Economist's View: Paul Krugman: Additional Notes on Gold-Plated Indifference
リンク: Economist's View: Paul Krugman: Additional Notes on Gold-Plated Indifference.
Paul Krugman emails more background on his column today. This appears in his Money Talks column and explains some of the economics behind his opposition to the Bush proposal:
Additional Notes on 1/22 Column, "Gold-Plated Indifference": As is often the case, I couldn't fully explain my views in the space available. So I'd like to explain at a bit more length why I'm so opposed to the direction Bush is going.
Basically, everyone agrees that health care is a messed-up sector. But there are two opposing doctrines about what the problem is.
I believe - and the evidence, I think, supports this belief - that the big problem is "adverse selection." An insurance plan offered to everyone at the same rate would be a great deal for relatively sick people, a poor deal for the healthy. So one of two things happens to private insurance. Either plans go into the "adverse selection death spiral," as sick people flock in, driving up rates, driving out more healthy people, and so on. Or insurance companies spend a lot of the money they receive in premiums screening out "high-risk" clients, so that the system has huge overhead and the neediest cases are excluded.
The clean solution to this problem is for the government to provide insurance to everyone. Other rich countries do that. So do we, for older Americans, veterans, and others. Actually, government health insurance is already bigger in America, in dollar terms, than private insurance - it covers fewer people, but that's because the elderly, who cost more, are handled by the government.
Employment-based insurance is a distant second-best, but better than nothing. Large employers, in particular, can spread risk widely, creating the kind of risk pool that dies from adverse selection in the individual market. And the tax preference for employer-based care, more or less by accident, has helped sustain this imperfect fix - which is why I'm highly skeptical of anything that might erode that preference.
What conservatives in the "consumer-directed" health movement believe, however, is that the big problem is "moral hazard" - people consume too much medical care, because someone else pays for it.
Now, this isn't entirely wrong. People probably do undergo expensive surgery with questionable effectiveness, and so on, because it's not out of pocket. Curbing that was supposed to be the point of managed care. But managed care didn't deliver, because people - rightly - don't trust private HMOs to make life and death decisions on their behalf. Successful managed care only takes place in institutions like the VA where there's more trust in the institution's motives.
The whole consumer-directed thing is, in my view, just an attempt to avoid facing up to that failure. Rather than admit that private-sector institutions aren't any good at rationing, conservatives now say that patients should be induced to ration their own care by being forced to pay more out of pocket. And that's where Bush's attack on gold-plating comes from: reduce the tax advantage of employer-based care, and deductibles and co-pays might go up.
The trouble is that the big money is in stuff like heart operations - areas where (a) people can't pay out of pocket in any case - they must have insurance or go untreated - and (b) people really aren't sufficiently well-informed to make the decisions. Yet the whole focus of consumer-directed doctrine is on things like routine visits to doctors' offices and annual dental checkups. It's going where the money isn't - because the advocates just can't believe that markets aren't always the answer.
Now here's the thing: in the name of consumer-directed health care theory, Bush is proposing changes that would essentially encourage people to move into the individual market - which wastes a lot of money, and doesn't and can't work for those most in need - while undermining the employer-based system, which isn't wonderful but is still essential. In particular, healthy high-income people would be encouraged to drop out of employment-based plans, leaving behind a sicker risk pool, driving up rates, and pushing employer-based care in the direction of an adverse selection death spiral. The plan we're supposed to learn about tomorrow doesn't sound big enough to have catastrophic effects, but it's a step in the wrong direction.
Posted by Mark Thoma on January 23, 2007 at 03:33 AM in Economics, Health Care, Policy | Permalink | Comments (24)
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The whole consumer-directed thing is, in my view, just at attempt to avoid facing up to that failure. Rather than admit that private-sector institutions aren't any good at rationing, conservatives now say that patients should be induced to ration their own care by being forced to pay more out of pocket.
Krugman misses by a mile. The whole problem is that conservatives believe in "I got mine, screw you".
Conservatives believe in the market? Hell will freeze over before that. Conservatives believe in conserving their power and wealth, at any cost. That's the beginning and end of their creed.
Posted by: billy | Jan 22, 2007 3:51:26 PM
Billy,
The idea that conservatives are the only base whose members are susceptible to corruption is both infantile and unhelpful to the larger debate.
