participants (0.4 percent) left the
experiment voluntarily during the observation period, while of the 2,664 who
were assigned to any of the cost-sharing plans, 179 participants (6.7 percent)
voluntarily left the experiment. This represented a greater than sixteenfold
increase in the percentage of dropouts, a difference that was highly significant
and a magnitude of response that was nowhere else duplicated in the experiment.

What explains this? The explanation that makes the most sense is that the
dropouts were participants who had just been diagnosed with an illness that
would require a costly hospital procedure. … If they dropped out, their coverage
would automatically revert to their original insurance policies, which were
likely to cover major medical expenses (such as hospitalizations) with no
copayments … As a result of dropping out, these participants’ inpatient stays
(and associated health care spending) did not register in the experiment, and it
appeared as if participants in the cost-sharing group had a lower rate of
inpatient use. … the cost-sharing participants who remained exhibited a lower
rate of inpatient use than free FFS participants, not because they were
responding to the higher coinsurance rate by forgoing frivolous hospital care
but instead because they did not need as much hospital care, since many of those
who became ill and needed hospital care had already dropped out of the
experiment before their hospitalization occurred. …

Hat tip to The HealthCare Economist.

Medicare benefits for prescription drugs

The Medicare prescription drug benefit was, from the beginning, flawed in the details of its execution.  But in general terms it is turning out to be one of the best health care investments our government is making:

Rewarding inventors with inefficient monopoly power has long been
regarded as the price of encouraging innovation.  Public prescription
drug insurance escapes that trade-off and achieves an elusive goal:
lowering static deadweight loss, while simultaneously encouraging
dynamic investments in innovation.  As a result of this feature, the
public provision of drug insurance can be welfare-improving, even for
risk-neutral and purely self-interested consumers.  In spite of its
relatively low benefit levels, the Medicare Part D benefit generate
$3.5 billion of annual static deadweight loss reduction, and at least
$2.8 billion of annual value from extra innovation.  These two
components alone cover 87% of the social cost of publicly financing the
benefit.  The analysis of static and dynamic efficiency also has
implications for policies complementary to a drug benefit: in the
context of public monopsony power, some degree of price-negotiation by
the government is always strictly welfare-improving, but this should
often be coupled with extensions in patent length.

In other words, the optimal ex post incentive scheme involves some market power for drug makers.  To some extent the subsidy counteracts the deadweight loss resulting from that monopoly by lowering real prices to consumers.

Here is my previous post on the topic, also indicating that the Medicare prescription drug benefit is not nearly as costly as has been charged.  Of course subsidizing the pharmaceutical companies does not always sit so well with the left, so I am curious whether progressives will accept this result.  And I am curious whether they envision single-payer programs as continuing this subsidy, or confiscating pharmaceutical company rents instead.

As a side remark, Martin Feldstein was the one who saw, way back when, that health care economics would become such a major field; kudos to him.

Addendum: Sorry for the omission, here is the paper itself.

The best two sentences I read today

According to a study that even the New Republic’s Jon Cohn admitted he
thought was probably exaggerated, being uninsured killed 18,000 people
a year this decade.  Methicillin-resistant Staphylococcus aureus, on the
other hand, apparently kills 19,000 a year.

That’s from Megan McArdle, who continues:

Non libertarians can, of course, go along wishing that we would have
national health care and a War on Infection.  But it’s worth asking
yourself: in a world of scarce resources, where you could only have
one, which would you choose?  And by what principle?

The fact that I have read very few sentences today does not diminish the stellar quality of these thoughts.

How to debate health care policy

Health care policy should be debated through micro-facts.  Let’s consider a few:

1. American health care outcomes look much better once we adjust for race and other demographic factors, including violence and car crashes.  Some groups — such as Asian-American women — have remarkably good health care outcomes.

2. Some of the health care savings of other systems occur through price effects (e.g., doctors are paid an average of $60,000 in France) and do not involve real resource savings.

3. American’s high expenditures, however wasteful they may be, nonetheless drive much of the world’s medical innovation.  Medical innovation is also a public good to some extent and no the pharmaceutical companies are not simply parasites on the NIH and universities.

4. America has a different structure of interest groups. and therefore a single payer system in the United States would not operate as does a single payer system in other countries.  It would more likely favor the interests of doctors and insurance companies, for a start.

