Russ Roberts

Cochrane on Health Care

EconTalk Episode with John Cochrane
Hosted by Russ Roberts
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Munger on John Locke, Prices, ... Angell on Big Pharma...

John Cochrane of the University of Chicago and Stanford University's Hoover Institution talks with EconTalk host Russ Roberts about how existing regulations distort the market for health care. Cochrane argues that many of the problems in the health care market would go away if these distortions were removed. In this conversation, he explores how the market for health care might work in the United States without those distortions. He also addresses some of the common arguments against a more choice-oriented, less top-down approach.

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0:33Intro. [Recording date: November 6, 2012.] Russ: We're taping this on election day in the United States and our topic a spectacular paper that you wrote. What we might do with health care if we eliminated not just the Affordable Care Act (ACA), known as Obamacare, but many of the restrictions that the government places on the health care market. The paper is so good I am tempted to read it out loud and just let you comment from time to time, but we'll actually have a conversation. But we will put a link up to the paper and I encourage everyone listening to read it. It is quite educational, entertaining, and very lively. Now you start by making the distinction between health care and health insurance. Isn't health insurance the key? Don't we want everyone to have health insurance? Guest: Well, the way you posed that question I think reflects something unfortunate that happened to the language. We assume that the only way these days you can get health care is if you have health insurance. People say: We need people to have health insurance so they have access. Of course, you have access to coffee because you have a dollar in your pocket, if somebody wants to sell you coffee. So, I think we need to break that link to make this sensible. So, what we want--we certainly want everybody to be able to get good quality, low cost, efficiently provided health care. Health insurance is part of that, but not the only part of that. And what insurance is supposed to do is insurance protects your wealth against the big costs of infrequent events. But to comingle the whole idea of you need to have insurance to be able to go get a bandaid put on is kind of the silly state of the world where we are at. And the article was trying to think through how we could arrange things a little better. Russ: You start off, though, with how you would restructure the insurance market if you had your druthers. And, as in the paper, I don't want to spend a lot of time on that. But you do believe there should be a market. If left alone, there would be an insurance policy that would emerge. Or do you want to regulate that? Tell me what you think the ideal health insurance problem to deal with is. To deal with unexpected large things. And I'm adding the word 'unexpected,' which you did not put in there. But I would include both 'large' and 'unexpected.' Guest: Well, I edited the paper better than our conversation. Yes. So, health insurance wasn't working that well. Now, part of why it wasn't working that well is that insurance always sits on top of a market. Your car insurance sits on top of a functioning market to get your car fixed. And health insurance in many ways doesn't. But there were problems with health insurance and we do need to think about how health insurance can and should work. And briefly the answer is: Insurance should be individual. There is no reason whatsoever that your insurance should be tied to where you work. No matter who pays for it, you should have an individual policy that insures you and goes with you when you quit your job or move across state lines or whatever. It should also be what we call guaranteed renewable, meaning that if you get sick, they won't drop you. That's not something that needs to be enforced by the government. It's something people want and is something insurance companies can and happily will provide. Russ: So, why don't we see it now? Guest: Because it's illegal. Flat out, right now, you can't do it. And in addition there is this big tax subsidy for employer-provided group insurance that is not available--if your employer buys you an insurance policy that you can take with you, he can't take the tax deduction for it. And so we've both subsidized and regulated the right system out of existence. So that's fairly easy to fix. Now, we have a big mess on our hands. Russ: And the big mess is? Guest: The health care markets. Russ: And what needs to be done there? What's wrong with it? We have pretty good health care in the United States, it seems. Guest: We have pretty good health care. But as all of us know, the way the market works is a model of lack of transparency, ridiculous prices, and so forth. In any other market--if you walk into a hospital and say: I'm a rich person; I've got a million bucks, I don't need health insurance; I'll just pay for this--their eyes light up and they start charging you ridiculous prices. These always end up with stories. My wife was fighting a bill this morning, because she was in to her dermatologist and asked the dermatologist: By the way, as long as I'm here, can you look at a wart on my foot? The dermatologist did, and then the bill ended up--a $500 extra charge was added to the bill for checking out wart. Russ: Diagnosis. Guest: Three seconds. This sort of thing happens all the time. We all know that the market for health care is horribly distorted. Which is why we all need insurance. So that's the central problem.
5:45Russ: So, let's start, as you do in the paper, with the supply side, and then move on to the demand side later, which you just alluded to. On the supply side, as you point out in the paper, there have been some incredible revolutions in customer service and provision of quality. In retailing for example you mention WalMart and Home Depot; of course that forced their competitors to match their efficiencies. Southwest Airlines, extremely effective in the airline business. Automobile assembly. Why are hospitals seemingly so inefficient? Guest: So, hospitals are inefficient. We want to bend down the cost curve and provide things more efficiently. We also want new and innovative products to come our way, and then those costs to be driven down, like cell phones are. So, we look at hospitals, and you can tell it's a mess. What's the difference? Well, one of the big differences is lack of competition. Why can a hospital get away with not telling you how much it's going to cost before you walk in? Well, because there isn't a competitive hospital that can come in and take your business by doing a better job. And that's what we sell in the airlines. We all like to complain about the airlines, but they cost a third as much as what they cost in the 1970s. And the key to that was competition on the supply side. New innovators were able to come in and undercut the old guys, figure out that wrenching transformation of how to make the industry more efficient and grab your and my money. And that doesn't happen in the medical field. There's lots of barriers to supply side competition to come in and take your money. Russ: Now, a lot of people get uneasy when they hear about competition in the medical field: It might be fine for some things but health care--do we really want doctors trying to be cut-throat about trying to get people's business? And: that will lead to bad practices. We'll come, at the end of this conversation, to some of the common criticisms that are made of a more market-based approach, but right now, let's put that to the side and let's just ask the question: Why isn't there more competition? Which is one of the things you deal with in the paper. You are obviously right: competition in the electronics business--you refer to the fact that there's no Moore's Law for--I'm going to read this quote. You say, "Why does Moore's law not apply to medical devices? Why has the price of cell phones, GPS, and computers come down so fast relative to the prices of medical technology? Where is the home MRI? There is nothing deeply different about medical and other technology. The answer is that supply and demand -- in the current highly regulated system -- is not producing the Moore's law incentives." So, what's stopping those incentives from emerging as in a competitive environment? Guest: So, you said two things, and I want to answer them both. The first one you said is this classic [?]: won't competition lead to shoddy service and so forth. And that's the classic constant theory expressed ahead of time. But let's look at our experience on what happens in competitive markets. Competitive markets don't survive by shafting you. Competitive businesses are scared to death of a negative yelp rating. And in fact the kind of quality you get from your computer maker is remarkably high. Now, why are we not seeing competition? There's a lot of law and regulation stopping competition. And I'll give one example. It's one of thousands, but it's so clear that it really makes the story. These are the Certificate of Need Laws. And a lot of this stuff is State. It's not just Federal regulation. So, many states, including where I live, Illinois, in order to build a new hospital or even to buy a big piece of equipment like a CAT-scanning machine, you need to get a Certificate of Need from--there's state board that issues these things. The people on it are appointed by the Governor. That's always a joke in Illinois--you say 'Governor' and everybody laughs. And it's explicitly in the charter that the purpose of this is to keep up profits of the existing hospitals. So, existing hospitals are allowed to say: No, you can't bring in a specialty clinic that does dialysis cheap. You can't bring in a specialty colonoscopy practice that really knows how to get the people in and out the door and do a good job on that. Because that will threaten our profits. Well, you can imagine how happy United Airlines would be to have a Board that could review every proposed expansion by Southwest and say: No, you can't do that; that's going to hurt United's profits. Russ: It used to have one. Guest: That used to be exactly what the airlines had, back in the old days. Russ: And it was a lot more expensive. Guest: Just removing that was a key thing that brought down airline tickets by a factor of 3. That's one example of the many little subsidies we have in place. If anything it's amazing how well hospitals work. If you and I as economists looked at this highly regulated system where it's very hard for new people to come in and compete and can't compete on price, in part because so much is paid by insurance, how is it that this whole thing doesn't fall apart? Well, it's full of really dedicated people, is the only thing that I can see. Russ: Right. So why isn't that enough? We both agree that most doctors and nurses and administrators care deeply about making people's lives better. In fact, you can argue that that would be even better than what motivates Southwest employees. I think they also care about people, but they have the profit incentive also. You could argue that sometimes pushes them to cut corners. Why isn't the dedication and compassion of people in the medical business sufficient to produce the kind of innovations and improvements we are talking about elsewhere? Guest: As you said, for the same reason that the dedication of the airline employees was not enough to produce efficiencies back in the old days. I mean, efficiency is about figuring out how to schedule things carefully. It's about not paying more than you have to. So, efficiency in these other businesses was a wrenching process. Airline pilots used to be paid a lot. They aren't any more. Mechanics used to be unionized and paid a lot. They aren't any more. When you can outsource things that need to be outsourced, you outsource them, and you pay a lot less. For the suppliers, this is a wrenching process, and I think everybody in our political sphere has a hard time understanding: the point of economics is to provide cheap, quality goods for the consumer, not to give everybody a chance to keep prices up and therefore keep the profits of producers and other people like that in check. And that's really where it needs to go in order for the hospital to get like the airlines, if what we want is low prices and good and efficient service.
13:10Russ: And let's talk about some of the processes in the medical field. You write--another quote from the paper: "On reflection, it's amazing that computerizing medical records was part of the ACA and stimulus bills. Why in the world do we need a subsidy for this? My bank computerized records 20 years ago. Why, in fact, do doctors not answer emails, and do they still send you letters by post office, probably the last business to do so, or maybe grudgingly by fax? Why, when you go to the doctor, do you answer the same 20 questions over and over again, and what the heck are they doing trusting your memory to know what your medical history and list of medications are?" So, what's the answer there? Why haven't those improvements taken place naturally? Some of them have, of course. My internist does use the equivalent of an iPad, and some kind of software that I'm sure is customized for the medical field. And he did it before the Stimulus Package passed. But it's a very slow business to adopt modern technology. Why? Guest: Yeah. So it has been a remarkably slow business; and there, too, I think there is a lot of regulation getting in the way. One of the big problems was patient confidentiality laws--fear of getting sued if the wrong information went the wrong way. Another part of it is how they are paid. So, there are restrictions on supply, which keep competition from coming. But there's also big restrictions on who pays what. If the client isn't paying and he had this in-network hospital that he goes to, well a new hospital has a hard time prying that client away. And a similar thing happens--so much of, hospitals spend a lot of time thinking about how they organize stuff, but they are organizing both to the payment rules of both the government and the private insurers. So, your doctor doesn't answer emails because he can get paid if you show up and wait in line for three hours and talk to him in person for 12 minutes and 30 seconds. But he can't get paid for answering an email. So, they weren't in the business of answering emails. And strongly discouraging doctors from answering emails. Now, if you are paying your own money, obviously they figure it out. Your dentist answers emails. Your plastic surgeon answers emails. Your vet answers emails. Because they are in a business to get your money. The doctor in in business to get the government's money, or the insurance company's money. Russ: Talk briefly about licensing, as you do in the paper. Most people think licensing for the medical profession is obviously a good idea. You wouldn't want some unqualified doctor. And yet it has some very serious costs. Guest: Yeah. And licensing--the way to get a bunch of libertarians excited late night when they've had a little too much beer is to talk about occupational licensing. In the politically realistic world, we are not going to have no licensing. And licensing can maintain a minimum standard of quality. But licensing gets used to restrict supply. And this was Milton Friedman's Ph.D. thesis: throughout many industries, groups put in licenses, and then they make the license tests hard; and then they restrict the number of people that can get the licenses. All in order to keep up the prices for the people who benefit from those licenses. Taxicabs are the most obvious example that most of us are familiar with. Cities restrict the number of taxi medallions. The result is that you pay more for taxis than you would otherwise do if anyone who wanted to could go in and get a taxi inspected and licensed and so forth, than if other people who wanted to who had them. Russ: And you give the example of a parent late at night trying to get some medication for his kid. Guest: Any time you do health stuff you get people's own experiences. So, I have four kids, and it seemed like every time we went on vacation, someone got an earache and it was 2 o'clock in the morning and I need 5 milligrams of amoxicillin and I need it now. And it's going to be a long trip to the emergency room, so that a real doctor can charge $200 to peer in my child's ear, say exactly what I know--it's red in there--and prescribe me my amoxicillin. And then I have to go down to a real pharmacist to give it to me. All at monstrous extra cost. Yup. Russ: And that could be solved in a much cheaper way by--how? Guest: Well, certainly you could go to a WalClinic. Why do I have to go to an emergency room? Why don't we have retail clinics where a nurse practitioner, duly and bonded, can look at you for $25, prescribe what you need, and walk out? Russ: There is some movement in that direction, right? Guest: There is some movement in that direction. But it's been resisted quite strongly. But when you think of where we need to go--there's this big complaint that uninsured people go to emergency rooms and charge up hundreds of dollars. Well, most of what they need could be easily handled at a WalMart Clinic for $25. But WalMart has a hard time getting into cities to sell clothes, let alone to put in WalClinics.
18:34Russ: Now, at this point in the paper you turn to some criticism of the Affordable Care Act. And I apologize again--I have to read this, because it's so good. Guest: Well, maybe we should have just read the paper while you and I take a break. Russ: We could. I think that would be a nice supplement to this podcast, for those who won't actually read it. But let me read this excerpt where you talk about why the current regulatory regime is not going to be effective at "bending the cost curve." You say the following:
The ACA and the health‐policy industry are betting that new regulation, price controls, effectiveness panels, "accountable care" organizations, and so on will force efficiency from the top down. And the plan is to do this while maintaining the current regulatory structure and its protection for incumbent businesses and employees.

