Some Health Care Discussion

Paul Krugman writes:

The basic facts on health care are clear: government-run insurance is more efficient than private insurance…

I believe that to be false (more on that later). He continues:

…more generally, the United States, with the most privatized health care in the advanced world, has a wildly inefficient system that costs far more than anyone else’s, yet delivers no better and arguably worse medical care than European systems.

But all of this runs so counter to libertarian assumptions about the superiority of individual choice and market mechanisms that they just can’t take it on board. So we have bald assertions that Europeans receive much less care than Americans, even though the data clearly show that it just ain’t so. And we have assertions that mean-testing Medicare is the answer to our problems.

The link that Krugman provides to justify that these claims “just ain’t so” is an article by Gerard F. Anderson, Uwe E. Reinhardt, Peter S. Hussey and Varduhi Petrosyan from the journal Health Affairs. The paper essentially shows that Europeans obtain the same quantity of services as those in the United States and therefore the difference in spending must be made up by the prices. Here is there conclusion:

In 2000 the United States spent considerably more on health care than any other country, whether measured per capita or as a percentage of GDP. At the same time, most measures of aggregate utilization such as physician visits per capita and hospital days per capita were below the OECD median. Since spending is a product of both the goods and services used and their prices, this implies that much higher prices are paid in the United States than in other countries. But U.S. policymakers need to reflect on what Americans are getting for their greater health spending. They could conclude: It’s the prices, stupid.

The problem with this analysis is that it lacks any measure of quality. The authors acknowledge that this is a problem while pointing out that it is hard to determine the correct measures of quality. However, without such measures, saying that Americans are paying higher prices is an incomplete and, perhaps, a misleading statement. The conclusion that Krugman seems to draw from this paper is that if Americans are paying higher prices for the services, then prices are the problem and a government insurance system could surely lower them. It is possible, however, that the differences in prices are explained by differences in quality. If Americans are paying higher prices for the same number of treatments, the higher price may reflect a quality premium. In which case, reducing the price through government intervention would lead to reductions in quality of service.

This gets us back to my original comment that Krugman is simply not correct to say that government-run systems are more efficient. For example, rather than look at cross-country analysis, let’s begin by analyzing things at home. For example, Medicare Part B forces doctors to choose to accept patients on assignment or not. The doctor’s choice plays a key role in the payment they receive. By accepting assignment, they agree to accept Medicare’s approved rate for services. However, if the doctor chooses not to accept assignment, they can bill the patient for an amount above the Medicare approved rate and Medicare will reimburse the patient for the approved rate minus the 20% co-payment (a process known as balance billing). The process of balance billing essentially allows the doctor to price discriminate. However, the federal government adopted balance billing restrictions of 115% of the approved rate and many states have subsequently adopted balance billing restrictions of their own. A fellow Ph.D. student here at Wayne State is currently writing his dissertation (sorry, it is not yet available online) on the effect of balance billing restrictions on the quality of care. I have been fortunate enough to read a draft of the paper, which provides overwhelming evidence (and the most comprehensive evidence to date) that these restrictions have led to uniform reductions in quality (across a broad spectrum of quality measures). Thus Krugman’s assertion that government-run health care systems are more efficient seems to be quite erroneous.

3 responses to “Some Health Care Discussion

  1. Pingback: » Blog Archive » Some Health Care Discussion

  2. Some points on this from a European economist, with hands on experience of the Danish and US health system.

    As much as I would like to conclude that a market based health system is best, its hard not to agree with Krugman to some extent (which I usually dont) that Europeans get more bang for the buck in health. The fundamental point being that health outcomes in the US are not better in general than in the US, and at a 50% higher price to GDP, they should be, even considering some bad living habits in the US (fast food, fast cars and no bike). This is not just Krugman, OECD is reaching same conclusion: “Although evidence is limited, it is not clear that the
    good clinical outcomes obtained are justified by the high relative spending levels, as other countries attain
    comparable outcomes for less.” (from$FILE/JT00140050.PDF)

    Partly, I think this is because the US health system is really poorly designed with asymmetric information and rent seeking (the OECD says so too, politely). Also, it is hardly really private as the public sector lands more than half the bill one way or the other. The European system I knows, works through a one-size-fits all strategy. This imposes dramatic limitations of supply and therefore consumer losses. But these losses are in areas that are least crucial for survival and cure. In the Danish system health care is almost certainly underproduced and of underquality (which has led to strong growth in private add on insurance). But it does deliver bang for the buck, in the sense that underproduction is taking place in the least crucial areas (more people in the room, no flowers, unattractive nurses, longer waiting for soe services ….). On the other hand, after being to a US hospital, Im convinced that a lot of oversupply is going on there (OECD says 2-40% for surgical services). Its pretty easy for a doctor to convince you that an extra day and an extra X-ray is a good idea. Especially if insurance is picking the bill. And letting HMOs do the job of rationing is not better than letting public administrators in the hospital do it (Europe).

    I really think the US debate on health should move on. Just because you are pro market solutions in general, doesnt mean than any market solution is good. Especially not when there are externalities, asymmetric information, public insurance, rent seeking and all that involved. The US health care system is broken. This doesnt mean that European systems are good. They are broken too in other ways. But clinging to the US system because its “market” and being against “European” because they are not, appears to be more driven by economic religion, than by facts. Stop shooting at Krugman. Start thinking hard about innovative ways to fix the market errors instead. And public production of basic services arent always bad (only usually so).

  3. The website Turning 65 Made Easy is designed to help individualsturning age 65 understand Medicare.

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