Responding to a post by John Cochrane, on his own blog Greg Mankiw refers readers to this piece that Mankiw claims to provide readers with education on the economics of health care.
various features of this market complicate the analysis of their interactions. In particular:
1. Third parties—insurers, governments, and unwitting bystanders—often have an interest in healthcare outcomes.
2. Patients often don’t know what they need and cannot evaluate the treatment they are getting.
3. Healthcare providers are often paid not by the patients but by private or government health insurance.
4. The rules established by these insurers, more than market prices, determine the allocation of resources.
5. In light of the foregoing four points, the invisible hand can’t work its magic, and so the allocation of resources in the healthcare market can end up highly inefficient.
There is much more at the link. In my opinion, the ideas are a fair representation of where the profession stands on health care, and these ideas do more harm than good.
1. I agree with the Grumpy One (Cochrane) that in terms of economics health care is not much different from other goods and services. Health care does not fit the model of perfect competition, but almost nothing does fit that model. Yes, it is hard to be an informed consumer in health care. It is also hard to be an informed consumer of economics textbooks, and yet nobody insists that the economics textbook market requires extensive government intervention to avert disaster.
Almost nothing in the real world obeys the textbook model of perfect competition. I have argued that what makes health care different are cultural factors. In fact, if you look at Mankiw’s list of complicating factors, three of the four relate to the use of third parties to pay for health care, which is entirely a cultural phenomenon.
There is nothing intrinsic to health care that makes it impossible for buyers to pay sellers directly. It is a cultural choice. Even for very large health care expenses, insurance could be structured like auto insurance, where the insurance company writes you a check based on an estimate of the “damage,” and you can then shop for either a more or less expensive treatment. (I am leaving out the case where you arrive at the emergency room unconscious. That is an event where third party involvement is necessary, but it accounts for a tiny fraction of health care spending.)
The basic cultural point I make is that each of us individually would like unrestricted access to medical services without having to pay for them. This is not sustainable for the nation as a whole. Health care policy that leans left will lead to government restrictions on access to medical services. Health care policy that leans right will lead to people choosing to forego some medical services because they do not wish to pay for their cost.
2. Mankiw views health care regulation as a cost-benefit trade-off between “too much” (inefficient) or “too little” (consumers not protected). In fact, health care regulation should be viewed through a public choice lens as an example of Subsidize Demand, Restrict Supply.
3. Mankiw offers pertinent facts about health care spending, but he neglects the important fact that we spend a huge amount on medical services with high costs and low benefits. That is one of the main themes of my book Crisis of Abundance. A related theme of that book is that much of our spending is on treatments and diagnostic procedures that did not exist forty years ago.
4. Mankiw discusses health insurance as if it were like car insurance or fire insurance. But what is really important is how it is not like those other types of insurance. With classic insurance, people rarely make claims, they make claims only for large, disastrous losses, and the premiums are low. What Americans think of as “good health insurance” is the opposite on all counts. I call it “insulation” rather than insurance, because it insulates people from having to make even small-dollar payments.
I really do not wish to make this a personal attack on Greg Mankiw. His job as a textbook writer is to represent the center of the profession, and he is doing so. The problem I have is with the center of the profession. And as you know, I fear that things will get worse rather than better in this regard.
“I agree with the Grumpy One (Cochrane) that in terms of economics health care is not much different from other goods and services. ”
Really?
For most Americans, healthcare is the second or third biggest bill each month. Almost all of us finance houses and cars, and these are highly predictable, stable expenses, anchored by tangible assets. Health care can spike into 6 figure expense obligations at any time, while we simultaneously experience a collapse in our ability to work.
To the extent that we can plan for these expenses over our lives, our individual earning curves and our individual health expense curves are near perfect inversions of each other. We need to plan for expenses decades in advance and have little or no flexibility when the bill comes due. The largest expenses occur as we are dying.
What we call health insurance isn’t really insurance. Health insurance as it works today only exists under strict regulatory constraints. A free market insurance model would never work as the central strategy for health care.
People are not cars. You can always fix a car for a predictable amount. You can write off a car that isn’t worth fixing.