Posted by: Patrick | Jan 22, 2007 4:02:00 PM
The idea that conservatives are the only base whose members are susceptible to corruption is both infantile and unhelpful to the larger debate
The idea that conservatives are amenable to a debate, open to reason, is hopefully an idea that's progressing along in the same direction as the 'flat-earth' idea. Or that someone who's a member of the flat earth society is due a debate.
- Debate SS reform with these thugs who have been trying to destroy SS for almost a century?
-Debate health care reform with these thugs whose primary aim in reform is to make sure that the insurance companies make out like bandits? Like Medicare D?
It would be fun to see things happening, and the conservatives all pissed off because it was not debated.
Oh, what the heck - Let them have their debate, as long as they get ignored when things get done.
Posted by: billy | Jan 22, 2007 4:36:26 PM
Mark,
I believe that Paul has raised many important points in his follow-up. I am also interested in your opinion and that of Paul Krugman regarding the following related post at Vox Baby in which Andrew challenges one of Paul's original statements in his column.
Andrew Samwick, Vox Baby, Monday, January 22, 2007, 2:55 PM:
"Pecuniary Externalities
For what it's worth, I think Paul Krugman makes some good points about the problems inherent in using the tax code to encourage or discourage the purchase of health insurance in his column today (original here, reposted here). I obviously don't sign on to his characterizations of "Bush and his advisers," and he stops short of his usual call for a single-payer system, so there's no reason to get into that today.
Were it up to me, I'd completely eliminate the exclusion of health insurance premiums from taxable income. That levels the playing field between premiums and other expenses (as the Bush plan tries to do), but it does so without forcing the tax code to be the arbiter of whether something was a legitimate health expenditure or not. It also raises tens of billions of dollars in additional tax revenue that can then be directed to all the other things the government needs to pay for.
However, I found this statement (highlighted in bold) in Krugman's column to be odd:
While proposing this high-end tax break, Mr. Bush is also proposing a tax increase — not on the wealthy, but on workers who, he thinks, have too much health insurance. The tax code, he said, “unwisely encourages workers to choose overly expensive, gold-plated plans. The result is that insurance premiums rise, and many Americans cannot afford the coverage they need.”
Again, wow. No economic analysis I’m aware of says that when Peter chooses a good health plan, he raises Paul’s premiums. And look at the condescension. Will all those who think they have “gold plated” health coverage please raise their hands?
Is he kidding me? That is almost the definition of a pecuniary externality. Wikipedia describes it as follows:
A pecuniary externality is an externality which operates through prices rather than through real resource effects. For example, an influx of city-dwellers buying second homes in a rural area can drive up house prices, making it difficult for young people in the area to get onto the property ladder.
This is in contrast with real externalities which have a direct resource effect on a third party. For example, pollution from a factory directly harms the environment.
Both pecuniary and real externalities can be either positive or negative.
So in the President's defense, there's a very simple argument to be made here. When one person feels inclined, for whatever reason, to purchase more health care services, that puts upward pressure on the price of health care services (if the supply curve is not flat) and thus the cost to everyone else in the market. Normally, we don't pay any attention to this, because that is precisely the mechanism by which a competitive market achieves economic efficiency.
The President is referring to the pecuniary externality generated by a tax distortion in the treatment of health insurance, which interferes with a market achieiving economic efficiency and thus should concern us. It goes as follows. Premiums are fully excludable from income tax, but out-of-pocket expenses are not tax advantaged. That favors health insurance arrangements in which there are low deductibles and high premiums. Such arrangements can lead to higher utilization of health services, since the insured faces no financial cost at the margin once the low deductible has been met. (This is just a standard moral hazard argument.) Krugman may not believe that the relevant behavioral effects are large here, but he's on shaky ground with his "Wow ... no economic analysis ..." comment.
For more on pecuniary externalities, I came across this source."
Posted by: Movie Guy | Jan 22, 2007 4:58:12 PM
Off topic, but Setser has one today on SS. Its titled
"Here is a scale variable for you .... Social Security's assets increased more than the combined assets of Saudi Arabia and Russia in 2006"
http://www.rgemonitor.com/blog/setser/174085
Posted by: billy | Jan 22, 2007 5:05:35 PM
For those who are serious about health care statistics, Kaiser is an excellent source. Perhaps the best source available.
The Kaiser Family Foundation - Health Care
Kaiser- Snapshots: Health Care Costs
Kaiser - Trends and Indicators in the Changing Health Care Marketplace
Posted by: Movie Guy | Jan 22, 2007 5:09:24 PM
Billy: From where I'm standing, you are right on about the conservative's dogma. They only care about those who pay their bills.
