[Part 1 of this discussion can be found here.]
The first response essay to Robin Hanson is written by David Cutler. Cutler does a good job rebutting some of Hanson’s claims. However, I also have some points of contention with Cutler.
First, as I stated in the previous post, I am not necessarily concerned with specific amounts of spending relative to GDP because as one individual with one mind, I do not possess enough knowledge to state the optimal level of spending on health relative to income. Further, a simple observation of correlation between health spending and health status is not enough to claim that this spending is necessarily wasteful. Cutler explains this as follows:
Virtually every study of medical innovation suggests that changes in the nature of medical care over time are clearly worth the cost.
If you don’t want to take this on faith, take a quick quiz: would you rather get today’s medical care at today’s prices, or be given $5,000 per year but only get medical care at the 1975 level — doctors trained at that level, hospitals with equipment from that level, and drugs available then? The $5,000 is the increase in real per person medical spending in the past three decades, so this is asking you to choose today’s care at today’s prices or 1975’s care at 1975’s prices. I have yet to encounter more than a handful of people who want the standard of care in 1975, even with the money back.
This doesn’t mean that there is no waste, only that we are spending money on different services in an attempt to improve health status and increase our health capital stock.
My main point of contention with Cutler is his claim that,
…we have no evidence that consumers facing higher cost sharing will make the right medical care decisions. Indeed, the evidence suggests the opposite.
This is largely true. However, I have a working paper (sorry, not available online — yet) that demonstrates that if cost-sharing were substantially high, ceteris paribus, it would lead to reductions in health expenditures relative to GDP. This suggests the following:
1.) Individuals are not necessarily over-consuming health expenditures. Therefore health insurance would have to be drastically reformed on the demand-side in order reduce expenditures.
2.) Consumers are plagued by their utter lack of information regarding price, quality, and effectiveness.
Since there is no way for me to statistically separate out and analyze the information available to the consumer (which is likely a function of the amount of cost sharing) using econometrics, my gut tells me that it is the latter.