Category: Medicine

Virginia Postrel has an excellent piece in the online Atlantic on the shortage of transplant organs, it includes a very good discussion of both the promise and limitations of kidney swaps and donor chains.  Imagine that Mrs. Smith and Mr. Jones each need a kidney transplant.  Mr. Smith is willing but due to an incompatible blood type unable to donate a kidney to his wife.  Similarly, Mrs Jones is willing but unable to donate a kidney to her husband.  In a kidney swap, Mr. Smith donates to Mr. Jones and Mrs. Jones donates to Mrs. Smith.  Everyone is happy.

Donor chains extend this idea.  We start with an altruistic donor willing to give to anyone – by careful arrangement it's then possible to produce many transplants.  Recently, a single donor led to a chain of ten transplants!

Despite the promise of these techniques they are being underutilized.  Amazingly, the National Kidney Registry, which coordinates swaps and chains, has donors who are waiting to give.  A clear reminder that $500 bills aren't always picked up as quickly as we would like. 

Even the maximal use of swaps and chains won't solve the crisis, however. For that we are going to need better incentives to encourage more donors.

Via MR commentator John Chilton, here is a link (JSTOR, but free pdf here) to the classic and excellent treatment by Lawrence Summers on mandated benefits.  My view is that the main case for mandated benefits is simply to note that public provision is often worse and that direct subsidy, such as a cash transfer, is not always feasible.

The case against is simple too.  Say that previously unprovided health insurance would have cost the employer 60 and would have been valued by the worker at 40.  You're imposing a tax of 20 on the employment relation.  In the short run firms will hire less labor and during a recession is an especially bad time to produce that effect. 

In the longer run, if the market is competitive, wages will fall by 20.  We're forcing relatively poor workers to consume more medical insurance, and more medical care, than they wish to, at the expense of their cash income.

Do not forget the excellent words of Ezra Klein:

Indeed, the main impact of health-care
reform on health may be that if it could contain costs, we'd have money
to spend on things that actually do make us healthier.

He means things other than health care in the narrow sense.  I don't know if Ezra opposes the mandates approach (compared to what?) but his quotation indicates a problem with it, even from the standpoint of health alone, much less considering the other pleasures of spending or saving cash.

Of course some of the people covered by the mandate would otherwise end up showing up at emergency rooms.  Treating them that way would get tacked on to my medical bills, one way or another.  With a mandate they are no longer my financial headache. 

With this new change, who's better off?  Me.  Who's worse off?  The previously uninsured poor person.

You might say: "We are covering more people, at a lower price, than we had thought possible."  That sounds like a kind of triumph.  But if you cut through to the actual analysis, your paternalism has to be a lot stronger than your egalitarianism for you to support this kind of measure.

Ruth Marcus tells Democrats not to go to the wall for it.  She is not personally against the presence of a public plan, she just doesn't think it is a "do or die" question.  There are other ways of making the sector more competitive, if need be.

Here is the veteran commentator Wisewon on the public plan.

As Ezra Klein indicates, the health insurance exchanges are a more important part health care reform.  Here is a progressive symposium on the public plan; read Paul Starr.

Brad DeLong writes:

We should set up a public plan, let it compete with the privates, and
see if it can provide care people like more cheaply than the private
insurance companies. Friedrich Hayek would approve: the idea is to use
the market as an institutional discovery mechanism.

Is this the SOE model?  I'm still stuck on what the public plan will be instructed to maximize, much less what it will end up maximizing after ?? years of Congressional interference.  And exactly who in our government will mimic the behavior of shareholders?

Greg Mankiw has an interesting column on the public plan option; you've already seen related points on his blog and on MR.

Today I'm interested in a slightly different question, namely the potential benefits of monopsony.  Imagine a benevolent single buyer of health care services.  Forget about whether or not it could be a government; let's just focus on the logic of the model.  I can think of a few scenarios:

1. The buyer bargains down price and suppliers in turn lower quantity.

2. The buyer bargains down price and the monopolizing suppliers respond by expanding quantity.  The monopsonist moves us to a more competitive solution.  Note that under this option the direct institution of more competition could have the same effects.

If #2 is true, you might expect supply restrictions to be an important issue.  That is, the people who favor monopsony should also favor greater competitiveness on the supply side.  Yet this does not seem like a current priority.  I hardly ever see talk of deregulating medical licensing, allowing paramedics and nurses to perform more basic medical functions, or abolishing other entry restrictions.  I do recall that an earlier version of Obama's plan, struck down by Congress, would have created a nationwide insurance market.  There was no big fight, either in the administration or in the blogosphere.

