Everybody Likes Free Beer

There has been quite a bit of comment on this graph of rising healthcare costs from the Kaiser Family Foundation:

so I thought I’d put my oar in if only to question some of the other comments about it and raise some questions of my own.

Matt Yglesias titles his post on the graph “Consumers Like Buying Health Care Services”. That may or may not be true; I don’t believe you can make that determination from this chart. However, the remark does bring up some useful distinctions. “Buyers” are people who lay out money for something (just as “taxpayers” are people who actually pay taxes). In the United States and, I believe, all of the countries in that chart, consumers and buyers are two different groups of people, i.e. for a sizeable chunk of consumers their healthcare is heavily or entirely subsidized.

There are actually three components of any purchasing transaction: the buyer, the individual who makes the purchase decision, and the end consumer. They may be the same person; they may be three different people. So, for example, when I was very small (well over a half century ago) I may have eaten the chocolate Easter bunny (consumer) but my mom bought it (purchase decision) and my dad paid the bill (buyer).

Healthcare is a bit like that. Patients are, in general, neither the purchase decision-makers nor the buyers. Those roles are filled to some extent by physicians and insurance companies (and employers) or the government, respectively. Efforts at reducing costs follow that transactional process: they are targeted at unifying these roles and take different tacks depending on the ideological preferences of the proponent. So, for example, the Ryan plan is an attempt to make consumers more responsible for paying their own bills under the (in my belief) incorrect apprehension that if healthcare consumers and healthcare buyers are one and the same that the consumers will behave more prudently. However, it ignores that the role of consumer and decision-maker are also distinct.

The ACA via its review board strategy attempts to unify the decision-maker role with the buyer role. I believe it will be frustrated in that by healthcare consumers and by the sheer scope of the task: I don’t believe there are enough utterly unnecessary or provably futile procedures performed to achieve the necessary cost savings.

All that I think can be concluded from the graph are that a) healthcare costs for the selected countries in the graph are all rising at an unsustainably high pace and b) our healthcare costs are enormously higher than those of the other countries in the graph.

Now I’ve heard it argued that healthcare is a superior good and that as incomes rise more will be spent on healthcare. I think that argument is largely hooey for reasons largely along the lines of the transaction process I’ve outlined above: the consumers aren’t the only ones making the decision process and the consumers are insulated from both the decision-making and buying roles. It may be true that healthcare is a superior good; I just don’t think you can make that determination based on rising incomes and rising healthcare costs. The rising incomes and the rising consumption are on the part of overlapping but different groups. Is the theory of economics under which when party A says that party B must consume more X and it will be paid for by party C the theory of superior goods? I don’t think so.

Here’s my question: how much do the very rich (where most of the income growth in the United States has come from) spend on healthcare? Has their healthcare spending on themselves risen at the same rate as their incomes, at a lower rate, at the general rate of cost increases in healthcare, or not at all?

And the graph itself does bring up a question for me. Healthcare, as noted above, is hardly a market at all but some of its aspects are more market-driven than others. So, for example, GPs are more portable than medical specialists like, say, cardiologists or neurosurgeons. When physicians move from country to country it tends to be as GPs. And the median wages of GPs are more similar from country to country than, say, the median wages of cardiologists.

As is obvious from the chart the U. S. is the highest payer among the countries selected for it. To what extent does the price paid by the highest payer push up the prices for the other countries in the chart? Unless the answer is “not at all”, the perverse U. S. healthcare system is increasing healthcare costs everywhere.

Follow-up question: to what extent is that offset by the higher R&D costs that the U. S. is paying? What’s the relationship between costs and benefits?