Wednesday, October 4, 2017

Atlas on Health

My colleague Scott Atlas has a superb oped in today's (October 4) Wall Street Journal. Instead of just arguing about health insurance and how we, via the government, will subsidize and pay for health care demand, let's fix the equally catastrophically broken health supply system.
"Republicans have now failed twice to repeal and replace ObamaCare. But their whole focus has been wrong. The debate centered, like ObamaCare, on the number of people with health insurance. A more direct path to broadening access would be to reduce the cost of care. This means creating market conditions long proven to bring down prices while improving quality—empowering consumers to seek value, increasing the supply of care, and stimulating competition."
This is the kind of out of the box, out of the usual left-right mudslinging idea that might someday spark a bipartisan reform, if our legislators could someday get past scoring symbolic points and sit down to actually fix something. (I have written similar ideas, but nowhere near as clearly, or as based in lots of fact-based scholarship and detail as Scott has.)

Scott starts with the sensible idea that we need to expand people spending their own money, via high deductible catastrophic plans, and vastly expanded HSAs. True, and well documented, but just spending your own money doesn't really help as long as supply is so constrained. In the joke version, it's like spending your own money to find a cab to LaGuardia in the rain at 5:00 PM on friday pre-Uber. Supply is constrained, and competition is stifled, so the government can enforce cross subsidies, and just paying out of pocket is not really going to help until supply competition is unleashed.

Scott gets there quickly. To the view that we need more regulations forcing hospitals to post prices -- sort of like the funny prices you see posted in hotel rooms on occasion, and likely just as effective -- Scott answers the fact, obvious to us, but new to Washington,
The most compelling motivation for doctors and hospitals to post rates would be knowing that they are competing for price-conscious patients empowered with control of their own money.  
Accent on the competing. If they don't someone else can and will. Specifically,
... work strategically to increase the supply of medical services to stimulate competition. In large part, this means deregulation. Lawmakers should remove outmoded scope-of-practice limits on qualified nurse practitioners and physician assistants. ... 
Medical credentialing should be simplified, and the licensing boards should institute reciprocal (national) licensing for doctors to help telemedicine proliferate across state lines. Medical school graduation numbers have stagnated for almost 40 years.
I might add, H1B visa for any qualified doctor or nurse who wants to immigrate.  Holding back immigrant supply to keep up American wages sounds nice, until you realize who is paying those wages -- all of us.
Archaic barriers to medical technology also impede competition and raise prices. ...certificate-of-need requirements, which require health-care providers to get permission from the state to add medical technology like MRI scanners,...are still in place in 34 states, Puerto Rico and the District of Columbia. 
introduce the right incentives into the tax code. Today employees aren’t taxed on the value of their health benefits—and there is no limit to that exclusion.
Similarly, ObamaCare’s premium subsidies and the tax credits proposed by Republicans artificially prop up high insurance premiums for bloated coverage that minimizes out-of-pocket payments. 
As the last paragraph emphasizes, this is bipartisan. The same Democrats who realize that occupational licensing and zoning density restrictions are really hurting real estate and labor markets, adding to inequality, can realize the same thing of all our restrictions on the supply of health care. 

Scott's book is an excellent longer treatment of these themes, well documented with many more ideas. And best of all, it's available for free from Hoover, though you really should go out and buy one.  


  1. Milton Friedman suggested a very similar thing fifty years ago in Capitalism and Freedom. Perhaps, fifty years from now, a politician will actually listen to an economist and consider implementing these ideas.

  2. This seems much more reasonable. National licensing is good. National standards for malpractice that eliminate "local standard of care" as criteria would be better (see below). Also, HSAs are great...but, ignore the cold reality that most Americans are not savers. They live paycheck-to-paycheck and use debt financing. They alter expenses going forward to accommodate debt payments. It might not be the best personal financial planning, but it is how many live. To be frank, rich people probably should be so judgmental. People don't save to buy a house or save up to go to medical school. They borrow the money and the vast majority pay the money back. So, adding loans with reasonable repayment terms, as is done with student loans, to the mix makes some sense. It would get people care and force a far more market oriented approach. I outline such an approach here:

    For the malpractice stuff, see: Frakes, Michael. "The impact of medical liability standards on regional variations in physician behavior: evidence from the adoption of national-standard rules." The American Economic Review 103.1 (2013): 257-276.

  3. "Republicans have now failed twice to repeal and replace ObamaCare." .. Right off the bat. Republicans have tried to kill Obamacare more than 70 times. Not just twice.

    Then the author slips back into the tired old dog 'We need more competition and less regulation'. Hogwash. We spend $3.2 Trillion a year on health care as a nation, we don't cover all Americans, and we have atrociously poor results compared to other developed nations, who pay on average 1/2 what we do. The answer is very simple. DO WHAT THEY DO! First, we start by killing the disease that Nixon introduced when he opened Pandora's box, and passed The Health Maintenance Organization Act of 1973, before which, health care was non-profit by law. Then we review what all other developed nations do and pick the best system!