Those who favor monopsony might have another model in mind.  In this model there are many medical suppliers but each supplier still has a fair degree of ex post monopoly power.  Search costs, non-transparency, lock-in, and consumer irrationality can generate this kind of result.  And in these models allowing for more entry needn't much help the basic problem.

Under #2, which other policies will help set this market right?  What are the possible policy substitutes for monopsony?

And in #2, what happens if a monopsonist third party payer bargains prices down?  What are the offsetting quality responses?  Are monopsonists good at bargaining for higher levels of quality?  Or might the all-in-one, bureaucratic nature of the monopsonistic enterprise mean that the monopsonist is very good at bargaining over price (measurable) and very bad at bargaining over quality (harder to measure and verify and we already know there is irrationality, non-transparency, lock-in, etc).

If we put monopsony in place, can a version of the Card-Krueger monopsony model apply to medicine, namely a welfare-improving minimum wage for doctors, albeit at a very high level?  That would mean we don't want the monopsony to economize on how much we spend on health care. 

For all the recent writings on health care, these questions remain underexplored.  Comments are open, but today I'm not interested in the usual bickering about public vs. private sector.  I'd like to hear about the logic of monopsony.

Ezra writes:

Paul Starr has an important column
today on the dangers of a badly designed public plan. The issue
essentially comes down to adverse selection. If the public plan becomes
a dumping ground for the sick and the old, it will be too costly for
the young and the healthy. Rates will go up, and conservatives will
point to the plans as costing X percent more than private insurance,
thus proving the inefficiency of the government.

That's exactly right I think, although I suspect Ezra sees it differently.  I've still yet to see good reasons for expecting any equilibrium other than that one as outlined.  I should add that some or maybe all defenders of the public plan can consider that an acceptable outcome: spend more money to cover more people and of course mostly from high-risk groups.  But that's what it boils down to, not some kind of magical competition which will allow us to save on general health care costs without cutting back on real health care treatments.

Here are my previous posts on the public plan, see the first two links. 

Ezra Klein asks:

Stein's Law is the dictum named for the economist Herbert Stein.
If something cannot go on forever, he's reported to have said, it will
stop…It cannot be the case that we
will let health-care spending literally consume 100 percent of
America's gross domestic product before the end of the century.
Health-care spending cannot continue to increase at this rate. Thus, it
will stop.

I can imagine health care consuming thirty to forty percent of U.S. gdp at some point well short of the next century.  (When did people first realize that agriculture would fall to such a tiny share?)  In any case, Ezra frames a key issue:

Every year, we contain costs by quietly letting 2 million or so more
people fall into the ranks of the uninsured. And why not? It does not
require an act of Congress. It does not require a war with a powerful
interest group.

Recent polls notwithstanding, I still don't see the median U.S. voter as either a) willing to have his or her own health insurance taxed, b) accepting serious restrictions on Medicare reimbursements relative to the status quo, c) accepting the mix of HMOs and co-ops that could actually control costs, or d) taking lots of money away from "health care" and putting it into arguably-more-effective public health programs.

Polls are tricky.  The HMO revolution of the 1990s did not "poll" well ex post and that is why it is no longer with us.  Remember also that Harry Truman ran and won on a single-payer platform.  That was a long time ago.  That and other health care reform ideas have been popular in this country except when it comes to doing them.

So to answer Ezra's question, no I do not believe in Stein's Law.  The impossible will likely continue (until it stops).  If economic growth exceeds one percent and progress against disease continues, rising health care costs imply a semi-stable equilibrium for a long time to come, even if it's far from an optimum.  Cheaper, uninsured "retail" care, run on a walk-in, Wal-Mart sort of basis, may alleviate the burden on the uninsured to some extent.

Addendum: Read the comment by Garett Jones:

If the median voter hasn't changed her position much in the last
year or two, then by the MVT the policy outcome won't change much.
Whether the median voter is the "median member of Congress" or the
"median voter at the booth" is a minor question at that point.

The Dems have picked up a lot of culturally-conservative seats so
the median member of Congress probably hasn't changed her views all
that much. When you hear "The Dems won a seat that had been GOP for
decades" you should probably think Blue Dog.