Well, let's look at the historical record of this approach, the great examples in which industries, especially ones combining mass‐market personal service and technology, have been led to dramatic cost reductions, painful reorganizations towards efficiency, improvements in quality, and quick dissemination of technical innovation, by regulatory pressure.

I.e., let's have a moment of silence.
And your point being that there's no reason to think that this is going to work. Guest: Yeah; go on and read the next paragraph, because I was just getting going there. Russ: It's true. The next paragraph is:
No, we did not get cheap and amazing cell phones by government ramping up the pressure on the 1960s AT&T. Southwest Airlines did not come about from effectiveness panels or an advisory board telling United and American (or TWA and Pan AM) how to reorganize operations. The mass of auto regulation did nothing to lower costs or induce efficient production by the big three.

When has this ever worked? The post office? Amtrak? The department of motor vehicles? Road construction? Military procurement? The TSA? Regulated utilities? European state‐run industries? The 9 last 20 or so medical "cost control" ideas? The best example and worst performer of all, ... wait for it... public schools?

It simply has not happened. Government‐imposed efficiency is, to put it charitably, a hope without historical precedent. And for good reasons.
So why don't you talk about what those reasons are? Why we should be pessimistic? Guest: Boy, I had fun there, didn't I? Russ: Yeah, you did. And as you told me before we started recording, you wrote this paper--you are not a health care economist. You are a finance and macro economist. But of course you know some price theory. So you are kind of dabbling in other people's territory. And I'm sure they were not so happy to hear this. But why should we be skeptical? Maybe this time will be different. Guest: Maybe. Well, I think it was said that the second marriage is the triumph of hope over experience. Russ: That's right. Guest: Well, there are reasons why. And I don't want to sound like I am an anti-government anarchist. The government does stuff fine. Russ: That's my job. Guest: The government does stuff fine. It repaved the road outside of my house. I could tell it paid three times as much as it needed to, but it got the road paved. Stuff that we can't do otherwise, the government can do. But no one has ever thought of government as being the way to get stuff done efficiently. We thought of it as being the way to get stuff done--to fight WWII--stuff that has to be done, at horrendously inefficient cost, but they have to do it. Now, reasons. Yes. Governments have to listen to everybody. So all the stakeholders are there. So, imagine a government saying: You have to outsource these jobs to China because it's cheaper and will give us lower prices for consumers. There's no way--you have to bust up this union and move production to a non-union state because that's cheaper for consumers. You have to let lots more people into medical schools or let foreign doctors practice so that we'll drive down how much you guys make. Governments by their nature have to listen to everybody, and the consumer is always last in line. I think I would put that as Reason 1 why that approach just doesn't work. And can't work. Russ: But you point out, correctly, that in the market place--you drive a Lexus and I drive an Accord and someone else drives a Hyundai, and somebody's in First Class in the airlines and somebody's in the back and somebody else is on the bus, to make that trip. And we tolerate that distinction when we talk about most goods. But we are a little uneasy doing that for health care. Do we really want a world where the rich people get the best health care and poor people get lousy health care? Guest: Yeah, well this is the hard fact about health care. And the hard fact about the political allocation of everything. Health care is a personal service. It's not like filling the pothole out in front of your house, where it's kind of clear and everybody gets the same thing. It's the most important personal service you can get. Its quality varies enormously. In the economy as we have it people get different qualities of stuff according to their willingness to pay, mostly, and their ability to pay, a little bit less. And we'd like to say: Oh, the best for everybody. And I don't think you can say anything less than that in the political sphere. But the fact is there's only so much GDP to go around, and the best for everybody just can't happen. We can't all fly on private jets. Some of us got to go Southwest. And I'm one of those people. I'm in economy on Southwest. Why? Because it's not worth it, and I'd rather have the money than a private jet. But Southwest gets me there. It's not a heartless terrible economy that I have to fly in the middle seat in the back of Southwest. I get where I'm going at reasonable price and very good safety, but a government can't possibly allocate health care that way. Russ: And they don't. So I think the real issue is, there's a tradeoff between-- Guest: They promise the best for everybody. And that money not being around, we sort of get the worst for everybody. Russ: Or something in the middle. And some people would say that's better than some people getting not very good at all. And I think the question is: how bad is it for the average person relative to wealthier people, and I think the Southwest airlines, or the car example--being, suffering through driving a Hyundai is not suffering. Guest: So, these industries have done a very good job faced with competitive pressure of figuring out what dimensions of quality are really important and what dimensions of quality really aren't important. So, for example, suppose that one person gets to have their MRI two blocks from his office at 1 o'clock in the afternoon, and somebody else has to have it at 9 o'clock at night across town. We both get the same MRI. Now, if that costs a lot less, is it really so unjust? And that's what Southwest has figured out. I'm willing to put up with being in the back of the cattle car but having a very safe trip, because I pay a lot less to do it. Russ: And it's on time. Guest: Of course, if the government said: John, you've got to economy class, and Russ, you get to go business class. Well, we'll be out in the streets fighting that out with pitchforks. It turned out that paying their own money, people were willing to sit in tiny seats. And remarkably unwilling to pay $20 or $30 to get seats that are slightly farther apart. Yet can you imagine the government seat-selection board saying: All seats shall be 27 inches apart? Russ: Well, they might. Because those seats are going to be very inefficient. And that's the best they can do. They can't--I think the real tradeoff here is between the innovations that competition produces, which usually means that the average person gets a great deal--there are some people who get a better deal than that, though, obviously in the private market. As you point out, your Lexus is more comfortable than my Accord, but we both get a really nice, safe car that is very reliable. I think that's a pretty good world; that beats all of us driving a Yugo, or a--I can't remember the Soviet car; is that the Lada? It's ugly, it's expensive, and it's not very reliable. And that's what I worry we get when we say: Let's give everybody the same quality, because health care is too important to leave to the market. Guest: Yes, and because what you don't do is you don't squeeze the efficiency frontier. And in fact, so the private industries have done a remarkably good job of socialism--of taking from rich people and giving it to poor people. Look at business class. Those guys out in the front are ridiculously overpaying, by my mind, for the slightly wider seats. But what you and I get sitting in the back of economy class is--they cover most of the fixed costs of the flight, and you and I are being cross-subsidized up to the hilt by the people up in business class. Now, if a government said: We're going to tax the rich, if you will, and they are going to have to pay 3, 4 times what we pay for what looks the same, people would be up in arms. Yet we voluntarily do this. And similarly innovation. The system for innovation, in the rest of the economy is people who are either willing to pay or rich or slightly in the money subsidize the innovations. And then it trickles down to the rest of us. And that's how we get--if you are just willing to wait a year or two, you actually get stuff. Well, that's again a thing that the government planning board couldn't possibly do. Yet the result is none of us get the innovations.
28:38Russ: We're moving into the demand side. Let's fully go there. What's wrong with the demand side of health care? Why is it so distorted? Guest: Well, lots of reasons, to tell the story. Health insurance became health payment plans. So, your car insurance doesn't pay for your oil changes. For all sorts of good reasons. Imagine if in order to get an oil change you had to call up, and your primary mechanic had to diagnose that you needed an oil change, and send you off to the oil change specialist; and then you had to wait 6 weeks and then fill out three forms and FAX them in and provide your car's maintenance history. And then argue over the co-pay. We don't do that. Yet health insurance turned into being this way. And the reason is because of the tax deduction. By making regular expenses part of insurance, then everyone can get the tax deduction for it that they wouldn't otherwise get. But then once the market is all paid for by insurance, nobody is paying their own money. This is fairly obvious stuff, and if people aren't paying their own money then both they don't have the incentive to economize, but more importantly, suppliers can't make money by inventing the Southwest Airlines and saying: Look, I can give you the same thing, with a little inconvenience, but I can cut the price in half. You and I say: Why should we bother with that? And furthermore, a hospital has to choose one or the other. You can be an all cash hospital or you can be an insurance hospital, but you can't be half and half. Because the whole insurance company game falls apart if you actually list the prices. So, that just kills that method--the fact that we are all paying for our expenses is turned into payment plans, that hurts the demand side and hurts the supply side and gums up the works on everything. Russ: Yeah, but some people would argue that that's a good thing, just having the insurance paying for everything, because health care is what you need. We don't want people making decisions to economize on their health care. That's the reason we want it to cover everything. That's a horrible thing; people would have to make decisions, life and death decisions, about whether to go to the hospital or not? That sounds awful. Guest: You're serving me empty softballs here, aren't you? Russ: That's my job. Don't worry. I tell the listening audience: we have Marcia Angell coming on in a few weeks; she'll give the other side, I'm sure. So we will hear someone from the other side of the spectrum. I love it when people complain that we have too much free market health care coverage on this program--because, you know, there's so much of it everywhere else; why would you need it? But my view is: If you want to hear the other side, it's everywhere. So, I like to think maybe we could use a little more of this bottom-up, emergent story as a possible health care improvement. So, carry on. Guest: You are right. It's kind of funny. It's seen as radical, yet the free market applies just absolutely everywhere else. It's kind of funny that it's out of the conversation even though it seems fairly straightforward. So need and who can shop and so forth. I think one of the biggest problems is you tell these anecdotes, like: people in life and death situations can't shop. But what fraction of health care expenses are actually made in the heat of a life and death situation? Answer: practically none. That doesn't say why health insurance should cover my annual dermatology checkup. Or why I can't be asked if I am going to see my doctor do I have to do it over here or across town. Or all the many other little conveniences of daily in-and-out care. And so much of health care is not, I broke my arm, I had a heart attack; patch me up. All the expensive stuff is chronic, long-term conditions where there's a whole range of different things we might do for you. None of it really works. Which kind of side effects does it have? Where the convenience aspect of treatment is as important as actually which drugs you get and when. The dirty little secret is how little compliance there is among patients for long term regimens. And that sort of thing is all very amenable to people shopping and to suppliers trying to offer the bright package of cost and convenience. But the dirty little secret is people have to be paying on the margin out of pocket. That you have to see the economic consequences of your choices if we are ever going to get the kinds of process efficiencies that can bring the costs down. As long as you are letting me go, let me--I think if we phrase this the right way, rather than saying, you have to pay for that expensive test, suppose that your doctor says: You need an MRI. And the insurance company is going to get billed $5000. So, what happens if the insurance company says: Look, you can have the MRI or you can have the $5000 cash right now. Or, you can have the $5000 bucks but if you are willing to go across town and get it at 2 o'clock in the morning, you can get $2000 bucks cash. A lot of people would pick that. The MRI is typically something that you don't have to have this instant anyway. Well, on the margin--I'm telling the story to try to get the 'can't afford' stuff out of your mind--but on the margin, people making those kinds of choices is the only way that we are going to get the costs and inefficiency down.
34:32Russ: So, let me read another excerpt here, which I think highlights a very useful perspective on insurance that I think we often forget about. You are giving this paper at a conference of health care folk, and you said,
Nobody in this room really needs health insurance for anything less than catastrophes. We pay for transmission repairs, leaking roofs, and vet bills out of pocket. Most people in this room send our kids to private schools, throwing away our right to expensive public education. We could easily "afford" most of our routine medical expenses, and even pretty big unplanned expenses, especially if we were paying commensurately lower health‐insurance premiums.

But we all have health insurance, and deal with the paperwork nightmare.