Health care is a bit different.
“Health care can spike into 6 figure expense obligations at any time, while we simultaneously experience a collapse in our ability to work.”
But most of it doesn’t. And the bit that does fit your model can be covered by catastrophic insurance at a fraction of the cost.
Your POV is biased by living in a system in which for the past 70 years, government regulation on subsidizing of 3rd party payments for health care has exploded and grow to overwhelm most health care spending.
In other words, health care spending is what it is due to the elimination of free markets in health care and the means to pay for it, not due to some unique quality of its economics…
Many have made this point, but I recall it particularly from Megan McArdle, that what Americans call health insurance is really just a healthcare prepayment plan, which is not what most people want, other than aging boomers who finally expect the delivered healthcare value to exceed the prepayments. Like extended warranties sold in the checkout aisle of big box stores, these prepayment plans are not good values and set up a contentious process for extracting the value from them. This aspect is somewhat shared with real insurance, except real insurance is not used to cover events that are expected on an individual level. Real insurance is used to cover events that are unpredictable and catastrophic at an individual level yet reasonably predictable for large statistical aggregates.
And I’m not sure about these “small-dollar” payments. It’s astounding to me that a healthy young person is expected to pay monthly health care premiums that compete with or exceed car payments or rent (over $400 in many cases). It seems like a very stiff head tax whose proceeds are earmarked for a terrible machine that grinds up money.
Despite having employer-provided health insurance and Medicare coverage, my wife and I each pay our physician $49/month for essentially unlimited access. He takes no insurance or government payments. The monthly payment amounts to far less than we were paying in co-pays and large deductibles for coverage under our health plans. We have his cell number, which he picks up off-hours, and he is not bound by the arcane and stifling rules governing insurance payments.
I don’t see how this is a good deal unless you’re awfully unwell people. My wife and I have not spent anything close to that in copays and deductibles under Medicare (me) and employer coverage (her)
The question one needs to resolve is whether health care is more like a commodity such as a car, or a form of protection like a fire department. Once that is decided the method of payment is obvious.
You really need to break “health care” into smaller categories. The answer to your question is completely different if we’re talking eye glasses and vaccinations, vs. car accidents and heart attacks vs. cancer vs. long term care for dementia. Stop lumping all these together!
@Rick Hull, @true libertarian
Current health insurance does not work like:
… a health care prepayment plan- there is no connection between the amount paid by an individual and the benefits consumed by that individual
…or an extended warranty plan- this is just a profitable, small-ball form of standard insurance. Individuals are not paying for their actuarial risk profile.
Health care is not like:
…a commodity, like a car- highly predictable, highly transparent exchange of value that can be fully planned for
…a fire department – protection against an unlikely disaster that doesn’t happen to most people and for which risk can be minimized
@Tom
http://www.thedailybeast.com/health-and-human-services-secretary-doesnt-understand-what-insurance-is
You say there is no connection between the amount paid by the individual and the benefits consumed. I say there are numerous, significant connections. Plans with higher premiums include more “free” or discounted benefits. Individual subscribers will consume more of these discounted benefits. Cheaper plans don’t cover as much. Individuals will consume less or none of these uncovered benefits. You would do well to consider what other connections exist. Is it a desirable that current or future “health insurance” benefit consumption be completely disconnected from funding? How might that play out?
Fair enough, it was wrong to say there was “no connection”, but the connection is clearly far too loose to describe the arrangement as one of prepayments. I don’t think the McArdle op-ed made a convincing case for that view either. She just declared it.
I’m not suggesting current or future “health insurance” benefit consumption be completely disconnected from funding. Any scheme that can achieve an equilibrium would have to incentivize lower and more cost effective consumption in order to work. However, suggesting a more rational form of real insurance will solve things seems to me to be a gross oversimplification of the challenges here.
Isn’t that fact that we have “medical services with high costs and low benefits” simply the result of 3? When someone else is paying cost/benefit ratio is meaningless.
