Mis-education of health care economics

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.