Category: Medicine

Have you ever heard the claim that U.S. medical care is in trouble because we subsidize third-party insurance through the tax system? Glenn Hubbard presented this view in the Wall Street Journal this Tuesday. Hubbard writes:

Reform the tax treatment of health-care expenses. The most far-reaching and misguided government policy, established more than 60 years ago, allowed employer-provided health care to be exempt from taxation. Under this policy, medical care purchased through an employer’s insurance plan is tax-free, while direct medical-care purchases by patients must be made with after-tax income. The tax preference for employer health insurance has been instrumental in creating today’s third-party payment system. In this perverse world, true insurance, in the form of coverage for catastrophic health events, is the exception; prepaid health care, in the form of coverage with low deductibles and copayments, is the rule. The tax preference for insurance is the primary reason five out of every six dollars of health-care spending are paid by third parties…

Low copayments and deductibles fuel excessive cost growth and breed wasteful medical practice…consumers have little incentive to limit their use of unnecessary medical-care services, little incentive to shop for the health plan that best suits their needs in a cost effective way, and little incentive to evaluate their care on the basis of value.

But I’m stumped. If the argument is that tax deductibility leads to too much health care, I can see the logic. But then the problem is in the pretzels and beer markets; health care should be doing fine, albeit in bloated form.

Alternatively, it might be argued that buying health insurance involves a negative externality on others. Maybe insurance companies are intrinsically bad monitors, and more insurance corrupts the system as a whole. Grant this premise, but where do we end up?

1. We would have a good argument for taxing insurance purchases. Yet the insurance point is rarely raised with this conclusion in mind. We might have (yikes!) an argument for greater government involvement in health care.

2. If insurance companies are such poor cost monitors, why doesn’t this raise premia accordingly? The poor monitoring of the company would be reflected in policy price and thus would be internalized by the people or institutions who buy the policies. The externality should vanish or at least significantly diminish.

3. Why should insurance subsidies lead to “low copayments and deductibles”? Insurance with high copayments and deductibles is favored by the tax system as well. That being the case, why do we blame the tax system for how insurance is (perhaps) poorly structured?

All these points collapse into a more simple query: how can a simple relative price, whether a distortion or not, corrupt the cost control practices of an entire industry?

And if government provision of health care is ineffective and costly, isn’t there a positive externality from the purchase of private health insurance?

Many of the people who cite this argument about health insurance are smarter and more accomplished than I am. I will grant their greater wisdom and authority. But at the end of the day, I still don’t get it.

In the latest Milken Institute Review, Nobel laureaute Gary Becker argues (sign up required) that the FDA should permit drugs to be sold once they have passed a safety standard, i.e. a return to the pre-1962 system. He writes:

…a return to a safety standard alone would lower costs and raise the number of therapeutic compounds available. In particular, this would include more drugs from small biotech firms that do not have the deep pockets to invest in extended efficacy trials. And the resulting increase in competition would mean lower prices – without the bureaucratic burden of price controls…

Elimination of the efficacy requirement would give patients, rather than the FDA, the ultimate responsibility of deciding which drugs to try…To be sure, some sick individuals would try ineffective treatments that would otherwise have been prevented from reaching market under present FDA regulations. But the quantity of reliable health information now available with only a little initiative is many times greater than when the efficacy standard was introduced four decades ago.

Dan Klein and I have written extensively on this issue at our web site, FDAReview.org, and in our latest paper Do Off Label Drug Practices Argue Against FDA Efficacy Requirements?

Advocates of national health insurance point out that the U.S. spends more on health care, per capita, than any other country in the world. At the same time, Americans rank only in the middle when it comes to actual health and longevity. So you might believe that we could nationalize the industry, save money, and improve our health. Think again:

The proper way to measure the performance of health care is to measure the difference it makes in the quality of life of people who come for help…What we need to know is whether the higher level of spending means the United States is much less productive in health care than other countries.

In an attempt to test the limits of knowledge here, we studied the treatment of four diseases — diabetes, cholelithiasis (gallstones), breast cancer, and lung cancer — in three countries: Germany, the United Kingdom, and the United States. These three countries were the only countries for which comparable data existed for these diseases, either nationwide or for large regions.