5. If we take the international health results/expenditures data at face value (and we shouldn’t), they imply that greater access to medical care does not itself improve health outcomes.  So we should be careful in how we use and cite such results.

6. Health care outcomes improve with income even under single-payer systems.  Our best estimates suggest that this gradient is no steeper in the United States than it is in Canada.

7. Having health insurance does improve your health care outcomes, but not to an amazing degree.  The largest benefits are arguably the alleviation of financial risk, and no I am not meaning to slight that factor.

8. Pharmaceuticals, unlike many forms of health care, have large and noticeably positive effects on individual health.

9. The major Democratic health care plans on the table all, one way or another, admit they will spend more money on health care.  The fact that other countries spend less therefore does not help predict the change in spending that would result from these plans.

(Sorry for the lack of links, I am on the road, google back to previous MR posts for documentations.)

Now here is how to debate health care policy.  Ask a defender of single payer systems (or other possible reforms) how many of these points he or she accepts.  Settle on that list, noting that residual disagreements may well remain.  Then debate what the list means for what America should do about health care policy today.

Here’s how not to debate health care policy.  When you hear one point on that list, bring up in response that other countries spend less and produce better health care outcomes and that therefore we should copy the systems of those countries.

But libertarians, I am not letting you off the hook either: Isn’t there some form of further government intervention into health care that could help somebody?  And if your basic model is that governments steal as much money as they can, and then waste it all, shouldn’t we then jump at the chance to institute health care subsidies of this at least partially helpful nature?  The alternative is simply that the money gets wasted some other and worse way.

More on health insurance mandates

Megan McArdle writes:

Tyler wonders what will be done
with people who are required to by health insurance, but don’t. The
answer, I think, is "they’ll get treated". The object is not to play
chicken with people; we can’t make a credible committment not to treat
people without insurance (and thank god for that.) The object, as I see
it, is to force the people who care about things like legality to get
insurance rather than rolling the dice. The people who don’t care about
such things will continue costing us some fraction of the small amount
that caring for the uninsured currently costs us now. It may only be a
slight improvement, but it’s still an improvement.

"Improvement over what?" is my query.  I prefer taking the needy (some would say more than the needy, not I) and having the government directly provide health insurance for them.  I imagine a better and no-real-role-for-the-states version of Medicaid, at the expense of Medicare (lots of old people are wealthy) if it fiscally must be.  If it’s worth forcing X to buy health insurance and then subsidizing X, it is worth giving X health insurance directly.

Avoiding the mandate keeps the private insurance market relatively "clean," as it were.  Mandating private insurance means that the government has to regulate the content of that coverage and that private insurance will likely become more cumbersome and more contested and more expensive for everyone.  It means we will never have true insurance deregulation; private plans should be free to compete, innovate, offer catastrophic-only plans, sniffles-only plans, and so on.

The benefits of the health insurance mandate are otherwise small.  Many people care about "being legal" (the parents of uninsured 20 somethings?) but those people are probably the least likely to need the insurance.  And I am leery of having a law that we know in advance we are not going to enforce.  (It’s not as if you post a 25 mph speed limit knowing you will only pull over the young people who look like criminals; in this case we’re simply deciding on no enforcement or using some dubious bureaucratic tactic of differentiation across citizens.) 

And aren’t mandates more generally a dangerous and over-used practice?

So I say no, let’s not do it.  It might be better than doing nothing, but doing nothing is not the only alternative before us.  Doing nothing is not even the likely alternative at this point.  The mandates limit chances for better long-run reforms, though Matt and Brad will tell you this is single-payer, I will look toward insurance market deregulation.  Only one of us has to be right.

Addendum: Here is Ezra Klein on same.

Mandatory health insurance

Glen Whitman reports:

1. According to an Urban Institute study, uncompensated care for the uninsured accounts for only three percent of U.S. health care costs.

2. 47 states require drivers to buy automobile insurance, yet the median percentage of uninsured drivers in these states is 12%.

3. States should eliminate required benefits from insurance policies and allow the poor to buy policies for (relatively) cheap catastrophic care.

Here is the full piece, from Business Week; this is a topic deserving of more attention.  I’m still wondering what — de facto — will be done against those poor people who are required to buy health insurance but don’t do so.