Again, I'll state that nothing will ever get done, not even half right until we get some meaningful, serious and draconian campaign finance reform. Nothing... It's not an issue of conservative or liberal each group has their song and dance that they perform on behalf of the special interests that they represent...
It's all about commerce, corporations and the "corporate elite", the "Black Matter" influence in the Beltway. It is impossible not to fall under their influence. It does not matter if you are a conservative or a liberal or a progressive. They control the media and the money, they are commerce, they destroy the environment for a fee and they couldn't care if you live or die, or if your entire family is wiped out so long as they can collect a fee.
Krugman is a smart guy and I respect him for his courage, but in this case he's a nickle short which might as well be a trillion short. Bush's proposals are nonsense, fodder for distration, and not worthy of response.
We need to "Nationalize" our entire health care system. Just like the public school system, it is far better to have a bad one than none at all. And even if it starts out bad, it will evolve and improve with time. Or not, but it would still be better than what we have now.
And, that's the way it is....
Best regards,
Econolicious
Posted by: ECONOMISTA NON GRATA | Jan 22, 2007 5:29:29 PM
Paul Krugman:
'What conservatives in the "consumer-directed" health movement believe, however, is that the big problem is "moral hazard" - people consume too much medical care, because someone else pays for it.
'Now, this isn't entirely wrong. People probably do undergo expensive surgery with questionable effectiveness, and so on, because it's not out of pocket.'
Now, what expensive surgery do people with health insurance undergo here that they do not undergo in France or Japan or Australia? I have no idea what this refers to. Like, say, surgery for heart disease or cancer? Like, say, for breast cancer when you are trying to, say, live? I do not understand.
Posted by: anne | Jan 22, 2007 5:44:04 PM
Other than cosmetic surgery, which is not covered by insurance, I cannot imagine what expensive surgery is gobbled up because we are fortunate enough to have health care insurance. Phooey.
Posted by: anne | Jan 22, 2007 5:46:45 PM
Conservatives spend lives worrying about everyone's morality but their own. Worry about the moral hazard of being watching someone you love suffer. Fools.
Posted by: anne | Jan 22, 2007 5:49:15 PM
As long as a third of health care spending is due to hospitalizations, I am not sure moral hazard arguments about comprehenseive health care benefit designs, and tax subsidies mean very much. What health insurance plan would exclude hospitalization for heart attacks, strokes, congestive heart failure, etc? And even if one did omit that out of their new lean mean comprehensive care policy, federal and state law often mandates some kind of treatment if a person meeting certain criteria manages to get inside the emergency room. So if an overweight diabetic smoker with congestive heart failure, and some digits rotting off gets to the emergency department door, that person gets some treatment. Those kind of people are one of the major money sinks of modern medicine in the US.
Also doctors are socialized to provide care when 'needed' in the US now, and they will game diagnoses of borderline cases to keep them in the hospital, or find some kind of funding for treatment. It would be nice to say that removing tax subsidies for comprehensive care would improve "market efficiency." But what does that mean when society has made the decision that everyone who is in bad-off-enough health gets treated if they can crawl through the door or make it to the ED alive in an ambulance? The days of coughing up some cash before the doctor will make a housecall are over, probably for good. But maybe fixing that is the next phase of the Bush proposal.
Where are the recent expenditure increases? Mostly drugs and administrative costs. Drug pricing in the US is a racket and if you doubt that, look at the stability of excess profits in that supposedly very risk drug industry, and the proliferation of me-too drugs, and patent extension gimmicks. The increase in administrative costs makes Krugman's point.
It would be nice to see the service breakdown of spending by the heavy vs. light spenders. I have not found those breakdowns, but they would be very interesting to see. I would bet that the heavy spenders (the 20% of population that account for 80% of the spending) have much higher than a third of their costs from hospital admissions) But I am not sure. The usual cost and utilization data you see don't answer the crucial questions.
Posted by: anon | Jan 22, 2007 6:36:32 PM
The ancient Yama Yoga were positive in their religious rules.
They said Do not Harm, as about as negative a religious tenet as they would hold.
They said things like live with want you need, no more.
Anyway, I enjoy seeing the helth system compared to a free market.
I have lots of money send me the deed to the Brooklyn Bridge too.