    On one point, I agree. Trump's reduction in the number of doctors and aides allowed into our country under Visas is ill-informed and has been publicized as detrimental to our system. Remarkably, that issue doesn't stop Trump from hiring 97 maids, cooks and waitresses from foreign countries under the Visa program for Mar-A-Lago, nor does it seem to affect the 29 Visa workers that his kid hired to look after his vineyard.

  4. Scott Atlas is correct: it is a demand and supply proposition, not just a demand proposition. Which raises the question of “why “ demand for health-care is in the political spot light…but not supply of health-care? Public Choice Theory might help answer the question. How so?

    One might start with Milton Friedman, many decades ago, making the statement [paraphrasing]: The American Medical Association (AMA) is the most successful union ever within the USA. Yep, supply has been constrained from circa 1960 forward, becoming the norm in health-care not the outlier event. The constrained supply, as usual, is fueled by politicos through the mechanism of government.

    The politically constrained supply, the beneficiaries thereof, represent political constituency building exercises, by politicos, with other people’s money (your money). From certificate of need (CON) legislation to many other legislative events, politicos of all stripes have built a beholding political constituency that yearn for the status quo of constrained supply, as constrained supply increases price and hence revenue.

  5. I thought the evidence in healthcare was that prices were higher in areas where there were more physicians? In hospital construction the old adage is "a bed built is a bed sold". Supplier induced demand in a thing. Having the same human do DX and RX is an issue. See Mohs surgeons.

    1. This would be a good final exam question for economics. (Hint: Physicians move to places where prices are higher -- more wealthy and old people demanding health care. Restaurants are also more expensive in New York where there is one on every block. No "supply induced demand" needed.)

    2. Except the sequence matters. If prices/utilization goes up *after* beds are built/physicians move in...then it is not so clear-cut. Option 1 is expectations sort of argument. Option 2 is supplier induced. Which one is the simpler argument?

    3. I've heard the "supplier induced demand" argument in health care. I've also seen studies arguing that states with certificate of need requirements have higher prices. I'd be interested in seeing solid evidence one way or the other, but this seems an area where one can get whatever result is desired by tweaking the analysis.

  6. Professor, I love your optimism, sorely needed in times like this.
    I wish I could have it.
    I do not disagree neither with you or with Scott Atlas. All great ideas.
    But, you and Scott Atlas are forgetting the political economy, the public choice aspect of this discussion.
    You say, "This is the kind of out of the box, out of the usual left-right mudslinging idea that might someday spark a bipartisan reform, if our legislators could someday get past scoring symbolic points and sit down to actually fix something." Politicians are in the business buying votes, and they will do it by promising Shangri-La. And if this means, promising "health care for all" via a nationalized system (a la Canada), they will do it. And there will be no way back, ever, forever.
    Democrats are already marching in that direction. Republicans are wishy-washy, they cannot repeal the ACA, and even less, come up with a replacement.
    So no, prospects are not good. And the march toward a nationalized system goes on, uninterrupted, with no serious challenge in sight.

  7. Unfortunately, having people spend more of their own money in high deductible / HSA type health plans will not encourage price competition.

    In a high deductible plan, the amount of money the consumer pays during the deductible phase has nothing to do with any price posted or advertised by the doctor. The amount paid is the amount the doctor and insurance company have contracted for. This amount depends on the insurance company and consumer's exact plan (and at times I get he impression the phase of the Moon enters into the calculation).

    Given the large number of slightly different contracted insurance plans (which I'm told can be hundreds or thousands), there is no practical way for the consumer to price compare even if prices are posted.

    I will agree with the earlier commenter's complaint about the Health Maintenance Organization law. This seems to have been the trigger moving from consumers seeing a doctor and filing an insurance claim to insurance companies directly billing doctors, which then moved to provider networks, contracted rates, and all of today's complexity.

    A move to price competition would probably require a move back to "traditional" insurance -- the doctor bills the patient, the patient files insurance. There is no way this would fly politically, we've all been trained to expect a third party payer. I've experienced doctors and pharmacists who are apologetic about $5-$10 out of pocket expenses, they appear to have been on the receiving end of complaints about these expenses.

  8. The two changes I would like to see (which should be favored by both democrats and republicans) are:

    1) Price lists for every procedure. Everyone pays the same price for the procedure whether you are an insurance company or an uninsured person. No reason uninsured people should be subsidizing people that are insured.

    2) Price lists for drug prices. Same as above but with the additional constraint that no drug company is allowed to charge more in the US than they charge in other first world countries. I'm ok with lower prices to poor third world countries, but no reason for US to subsidize people in Europe and Canada.

  9. It is easy to spot flaws in the health delivery system in modern America, some of which are identified in the Altas article and the commentators above. The issue seems to be not a dearth of ideas but a lack of political will. I am dubious that any of these reforms will come to pass and think that the most likely outcome is a more socialized health care system.


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