Why? You don't need an "insurance" company to negotiate your cellphone contract, home repair and rehab, mortgage, airline fare, legal bills, or clothes, and pay as we do for health....
So, you raise the question, you make the point that a lot of what health care insurers are doing is doing the shopping for us. And that is nuts! We take it as: Well, of course I don't look at the price; my health insurance company did that. And that's a remarkable change from 50 years ago when it was different. And prices were lower. Guest: You started this conversation with: Don't we want everyone to have health insurance. And let's go back to that. Because I think it is an important, eye-opening question. Why do relatively well-off people, why do they have health insurance? It used to be health insurance had a million dollar lifetime cap. So, if you had $5 million bucks, why do you need health insurance? The most they are ever going to give you is a million bucks. Well, now you know why even rich people wanted health insurance. Because if you walk into the hospital, you are just a mark ready to be squeezed. Which is kind of sad. For example, I don't know about you: I don't have collision insurance. I have a 10-year-old Honda. Why do I need collision insurance on it? If it crashes, I'll either dump it or I'll go buy a new car. I have $10,000 worth of risk-bearing capacity there. And health insurance ought to be the same way, because then you save on--my example of filling out the forms for the oil changes. Well, as you know, you walk into a hospital and say, I'm paying cash, and they say, Hallelujah! They'll charge $500 for a bandaid. Why? Because we are in this system of cross subsidies. Medicare and Medicaid pay far less than they cost. The insurance companies, which are fairly uncompetitive at this point--there's not that many of them left--they are willing to go along. They pay medium rates. They have negotiated rates with the hospitals. They know they are paying more than they should, because they are cross-subsidizing Medicare and Medicaid. But hospitals' not being a competitive business, there's no way to get around that. But then they have these big, negotiated rates. And you can't tell what they are actually getting. They have this system of rebates for this, that, and the other thing. And then the poor guy who walks in and wants to pay cash, he faces this huge sticker price. Which nobody's actually paying. A lot of that is so we can put a chit in the door--when the indigent guy goes bankrupt then we can say: Well, I'm not going to charge you $500,000; how about you pay me $2500 and we'll get rid of it? Russ: I remember when, one of the times my wife was delivering one of our children: The orange juice, I think it was $500. Actually, I looked at the bill. Of course, I didn't pay it. It came out of my insurance. But I actually looked at the bill and it said something like $500. Now, part of the problem is, like you say: I think it's a made up number. The reason I think it's a made up number is, obviously, I'd be thrilled to bring own orange juice and get a $430 rebate, or a $480 rebate, or something. And the insurance company would be happy for me to do it if it really did cost $500. So I don't even know-- Guest: I'm going to try this--bring orange juice and say: Oh, no, no; $500 bucks? How about I sell to you. Russ: And we'll knock the bill down. And you'd think--that should be happening all over the place. The fact that it's not tells me that those are fake numbers. And that it's not realistic. Guest: And fake numbers means you are looking at a completely uncompetitive market. Russ: Correct. So, you did mention that there aren't that many insurance companies. Doesn't that make you uneasy about a private market for insurance and a less regulated, less subsidized world? Guest: Well, I think there are very few because it is such a regulated and subsidized world. They've been driven to large economies of scale--you can only have a couple of them left. We're heading to--unfortunately where we are also heading in finance as well--to deal with the regulations you have to have lots of lobbyists and lots of connections in Washington. And that highly regulated system seems to end up with 5 big banks, 5 big insurance companies. All in cahoots with the government. Too big to fail, too big to compete: Certainly we're not going to let new upstarts in to try to take business from them. Russ: And aren't there a lot of restrictions on interstate competition among insurance companies? Guest: Yeah. There inter-state and there's intra-state. Sort of the obvious one that got some political traction is: Wait a minute; why can't I shop across state lines? Which also more deeply means: Why can't I keep my insurance when I move across state lines? That immediately dumps you into pre-existing conditions the minute you move across state lines. But there's all sorts of regulation on insurance within states. So, in Illinois, health insurance has to pay for acupuncture. And therefore my premiums go up to pay for your acupuncture. Whose fault is that? That's the state insurance commission, that's not yet the Federal regulations. Now the Federal regulations add layers of all kinds of stuff, too. Russ: It's coming.
40:37Russ: Let's turn to some of the objections that people have to letting markets emerge here. A good friend of mine is a doctor and he's free market oriented, but he says: Well, health care, that's different. I think we may even have used your actual example: What are we going to do about the homeless person who has a heart attack? If we had a private market in health care that person would just die in the street. Guest: Well, when a doctor tells you, health care is too important to be left to economics, you answer: Great; we'll put you on a $20,000 salary from the Federal government, because it's too important to ask you to actually take money for something so important as health care. Let's see what he says. Russ: That's correct. He would not like that. Guest: The straw man of the homeless guy who is going to have a heart attack in the street. There's so many of these little straw-man anecdotes pervading this it's very frustrating. But that's not what we're talking about with the ACA and with the vast majority of the regulation of health care. We need a system of charity care. And charity health care has been around for at least 800 years, if not longer. In fact, it mostly was charity for a long time. But in order to solve the problems of a homeless guy with a heart attack, I don't see where it's written that the Federal government has to mandate that your and my health insurance has to provide wellness benefits and acupuncture treatments. Or that no hospital may ever compete. So, yes, we do need a system of charity care. But this is not about charity care. It's about a huge middle class entitlement. It's about fundamentally, rather than average, middle class Americans, who might earn $40,000-$80,000 a year, rather than saying, Look, you are going to pay for your regular stuff and you are going to have an insurance policy that covers the really catastrophic stuff, we are saying to those people: No, it's all going to be--you are going to pay taxes. Someone's paying. There's no government that pays. We are going to pay for this stuff through your taxes and then this is all going to be provided for you free. And you don't need to create a huge middle class entitlement with commensurate tax payments in order to solve the problems of charity care for homeless people. Russ: And of course, if we weren't subsidizing health care so dramatically as we currently do, those market prices that would emerge, which would be real prices, would be much lower. Not only would they not be $500 for an orange juice, they wouldn't be $80. They'd be $3 or $4. Or $5. Guest: Right. My trip to the emergency room to get amoxicillin for my child's ear infection ought to cost about $25. It shouldn't cost $500 and 4 hours of my time at 2 in the morning. And I think a competitive system would go a long way towards providing better stuff for poor people. When we protect an industry, who ends up hurt the most is always the poor, who are not allowed to be served by bare bones but effective and low-cost services. Russ: What about adverse selection? You mentioned that also--the idea that insurance markets won't work for health care because the sickest people will be the ones who want the insurance; they know that; and then the market will just collapse. What's wrong with that argument? Guest: Yeah. It's a good example of how a little bit of economics is a bad thing. We all trundle through the economics classes and then you get your supply and demand, and then the teacher's following the textbook and says: Now, there's a monopoly and there's adverse selection and moral hazard. So, we remember all these little stories. Even though it's not clear that those stories have anything to do with the actual problems in the real world. So, adverse selection happens when you know more about your health than the insurance company. So then people who know they are sick sign up for insurance; people who don't know that they are sick, who know they are healthy, don't sign up for insurance--because the prices are too high. You only get the sick people in insurance, and the insurance market supposedly falls apart. Nice theory. Now, let's look at the real world. First of all, do you actually know more about your health than an insurance company that has access to all of your medical records and maybe your last physical? Or do maybe they know a lot more about your health than you do? Second, why is it that insurance companies charge everyone the same price? They don't condition on the health that they can plainly and obviously see. Fat people don't pay more than thin people; smokers don't pay more than non-smokers. All sorts of things they don't condition on. Why? Because the government forces them not to. They are forced to offer the same product to everyone at the same price. So we do have adverse selection, but it's not because of the information problem you learned about in an economics class. It's imposed by the government. And the ACA is doubling down on that idea. Everybody gets health insurance. No pre-existing conditions. And, everyone has to pay the same amount for it. Well, that's adverse selection waiting to happen. Russ: Although, I think you can get a discount if you don't smoke. I think there are some--they don't put you on a scale and charge you different amounts. Guest: Oops. I may have got my facts wrong on the smoking. Russ: Not important. Guest: Got to get the facts right. But yes, they don't fully rate you. They don't look at your medical history and your last physical and then say: How much is this going to cost you? Because they are not allowed to. Russ: And I just want to mention in passing, you give such a nice example. This difference between theorizing and the real world, which George Akerlof, Nobel Prize winner whose most famous paper is "The Market for Lemons": because of asymmetric information between the buyer and the seller there should be no used-car market. Of course, somehow that problem gets solved. The market finds ways around that problem. I don't want to be unfair to Akerlof; I