The visible hand in economics

Archive for the ‘Health economics’ Category

Greg Mankiw reports that a lady in Britain was prevented from supplementing her state-provided healthcare with private care. Apparently the NHS favours equality over efficiency:

Officials said that allowing Mrs. Hirst and others like her to pay for extra drugs to supplement government care would violate the philosophy of the health service by giving richer patients an unfair advantage over poorer ones.

Clearly, this restriction on her ability to spend her money as she sees fit is not allocatively efficient. The policy is also likely to diminish the health of the population, as the rich are no longer allowed to boost their healthcare levels above what is offered by the government. That, in turn is likely to lead to a greater burden on the government run, public healthcare system.

The morality of equality must run strongly through the British government for it to prevent spending that would reduce the load on its own health funding. Mankiw has an interesting analogy for those who agree with the government’s policy:

Should a parent who hires an after-school tutor for his child be barred from sending the child to the public schools?

People are making a big deal about the fact that National wants to lift the cap on GP (general practitioner) rates. Now I know pretty much nothing about health policy, especially not New Zealand health policy, but I can see some of the merit in getting rid of the cap.

Now before you kill me let me make my case. I agree that in the short run the lift of rates will be painful in areas that do not have competition for GPs. GPs aren’t all going to rush into Otorohanga (small but beautiful country town ;) ) just because they hear that they can make some extra money there. Furthermore, there is a shortage of GPs, which means if we let them set prices they will have market power and they will set them above the market optimum. Beyond this people are also scared that if prices go up, poor people will not be able to afford health care, and in a society like NZ that is just not right. I agree that these points are highly relevant, but they are not the be all and end all of the argument.

We have a shortage of GPs. You increase the supply of GPs by increasing the return for people for getting trained and moving into that line of work. If we allow GPs to increase rates, then in the long run the supply of GPs will rise, and this is a good thing. Furthermore, if society is worried that poor people will not be able to afford doctors visits, why don’t we give them some sort of subsidy. If we subsidise the price for poor people, then poor people will be able to afford to see a GP, and GPs will still get their market rates.

Price controls are never a good policy. By keeping the price of visits to GPs artifically low we reduce the supply of GPs, by lowering the incentive of students to study and move into this type of work. By allowing market prices we can ensure efficiency. From there, subsidies and targeted assistance are the best ways to achieve our equity goals, not ad hoc price controls.

I generally enjoy The Economist’s blog, but I think they’ve taken their free-market philosophy a little far with their post on the “de facto monopoly of the American Medical Association in the distribution of licences to practice medicine.” Their claim is that the AMA extracts large rents from their monopoly and unfairly prevents other from practicing medicine. I don’t know what sort of rents doctors get from their education so I can’t comment on that. A more interesting question is whether it would be efficient to allow a deregulated market in medical practice.

Every time you go to the doctor you are, effectively, contracting for medical services. A well-known problem in contracting theory is lack of verifiability. The problem is that it is very costly to you to find out whether the doctor is providing you with high quality medical services. If you are not yourself trained as a doctor then you have to seek the opinion of someone who is in order to verify the quality of service you received. Even then, there is a question mark over the third party’s credibility: they may want to either protect the reputation of medical practitioners or, alternatively, destroy the reputation of competitors. Even the knowledge that you recovered from illness is not enough since this is a very noisy signal of medical quality. Without specialist knowledge it is impossible to know what the outcome would have been in the absence of treatment. The suggestion that consumers ought to have “choices over traditions of training and styles of care” suffers from the same problem. In the absence of highly specialised knowledge there is no way for consumers to verify the quality of each style of care.

There are two possible remedies to the problem of verifiability: information and regulation. Consumers can be informed by the AMA about the choices they face in a deregulated market or the market can be regulated. Unfortunately, it is simply not possible to become an expert on medical care by reading a couple of pamphlets. Placing the burden on consumers to choose wisely is unlikely to result in an efficient health care outcome. By contrast, regulation puts the burden of choice on experts in the field for whom it is far less costly to evaluate performance. It is quite possible that the rents that the AMA extracts from consumers are far lower than the costs to society of deregulation.

Over at Cato Unbound the health care debate rages on. David Cutler and Dana Goldman reply to Robin Hanson’s original article by almost agreeing with him. They both begin by acknowledging that much of our current health care spending is wasted. The gist of their criticism is that when you reduce health care consumption then you reduce necessary as well as ‘wasted’ health care. Consequently they call for increases in the effectiveness of spending rather than cuts to it. Note that Hanson never claims that the spending that does happen shouldn’t be controlled by doctors to ensure that necessary procedures still get performed.

Moreover, the criticism really seems to be an attempt to avoid the problem by simply wishing it away. Nobody denies that it would be nice if no health spending were wasted and it were all highly effective for treatment purposes: the fact is that it’s not and it probably never has been. As Hanson asks in his reply, “why must this distant possibility [of better health care] stop us from publicizing and acting now on our consensus that we expect little net health harm from crude cuts?”

Ezra Klein claims that some of the spending might be justified in order to raise peoples’ quality of life showing that we care. This might be a valid point, but I question whether that money couldn’t have a greater impact on peoples’ quality of life if it were spent elsewhere in the government’s budget. I have never been one to call for slashing social spending indiscriminately, but I’m surprised by how weak the replies to Hanson’s rather radical essay have been. The overwhelming response seems to be a knee-jerk rejection of such extreme spending cuts without a real refutation of the reasoning behind them.

