Megan McArdle muses over why healthcare and education are so expensive:
So how do we explain health care and college cost inflation? Well, health care economist David Cutler once offered me the following observation: In health care, as in education, the output is very important, and impossible to measure accurately. Two 65-year-olds check into two hospitals with pneumonia; one lives, one dies. Was the difference in the medical care, or their constitutions, or the bacteria that infected them? There is a correct answer to that question, but it’s unlikely we’ll ever know what it was.
Similarly, two students go to different colleges; one flunks out, while the other gets a Rhodes Scholarship. Is one school better, or is one student? You can’t even answer these questions by aggregating data; better schools may attract better students. Even when you control for income and parental education, you’re left with what researchers call “omitted variable bias†— a better school may attract more motivated and education-oriented parents to enroll their kids there.
So on the one hand, we have two inelastic goods with a high perceived need; and on the other hand, you have no way to measure quality of output. The result is that we keep increasing the inputs: the expensive professors and doctors and research and facilities.
While that’s probably a better explanation than Ezra Klein’s, which boils down to that both are necessities, or “Baumol’s cost disease”, I think that any good explanation for why healthcare and education are so expensive needs to explain why both are much more expensive here on a per capita basis than anywhere else in the world.
One thing that Megan might add to her model is that both healthcare and education are provided artisanally, despite a paucity of evidence that is the most effective approach, and the artisans have been left in charge of determining what should be provided and how it should be provided. There’s also a widespread delusion in the United States, no doubt a triumph of marketing, that all sorts of goods but particularly healthcare and education, are luxury goods and must necessarily be better the more you pay for them.
Costs will never be controlled as long that’s the case, particularly as long as those costs are not borne directly by the consumers. That’s the acorn in the prescriptions of the privatizers.
why healthcare and education are so expensive</i.
You also have a very basic macroeconomic effect. Most products require far fewer workers to produce today than in the past. That includes everything from cars to food. However, education and healthcare are still made by hand, essentially one at a time. That means as overall productivity has increased, productivity in education and healthcare has not.
It's the same reason why few people have cooks and maids. While in the days of Downton Abbey, workers were content with room and board and a tuppence, the same workers can now expect much higher wages along with healthcare and retirement benefits.
The costs are high because the practitioners have to be certified (licensed) by the gummint. That’s the reason haircutters, plumbers, electricians and lawyers cost a fortune, too.
Fortunately, the gummint hasn’t gotten around to licensing computer designers or programmers, and especially hookers, or we’d be paying a fortune for our major pleasures, too.
Milton Friedman explained it all in Free to Choose.
“There’s also a widespread delusion in the United States, no doubt a triumph of marketing, that all sorts of goods but particularly healthcare and education, are luxury goods and must necessarily be better the more you pay for them.
Like luxurious bags of saline solution: How to Charge $546 for Six Liters of Saltwater.
Because both are managed and financed less directly by government here than they are in most western nations?
So. . . the costs are borne more directly by consumers in those countries where healthcare and education are far cheaper? Aren’t they in fact borne less by consumers? If that’s true, whence the assumption?
Let me try to express what I’m getting at a bit more clearly, Michael. Healthcare costs are rising everywhere at an unsustainable rate. Not just here. Everywhere. They are rising faster here. But France’s and Germany’s healthcare costs are rising at an unsustainable rate as well.
If we were to constrain our increases in costs only to the level that France’s costs are rising, it would still be too fast.
There are only two ways to constrain the increase in healthcare costs: either by market forces or administratively. Market discipline isn’t operative and I don’t believe it can be made operative in a way that’s compatible with reasonable standards of public health.
We have shown no will to constrain healthcare costs administratively. The annual “doc fixes” demonstrate that conclusively.
But the privatizers are right on one thing: if we could impose market discipline it would constrain costs. But we aren’t and we won’t so it can’t.
Okay, but one of those is a moral impossibility and the other is a political difficulty. I choose B.
And if you offer me a choice between unsustainable over the next 10 years and unsustainable over the next 30 years, again, I’ll take B.
As a wise man named Schuler once crystallized for me: That which is unsustainable will not be sustained. The preferable means of adapting to that impending unsustainability would be government action. Impossible so long as one major political party still swore fealty to the ‘let ’em die’ option. (By the way, that remains the GOP ‘plan.’)