don't know if he really said there should not be one. But obviously many people jump from that kind of theoretical result to the implication that the market would never be able to provide this. And it provides it just fine. Guest: Yeah, no, George's paper--and I'm a big Akerlof fan--is brilliant for showing here's the problem unless we find some way to fix that problem. And it turns out the markets have found ways of fixing that problem. Or, it turns out, as in the case of health insurance, it's not obvious that there really is a big information asymmetry--that you know so much more about your health than the health insurance company knows. That it can happen. And I think the same is true increasingly in used cars. You don't really know a whole lot more about how good your car is than the purchaser can. It's best if he has a mechanic look at it and look over the records. That's how the used car market works. Russ: We know a few things. But of course, if you are buying my used car, you are going to work really hard to find out what I might know. And there are a lot of different ways you can do that. I'm selling my car today, actually, as it turns out. And there are a couple of things I know that aren't obvious, which I will reveal--because I am an honest person--but I understand that not everybody's honest. And in a world where people are not totally honest, other people are going to look. The question is how effective that is. It's an empirical question, and most of the time it seems to work pretty well. Guest: And then we have insurance. We have insurance for all sorts of things. Asymmetric information does not make car insurance fall apart. It doesn't make home insurance fall apart. So, it's not obvious why you can't have health insurance because of asymmetric information.
48:38Russ: What about the complaint that we don't know enough about our health care generally? We don't want to become experts. Let's let the government decide what the best treatments are. I should get the diagnosis from experts, and if people could shop around they are going to make a lot of stupid mistakes. They are going to throw away money. They are sometimes going to skimp on health care and preventive care and therefore hurt themselves. Much better to let the experts decide from the top down. Guest: Well, you threw a whole lot of things in there. Russ: Yeah, we could spend another whole hour on that. But do your best. I'll give you five minutes. Guest: Right. So in health care we are buying a good where the seller knows more than we do. Although my doctor cringes every time I show up with a whole bunch of stuff printed out from WebMD and Wikipedia. That's changing. But throughout the economy we purchase services from people who know a lot more than we do. We buy lawyer services; we buy tax accountant services. We buy financial services, home repair services. I can't tell A-grade from B-grade plywood. And somehow we are able to buy services from people who know more than we do, and that works fine. It's not obvious why that can't work. That works for vet services, where you pay your own money; and it works for dental services, where you pay your own money. And plastic surgery, where you pay your own money. Why does the government have to run it? And conversely, all of these things--there's this funny thing that happens where you come up with one straw man where the market doesn't work and suddenly, I therefore accept that the government has to decide what we all need. Wait a minute! We are comparing two different institutions. Russ: Both flawed. Guest: How good is the home repair advisory board going to be at figuring out what kitchen counters you need? And just which kind of 'fridge do you want; and which kind of fixtures should go on the lights? As opposed to you doing your best. And especially health, the one thing that's most important for your whole life. We've got to remember: I think there's this vision in people's minds of health being very simple and easy to figure out. You know, you have a pothole, you need the pothole fixed. You have a broken arm, you need it set. No. Most of what we do with health is--it's not clear what you need. It's not even clear how much diagnosis do you need. We've all been running around from specialist to specialist, getting that right, and then which course which treatment do we need? It's not at all something that that kind of personal service couldn't be supplied from top down. If you don't think that government could provide you home rehab--here, our rehab counselor will come in and take care of it for you--I mean, goodness gracious, why wouldn't they be able to tell you what kind of health care you need? Russ: Well, you could argue that the color of the granite is a personal preference, but the color of your splint or cast is irrelevant. And so I'm not sure that that's the right analogy. Obviously--and I think the other criticism that you'd hear is: They work pretty well, those markets in the private sector like home repair and car repair, but they don't work very well--they don't work nearly as well as buying a shirt or the tools at Home Depot or the shirt at WalMart. Those markets work a lot better than these more complicated service provisions where you are not sure what's wrong. You take your car in; it's making a funny noise. You've got a chest pain. These markets are prone to mistakes, some of them honest, some of them not so honest. So, I think it's an interesting challenge for those of us who would want a more bottom up health care system to make that case more definitively. Because I think most people would argue that the car repair and home repair markets are full of thieves, and it can be a frustrating business. Guest: I think that's a good point, that the markets for services like these, especially those with a wide divergence of expertise, are troublesome. And they haven't really been corporatized. Airline service is kind of a service; but taxis are still kind of a disaster as far as quality is concerned. But nonetheless, the alternative of government deciding what you "need" and then prescribing it for you--it sounds great if you have in mind a broken arm. But if you have any of the modern diseases, it's kind of a dream that there's some panel of experts who can say: Here's exactly what you need and what you don't need. Especially with so many things that we have where we are kind of on the edge of understanding what works and understanding what doesn't work. How many experimental treatments do you need versus not need, when we're not really going to be able to fix you? Russ: It's very complicated. You give the example in the paper of back pain. We can think of lots of examples. Chronic pain generally is a bit of an art, and not so much of a science. And it's not--I think the right conclusion to draw is that the private sector works fairly well. Not as well as it does in other areas, but it works fairly well. And: Would the government sector work better? Not: Oh--as you say--the private sector is flawed so we have to replace it. Show me that the public sector will have the incentives to do what's best for me or what's best for most of us. The other comment that you hear is: it's okay for you to come in with your WebMD stuff, but the average person isn't smart enough to do that, and they'll be taken advantage of by doctors. Guest: It's horribly patronizing. It's offensive. Russ: I agree with that. Guest: Oh, we the aristocracy need to take care of them because they are too stupid to make their own decisions. But of course that doesn't apply to us. Or us in the health policy field. We have the connections; we know how to do this for ourselves. Russ: Yeah, I find it insulting, too. But they don't. The people who make that argument feel virtuous about it. We don't find it so virtuous. Guest: Well, we've got to be practical. So, let's try to find examples where: has that ever worked. Especially in something where personal preferences matter as much as health care. And I think the answer is no: where you have things where governments decide, especially at a national level, here's the kind of car everybody needs. Here's the kind of air travel everybody needs. The results have been pretty catastrophic. The Trabant versus even the Chrysler. Russ: That's right.
55:10Russ: You and your paper talking about the political feasibility of this kind of move. As I said at the beginning, it's election day today. In theory, if Romney wins, we are going to maybe move away from the ACA, or Obamacare. If Obama wins, presumably it's going to become more ensconced. What's your advice? You can see early on in the paper this is a long-run strategy, not a strategy probably for tomorrow. Either way. How do we get there from here? What are your thoughts on how we get to a more competitive, emergent health care system compared to the one we have now? We seem to be moving in the opposite direction. Guest: Yeah, we do. Even when Romney was pushed on what he was going to do, he said: Well, but of course we can't let insurance companies discriminate on pre-existing conditions. Well, once you've done that, you've swallowed the fly--the old lady that swallowed the fly. Russ: It's over. Guest: And once you do that, you've got most of the ACA. So, what do we do? I think you and I operate on the range of ideas. And I do think ideas matter. You are not going to get a free market approach to health care as long as most of the voting population says: Oh, health care, that's too complicated for the market; it has to be provided. And so long as it's repellent, the idea that you should have to pay for this stuff. That somehow the government will give it to you for free, and that's a right. Forgetting the fact that someone has to pay the bill somewhere. So, I think we--there is a point in saying things that are politically infeasible in the next six months, because you have to chip away at the ideas. First you need a majority of voters to say, to understand: Yes; the only way I'm going to get the Southwest Airlines, the only way I'm going to get halfway reasonable health care here, is to free the darn thing up. Not to add layers and layers and layers more bureaucracy on top of it. That's going to lead me to Trabants and Ladas, not Ferraris. Or Southwest. Second, then, step two is, you are in the situation where there is so much rest of government, where everybody understands what we've got is silly and we've got to get to the political process. With taxes, we all understand that the current U.S. tax code is insane; and yet, and now we can talk about how to make it politically feasible to get it through. So, I think it's worth operating on the level of ideas and not a 57-point plan with what do you repeal and what regulation do you keep and so forth. Russ: And it's always good to remember, as F. A. Hayek pointed out: The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design. Guest: I really like that. Russ: I don't think it applies anywhere more pointedly than in the health care market. Guest: Yeah, so how long did it take between Adam Smith and Hayek and airline deregulation? Well, Adam Smith didn't come up with a 22-point plan for airline deregulation. But he did get the idea out there. And we have to do the same thing for health insurance.