I will have some more abuse.
Health care. Someday we all will need it.
So, we do things to cover the risk. We buy insurance.
I see insurance as betting I will get sick and collect more thn I pay in. If a year passes when I do not get sick and have not gotten medical services back for my bet I lose.
If I win the bet the conservative say I succumbed to a moral hazard.
Okay, I really wnated to in an get put under by an anesthesiologist after soem nurse poked me a few times to many to start an IV.
Right.
I see health care and health insurance in the same light I see the casinos. You go in with the idea you can win and all the statistics say you lose.
There is no market it is a betting game!!
Which side is in the bed of the moral hazard, the casino or the health care consumer?
Posted by: ilsm | Jan 22, 2007 6:41:40 PM
Orthopedic surgery for old folks (hip replacement, etc.) would quality as good examples of moral hazard due to comprehensive health insurance. Procedures to correct vision problems in elderly. Urinary incontinence for elderly women, prostate treatment for old duffers. They are old farts and not productive workers anymore, so screw 'em. If you take that kind of elective surgery out, and let them pay for it themselves, or wait for years, that would reduce costs. But now much, especially now when diabetes, obesity and non-fatal ischemic heart disease are the health care growth sectors -those are where the likely big future increases in demand will be.
But, then we would have those horrible waiting lists for elective surgery like those socialized medicine countries do. Except it would be OK, see, because government tax policy bureacrats working through the private insurance market benefit design process and pricing would do the rationing, instead of health care bureaucracy rationers doing the rationing. I see it as six of one, and half dozen of the other.
Posted by: anon | Jan 22, 2007 7:05:53 PM
"Were it up to me, I'd completely eliminate the exclusion of health insurance premiums from taxable income. That levels the playing field between premiums and other expenses (as the Bush plan tries to do), but it does so without forcing the tax code to be the arbiter of whether something was a legitimate health expenditure or not. It also raises tens of billions of dollars in additional tax revenue that can then be directed to all the other things the government needs to pay for."
This with a tax break for the investor class as an offset?
Posted by: ken melvin | Jan 22, 2007 7:09:54 PM
Best insurance is to exercise, keep weight down, don't smoke and drink only in moderation, and light on the red meat, heavy on the fruits, nuts and vegetables and whole grains. Old folks who do that have about 1/4 the health care costs per year of survival than high risk groups of the smae age.
Healthy old people die pretty cheap. Unhealthy life-style chronic disease middle agers and "young" elderly eat up the bucks. Maybe we need "healthy habits" means testing. So you would have either public or private insurance nanny state.
Posted by: anon | Jan 22, 2007 7:10:54 PM
What is the definition of 'legitimate health expenditure' when there are legal constraints on who can be refused care when they get really messed up and manage to get to the emergency room or hospital while still breathing? I wonder what that might be? Any suggestions?
Posted by: anon | Jan 22, 2007 7:13:03 PM
Krugman says:
"... People probably do undergo expensive surgery with questionable effectiveness, and so on, because it's not out of pocket. Curbing that was supposed to be the point of managed care."
Since it has been discussed in the comments above, I should explain how this works in Austria. Here the basic problem of the health care system is that it can do too much, but this is not so because people consume "expensive surgery with questionable effectiveness". This is so because effective surgery cost so much. You see the >big money< is not in small operations or every day things (like treating the flue), but in big big things (like treating cancer. First of all I still have to see one humane being who out of his/her own free will undergoes cancer surgery, or takes any of the (very expensive) drugs prescribed there. (Usually people don´t regard this as being fun)
The problem is that we can treat many diseases whose name we didn´t know twenty years ago, and we can do this very effectively, but not cheaply.
(One example is the way ailments of nerves and arteries are diagnosed. One try (using all the fancy equipment available) cost approximately 20.000 Euro.)
It is wrong to say that the >big items< on the list are things not necessary.
Posted by: Maximilian Oberbauer | Jan 22, 2007 7:34:10 PM
Pharmaceuticals get a lot of blame for rising health care costs and the US prescription drug market has grown rapidly over the last decade or so but as a percentage of healthcare spending pharmaceuticals are relatively small and don't really account for the US overspend relative to other countries.
Pharmaceutical expenditures as % of total healthcare spending:
France 18.9
Germany 14.1
Japan 18.9
United Kingdom 15.8
United States 12.3
So the US spends the lowest percentage on pharmacueticals. The absolute per capita number is larger of course since the US spends around 15% of GDP on healthcare but given the above rations France and Japan probably spend comparable amounts.