Which is why it was, in my opinion, such an important first step to move this decidedly into the federal government’s basket of worries. That has now been accomplished, and that is why the Republicans, in a panic, have voted 40 times to repeal Obamacare. They don’t fear it will fail, they’re terrified it won’t.
They’ve seen how quickly their natural constituents (old farts) became addicted to Medicare and now Medicare Part D. They know full well that people will embrace adult child coverage and pre-existing conditions coverage and soon, exchanges.
Once the government takes on that responsibility, the battle will shift to making it work better. But the first step was necessary. It was what could be accomplished under the circumstances — not the optimum, but the possible.
1) It is not licensing. Care costs a lot less everywhere else, licensed or not.
2) McArdle forgets that there are close to perfect substitutes for food stuffs and drinks. Asparagus too expensive? Buy broccoli.
3) We have the most market based system in the world. We are the most expensive. Number two in expense is Switzerland, the second most market based system. Probably just a coincidence.
4) Medical technology doesnt mature, for the most part, like other technologies. Some of that is churning for money, but some of it is real changes in the tech.
5) If we could impose market discipline, I think it likely that we would see fewer and fewer people able to afford care. You pretty much need to eliminate insurance if you want to have markets work.
Steve
That’s my take, too, steve, which is why I don’t support it as, say, Steve V. or Drew would. However, unlike you and Michael, I don’t see the PPACA as a step in the right direction but as, at best, a step sideways, putting off the reforms that are necessary until some time in the future when we’ve done more damage to our economy and the entrenched interests preventing reform are even more determined.
I guess we can never trust the people to make choices for themselves. Only big government can be the great equalizer, the ‘Big kahuna’ who is the know-all, be-all for everyone’s needs, ambitions, lifestyles and so on.
I think steve’s (3) is debatable; different systems have different levels and places where market, as opposed to state, controls dominate. I don’t think we can make blanket comparisons. We may not have the right mix, and I do not believe the United States will go to far from a mixed economy system without extremely bad outcomes.
And I think the metric is not correct. The U.S. is a relatively wealthy country with relatively liberal immigration policies. It will spend more on healthcare than other OECD countries that are poorer and more discriminatory, regardless if we find an optimal system. I think the question is whether the healthcare system we have is sustainable for our economy. I can google questions being raised in other OECD countries concerned about whether their healthcare system is sustainable for their economy (largely in light of the worldwide economic downturn) — nobody appears to be as wealthy as they thought they would be.
steve says:
1) It is not licensing. Care costs a lot less everywhere else, licensed or not. WRONG: care costs less in Germany, for example, but the care is generally much inferior.
2) McArdle forgets that there are close to perfect substitutes for food stuffs and drinks. Asparagus too expensive? Buy broccoli. WRONG: there are perfect substitutes to care in the USSA. In Thailand, India, Hungary, Czech Republic, Mexico, and other countries, you can get equivalent or better medical and dental care for less on a PRIVATE market. (cf. Medical Tourism)
3) We have the most market based system in the world. We are the most expensive. Number two in expense is Switzerland, the second most market based system. Probably just a coincidence. WRONG, a coincidence for sure, and I think you are not considering the pure market-based (since there is no real socialist alternative) systems in much of Africa, which are very cheap. Furthermore, you are not considering the systems like Brazil’s, where you pay nothing for gummint bad care, but where anyone who has any money or sense pays privately on the open market. Same thing in Germany, as well, where I, as a consultant or even high wage-earner was able to opt out of the health-insurance system and pay on the private market (“freiwillig versichert”).
5) If we could impose market discipline, I think it likely that we would see fewer and fewer people able to afford care. You pretty much need to eliminate insurance if you want to have markets work. RIGHT, you have to eliminate insurance, and Walmart has already opened clinics to treat the uninsured on a market basis. What we need is to kill Obamacare and institute Walmartcare.
Steve
steve says:
1) It is not licensing. Care costs a lot less everywhere else, licensed or not. WRONG: care costs less in Germany, for example, but the care is generally much inferior.