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COMMENTS (90 to date)
Floccina writes:

The healthcare industry has an advantage over some of the other service industries mentioned in that GPs do little of the expensive work themselves but instead farm it out to specialists. If we had more free market health care this would put GPs in position to act in their patients interest value wise without reducing their own income. I have had the experience of a doctor knowing that I will pay so much out of pocket prescribing cheater options.

NormD writes:

Questions:

1 - High Prices

Years ago when I worked in healthcare billing I was told that doc/hospitals have to charge high prices because many (most?) contracts specify that the insurer must be afforded the "best price" and they then pay a percent of this.

I was told that insurers would send in auditors to audit medical bills and if a doc was found to have offered some patient a better price (perhaps out of sympathy) all of their previous bills were repriced and huge payments were demanded of docs.

2 - Email

My doc has told me that communicating via email violates HIPPA and results in a $10K per email fine.

Great podcast!

NormD writes:

Why could we not allow Americans to "buy into" Canadian (or other) healthcare systems? Initially this would be offered to people living near the border, but perhaps the Canadian Healthcare Service would setup American hospitals if the demand was there?

So many people who are in favor of single payer systems point to Canada as the model. Fine, let them use it. Who knows, perhaps they are right?

David writes:

My wife has worked in hospitals for some time now and has insight into the management of hospital staff. First off, it is basically impossible to fire anyone regardless of how bad of an employee they are. The managers are so hand tied by regulations and fear off lawsuits that incompetent employees continue to be employed. Lack of competition for medical services definitely has a negative affect on the quality of labor for hospitals. If people really knew the type of people that are employed behind the scenes at hospitals they would be appalled.

I also have never really seen a analysis by free market economist on socialized European health care. The majority of Europeans seem happy with the service they get.

Greg G writes:

It's not hard to show that our health care system could benefit from more market efficiencies and you did do that here. But there were too many badly tortured analogies, too many cases of economists theorizing about how people should behave while disregarding how they do behave, and there was too much idealizing of the market in my opinion.

It is true, as John points out, that most cost reduction for most products comes from new entrants to the market. Is that really a realistic expectation when it comes to hospitals? He kept making an analogy between hospitals and airlines. An analogy between hospitals and airports would have been far more appropriate.

I laughed out loud when it was suggested that true free market healthcare might result in Moore's Law type efficiencies. I am no expert on technology but I am pretty sure Moore's Law is confined to some very specific things about computing power. Even your next favorite analogy about airlines offers nothing like Moore's Law type results. But when you are fantasizing about a libertarian state, who needs limits?

Citing Business Class pricing as an example of people producing market efficiencies by "voluntarily paying through the nose" struck me as ironic. Business Class pricing would not be sustainable if those riding were all paying directly. In many cases those riders chose Business Class precisely because they could pass the cost on to the stockholders of the companies they worked for. There would be a lot less Business Class flying if stockholders had a more efficient way of communicating their desires.

Regardless of what economists think they should do, most people will never view treating conditions that can cause death, disability and chronic pain the way they view buying airline tickets and computers. Nor should they.

John Cochrane says health insurance should be about protecting wealth, not health. Well, that only works if you have wealth. For the half the population that live paycheck to paycheck it really is about health.

David writes:

@greg

Greg, I believe large cities do have many airports that range in size and capabilities. I think there is an array of airports/runways that handle smaller planes (specialized services?). Cities like New York and LA have a multiple international airports. Not sure what the local regulations are for the construction of new international airports but I would guess there are many.

Why wouldn't people choose how they treat their medical conditions like they choose other products. Are you suggesting when it comes to medical services people dont want the best quality for the price they are willing to pay?

Greg G writes:

David

Hospitals and airports are alike in that it is very difficult for a new one to enter the marketplace. Certainly regulation has a lot to do with this but the high fixed cost alone would make entry an unappealing investment in most cases even without that. These are not operations that can operate profitably with a lot of excess capacity.

In some cities it may be meaningful to talk of a marketplace for hospitals but for a great many people the number of hospitals it is practical for them to choose from is one.

Of course I am not suggesting that people do not want the best possible value when they pay for medical services. Did you really interpret what I wrote to mean that?

My point was that there are many things that make shopping for medical services different from products like airline flights and computers. First and foremost is the amount of suffering that results if you can't afford the product. Being unable to afford a plane ticket or a computer is not all that much like being unable to afford a needed hip replacement.

The problems of asymmetries of information and emotional decision making are also different with medical decisions. Vast amounts of money are spent on both ineffective medical treatments and outright quackery. Not much at all is spent on tickets for planes that don't fly or computers that don't work.

SaveyourSelf writes:

I am a Family doctor in the Midwest. Some of my patients are Mennonite. They pay only cash. As you might expect from a group of people who pay for everything out of pocket, they ask a lot of questions about prices, risks, benefits, "why do I need that?" etc. They get the same healthcare as insured patients. On the whole, though, they pay less for their healthcare because they make themselves more informed about their choices and they consider cost.

I asked a couple of them, just out of curiosity, if they have been hurt by the "ever rising cost of healthcare." They had not noticed.

I thought that was telling.

Sebastian writes:

There are some podcasts that make economics seem like a dreadfully formulaic and intellectually uncurious discipline. The fact that the mainstream media doesn't present actual libertarian reform ideas is a tragedy. Presenting them in a totally uncritical manner is almost as sad.

Q: What's wrong with healthcare in America?

A: Too much government.

Q: How do we know that?

A: Because government is always the problem.

Q: What about, say, France? They pay half what we do per capita and get better results.

A: WRONG! Every study that shows this is wrong, they really get about the same results as us.

Q: But they pay half as much.

A: 5% of the US population gets 10% better treatment! Also Americans just like eating a lot.

Q: But they pay half as much.

A: Socialism.

Q: What if insurance companies don't want to insure people with a high genetic predisposition for cancer?

A: Of course they will, after all they insure drivers with a DUI on the record(for triple the cost).

Let's make healthcare more like car repair.

http://www.consumerreports.org/cro/2012/04/high-prices-and-poor-repairs-lead-top-car-service-gripes/index.htm

I don't think this show talks too much about healthcare. If anything it doesn't talk about it often enough. However there is only one America, and there are as many healthcare systems on this planet as there are nations. Maybe look at how other countries do things and then offering a fact-based libertarian critique(corruption, examples of cronyism, examples of regulations that hurt actual people in an obvious way). Paving my road cost 3 times more than it should have. I know this because I saw it in the entrails of a chicken.