Yup. When the consumer is largely divorced from the cost of a product or service, he spends less wisely, less prudently and consumes more carelessly than when his own money is being spent…
Health care is quite different than many/most other goods – there’s no apparent[1] investment than can be made to increase the supply of doctors. I say that – France nationalized medical education and seems to do okay.
I just hesitate to equate nationalization with “investment”.
[1] perhaps a combination of “Walmart-ization” and the the Henry Kaiser approach could be used, but isn’t. So this isn’t “apparent” but a convenient fiction.
“There is nothing intrinsic to health care that makes it impossible for buyers to pay sellers directly. It is a cultural choice.”
Yeah, except for the simple fact that there would not be enough time in the day for buyers and sellers to make their deals with each other, not to mention that one side has no basis of knowledge of what they should buy.
Good thing you know how a car works so you can decide what to do when it doesn’t work right.
“Yeah, except for the simple fact that there would not be enough time in the day for buyers and sellers to make their deals with each other”
Why not?
“not to mention that one side has no basis of knowledge of what they should buy.”
As oppose to all the other commodities people buy? Do people really know much more about 90% of the other things they purchase than healthcare?
And why would our central planners have a better basis for knowing what we should buy?
Arnold,
Here’s a response to Cochrane by Noah Smith… http://noahpinionblog.blogspot.com/2017/09/handwaving-on-health-care.html
Maybe you could respond to it to.
” What Americans think of as “good health insurance” is the opposite on all counts. I call it “insulation” rather than insurance, because it insulates people from having to make even small-dollar payments.”
We’ve a perfectly good word for this, “assurance.”
Assurance is a means of, possibly tax privileged, saving for high probability events. Insurance is a method of, well, not saving but providing for, low probability and expensive events. Fire insurance for a house is insurance, burial insurance, given the low probability of being lost at sea, is actually burial assurance.
Health care is both. That appalling cancer that the new drug is $475k for, the scraping up off the road and 12 months in ICU as a result are both low probability events. Insurance is the right model here – and we’ve got it, catastrophic insurance.
What ails US health care more than anything else is that things which are assurance – annual blood tests, contraception for the majority of a woman’s fertile life, shots for the kids, are dealt with through an insurance, not assurance, model.
I don’t say this is all of it, but splitting out the two would help. Catastrophic, even government run (as Brad Delong has suggested) insurance plus those medical savings accounts for the assurance. Will never happen of course but it would help.
Why does government need to be involved with either? Catastrophic insurance is actually the cheaper and more prevalent product; government would surely reverse those qualities.
Assurance is a savings issue like retirement savings. Again, easy to accomplish with no government interference…
To give you a foreign POV (Germany) for the 5 Pts by Mankiw:
1. But this is true in almost all markets. Government always has an interest about the outcomes. This is true for Airlines, Car Market, energy market and others. Rarely does this improve the situation, always does it make it more costly. So in my opinion this is not a point specific for health care markets.
2. Well how many people do know what they are getting when it comes to car services? I believe 80-90% of the US population do not know how a turbo-charger works or a dual clutch transmission. Yet we go to a service provider (or two for cost comparison) and select what we want. This is also a point he makes elevating him to a position of omnipotence compared to other people. F.e. there are people who believe to know whether they need a vaccination & if Mankiw would tell them that they dont know what they are doing, I think there would be some strong worded feedback.
3. Yes, this is true for many countries. Yet in Germany there is the private health care sector where I as a patient get the total costs & have to pay it, if I dont involve my insurance. For all routine operation up to a certain price point, I never do & sometimes I even argue about the necessity of procedures to see whether there is a good reason for it. So this is mostly dependent whether you are having a health security sector or a health insurance sector.
4. Yes, but this falls into the category of Pts. 1 and is entirely dependent on the government regulation of the health care sector & not the health care market per se.
5. True, but also only if Pts. 1 – 4 are fixed by the government. So, also only if you see “government universal health care” as the unwritten basic rule and fixture of health care.
To me, any discussion of health insurance should be joined with
a discussion of licensing of medical doctors, pharmacists
and other health professionals. My intuition tells me they probably
interact with each other?