2) McArdle forgets that there are close to perfect substitutes for food stuffs and drinks. Asparagus too expensive? Buy broccoli. WRONG: there are perfect substitutes to care in the USSA. In Thailand, India, Hungary, Czech Republic, Mexico, and other countries, you can get equivalent or better medical and dental care for less on a PRIVATE market. (cf. Medical Tourism)
3) We have the most market based system in the world. We are the most expensive. Number two in expense is Switzerland, the second most market based system. Probably just a coincidence. WRONG, a coincidence for sure, and I think you are not considering the pure market-based (since there is no real socialist alternative) systems in much of Africa, which are very cheap. Furthermore, you are not considering the systems like Brazil’s, where you pay nothing for gummint bad care, but where anyone who has any money or sense pays privately on the open market. Same thing in Germany, as well, where I, as a consultant or even high wage-earner was able to opt out of the health-insurance system and pay on the private market (“freiwillig versichert”).
5) If we could impose market discipline, I think it likely that we would see fewer and fewer people able to afford care. You pretty much need to eliminate insurance if you want to have markets work. RIGHT, you have to eliminate insurance, and Walmart has already opened clinics to treat the uninsured on a market basis. What we need is to kill Obamacare and institute Walmartcare.
I think that’s because you’re a policy guy and largely apolitical. I’m a politics guy. Politics is the art of the possible not the perfect. I think politics made perfect absolutely impossible, but the sidestep made “better” a possibility in the future.
I’d analogize it to DADT, or Obama’s “evolution,” which lots of people despised, but I thought were necessary sops to those who get there eventually but more slowly than I’d like. I think 20 years from now we’ll see the ACA as politically clever, though I imagine we’ll have replaced most of it.
Jan:
In some cases, yes. Unless you’re going to build your own highways, inspect your own food and defend yourself from bad guys.
Going to a reductio ad absurdum weakens your point rather than strengthening it. We all know and accept that government is necessary for some things, less relevant for others. We’re down to discussing what precisely belongs in Column A rather than Column B.
Why would health care belong in the Free Market column as opposed to the government column given that every single developed nation on planet Earth has A) more government involvement and B) Less expensive health care with C) roughly equal and in some cases superior outcomes? And why, given that Medicare is actually our most efficient health care delivery mechanism, would we leap to the assumption that our own government is not up to the job?
You have ideology, but no logical argument.
I see no empirical evidence that the discussions prior to the enactment of the PPACA, the PPACA itself, or the discussions afterward have moved the “Overton window” in the direction you’re suggesting. The opposite if anything.
I think the reasons for that are that you can’t do that using the approach used by the PPACA—mollifying powerful “stakeholders”, buying off potential adversaries.
I also think that something you’ve frequently asserted—the PPACA has established a right to healthcare—is empirically wrong and I doubt that many people see it that way. It has established a right to healthcare no more than the Social Security Act established the right to any particular level of benefits (or any benefits at all) and the courts have repeatedly found that not to be the case.
At most it has established a right to healthcare insurance and that has always been the case. The problem with healthcare insurance has always been affordability and when the dust has settled the PPACA will probably only have lowered the cost of insurance in a relative handful of states, e.g. California, New York, Massachusetts, that had already enacted PPACA-like provisions and had healthcare insurance that was more expensive than in most other states to start out with while raising the cost of insurance in others.
In other words working around the margins, changing very little, kicking the really tough decisions down the road.
“care costs less in Germany, for example, but the care is generally much inferior.”
That is what some people claim, but there are no data to support that claim. You need to understand the difference between survival rates and mortality rates and you will be better able to understand why care in Germany and the US is about on par, with theirs better in some ways.
“. WRONG: there are perfect substitutes to care in the USSA. ”
You miss my point, which I could have made more clear. If a doc orders an MRI for your kid who is having headaches, there really isnt much of a good substitute. You might be able to get it done more cheaply at some places, but there is no substitute for the test itself. (Medical tourism is not practical for most people.)
“WRONG, a coincidence for sure, and I think you are not considering the pure market-based (since there is no real socialist alternative) systems in much of Africa, which are very cheap. Furthermore, you are not considering the systems like Brazil’s, where you pay nothing for gummint bad care, but where anyone who has any money or sense pays privately on the open market.”
Sure. I get lazy and irritated that I have to constantly add in the caveat of first world quality medicine. You can certainly go to Africa, and get what you pay for. I would also agree that we can cut the costs of health care if limit it to the few people who can pay for care out of pocket. I think I made that clear in #5.