The relevant measures were either life expectancy after treatment or measures of the quality of life. And how about the results:

The United States is more productive in all these diseases except for diabetes in the United Kingdom. [emphasis added] The reasons for this result can be traced directly to the huge differences in the way the health care sector is organized and governed across these three countries. The UK health care system is almost entirely government owned and run…The result has been that the United Kingdom has no invested as quickly in technologies that have dramatically improved the diagnostic capabilities of medicine and significantly reduced recovery time…Germany, on the other hand, has a system more like the United States had twenty years ago. In Germany, medical expenses are paid for on a task-by-task basis for services of doctors and hospitals. As a result, hospitals in Germany have no financial incentive to reduce length of stay.

In other words, Americans pay more but get better health care in return. We die sooner because we eat too much and exercise too little, among other facts. For similar results, see this comparison of the U.S. and Japan.

The quotations are from William Lewis’s interesting The Power of Productivity, see p.97. Lewis is a partner at McKinsey, an economics and management consulting firm. Here are other McKinsey writings on health care ($$), including the comparison with the UK and Germany.

By the way, this essay suggests that most of the productivity benefits of health care spring from pharmaceutical consumption. Of course we lead pharmaceutical production but also pay the highest prices. It would be a disaster for the world as a whole if we tried to save money on this front with tight price controls.

The bottom line: National health insurance is unlikely to save on medical costs, unless it cuts back on treatment drastically.

Mainstream media is finally getting the message about DDT. Tina Rosenberg, writing in the New York Times Magazine, puts it well:

DDT killed bald eagles because of its persistence in the environment. ‘Silent Spring’ is now killing African children because of its persistence in the public mind.

I’m delighted to see the Rosenberg piece, even if everyone I know has understood this issue for years.

I have a new article on the shortage of human organs. Regular readers will be familiar with my views so I won’t go into the details but I was especially pleased with the conclusion examining moral objections to organ selling.

Adam Smith noted that in his time there were “some very agreeable and beautiful talents of which the possession commands a certain sort of admiration; but of which the exercise for the sake of gain is considered, whether from reason or prejudice, as a sort of public prostitution.” As examples, Smith lists acting, opera singing and dancing. Today the list strikes us as peculiar, perhaps even foolish. What could possibly make opera singing admirable when done for free but despicable when done for pay?

And yet, however peculiar the views of Adam Smith’s contemporaries were on financial compensation for opera singers we can an at least say this in their favor–no one ever died because of a shortage of singers.

Addendum: I learned of the Smith quote from a wonderful paper on prostitution by Martha Nussbaum, Whether from Reason or Prejudice: Taking Money for Bodily Services. I can’t find the paper online but it is reprinted in Liberty for Women which has a number of other excellent papers.

A number of people emailed me or blogged (eg. here and here) on my post, Artificial heart won’t save lives. The number of transplants is constrained by the number of donated organs thus the main effect of the artificial heart, which is just a temporary stop-gap, is to redistribute organs. The artificial heart makes some people better off at the expense of other people who are made worse off. No one challenged this conclusion but it seemed to make some people uncomfortable. Two arguments were raised in opposition, both of which are weak.

First, the heart does allow some people to live a little bit longer – this is a benefit, but a few weeks of life while chained to a big machine doesn’t seem like a big breakthrough to me. Second, the artificial heart could allow for better matching. Theoretically true, but there are already many more patients on the waiting list than there are hearts available so the opportunity for better matching is negligible. Consider, that for a given heart there are now 3500 people on the waiting list to choose from – how much better is the match going to be if we add a few more people to this list?

I am not against artificial hearts (some people say I have one!) perhaps one day the technology will improve enough so that someone on an artificial heart can be taken off the list, but the issue is comparative. Suppose that we put the funds gong into artificial hearts into programs to increase organ donation. One donated organ is say good for 10 years of extra life. Average time on the artificial heat is 77 days and it is not clear how many of these days represent extra days of live. Let’s say very charitably that 50 days are extra then this means that one real heart is worth 73 times as much as an artificial heart (10*365/50) and that is before adjusting for quality of life.

An FDA panel announced today that they would support approval of a new artificial heart. NPR and other media suggested that the new heart, which is designed only for temporary use and is not portable, would save lives by extending survival time until a transplant became available. But even if the artificial heart performs exactly as designed and even if it prolongs the lives of those who receive it, it won’t save lives overall.

The mathematics is simple; there are approximately 2200 hearts donated for transplant every year (data here). That means we can save 2200 lives a year and no more. All the artificial heart can do, therefore, is change who gets saved. Some people who previously died will live long enough to receive a transplant but this means there will be one less heart available for someone else on the waiting list. The artificial heart will make the waiting list longer but it will not save lives.

