[ExI] Medical Costs

Rafal Smigrodzki rafal.smigrodzki at gmail.com
Wed Feb 27 23:04:02 UTC 2008

On Sat, Feb 23, 2008 at 8:44 AM, Stathis Papaioannou <stathisp at gmail.com> wrote:

>  The bureaucratic rules are "make the hospital function as effectively
>  and efficiently as possible".

### No, no, no, this is not a rule, just as the preamble to the US
constitution is not really a law. This lofty but vague mission
statement has almost nothing to do with the daily drudgery of a
bureaucrat. The bureaucrat comes to work, drinks his coffee, and goes
to the meeting, where they discuss the minutiae of bureaucratic rules
that were written by other bureaucrats, with some input from
politicians and lobbyists and essentially no direct and truthful input
from customers. Obviously, even the customers do not have an incentive
to provide a truthful input - they have nothing to lose if they
complain and if their complaint is taken into account, others will
foot the bill. The inevitable result of this lack of short feedback
loops is misallocation of resources, which is obvious from the high
cost and poor condition of care in Britain or Canada.

 This is measured in terms of multiple
>  outcomes, such as length of waiting lists, surgical complication
>  rates, patient feedback, expenditure, income, and so on. Patients are
>  free to go to another hospital, public or private, if they wish.

### Patients are not "free" to go to a private provider if they have
to *pay* . Patients are being charged for nationalized health services
whether they use them or not, which means that choosing an alternative
imposes a double cost on them. If the cost of a choice is doubled by
force, then the choice is no longer free - it is *paid*, it is made
artificially expensive.


>  Private hospitals in Australia are generally smaller, and if they get
>  a complicated case they often put them in an ambulance and send them
>  to the nearest public hospital. The only real advantage to having
>  private health insurance in Australia (apart from tax advantages for
>  higher income earners) is that there is a shorter waiting list for
>  some elective surgical procedures; but as soon as a deficit in the
>  public system like this is identified there is pressure from the
>  ministry to improve the situation using available funds, and pressure
>  from the community to increase available funds if this doesn't work.

### How does the "pressure" work? How many hours of pressure does it
take to hire one more nurse in the geriatric ward? You are postulating
the existence of feedback loops through political action ("pressure
from the ministry") and through collective action ("pressure from the
community") but it is well-known that these kinds of feedback loops
are inferior to direct, contract-based control with exit option.
Really. Case in point: Bakeries. You folks here on this list may not
have had the experience of waiting in bread lines for bread baked in a
state-run bakery and sold in a state-run grocery. I can tell you, it's
no fun! One may take bread for granted if it is readily available from
dozens of sources from which you can choose at a whim, and then
perhaps it's easier to theorize about the superiority of a political
monopoly provider of services but such theories don't survive
confrontation with reality.

There is no difference between the provision of bread and provision of
heart surgeries, and both should be controlled using the same
pluralist, short feedback-loop mechanism.

>  Thus, the pool of money is constantly shifted around to where it will
>  do the most good, and the size of the pool is adjusted to what the
>  community is willing to pay.

### That's what used to tell me in school, too. It's good that I am an
ornery skeptic, and stopped buying this line by age 11.

>  >  This is dramatically different from the feedback loops between a
>  >  patient and a doctor who can be fired on the spot, or an insurance
>  >  plan that can be changed with a few phone calls.
>  If you don't like your doctor or your nurse in a public hospital you
>  can complain about them in the same way as you can complain about the
>  employees in any private corporation, and with the same consequences
>  to them.

### Complain? So what? What good does it do to *me* if I complain?
This is an important question: What benefit do *I* get from
complaining about a state employee, if I can't readily go to somebody


 You can also go elsewhere, including to a private hospital.

### I can't go anywhere else, taxes ate my income, can't afford to pay
double for another doctor.


>  The private choice is not available to poor people, but a large number
>  of relatively wealthy people still choose the public system, sometimes
>  even when they have private health insurance but they believe they
>  have a serious illness.

### If you get screwed to the tune of 500,000$ over your lifetime in
the form of the taxes for state medical care expenses taken out of
your income, well, one may be inclined to try to get some of this
money back.


>  The US spends more as a proportion of GDP, not just in absolute terms.
>  I would have said that the overhead and dead weight losses of multiple
>  health insurance funds seeking to avoid paying patients wherever
>  possible (with all the duplicated corporate bureaucracy that
>  involves),

### How do you mean "deadweight loss"? This term has a relatively
precise meaning in economic analysis but how are you applying it here
to multiple independent businesses? You would need to explain that.
BTW, the total cost of health administration and insurance overhead in
the US is about 7% of the total, and that includes the cost of
Medicare administration. It's peanuts compared to the total spending.


 the better prices drug companies can get for their products
>  in a fragmented market,

### If you believe that monopsony is a good idea, you should read up
on it. Monopsony is bad (i.e. generates deadweight loss), just like
monopoly, moreover, it has additional negative long-term consequences
beyond the deadweight loss. It leads to long-term attrition and stasis
among suppliers, with disastrous consequences on long-term welfare.
The whole point of a market is that it is, bah, it *must* be
fragmented, or else it is not a market.

 and the cost of medical litigation explains
>  where some of that money goes.

### We are discussing the superiority of competitive, pluralist
provision of medical care. Tort reform is another issue.

Read up on US medical spending, you will find that the items you
mentioned are a minor component of the price differential

As I said, some of the extra cost of medical care in the US is good
(leads to good outcomes, like innovation), some of it is a side effect
of state regulation in a partially free market (Medicare pricing
floor, employer health insurance tax exemption, EMTALA, HIPAA), none
of it is a net loss due to the partial involvement of pluralist
control mechanisms. The problem is Medicare, US medical costs started
skyrocketing only after Medicare became a mass program, it is the
prime reason for high prices, since Medicare participants are
*forbidden by Federal law* to engage in price competition. There is a
50,000 fine for every time you charge somebody less than you would
charge a Medicare patient! This is such a stupendous nonsense that it
leaves my mind reeling. The very low level of out-of-pocket spending
for medical care in the US coupled with employer-provided insurance is
another recipe for profligacy. Add medical licensing laws (all
courtesy of the state), and the result is inevitable.


>  As for outcomes, we have talked about this before, but it's really
>  hard to explain why you have to finesse the statistics to explain why
>  the US is near the bottom of the OECD list on almost every parameter
>  the WHO measures while spending 50-100% more than most other
>  countries. Could it really be that Americans as a group get sick *so
>  much* more often and/or severely than Canadians and Australians (who
>  are basically the same demographic) that despite the superior and
>  expensive health care they still die younger?

### Near the bottom? Which ones exactly? Average life expectancy?
Maybe self-reported health status? Wait times? Life expectancy at age
65? Life expectancy after a diagnosis of breast cancer? Infant
mortality rate among non-immigrant population? (try the 2007 CRS
Report for Congress for some real numbers)

Yes, Americans are more obese than any other OECD country citizens,
are more likely to die from accidents and homicide, have a higher
incidence of cancer and heart disease, and are not the same
demographic as Canadians or Australians. This is why despite stupidly
overpriced care of superior quality they die on average about as
quickly as people in other countries.

Actually, I have no idea how this discussion of the benefits of
freedom in medical care somehow inevitably gets derailed into
comparisons between various flavors of predominantly non-market
systems, with the US the stand-in for "market", and with freedom
getting the bad rap for all the stupidities imposed on Americans by
their government. American health care system is badly flawed because
of insufficient of freedom, and depriving us of all its vestiges would
make it only worse.


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