Some Health Economics for Scott Alexander, 1/23
He bought the wrong book
Overall I got the impression that health care was a bizarro-world where normal economics doesn’t apply. If you have the courage to say loudly and firmly “we refuse to pay a high price for this”, then providers have to give you a low price, and your health care system will be great and affordable. Seems hard to believe, but the US sure does pay twice as much per capita as countries that go with the “loudly refuse to pay more than a certain amount” strategy. I would have appreciated a book by a more economically-minded person explaining why things are like this.
He should have read my book, Crisis of Abundance. The reason that we spend more on health care is not higher prices. Yes, if you compare doctor salaries in the U.S. to doctor salaries in another country, we pay more. But that can mostly be explained by how much richer we are than other countries, so salaries have to adjust upward accordingly. If we paid doctors a Norwegian doctor’s salary, you would not want your kid to grow up to become a doctor.
(In the 15 years since I wrote my book, the costs of primary care in the U.S. probably have gone up more than in other countries. The government has managed to regulate small medical practices out of existence, forcing consolidation into giant provider networks with more bargaining power over insurance companies.)
The main reason that we spend more on health care than other countries is that we make more use of expensive procedures. Compare the per capita usage of colonoscopies in the U.S. with Canada.
Those additional colonoscopies don’t move the needle a perceptible amount when it comes to average life expectancy. They do move the needle on our national health care budget.
As individuals, we all want to have unrestricted access to medical procedures without having to pay for them. But the closer a nation’s health care system comes to satisfying those desires, the bigger the health care budget will be. In the end, every health care system in advanced democracies looks similar to every other one, because they are all trying to deal with this same trilemma.
Everybody hates the idea of rationing health care by price. We all want the “gift” of health care. So politically it is easier to ration health care by restricting availability. In Canada, as of the time I wrote the book, providers with the skills and equipment to perform colonoscopies were scarce.
In the U.S., we try to avoid rationing by either price or availability. So our spending soars and our average life expectancy goes nowhere. If we wanted to win the international life expectancy Olympics, then rather than throwing so much money at medical procedures we should try harder to fight obesity, homicide, drunk driving, and “deaths of despair.”
Everybody thinks that “good” health insurance pays for every health care expense, large and small, and even the insurance gets paid for by somebody else. People want to pay nothing out of pocket themselves, for either health care or health insurance. Government obliges as best it can by subsidizing or providing health insurance, so people don’t see the cost themselves.
Doctors and other health care providers like to see people get “good” health insurance, because that means a steady flow of customers. The original Blue Cross was established by health care providers, not because they wanted to be nice but because they wanted to be sure to get paid.
"People want to pay nothing out of pocket themselves, for either health care or health insurance." People also don't realize the extent to which government subsidies and regulations that greatly expand minimum requirements for health insurance increase their out-of-pocket expenses, especially if they consider that tax payments and insurance premiums also come out of their pockets.
I live in a rural small town. My physician used to have a practice with three physicians, some nurses, and six administrators whose sole purpose was processing insurance co. paperwork. My physician decided to become a "direct care" practice. He stopped accepting all insurance, including Medicare. He invited his patients to pay him $49/month, which has since been increased to $60/mo. and remained stable for several years. For that fee patients get 24-hr. telephone emergency access to, no-fee office visits up to 15/year, which I don't think is strictly enforced, basic lab work such as blood draws. There is no additional charge for any service provided during an office visit. They get immediate emergency appointments (during office hours), and non-urgent care within a few days. The practice also provides a limited selection of non-narcotic medications at very low cost. My daily medication costs $9 for a three-month supply. They also have a cash payment arrangement with a large corporate lab. For some lab tests the cash price is less than my insurance co-payment. I treat my insurance (a Medicare Advantage plan) as catastrophic coverage, although they do pay for things like my gym membership.
The moral of the story is that if people are free to make rational decisions based on the relationship between price and quality of service, they can choose to bring down their day-to-day medical costs by paying out-of-pocket.
I profoundly disagree with your statement on the huge income difference in MD's pay; "But that can mostly be explained by how much richer we are than other countries, so salaries have to adjust upward accordingly". This fails to include the most important factor: the effective monopoly the AMA wields over the supply of MD's and its host of restrictions on foreign trained MD's.
When the Sputnik satellite and ICBMs of the '50s and '60s exposed our limited supply of STEM capacities, the response was a massive increase in the education system producing Ph.D.'s in the sciences. These are professions in which the time, knowledge, and training requirements are similar to MD's. It was easy to self-fund your way through graduate school for those with ability, independent of socio-economic background.
The oversupply of physics Ph.D.s became so large by the early '70s that a union pipe fitter working for me, a scientist on a pollution control research project, garnered a weekly paycheck exceeding my bi-monthly check. Meanwhile, the education of MD's conveniently (for them) didn't expand to meet the demand, and the pay ratio between MD's/Ph.D's tripled, and the MD's even controlled the research fundings. In terms of scientific knowledge, the Ph.D's in biophysics, biochemistry, etc. know a lot more about how living things actually work than MD's who just learn the practical applied aspects of the problem. As a result, the AMA imposed limited quantity of MD's has an even larger effect.
Combining the monopoly control over the supply with preventing foreign MD's becoming US workers keeps costs from going down. In addition, there has been the evolution of a truly insane bureaucracy controlling the medical system in which there is near zero price transparency and no strong relationship between price and costs. Consequently, it is actually rather surprising that the ratio between our medical costs and those of the rest of the world is not even higher than just a factor of 2 or so. Give them time.