Steve
I don’t really comment on these threads anymore due to personal & job-related reasons, but will just say that in my experience as someone who increasingly works with primary care providers & systems, their interest in solutions for implementing value-based care and higher doc productivity has gone WAY up since passage of the PPACA.
I don’t think that means the law is necessarily responsible – the financial slowdown and the aging population are both powerful factors in their thinking. And my (much more limited) experience with specialists suggests they may be going in the opposite direction. Nonetheless, my perception is that some trends may be going the right way.
“but will just say that in my experience as someone who increasingly works with primary care providers & systems, their interest in solutions for implementing value-based care and higher doc productivity has gone WAY up since passage of the PPACA.”
Tom,
In my experience, change is very difficult to implement, unless there is some impending crisis demanding something ‘new’ happen to address the crisis. IMO, the enactment of the PPACA has become such an instrument causing HC providers and insurance companies to reevaluate how they deal with HC costs and delivery systems. It may be too little too late, but there is definitely genuine conversations going on in the HC industry. because of all the dire feelings and predictions that have been generated by this poorly crafted and unpopular HC law.
Again, we’re speaking different languages. As a matter of politics, of perception, of where this goes next politically, the matter has been moved from “market” to “government” in people’s minds. Were that not the case, why would Republicans be panicking? You act as if a legal definition is the point, it’s not.
Social Security established a right to a decent retirement. You can argue all day long that it didn’t establish any such thing, legally, doesn’t matter. The reason politicians of both parties jump through hoops on SS is because a de facto if not de jure right has been established. Same thing here.
Look at the specifics. Do you think the GOP would want to break out a separate piece of legislation to eliminate the adult child coverage? Not a chance in hell, because what has been given is not easily taken away. Ditto the pre-existing conditions fix. The fact is the biggest parts of the ACA, the ones people know about and care about, are not only popular, they have already morphed into “rights.”
Now, soon, people in those not-exactly-negligible states of CA and NY and many others will be getting discounted, subsidized health insurance and that, my friend, will also become a “right.”
Ten years from now GOP congressmen will be falling all over themselves trying to make various bits of the ACA work better because their constituents will demand it. It will be a government matter, with government solutions, and it will be as impossible to attack as SS or Medicare.
“Social Security established a right to a decent retirement.”
SS established less a right than a ‘perception’ of having one’s retirement taken care of, when they reached a certain age — 65. Unfortunately, it was a misnomer in that people would live longer and the money put into the system could not sustain the program in the long term. Also, the SS stipend would prove to be lacking in covering the every-increasing cost of living, even with COLAs added. Finally, SS has given a false sense of financial security, with implications that people would not need to actively save for their old age, and simply rely on SS forced deductions to cover the entire bill of their retirement. Current charts shown that less than 50% of senior age people have even saved $12,000 for their retirement needs. That’s pretty sad, IMO.
” Do you think the GOP would want to break out a separate piece of legislation to eliminate the adult child coverage? Not a chance in hell, because what has been given is not easily taken away. Ditto the pre-existing conditions fix.”
Those two pieces of the ACA pie are what dems always point to as irrevocable. I’m not so sure. But, even if they have been fully implanted in people’s minds as something they don’t want to live without, they can easily be incorporated into another HC reform act, one that holds far less HC land mines, and imposes no hardship on employment growth.
@Tom- I am one of those specialists. We are seeing quality and productivity emphasized like never before. I have over 40 years in medicine in some capacity. This is the first time I have really seen this kind of emphasis on costs AND quality at the same time. It is mostly being spurred by the ACA.
Steve
I suspect that the PPACA will turn out to be a giant turd, and the diamonds in that turd will turn out to be corn in sh*t. As @Dave Schuler has pointed out, it is about insurance not health care.
For the SS analogy to hold, the SS Act would have required companies to have a pension for each employee, and people without a company pension would be required to have a 401(k) or IRA. There would need to be some type of 401(k)/IRA exchange where low or no income individuals could get a government contribution.
The Medicare/Medicaid/VA analogies fail as well. In the end, the lower income folks will get screwed, but the upper end people will benefit from it. Same outcome, different program.