Matt’s talked in the past about fuel taxes to reduce emissions and reduce the time cost of congestion. This paper suggests that there may be further benefits to a fuel tax. Using US data the author estimates that

…a $1 increase in gasoline prices would reduce obesity by 15% in the U.S., saving 16,000 lives and $17 billion per year. These monetary savings would offset approximately 16% of the increased expenditures on gasoline. Additionally, …13% of the recent rise in obesity from 1979 to 2004 can be attributed to the decline in real gas prices.

He attributes this to both an increased time spent on incidental exercise and a reduction in eating at restaurants. It seems almost too good to be true, and perhaps it is, but it’s certainly an interesting alternative to taxing unhealthy foods.

Robin Hanson suggests on CATO Unbound that much of the health care spending governments do is a waste of money. Citing the RAND study on healthcare he says:

The experiment’s random assignments allowed it to clearly determine causality. Being assigned a low price for medicine caused patients to consume about 30% (or $300) more in per-person annual medical spending… For the five general health measures, [they] could detect no significant positive effect of free care for persons who differed by income … and by initial health status.

Despite this and other studies, governments still devote huge proportions of their budget to health care. Hanson points out that, despite the apparently negligible returns to greater medical care, there are “apparently strong aggregate relations between health and many other factors, such as exercise, diet, sleep, smoking, pollution [and] climate.”

If this evidence is to be believed, leading a healthy lifestyle is far more beneficial to one’s health than free health care. In light of this, is the government’s emphasis on providing low cost health care a good idea? Low cost health care results in far greater consumption of medical services, but does not appear to appreciably increase aggregate health. It seems an expensive strategy for a government to pursue and one that may provide perverse incentives to live unhealthily. If health care is seen as a substitute for a healthy lifestyle then cheaper health care may lead to people living less healthily than they otherwise would if they had to pay for their own health care. The moral hazard problem engendered by these incentives could further raise the costs to the government of health care, yet without appreciably improving health care outcomes. Does this mean that a new approach to health care funding, focussed on encouraging healthy living, is required?

An Otago university study that was sponsored by anti-smoking groups found that cigarette taxes should be increased.  We know that an externality tax is a good thing, however 70% of the price of cigarettes is made of of taxes already.  The question then is, do we need more cigarette taxes to set the social cost of smoking equal to the social benefit, are we at the social optimum, or have we already gone too far.  Where the price is relative to the social optimum is an important question.  If the price of cigarettes is already at or above the socially optimal level, further cigarette taxes will be inefficient.

Now I have no idea where we are in terms of social cost and social benefit.  Ultimately, if the money from cigarette taxes can cover all the additional health expenditure from smoking, then the tax is sufficient.

People know they are killing themselves with cigarettes, so if that is what they want to do we should let them.  The problem is that they negatively influence other peoples health and put a drain on the health system by getting sicker than people who do not smoke.  If the tax on cigarettes already covers all this, then I don’t want them to lift taxes anymore.  The goal of the cigarette tax should be to cover the externalities of smoking, not trying to stop consumption completely.

Now tell me how cigarettes being an addictive good influences this analysis ;) .  Bonus points for discussing how cigarettes may be complements to other externality creating goods.

As I was waiting in line to grab some McDonalds before going to see the latest Harry Potter movie I got to thinking about why the line was so long.  In fact, I got to thinking about why, when there are other perfectly good foods around the food court, was half the place lining up to grab some greasy McDonalds.

I realized the best way to analyze this is to think about my own behaviour.   Now I virtually never go to the McDonalds in the food court (that day I just had a hankering for a Boss burger), I usually go to the Chinese place.  However, when I’m in some foreign land (such as Hamilton), I always go for McDonalds or Subway.

When I go to buy food in a foodcourt in Wellington, I know I will be going back there again soon, so their is an incentive for me to experiment, find out what I like and then stick to that.  Simply put, its a repeated game.  When I arrive at a foodcourt in Hamilton, this is a one-off experience, I have no intention to come back to the city of the future.  So this is a one shot game.

Now, franchises like McDonalds offer a standardized product, I know what I will get.  The rest of the shops could sell anything.  As a result, McDonalds is the less risky option, there is less variance in the quality of McDonalds meals.  So even if the average food court meal is better, as long as i’m risk averse there is scope for me to grab MiccyD’s.  If it is a repeated game, then experimenting gives me information for future periods, as I know that some of the food is better than McD’s food, I’ll try things until I hit something (or a bundle of foods) I like, then I will repeatedly consume it (or repeatedly consume some time varying combination of fast foods based which is dependent on previous consumption).

By virtue of this blog I have to bring this rant back to government.   I think I can do that with health standards.  By setting and enforcing health standards the government cuts out the worst foodcourt places, and as a result lifts the average standard and reduces the variance/risk of eating at other stores.  Now even if McD’s was within the health standards before these regulations, they will be forced to up the quality of their product, or risk losing their one off customers.

So govt. health standards lift the standard of franchises, and reduce the risk of getting killed when you go for a meal.  That sounds like positive government intervention to me.

This article discusses public sector health spending in quite a damning way. Does anyone have any ideas how government spending on health could be more effective? Or does anyone think health spending is effective?

I might post on this later if anyone convinces me of their opinion ;)


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