And on Krugman's alleged evidence of unmet demand for health care
reform: As Larry Bartels's resarch shows, voters always say they want
more government services and lower taxes: They want more for less, no
surprise to economists. This is true even in Sweden. Voters leave it to
the legislators to figure out how to optimize their re-election chances
subject to those preferences and the government budget constraint. Is
there also a massive unmet need for tax cuts?

As the link..shows, support for massive health care reform
is lower now than in 1993: The median voter—whether in the booth or
on the floor on the House–is probably less supportive of massive
change than in 1993. Bad news for universal health care, if the MVT is
roughly true.

They ask that I direct more messages to Republican Congressmen (here and here); Kevin Drum discusses related issues.  They have a point and I'll state it more clearly: Republicans should support and indeed applaud Obama's attempt to cut some Medicare costs.  Republican Congressmen also should stand ready to make a "grand bargain" on health care, again provided that it puts Medicare on a sustainable cost basis.

If I don't write more "for Republican politicians," it is for two reasons.  First, I view their incentive as to make Obama fail, not to find an acceptable compromise that will move the nation forward.  Second, I view the future of Medicare as the President vs. Congress, not one party vs. another.  Democratic Congressmen will, ultimately, require persuasion as much as the Republicans or maybe more so.  I still think the real danger is not recalcitrant Republicans but rather that we will get a health care plan without plausible mechanisms for fiscal responsibility.  

The new voodoo economics is the claim that because we can (will?) make cuts in Medicare spending, we can afford to spend lots of money elsewhere.  I explain this in my latest column.  Excerpt:

Drawing upon the ideas of the Harvard economist David Cutler, the
Obama administration talks of empowering an independent board of
experts to judge the comparative effectiveness of health care
expenditures; the goal is to limit or withdraw Medicare support for
ineffective ones. This idea is long overdue, and the critics who
contend that it amounts to “rationing” or “the government telling you
which medical treatments you can have” are missing the point. The
motivating idea is the old conservative chestnut that not every
private-sector expenditure deserves a government subsidy.

Nonetheless,
this principle is radical in its implications and has met with
resistance. In particular, Congress has not been willing to give up its
power over what is perhaps the government’s single most important
program, nor should we expect such a surrender of power in the future.
There is already a Medicare Advisory Payment Commission, but it isn’t
allowed to actually cut costs.

Obama, to his credit, has very recently proposed to change this.  But will the fiscal story have a happy ending?  Probably not:

If we are willing to take comparative-effectiveness studies
seriously, we could make significant cuts in Medicare costs right now.
We could cut some reimbursement rates, limit coverage for some of the
more speculative treatments, like some forms of knee and back surgery,
and place more limits on end-of-life-care.

Those cuts alone will
not solve the fiscal problem, but if we aren’t willing to take even
limited steps to conserve resources, we shouldn’t be spending any more
money elsewhere.

Of course, we have not made such Medicare spending cuts yet, and there are few signs that we will. A Kaiser Family Foundation poll
found that 67 percent of Americans believe that they do not receive
enough treatment and that only 16 percent believe that they have
received unnecessary care. If the Obama administration covers more
people with government-supplied or government-subsidized insurance, the
political support will broaden for generous benefits, their
continuation and, indeed, expansion of current expenditures.

Read the whole thing.

I'm still thinking about this topic and I will refer you to a response by Frank Pasquale.  He knows a lot about the topic but I'm still not sure how to translate his points into econspeak. 

Here is another way of looking at my original question: some of the key (possible) problems in private insurance markets are adverse selection and lack of transparency in prices and terms of service.  Previously I asked whether the public plan does compete with the private plans for the same pools of customers.  Today I am asking whether greater competition necessarily improves these outcomes.  (It's trickiest when it comes to transparency; you might think that a more transparent plan will outcompete a less transparent plan, but the whole point of the lesser transparency is to make the plan look more attractive than it really is.  A truly transparent plan could look not so attractive at all.  The model here has many relevant iterations, with unclear results.  You get the best results when the presence of a transparent plan educates consumers about the nature of the market more generally, rather than just educating consumers about the nature of the transparent plan.  But that is hard to do)

As Pasquale points out, a lot of state insurance markets are currently not so competitive.  As it stands today, do the more competitive markets offer superior performance?  I genuinely do not know but I would like to see the evidence on this question.

But if the public plan exists, gambling actually becomes more practical.  Contra Tyler, I expect that Ezra's strong plan would actually hurt private plans as some of their healthiest, youngest patients made the rational decision to join the ranks of the uninsured.

Here is much more.