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Economics for Health Policy Wonks

This blog is one of the few health policy blogs that approaches its subject from an economic point of view. We believe that almost all the problems in health policy arise because of perverse economic incentives and that to solve those problems we have to get the incentives right.

In a way that’s too bad. That is, it’s too bad there are so few of us. What’s most missing from some otherwise good sites is…well…economics. Examples from Aaron Carroll, Austin Frakt and Sarah Kliff below the fold.

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This is from Aaron Carroll:

One thing to note is that the top 5% of spenders (some of the sickest among us) account for about half of all health care spending. More significantly, the bottom half of spenders (i.e., the healthier half) account for less than 3% of all health care spending…

When we talk about consumer directed health care, we’re talking mostly about healthy people…The problem is that healthy people consume so little care to begin with. If we could incentivize the healthier half of people to forgo all their personal health care spending, we’d spend $36 billion less out of a total $1.259 trillion in personal health care spending. That would be a drop in the bucket. And no one — no one at all — thinks we can get people to stop all their health care spending.

As I pointed out in the comment section of his blog, the patients in the top 5% this year are not the same as the 5% next year or the year after that. If they were the same people year after year, then our health care spending problems would boil down to the treatment of a small group of people. That, however, is not the case. That’s why you need good economic incentives throughout the entire distribution. And when all the employees face good incentives, the Rand Corporation finds that consumer directed health care plans lower the cost of health insurance by as much as 30%.

This is from Austin Frakt defending (apologizing for?) health insurance coverage for contraceptives:

If you’re in a hurry, all you really need to know is that health insurance is redistributive…

Taking contraceptives as a case study, it is very likely that almost no men use covered contraceptives. Same goes for most women above or below child-bearing age…The non-users subsidize the users, who clearly benefit with a lower net cost of contraceptives than they would otherwise pay without insurance.

Ah, but real insurance is a fair gamble. You and I pay the same premium, say, for a service but neither of us knows in advance which of us will actually get the benefit. On the other hand, if I force you to pay the same premium as I pay for a service and we both know in advance that I will use the service and you will not, that is not insurance. That’s theft. By the way, the vast majority of people in health policy don’t know the difference between insurance and theft.

This is from Sarah Kliff:

If you want to understand the problem of how we currently finance our health care system, there’s a great case study to be had in HCA, the largest for-profit chain of hospitals in the country. A New York Times investigation out Tuesday morning found HCA cardiologists in Florida to be performing unnecessary procedures on patients who, in some cases, did not even have heart disease in the first place.

Why perform an invasive procedure, which comes with risks to the patient, if it’s unnecessary?…[T]he doctors may have performed unnecessary procedures because there was a financial incentive to do so.

Get that? Now try this:

The health reform law does take some steps to address these unnecessary procedures, by creating new payment models where providers would essentially lose money by performing procedures they don’t need to. That’s the whole idea behind the health law’s Accountable Care Organizations, where doctors band together and take a lump-sum for covering a set number of patients. If they can deliver care for less — while hitting certain quality metrics — they pocket what’s leftover. Doctors that perform unnecessary care, and go over that set amount, will find themselves in the red.

It’s really hard to know where to begin. Almost all services in our economy are purchased fee-for-service. And usually without a hitch. Did you know that the iPhone repair shop down the street doesn’t perform unnecessary procedures on my iPhone? Are you surprised by that fact?

The problem is not fee-for-service payment; it’s third-party payment — as all loyal readers at this site already know. Any time you have third-party payment, you will have distorted incentives of one sort or another. If you pay doctors to overprovide, you are going to get overprovision. If you pay doctors to underprovide, you will get underprovision. ACOs are going to underprovide. Big time.

Finally, here is Aaron Carroll again, answering this question: “Will ObamaCare raise the price of your pizza?”

Let’s circle back around to Papa John’s, though. Part of what the act does is mandate that companies start providing health insurance to their employees or pay a penalty. Since some don’t do that already, this will cost them money. They could take this out of profits or reduce the salaries of their executives, but they will probably do what every business does: They’ll pass it on to the consumer.

This is as it should be. Some companies probably keep costs down by not providing comprehensive health benefits to their employees. Now, they will have to. I imagine some companies already do, which probably increases their costs, and now they will be on a more level playing field. Regardless, Papa John’s is telling you that people who order its pizza will now bear the cost of its employees’ health insurance.

Sorry. That won’t work, as should be clear by examining the equation of exchange:

MV = PQ

The amount of money in circulation (M) times the average number of times each dollar is spent (V) is equal to the sum total of all spending, or total output (Q) times the price level (P). Clearly, ObamaCare doesn’t change M or V. So total spending must remain the same. Conceivably, it could lower output by causing workers to lose their jobs. But Carroll implicitly assumes that everyone keeps right on working. So what happens to P? Nothing. One price can go up only if another price falls. But prices cannot on average go up or down as long as M, V and Q remain unchanged.

So who is going to pay for health insurance at Papa John’s and all the many other businesses that will face increased health insurance costs (which, by the way, will be almost all of them)? Answer: the employees. The economics literature is unambiguous on this point: employee benefits substitute dollar-for-dollar for money wages. For family coverage, Papa John’s employees are going to have to receive about half their compensation in the form of health insurance instead of wages — whether they like it or not.

Think about that the next time you hear an administration spokesperson ticking off all the goodies offered by ObamaCare. Free wellness exams, free contraceptives, free this, free that. The cost of all those freebies is going to come right out of the worker’s pocket.

SOURCE: John Goodman's Health Policy Blog

John_GoodmanJohn C. Goodman is president and founder of the National Center for Policy Analysis, a free-market think tank located in Dallas, Texas.  The Wall Street Journaland the National Journal, among other media, have called him the “Father of Health Savings Accounts.” Dr. Goodman’s health policy blog is the premier right-of-center health care blog on the Internet.  It is the only place where pro-free enterprise, private sector solutions tohealth care problems are routinely examined and debated by top health policy experts across the ideological spectrum.

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