But can 12.3% of healthcare costs be responsible for the US overspend? Even if we shaved off the 1.8% of GDP that is pharmaceutical spending, the US is still spending over 13% of GDP on healthcare compared to about 11% (including drugs) for the next highest spender.
It may also help put the problem into perspective to look at the historical shift in pharmaceutical expenditures. In 1960 when healthcare spending was only 5.1% of GDP, pharmaceuticals were 16.2% of the total. The pharmaceutical component declined as a percentage of the total, bottoming out in 1981-2 at 8.7% and after a brief recovery dropping to 8.5% in 1993-4. Since 1994 the share has expanded dramatically to 12.3% but is still below the levels of the 1960s.
Now one can argue whether this growth is justified based on the number of new therapies that have come to market but neither the comparative perspective, the absolute percentage of all healthcare spending nor the historical perspective suggest that pharmaceuticals are the decisive problem of the excessive spending in the US.
Posted by: yan | Jan 22, 2007 8:00:34 PM
Yan, just a little info:
I see Japan has about the highest number there. This doesn't surprise me. Doctors receive a percentage of the prescriptions they sell. Since what they charge patients is proscribed by the government, selling drugs is an attractive option.
I have very few complaints with the Japanese med system.
Posted by: elvis | Jan 22, 2007 8:20:48 PM
I think I read a study that said halth care input prices are higher in US than other countries: MD salaries, hosptital and clinic and million dollar machine capital costs, medical supplies. And those notoriously wasteful or miracle of capitalism marketing and administrative costs (which theyar are, depends on your point of view. Can't find the paper now, but higher input prices have something to do with it.
Drug costs are not the major component of expenditure levels, but they are the major component of the expenditure increase in health care. And it is the outlandish rate of increase that worries the US
Or at least the US claims to be worried about. I'm not so sure it really does since US policy has been to profit motive and free market health care up the wazoo over the last 25 years, so it has to be more better efficient than before, right? So what it the worry? It's a lean mean private market machine. And a powerful one that probably subsidizes government administrative pricing the provides public care at below cost (Medicare and Medicaid).
Posted by: anon | Jan 22, 2007 8:28:20 PM
Some more interesting stats on pharmaceuticals (from KFF so thanks MG):
Utilization: From 1994 to 2005, the number of prescriptions purchased increased 71% (from 2.1 billion to 3.6 billion), compared to a US population growth of 9%. The average number of retail prescriptions per capita increased from 7.9 in 1994 to 12.3 in 2005.
Pricing: Retail prescription prices (which reflect both
manufacturer price changes for existing drugs and
changes in use to newer, higher-priced drugs)
increased an average of 8.3% a year from 1994 to
2005 (from an average of $28.67 to $64.86), more
than triple the average annual inflation rate of 2.5%.
Profitability: From 1995-2002, pharmaceutical manufacturers were the nation’s most profitable industry. In 2003 and 2004 they ranked 3rd. In 2005 they ranked 5th, with profits (return on revenues) of 16% compared to 6% for all Fortune 500 firms.
Based on these three factors, utilization was probably the biggest contributor to rising prescription drug spending. Pricing is harder to talk about without knowing what percentage of the increases were due to new drug introductions. As for profitability, if it were 6% and not 16% that would shave off a mere .2% from the healthcare expenditures as % of GDP figure. I wonder what profit margins were like in earlier decades and whether 16% is really too high, as some insist, in an industry that is undergoing significant innovation.
Posted by: yan | Jan 22, 2007 8:44:09 PM
Yan, do you know when the laws changed about direct advertisement of drugs to consumers? Is it possible to see any effect of that in the consumption?
Posted by: Isabel | Jan 23, 2007 2:20:51 AM
This is interesting, I think:
I wonder how New Zealand is doing.
Posted by: Isabel | Jan 23, 2007 3:35:30 AM
"People probably do undergo expensive surgery with questionable effectiveness, and so on, because it's not out of pocket."
Again, this is conservative rubbish that Paul Krugman should be ashamed to have written, but Krugman is subject to the most mean-spirited criticism and even he may feel cowed at times. Nonetheless, find my the woman undergoing breast surgery as a moral hazard lapse. Rubbish.
Posted by: anne | Jan 23, 2007 4:26:38 AM