But then again, what is there to discuss about countries outside America? They have more government involvement in healthcare and so obviously their systems are worse. Why? Because we've studied the potato chip market and every market is the same.


Oh, yeah, and skin rashes form the bulk of medical expenditures. As opposed to, you know, end of life care(~30% of total expenses are in the last year of life) and cancer-like chronic disease.

David writes:

Greg

why should it be difficult for a hospital to enter a marketplace? I think you are forgetting Cochrane's point that with high regulation it is very costly for hospitals to come into a market. to use Cochrane's example, why cant a company like walmart provide simple medical services? Is it the market causing high fixed prices or is it over regulation? I think Cochrane provided sound reasoning to why regulation has driven up the cost of medical services thus making services unaffordable out of pocket.

"Vast amounts of money are spent on both ineffective medical treatments and outright quackery"... Cochrane's point on this is that the miss use of medical insurance and lack of competition creates inefficiency and "quackery". An inefficient Dr. who is a quack wont stay in business for long in a competitive market.

In some cities it may be meaningful to talk of a marketplace for hospitals but for a great many people the number of hospitals it is practical for them to choose from is one.

Which is the opposite of what used to be the case. There used to be small hospitals in virtually every neighborhood in most American cities. My two youngest brothers were born in a hospital that was located over a Safeway store.

I also couldn't help but laugh when Cochrane brought up the fact that he doesn't buy collision auto insurance on his ten year old car. I remember when, during the Health Care Summit, Barack Obama complained that he hadn't been sold such by his auto insurance company when he was a community organizer driving a $1,300 dollar beater car.

With ignorance like that from the President of the USA, can we expect any better from the electorate?

Greg G writes:

David

I actually like the idea of allowing companies like Walmart more regulatory leeway to provide medical services. I agree that regulation has had a big role in driving up prices. Please reread the first sentence of my first comment. If you think regulation is the only thing making hospital startups difficult and medical care a lot more expensive then we are just going to have to disagree on that.

The fee for service model is driving a lot of rising cost. A doctor who recommends an unnecessary procedure will usually get paid more than one who doesn't. A hospital that gives you a hospital acquired infection will usually get to bill a lot more than one that doesn't. Every time a doctors group buys some new medical machine the number of their patients who "need" that procedure goes up.

There are many people doing a thriving business selling totally ineffective "alternative" treatments entirely outside of the regulated healthcare system. There are so many factors affecting our health that it is extraordinarily difficult to judge the effectiveness of any one factor.

Healthcare is like economics in that way.

Todd Kreider writes:
I laughed out loud when it was suggested that true free market healthcare might result in Moore's Law type efficiencies. I am no expert on technology but I am pretty sure Moore's Law is confined to some very specific things about computing power.

While Moore's law just gives the exponential trend of the number of transistors on a chip, which in turn corresponds to consistent speed increases over time, Ray Kurzweil and others have demonstrated that similar exponential gains have been found in medicine.

For example,

1) sequencing the human genome through 2000/01 and now sequencing 12,000 cancer types.

2) imaging resolution increases, although there was a pause for a few years in the 1990s before resuming.

3)computer power increases that make sifting through thousand of compounds possible. The potential of resveratrol was discovered this way in 2002 and likely impossible prior to some year in the 1990s.

4)a computer with the power of Watson that is expected to 'learn' hundreds of thousands of medical documents to get patterns that propel research and diagnosis. Watson's power should be widely availaable to everyone by 2017-2020.

What isn't clear to me is whether Obama Care would slow down the greatest breakthtoughs due to increasingly more powerful computers.

Now if the government took over Intel and AMD.....

Rick Ballan writes:

Well healthcare shouldn't be a "market" at all. That's the whole point. Healthcare trumps economics. Treating health as just another commodity ultimately violates the Hippocratic oath.

Bobby writes:

That was really bad. That free markets generally work and that healthcare in America is not a free market is neither non-obvious nor only narrowly known. We don't need a podcast where two people say that over and over again. So the paper was only "good" in the sense that it stated things Russ Roberts is predisposed to believe really forcefully, it didn't actually contribute anything to anyone's understanding of the issues. As a libertarian, our arguments restated forcefully is nice to listen to in the same way that some liberals like to listen to Rachel Maddow and some evangelicals like to listen to televangelists, but I don't go to econtalk to pat myself on the back and confirm all my biases.

These are the basic contours of the healthcare debate: Person A: Free markets are efficient, we should make healthcare more like a free market, 'cause it ain't. Person B: Free markets are usually good, but in this case they aren't because: 1. We don't just care about efficiency with health care, we care deeply about universal access for moral reasons, and buying healthcare for poor people (and elderly people, if you are into that) deeply distorts the market in ways that can't be addressed with a wave of the hand; 2. Dying consumers being offered a chance to live are especially irrational, and market mechanisms work uniquely badly here; 3. There are lots of countries providing comparable (maybe slightly better, maybe slightly worse, probably a little of both) healthcare in statist ways much more efficiently, but the empirical evidence that market solutions will improve healthcare are not as obvious. Safer to follow the obviously working models; 4. Path dependency doesn't just lead to political constraints, it leads to policy constraints, and there are no smooth transitions from our highly-regulated, state provided healthcare system to a free market system. Then there are some common counter arguments like "french health care may be OK but it's only possible because of innovations funded by American healthcare" and etc.

So "great papers" enter that debate. They don't just restate one of the broad points everyone's heard over and over again, weakly. I get that if anyone actually thought, "We hate free markets, so we want to force statist healthcare solutions on people," this podcast would proudly answer with, "No, free markets are pretty great." But we already know free markets are pretty great, Russ, we listen to econtalk. And we already know that liberals aren't simply dumb statists because, again, we listen to econtalk, and you do a good job of letting those people have their (generally not cartoonishly dumb) say. So please, don't go the way of every other media outlet in America and invite people on whom you agree with just because they made the same old arguments especially forcefully and eloquently, keep focusing on substance. Or don't, if you want to engage in ideological hackery that's fine. Just please label those podcasts, so I can avoid them.

Phil Langton writes:

These podcasts are a routine that I value - I look forward to them. Many are brilliant (Munger's most recent one, for example).
This one was so poor that I don't know where to begin. I am now really worried because the last two podcasts on healthcare (from memory, Professor Charles Atlas and this one by Professor John Cochrane) were authored by bright men but were intellectually weak. They were worse than weak, they were dire. I now suspect that the speaker in each case have an unspoken motive and the arguments presented are the best they can do with the weak material on offer.

Russ, please invite Prof Cochrane back to talk about the police service - another expensive drain on the public purse. I wonder if he would advocate a market approach there? Offer better, more diligent and more forceful law enforcement for those who can pay. How long would it take for modern versions of Al Capone to appear? Would this be something that would serve society in the long run?

I should admit that I'm a UK citizen and that I do not pay for additional health insurance - I rely on the National Health Service. I have worked for two years in the US and have friends there to this day. The medical insurance companies in the US still operate with the same disregard to moral and ethical issues as the banks and look where that respect for the wisdom of the market led us.

Those who are sick of the way that business places profit above ethical and moral implications of their actions should really read Barry Schwartz 'Practical Wisdom' or look up his TED talks. Russ - a podcast from Barry Schwartz would be interesting and unlikely to be dire.

Simon C writes:

Admittedly this podcast covered familiar ground but I enjoyed hearing a well organised defense of the case for more open markets. The diversity of reaction in the comments is also interesting.
I was once watching "House" and a patient complained to Olivia Wilde that he had been waiting an hour for attention. I think it's meant to be a high quality hospital but she told him curtly he would just have to wait some more. I guess in a medical drama there is just nothing strange about that. But I thought "Can you imagine that happening at Bloomingdales?"
I sometimes like to imagine a popular medical tourism destination like Bumrungrad in Thailand trying to open a branch in the US staffed by Thai doctors. People fly to use them in Bangkok so they would surely be even happier if the service was available locally. I wonder how many laws prevent them from opening such a branch...

Greg G writes:

@ Todd Kreider
I was referring to the following quote from the podcast:

"Why does Moore's law not apply to medical devices? Why has the price of cell phones, GPS, and computers come down so fast relative to the prices of medical technology? Where is the home MRI? There is nothing deeply different about medical and other technology. The answer is that supply and demand -- in the current highly regulated system -- is not producing the Moore's law incentives."

The average MRI machine costs over a million dollars. It is a huge device with extraordinarily powerful magnets. The average person might get 2 MRI's in a lifetime. Computers and cell phones are much smaller and cheaper and the typical user will use the device many times each day. Do we really need to invoke government here to understand why we won't ever see the home MRI?

I could not have written a better parody of the kind of pie in the sky - markets can solve all any problem - reasoning that I am criticizing here. I was not suggesting that computing power increases resulting from Moore's Law will not be applied to medical computation problems.


@ Patrick R. Sullivan
If we only wanted the level of medical treatment that was available when your brothers were born over the Safeway Store we could easily provide that at a reasonable price. Let's not forget that the biggest single thing driving increasing medical spending is the vast increase in the quality and quantity of available treatments.


@ SaveyourSelf
Yes, it would be good if people asked more questions about their medical care and yes they would do that more if they felt the cost of the services they received. Even so, I don't think the perceptions of a couple of relatively healthy Mennonites are a good guide to the rising cost of healthcare.

Sebastian writes:

@Bobby: Thank you for saying what I wanted to say in a much more eloquent and polite manner. I am doubly dissatisfied with my earlier post now.

