Monthly Archives: March 2013

Hospital Charges

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Steven Brill has gotten the health-technocrats very excited. For example, Uwe Reinhardt writes,

hospitals are free to squeeze uninsured middle- and upper-middle-class patients for every penny of savings or assets they and their families may have. That’s despite the fact that the economic turf of these hospitals – for the most part so-called nonprofit hospitals

Pointer from Mark Thoma.

Solve the puzzle:

1. Itemized charges on hospital bills are very high. This is most obvious for items that you can buy yourself in a drugstore or supermarket.

2. Relative to these outrageous markups, profits at for-profit hospitals (and at “so-called nonprofit hospitals”) are not very high.

The explanation is that hospital costs are mostly overhead, meaning that they are not tied to billable services or events. The janitors who clean the halls and rooms once a day (or more)? Overhead. Record-keeping, billing, computer systems, communications? Overhead. Fancy medical equipment? Overhead. Nurses and other staff? For the most part, overhead.

Because most of the cost in hospitals is overhead (or fixed cost, in economic parlance), its allocation across billable items is arbitrary. That is why “tough negotiation” by Medicare does not really reduce overall health spending. Instead, it means that overhead costs have to be shifted somewhere else, including onto those who happen to be affluent but uninsured.

What would happen if we followed the prescription of Reinhardt and others, to force hospitals to bill everyone else at Medicare rates? Hospitals would either stop taking Medicare, drastically cut back on services (reduce janitorial service to once a week), or close altogether.

I am not saying that the business practices of doctors and hospitals are beyond reproach. But claiming that there is a free lunch in medical care from just paying providers a lot less money is unhealthy demagoguery.

Institutions-Intensive Economy

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My latest essay:

Over the course of Coase’s lifetime, the locus of economic activity has been shifting, from the farm to the factory floor to the office and even to “the cloud.” With each step, the concept of property has become more difficult to define, the economic entities have become more difficult to locate in time and place, the proportion of wealth that is intangible has risen, and earnings have become increasingly contingent on social constructs rather than on individual attributes.

Some of the themes circle back to the book that Nick Schulz and I wrote.

Deschooling Society

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Sugata Mitra is the subversive.

He calls it the grandmother technique, and it goes like this: expose a half dozen or so kids to a computer, and let them have at it. The only supervision required is an adult to listen the kids brag about what they learn. It’s the opposite, he says, of the disciplinary ways of many parents—more like a kindly grandmother, who rewards curiosity with acceptance and encouragement. And it is a challenge to the past century and a half of formalized schooling.

Does this idea come across as libertarian? To me, it actually owes something to the New Left of the hippie era. Anyone remember Ivan Illich?

John Cochrane on Banking, Expert Forecasting

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1. He liked Admati and Hellwig more than I did.

Ms. Admati and Mr. Hellwig do not offer a detailed regulatory plan. They don’t even advocate a precise number for bank capital, beyond a parenthetical suggestion that banks could get to 20% or 30% quickly by cutting dividend payments. (I would go further: Their ideas justify 50% or even 100%: When you swipe your ATM card, you could just sell $50 of bank stock.)

I think he is being careless. My own essay tries to consider why households would prefer to hold bank debt rather than bank equity. Keep in mind, however, that all of us agree that the relationship between government and banks is problematic, and that the problems are not solved by regulation.

2. He cites a nice essay by Alex Pollock listing statements by regulators prior to the housing crisis that showed their mindset before the crisis. They thought they had everything under control. In 2009, they changed their minds. Now, with Dodd-Frank, they tell us they have everything under control again. Note that Pollock could have included many more pre-crisis quotes, such as the “before” quote from Ben Bernanke.

Of course, Bernanke still believes that we live in mediocristan. On the outlook for long-term interest rates, the other day He said,

While these forecasts embody a wide range of underlying models and assumptions, the basic message is clear–long-term interest rates are expected to rise gradually over the next few years, rising (at least according to these forecasts) to around 3 percent at the end of 2014. The forecasts in chart 4 imply a total increase of between 200 and 300 basis points in long-term yields between now and 2017.

