Tuesday, August 4, 2009

Health Care Costs and Reform

Here is my attempt to organize my thoughts about this health care reform debate.

As far as I can tell, the following are the main arguments for why health care prices are at current high levels. I am not certain each of them is true. Though all five arguments explain why the standard market forces that would normally exert downward pressure on prices do work as well in this context.

  1. 1) Most consumers are insulated from the cost, true of those in most traditional insurance plans and government insurance.
  2. 2) Consumers are unable to discern small variations in quality, so prices do not reflect marginal benefit.
  3. 3) Due to lack of price-consciousness R&D is new-product focused not efficiency focused.
  4. 4) Due to the lifecycle of medical procedures and drugs, a large portion of the best medical treatments are under patent, and thus subject to monopoly pricing.
  5. 5) The government is unwilling to use its monopoly power in some market segments (medicare) to substantially limit prices. This is probably due to politics, the two main parties interested in medicare are health care providers and patients, providers care a lot about prices, patients do not care, because of #1.

Are there other major reasons for high prices that I have missed?

Total health care expenditures are a function of both price and quantity. Here are some reasons why quantity may be higher than optimal:

  1. 6) We are rich, health care is a normal good.
  2. 7) Americans are relatively unhealthy.
  3. 8) Consumers are unable to discern small variations in quality, so they over-buy.
  4. 9) Primary buyers (insurance companies) are not able to make choices about which treatments to pay for. I am not sure whether this is the result of regulation, competitive pressure, or some combination.
  5. 10) The government is unwilling to use its monopoly power in some market segments (medicare) to substantially limit procedures. Again, this is due to politics, both providers and patients prefer that the government is less discerning.

The current major health care reform proposal has provisions to address #10 and #5, which is supposed to substitute for a solution to #8 and #2, by giving some government body (medicare advisory council) a mandate to make tough choices about care, and give them a tool called "comparative effectiveness review." It is not clear if this will change #9. If public and private insurance are supposed to compete, and it is competitive pressure that keeps private insurance from making tough choices, I suspect that the government's mandate to do so will only hinder its competitiveness, leaving us with rationing only for those in the Gov. insurance plan who cannot get private insurance.

Another argument is that providing care for everyone will result in healthier people, thus fixing #7 through preventative care. I suspect that the increase in cheap preventative care will be larger than the care that is prevented. This is an open question though.

Finally, there is hope that a government plan will be more efficient than a privately run plan because they don't waste money turning people away. I have seen a lot of debate go back and forth on this one and don't know what to think.

Bottom line: administrative cost savings may be a one-time decrease in expenses, and so this plan places all of our hopes for cheaper health care in the ability of the government to effectively ration treatment. It does nothing to address many of the root causes of the price increases.

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