Rufus writes:

I don't think that Moore's Law is working in favor of healthcare due to the constraint of having to serve each patient individually. I have heard a statistic that in 1970 the average patient was seen by 3 - 4 different specialties during a hospital stay. Now that number can be as high as 14. The growth of knowledge has created increased specialization, which in turn makes providing health care a more "human capital" intensive industry. Entire fields like "interventional radiology" did not exist 30 years ago, or at least were very limited in application. So, unlike the potato chip factory episode of Econtalk a few years ago, the advance of technology is working against "efficiency" (at least if measured by the # of practitioners it takes to treat a patient). At least to me, when I think about reasons for the cost of healthcare going up, that is one of the key reasons. There's just a lot of overhead and inefficiency in workflow created by the need to have access to all of those specialists.

As far as the billing rates / prices issues, when I worked in consulting, we had a "standard rate" that almost no one paid. I think my official billing rate was $700/hr. In negotiations, we typically settled for $250/hr. However, I had friends who did the same work I did, but did that kind of work for Mergers and Acquisitions where the time component was a premium. They frequently billed at the standard rate. So, much like the example in the podcast about having an MRI during the day or late at night across town, the market does work out the proper price based on the needs of the individual. It makes sense that having access to a Pediatric Neurosurgeon on a 15 minute basis is going to cost a lot more than something less urgent or less complex. However, that would make the pricing so much more complex, no one would be able to understand it (and there are few who can understand the pricing models as the exist today).

Shayne Cook writes:

Russ and John:

Excellent Podcast - and to Dr. Cochrane, excellent paper ("After the ACA: Freeing the market for health care")! With your permission, I will be forwarding it to my elected representatives - both state and federal - now and often!

John Cochrane correctly notes the critical feature of health care in this podcast, "It's the most important personal service you can get." It has always been curious to me then, that every aspect (business) involved with health care finance in the U.S. is granted 100% tax-deductibility, except the individual actually receiving the service. (Current tax law allows only individual deduction for actual incurred health care expenditures that exceed 7.5% of gross income, and then only if itemizing.)

So, in my correspondence with my elected representatives, your paper will be accompanied by the following recommendation (see my comments), as a means of beginning implementation of "free market" dynamics to U.S. health care, with an altered government subsidy (tax code based) artifact ...

1.) Make all health care costs, either for actual individual's health care outlay, or insurance payments, fully tax-deductible for individuals only. Delete tax-deductibility of health insurance premiums from business. (Get business and government out of the business of health care finance.)

As Greg G (here) and others note, that tax-deductibility change alone still leaves low-income folks and/or high health-care maintenance cost folks "disadvantaged", per se. Tax deductions are of little incentive/value to low income folks, and high health-care maintenance folks will incur costs in excess of earnings. A workable market-based solution to that range of problems is to add the following stipulation to number 1.);

2.) Make the tax-deductibility of actual incurred health care costs, (afforded only to individuals per stipulation 1.), completely transferable, by contract, on a per-treatment basis. That would allow for others - family members, charities, businesses or other individuals - to assume the actual health care treatment costs for either the poor or those with excess health care costs, in exchange for their treatment cost tax-deduction.

Health care costs are the single largest and most critical "bubble" growing in the U.S. economy at the present time. The health care industry, and its related health care finance industry, currently accounts for something in the neighborhood of 18% of GDP. And it will grow even larger as a percentage of GDP under the ACA. It is a "bubble" that will burst, and fairly soon - because it has to, just like the "housing bubble" burst. The U.S. health care cost outlay rate is unsustainable!

I suspect the way the "bubble will burst", is through the eventual realization that the ACA is entirely out-of-control and unworkable, and that a "nationalized" system, on the order of the Canadian or European models, is proposed as the only solution.

I am NOT impressed with any sort of "nationalized" system and it is NOT the only solution. I vastly prefer a "market-based" system - such as the one I've proposed above.

jan D writes:

I'm all for markets but when everyone I know who has ever visited USA (and they usually favor free markets as well but not ideologically) tells me that we (Czech Republic) have a much better health care system I'm at a loss.
I can either make up a story about how the american health care system would beat ours if it were even more free market than it is today.

Or I could do the inconceivable: I could at least entertain the notion that maybe just maybe my theory isn't all that awesome and maybe the most free market system isn't nearly as good as some other systems on just about every measure for everyone except the millionaires.

Which is what Russ is really arguing for. Make the system as good as possible for the rich and it will somehow (a leap for faith here) become good for everyone. I know you could make up wild theoretical arguments why it would work (more leaps of faith) but the reality is somewhat different.

I was extemely disappointed with this episode. Russ was as uncritical as ever.
I'm not an economist but is this what passes for a paper in economics? Sounded more like an ideological rant to me. Where is the objectivity? Where is the careful collection and interpretation of ALL of the existing evidence?

Let's not forget that the biggest single thing driving increasing medical spending is the vast increase in the quality and quantity of available treatments.

That is not so. The thing driving higher and higher cost is the elimination of the incentives to economize due to a third party paying for something provided by one party to a second party.

Elsewhere--food, clothing, and shelter, aka, the necessities of life--have had their costs driven down by modern technology. It would happen in health care too, if it were allowed to.

Also, the legal regimen doesn't help keep costs down either.

Which is what Russ is really arguing for. Make the system as good as possible for the rich and it will somehow (a leap for faith here) become good for everyone.

Decidedly NOT (what Russ is arguing for).

Any system (even the socialist systems of Russia and Eastern Europe) is as good as possible for the rich. People who argue for a freer market in health care want to extend those benefits (that the rich now enjoy by their greater wealth) to everyone else.

Healthcare trumps economics. Treating health as just another commodity ultimately violates the Hippocratic oath.

Nothing trumps economics (properly understood), as economics is reality. 'Hard, harsh, but a rock under your feet.'

'First, do no harm' is being violated every day by our health care delivery system. With Obamacare it will get even worse.

jan D writes:
Any system (even the socialist systems of Russia and Eastern Europe) is as good as possible for the rich. People who argue for a freer market in health care want to extend those benefits (that the rich now enjoy by their greater wealth) to everyone else.

You couln't be more wrong. I bet you didn't spend even a second studying european systems.
1) Our system is not socialist (all specialists and practitioners outside of hospitals are self emploeyed, many hospitals were privatized and private health clinics are common)
2) it's not unique to Eastern Europe and Russia
3) it's not just one system (every country is different, something that americans still don't understand)
4) yes the rich can afford awesome health care, they can fly to the USA to have their nose hair trimmed if they want but that's not what I'm talking about. My point is that the health care that the non-rich get isn't much worse (usually just less comfortable) and that they actually do get health care no matter how poor they are.
And all this while spending a fraction of what the great USA spends.

jan D writes:
Nothing trumps economics (properly understood), as economics is reality. 'Hard, harsh, but a rock under your feet.'

'First, do no harm' is being violated every day by our health care delivery system. With Obamacare it will get even worse.

There are many (most?) economists who would argue for obama care. I bet you don't think that that sort of economics trumps everything, right? So you're really saying that your "economics" trumps everything.

My opinion is that almost everything trumps economics.

michaelm writes:

This discussion has been disappointing. Prof. Cochrane here presents a serious case for supply-side inefficiencies in the health care provision market and people start parroting talking points.

What I said about Dr Banke's podcast a few weeks back applies here, too: econtalk at its best. I'm extremely interested in how the US health care market would perform with some hefty supply side liberalization.

David writes:

The entire talk is focused on how bad government is when in my mind the root cause here is the bribery and lobbying which create incentives for government to drive bad regulations and the high barrier to entry and anti-competitive environment. You blame the government, I blame the insurance companies and the medical companies that prevent competition through government.

How can we fix government so we can fix other issues such as health care?

Sebastian writes:

My intention, at least, was not to parrot talking points. I didn't mind that this podcast preached to the choir(of which I'm kinda a part of on this issue). I DO mind that it's giving the choir agnosticism.

There are statements by Prof. Cochrane that are just wrong.

To give just two examples.

Claim: Statist healthcare systems are less open to foreign trained physicians.

Reality: The US requires foreign doctors to test as well as go through a residency program to practice. As far as I know EU countries require only the test. Something like over 1/3rd of UK physicians are trained outside the UK(hard to disentangle those that come from outside the EU altogether).


Claim: More statist systems can't control healthcare costs:
http://www.washingtonpost.com/blogs/ezra-klein/post/why-an-mri-costs-1080-in-america-and-280-in-france/2011/08/25/gIQAVHztoR_blog.html

Reality: Well, actually it can. And the analysis above is based on the cost of individual treatments not total systemic costs, therefore it can't be dismissed as 'rationing.' America literally pays more for almost every type of medical good and service than more statist systems. US patients and tax payers subsidize the entire planets' healthcare.


This does not mean that a more regulated US system is better than a less regulated US system. It just means that those particular arguments, as presented, are bad arguments.

Is the price of Lipitor in different countries really a useless talking point?

Joe Kash writes:

I just discussed some of these ideas with other physicians in the Doctor's lounge today. There are so many opposing forces that make a truly free market health care system only a dream and fantasy. It was fun to hear the usually free-market cardiologist who hates obamacare also argue with me over allowing Walmart and others to freely compete with cardiologists and other physicians. Jan D above has it all wrong. The rich who are in the right place at the right time love when government consolidates the power. It is easier to lobby centralized power than to compete in the trenches.

Greg G writes:

Russ, you say that more government involvement in healthcare means that we are patronizing people and telling them that "the aristocracy need to take care of them because they are too stupid to make their own decisions."

Well other democratic developed countries have made their decisions. There are lots of different healthcare and health insurance systems in lots of different developed countries. Almost every one has a system with more government involvement than we have. And almost every one has a healthcare system that is more popular among its own people than ours.

That doesn't mean all forms of government involvement are a good idea. It doesn't even mean they are properly understanding the real costs they are paying. They could be "too stupid to make their own decisions." Maybe they need an aristocracy of Austrian economists to make the correct decisions for them.

txslr writes:

I think that this podcast and the last (Munger on Locke, morality and gouging) and Arnold Kling's article on subjective value make a good set.