Of course, the forecasts in chart 4 are just forecasts, and reality might well turn out to be different. Chart 5 provides three complementary approaches to summarizing the uncertainty surrounding forecasts of long-term rates. The dark gray bars in the chart are based on the range of forecasts reported in the Blue Chip Financial Forecasts, the blue bars are based on the historical uncertainty regarding long-term interest rates as reflected in the Board staff’s FRB/US model of the U.S. economy, and the orange bars give a market-based measure of uncertainty derived from swaptions. These three different measures give a broadly similar picture about the upside and downside risks to the forecasts of long-term rates. Rates 100 basis points higher than the expected paths in chart 4 by 2014 are certainly plausible outcomes as judged by each of the three measures, and this uncertainty grows to as much as 175 basis points by 2017.

Pointer from Mark Thoma.

Jeff Sachs on the Administration’s Budget Plans

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He writes,

In effect, he would allow rising outlays on mandatory programmes such as Medicaid and Social Security and debt servicing to crowd out public investments that are vital for America’s long-term economic future…

Mr Obama probably hoped that when the moment of truth arrived, when the spending cuts started to bite, the American people would support higher taxes rather than the spending cuts long called for in his own budget proposals. And perhaps they will still do so. Yet he has never presented an alternative with more robust tax revenues in order to fund a higher sustained level of public investments and services.

Pointer from Tyler Cowen.

I know that the conventional wisdom is that Republicans and conservatives are hopelessly irrational and self-contradictory on fiscal policy. Let us stipulate that such is the case. That does not mean that the Democrats and progressives are rational and coherent. If someone on the left can point me to a budget that does what you want, does not lead to explosive deficits, and does not depend on spending an imaginary dividend of “lower health care costs, through magic,” I would like to see it.

To put it this another way, I think that even if the entire conservative side of the political spectrum were to collapse tommorrow, the left still could not govern.

Where Wages Are Stickiest

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From the National Employment Law Project:

Industry dynamics are playing an important role in shaping the unbalanced recovery. We find that three lowwage industries (food services, retail, and employment services) added 1.7 million jobs over the past two years, fully 43 percent of net employment growth. At the same time, better-paying industries (like construction; manufacturing; finance, insurance and real estate; and information) did not grow, or did not grow enough to make up for recession losses. Other better-paying industries (like professional and technical services) saw solid growth, but not in their mid-wage occupations. And steep cuts in state and local government have hit mid- and higher-wage occupations the hardest.

Pointer from Tyler Cowen (also Mark Thoma).

Focus on the last sentence. What if pay for all government workers–federal, state and local–had been reduced by 5 percent at the start of the recession? How many jobs would have been saved?

In general, I think that we mis-frame the government budget issue when we talk about taxes vs. program cuts. Instead, we should be talking about taxes vs. reductions in compensation for government workers. It is not at all clear to me that we need to reduce incomes in the private sector in order to maintain incomes in the public sector.

How Overpaid are American Doctors?

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Kevin Drum writes,

The bottom line is that compared to other rich countries—all of which pay Medicare rates or less for medical services—American doctors are pretty well paid. The report also shows compensation as a ratio of the average wage in each country, and the story is similar (though GPs look a little closer to the OECD average when you compare their pay to average wages).

1. Why isn’t the focus on this latter ratio? If you were to draw an international comparison chart of wages not adjusted for the average wage in a country, most occupations in America are “overpaid.” That is what having relatively high productivity will do for you.

2. Has anyone compared hours worked by doctors across countries? I bet that American doctors work more hours. I also bet that if you cut their rate of pay, they will not continue to work more hours. That is, I think that the substitution effect will dominate the income effect. (If nothing else, the lower the rates that government pays doctors, the fewer patients that doctors will accept for whom they are paid government rates.)

3. I think that if there is an issue at all, it is limited to specialists. And that is because specialists produce more billable services. That problem is as severe in Medicare as it is outside of Medicare.

Overall, I am skeptical that experts in Washington can “fix” the pay of doctors.

Schumpeterian Growth

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The paper is by Aghion, Akcigit, and Howitt. They see creative destruction as less important in economies that are catching up to the state of the art in technology. It is more important for what they call “frontier economies,” meaning economies that require innovation for growth.

the theory points to appropriate growth policies, i.e. policies that match the particular context of a country or region. Thus we saw that more intense competition (lower entry barriers), a higher degree of trade openness, more emphasis on research education, all of these are more growth-enhancing in more frontier countries.

Read the paper, and think about China.