Here is Glen’s post on Joel Waldfogel, and here is Glen attacking restroom hand dryers.

Canada v. U.S. on Health Care

Jason Shafrin, the Healthcare Economist, has a good review of the O’Neil and O’Neil NBER working paper, Health Status, Health Care and Inequality: Canada vs. the U.S.  (This paper was also mentioned by Tyler recently).

American are less healthy than Canadians. What this paper finds, however, is
that this is mainly due to the fact that the U.S. has a higher incidence of
disease. It turns out that Americans may have slightly higher access to
treatment than Canadians.

Read the full review.  Of course, the Canadian system is cheaper but very few people are willing to lobby for less health care.

This idea should be well-known, not novel

A small Michigan insurer is trying a novel way to woo young, healthy people who lack health insurance: let them buy lots of coverage after they get sick.

American Community Mutual Insurance Co. is rolling out an unusual two-tier coverage plan today that would give policyholders struck by serious illness or accidents the option of adding $5 million of coverage.

Here is the article.  Here is John Cochrane on time consistent health insurance , a more radical and indeed consistent version of the same idea (you can also find this paper in Alex’s excellent book Entrepreneurial Economics).  Under Cochrane’s scheme, you also insure against the possibility of your premiums rising in cost, due to your illness.  In essence you are buying insurance against bad health insurance outcomes.  So if you get sick yes you can buy more insurance and yes your premiums cost more but in part you are protected against bearing all of those costs yourself.

A defense of employer-linked health insurance

The employer-based system provides a tremendous service to workers by providing a buffer between the plan administrator or insurer and the workers and their families.  The employer helps the employee navigate the system, is an advocate for the worker and frequently assists with claim appeals and disputes, not to mention assuring that premiums are efficiently collected.  Employers are also leading the charge on the health and wellness front.  Employers who seek to abandon this system out of hand should consider the consequences of having thousands of workers taking the time (on the job) to resolve the many issues and problems that will continue to occur under any insured scheme, but now with individuals left to navigate the system on their own.

I have been an employee-benefits professional for nearly 46 years and have worked with thousands of employees on every kind of health-care issue imaginable under every type of health-care plan.  Most of the problems are created by the patients and the health-care providers, not the dreaded insurance company.  That is unlikely to change.

That is Richard Quinn, of Verona, New Jersey, in a letter to The Wall Street Journal, Sept. 15, p.A7.  On net, I do not agree with this opinion, but this perspective is too often neglected in health care debates.


Eventually, Medicare should completely transform the way it pays physicians and hospitals.  Instead of paying doctors and hospitals separately and reimbursing them for how much care they deliver, it will want to begin paying them as a group on a per-capita basis, depending upon the number of patients they care for.  (Because outcomes of their patients will be monitored and eventually made public, these integrated systems will not want to attract more patients than they can handle simply to boost their incomes.)

That is from Shannon Brownlee’s new Overtreated: Why Too Much Medicine is Making Us Sicker and Poorer, which should be read by anyone interested in health care economics.  I have a few points:

1. The early chapters are too anecdotal for my tastes, but later the book becomes more analytical.

2. The author writes as if doctors can be steamrollered into submission and forced to adopt better compensation schemes; in this sense the public choice analysis is naive.  Yes maybe that is what "should happen" but I predict that greater government involvement will be geared toward protecting the rents of American doctors, not making them passive servants of the public interest.

3. The (favorable) discussion of VHA is more insightful and more subtle than the usual treatments.  For instance we learn that the much-heralded computerization of VA records was created in direct violation of government law.

4. The chapter on the rise and fall of managed care was excellent.  Yet the core problems with managed care also would plague the author’s proposal for compensating doctors and hospitals, quoted above.

5. The policy prescriptions focus on changing the bundle of health care, rather than just cutting back on health care, so the title is not strictly accurate.  The author is not a radical Hansonian but rather favors more "integrated care" and more primary physicians.

Robin Hanson, now there’s a guy who favors gross cutbacks in health care, he argues they won’t cost us actual health.  See the recent forum over at CatoUnbound.

Addendum: See also this NYT magazine article, "Do We Really Know What Makes Us Healthy?"