The only way we can truly save lives is to increase the number of organ donors. As readers of Marginal Revolution will know I have suggested financial compensation and organ donor clubs as the only realistic solutions.

Since 1991 the teenage pregnancy rate has fallen by about 22 percent, reversing a 40 year trend. In a lengthy story, the NYTimes suggests that learning from the hard experience of others is the explanation for the drop without explaining why it should take 40 years for this learning to take effect. They do note “teenage pregnancy had already begun its decline in 1991, well before welfare changes and the economic boom, and well after the first round of sex education programs.” The Times, however, does not examine the most controversial but well-supported explanation, the introduction of legalized abortion in the 1970s.

If this explanation rings familiar it should. In a very controversial paper, Steve Levitt and John Donohue provided evidence that legalized abortion in the 1970s reduced crime some 18 years later. The theory is simple. Abortion rates are higher among the poor, the unmarried, teenagers, and African Americans than among other groups and children born to mothers with several of the preceeding characteristics are at increased risk for becoming involved in crime. Legalized abortion gave these mothers an option and thus reduced the number of at-risk children who might otherwise have grown up to become criminals (note that abortion doesn’t mean fewer children per-se, it may simply delay childbearing to when the mother is not poor, a teenager or unmarried which works just as well.)

In brief, the evidence for the Levitt-Donohue theory is a) the timing is consistent, b) states that legalized earlier had earlier drops in crimes, c) there is a dose-response effect i.e. states that had more abortions had bigger drops in crime, d) the drop in crime in the 1990s occured among those cohorts who were potentially affected by abortion policy in the 1970s (and not among say 40 years olds.)

Joined by co-author Jeff Grogger, Levitt and Donohue apply the same idea to teenage pregnancy and find very similar results – thus reinforcing their earlier story. They write:

Parents who are least able or willing to begin caring for a newborn are most likely to make use of abortion. The abortion rates for teens, the unmarried, and the poor are substantially higher than for the general population. Children who are born unwanted are subjected to poorer care both during pregnancy and the early years of life. With the legalization of abortion, mothers with unwanted pregnancies suddenly had a new recourse. Consequently, the number of children raised in adverse environments dropped substantially. Donohue and Levitt [2001] showed how this change reduced crime among the subsequent generation by 15-25 percent. As teen childbearing is a closely associate social pathogen, the magnitude of the drop should be similar.

Our empirical evidence suggests that birth rates as teens are strongly negatively associated with being born in a state and time period in which abortion rates were high. Our results suggest that teen birth rates today may be 20 percent lower as a consequence of legalized abortion in the 1970’s.

Steve Verdon finds this graph in a short report from the Joint Economic Committee.

Of course, the graph shouldn’t be taken too literally, other factors, especially technological change, are more important (see Newhouse’s review (JSTOR), but the chart is a useful reminder that the law of demand applies to health care just like everything else.

That’s what David Cutler argues in his recent book Your Money or Your Life.

Cutler believes that our expenditures on health care have more than justified their cost. He therefore opposes the traditional recipe of “cut costs and use the savings to finance greater access.” His attitude is closer to “expand care now and improve the quality of outcomes.” If you think that more discretionary spending doesn’t make many people much happier, why not make them healthier and longer-lived instead?

As I read the book, Cutler is pushing two major ideas:

1. Subsidize insurance to ease the problems of the forty million uninsured. But he repeats the usual numbers, without convincing me that the problem is as bad as it sounds.

2. Pay for health care results, rather than rewarding expenditures per se. In other words, give doctors and hospitals bonuses for actually making patients better.

A loyal reader of MR should not be surprised to read that Robin Hanson had the idea first. Read his intriguing essay at the link. In Robin’s vision you buy your medical care from an institution that contracts with a third party to pay penalties, or receive bonuses, depending on your longevity, disability, et.c — whatever can be measured. I can imagine such incentive schemes working in the decentralized private sector, especially after much trial and error experimentation. (Note the potential adverse selection problem: you don’t want providers to have an incentive to shun hard-to-improve cases.) It is much harder to see federal or even state governments getting the incentives right, and having the political capital to see the correct decisions through.

The bottom line? Cutler is obviously a smart guy but overall I found the book underargued. I like his optimistic, can-do attitude, but I don’t trust it in the hands of politicians.