For example, I am always struck by people who say that the U.S. spends too much money on medical care. How do you know? Because we spend twice what they do in Europe (if you even believe those numbers)? Maybe Europeans spend too little! Their medical results are generally not as good as those in the U.S., but even if they were, what is the value of waiting, additional pain, incapacity, risk?

These are subjective values, and no one knows or can know what they are worth. So why do we think that the U.S. spends too much on health care? We strongly suspect it BECAUSE we have a third-party payment system, barriers to competition, etc. and economics tells us that these things will lead to overspending.

This, I think, is important: We don't know that the U.S. pays too much by observing that we pay more than some system that rations care through coercion, hypothesizing then that freeing the market would enforce market discipline and bring the expenditures down. We only hypothesize that we spend too much because the system in place, we believe, encourages overspending. We have good theoretical reasons to believe that repairing the system would bring down total expenditure, but the real benefit of repairing the system is that it would allow people to spend the amount they want on things they desire.

Whether that is more or less than France is not important.

txslr writes:

Sebastian,

I have looked through the transcript of the podcast and I cannot find where Dr. Cochrane said either of the things you claim he said. Perhaps you could provide quotes?

Sebastian writes:

The quote is around the middle of the podcast. I searched the page for "foreign" to get to it.

"[in the context of having to reduce costs] You have to let lots more people into medical schools or let foreign doctors practice so that we'll drive down how much you guys make. Governments by their nature have to listen to everybody, and the consumer is always last in line."

The section was bigger, but the gist of it(maybe I got it wrong) was that the government would be unable to limit costs.


Again, I don't disagree with the claim that a more free market approach to healthcare would be good. I just don't think this is a good argument for that claim.

Justin writes:

Big fan of EconTalk, but this one was well-below average. It was a feel-good session between two like-minded individuals. I learned that economists who are pro-free market think the government should get out of the healthcare industry and that since you can buy a used car buying health insurance when you are seriously ill shouldn't be a problem.

I would pass on this particular episode. Maybe go find one in the archives that suits your fancy.

Justin writes:

@SaveyourSelf

I'm wondering what these patients do if they ever get diagnosed with glioblastoma? Do they typically have a few hundred thousand to drop on treatment? Do the doctors and hospitals cut them a break for religious reasons (hardly a scalable option)? Do they forgo treatment?

I don't know, but it seems like in that situation they would either feel the bite of inflated healthcare costs or would otherwise be in a special situation.

Sebastian writes:

There is no evidence of rationing in other healthcare systems that would account for the difference in cost.

The study mentioned in the article I linked, by Ezra Klein, accounts for quantities of treatment and still finds that Americans pay more for the same unit of a drug. French people don't get denied Lipitor. They just pay half what Americans do for a dose of it.


Moreover, plenty of countries allow you to buy additional private insurance to top off the state provided one. The arguments about forcing Grandma to live with a bad hip, though she's willing to buy it are not generally applicable(Canada(?) craziness aside).

Sorry for the double post.

txslr writes:

Sebastian,

I think you misunderstand what Dr. Cochrane is saying there. He certainly didn't say that statists systems can never control costs or that statist systems will never allow foreign doctors in. He said that when the government makes decisions it listens to all of the stakeholders and then makes a (ultimately political) decision. Hence, in the U.S. it is hard for foreign doctors to practice medicine because stakeholders (U.S. doctors) prefer to maintain barriers to entry. The government listens to those stakeholders (doctors) and allows for restrictions of competition.

In the U.K., on the other hand, waiting times become so long due to a dramatic shortage of UK- trained doctors (due to low pay in the NHS?) that dissatisfaction of consumers forces the government to pay attention to that stakeholder group. Hence, more foreigners so as to shorten the lines.

It is interesting to note, too, that there are a lot of foreign doctors practicing in the U.S. in spite of the restrictions. I have read that there are more Canadian-trained doctors practicing in the U.S. than in Canada. Sounds like a market dislocation in one place or the other, no?

Dave Sage writes:

Maybe Mr. Cochrane could concentrate his efforts on two easier markets first and then solve the health insurance problem. Can he work his magic on the auto insurance and homeowners insurance markets such that we can have auto and homeowners insurance that is:
"portable, life‐long, guaranteed‐renewable, transferrable, competitive, and lightly regulated, mostly to ensure that companies keep their contractual promises. “Guaranteed renewable” means that your premiums do not increase and you can’t be dropped if you get"_______ (a hurricane) (an accident).

Robert Kennedy writes:

I agree with spirit of much of what Bobby wrote. Maybe because we share a first name? :) Most of the ground here has been covered elsewhere. While I admit appreciate a few of Dr. Cochrane's comments, particularly about regulations that stifle the individual insurance policy market, I found much of the discussion to lack rigor.

As Bobby says, most of us here understand that the US health care system is not a free market system and that it has lot of perverse incentives built in to it. What I'd like to hear more about is how systems in other countries keep their costs down. Do they limit volume and if so, how? Do they limit the costs of transactions, and if so, how? Do they limit access, and if so, how? I do understand that most other countries don't tie health insurance to employment. Is that the primary difference? How do other countries resist the public choice dynamics to load up the system with non-essential care?

Where I diverge from Bobby is the need for some sort of label for podcasts where Russ agrees with the guest. (Though I suspect Bobby was not completely serious.) One can tell pretty quickly from the synopsis where the episode will be heading. The variety here is what keeps it interesting, I think. Personally, my favorite episodes (other than those with his frequent guests, of course) include guests that Russ disagrees with. The recent episodes with Robert Frank & Joseph Stiglitz were stellar. This is Russ's show. He can do what he wants.

Todd Kreider writes:

Rufus

I don't think that Moore's Law is working in favor of healthcare due to the constraint of having to serve each patient individually.

The advances due to Moore's law mostly haven't reached patients yet but have helped researchers.

@Greg

I don't think Russ was at least partly mistaken, but I couldn't find the price of a typical MRI scanner in 1992 to compare. An MRI wouldnt follow Moore's law but still has had an exponential imaging improvement curve. 3T scanners, which cost more, are also replacing 1.5 scanners.

Here are 3 Kurzweil brain imaging graphs from 1970 to 2000. (scroll about 2/5 down)

http://www.kurzweilai.net/the-law-of-accelerating-returns

Todd Kreider writes:

Oops. I meant to write that I think Russ was at least partly mistaken. Reading this again, I'd put him at more wrong than right:


There is nothing deeply different about medical and other technology. The answer is that supply and demand -- in the current highly regulated system -- is not producing the Moore's law incentives.


Part of this is also timing. It is like asking in 1997: "Why can't I use the internet on my phone? The incentives aren't there."

The incentives might slow MRI advances but that is not at all clear - my original point.

Russ Roberts writes:

Todd Kreider,

That quote about MRIs and Moore's Law was said by me in the podcast but I was quoting from John Cochrane's paper.

SaveyourSelf writes:

@txslr

I adore your comment on the subject of "How do you know [we spend too much on healthcare]?", but there is one sentence in your comment that is incorrect that I feel compelled to address.

You wrote, "These are subjective values [waiting, additional pain, incapacity, risk], and no one knows or can know what they are worth."

You are correct that it is impossible for one person to quantify the value of those variables for OTHER people. Externalities of this sort are notoriously difficult for central planners to consider, particularly because so many of them are "unintended" and because they fall on individuals, not the central planning agencies. However, those individuals DO recognize and quantify the costs they bear and they include the aggregate value of those costs in the price range they express when making an offer in an open market.

This is a hugely important point. Those “unmeasurable” variables for central planners are INCLUDED--ie actually measured--in the prices that individuals express to a Free-market. Thus they are accounted for in the prices derived through the voluntary-informed-competitive market whereas they are invisible/absent when a government or other monopolistic institution arbitrarily sets or distorts the price in a market.

And I think this understanding strengthens your point. In France the price of healthcare may appear lower, but that is most likely due to the fact that so many of the costs are not included in their market’s price. France is Socialist. The government sets their price arbitrarily. US healthcare only appears more expensive because it is much closer to an ideal Free-market so its market’s price is much closer to reality. (That is not to say the US health system is an ideal Free-market--or even close--, but it is much closer than France).

This point can't be repeated enough. The amount of information expressed in an ideal Free-market’s price is titanic compared to the dearth of information contained in a monopoly or government-distorted price. They are COMPLETELY different animals. The fact that we call them both "prices" and use the same number system to describe both is EXTREMELY confusing. I think this is THE fundamental reason most people cannot understand economics and I think it is the root cause of all the arguments on this page.

txslr writes:

SaveyourSelf,

Exactly right. This is what I intended, but you put it much better than I.

--jl

Greg G writes:

SaveyourSelf

You make a thoughtful and well argued theoretical point. But it does raise an obvious question when it bumps up against reality:

If our relatively less socialized healthcare system is much closer to ideal than France - and if individuals are the best judges of what is best for themselves - then why is the French system so much more popular among the French than the American healthcare system is among the Americans?

Adam S writes:

I was listening to this podcast during my run today, and for the first 30 minutes kept yelling to myself "airline industry does not equal health care industry!" You buy a plane ticket (first class, business, or economy) knowing you will get from point A to point B. At worst, you end up with a worse meal or worse service than you expected, but it's safe and you get there in the same amount of time as first and business classers. Prices are transparent partially because air travel is transferable. If you don't want to take a plane, there are cars, trains or buses that provide a competing service with a different set of amenities.

Healthcare is not transferable. If you've got a serious illness, you need treatment, and reasonably fast. There might be many hospitals to choose from, but there's not a good substitute for medical care itself. I don't see how you can use this analogy when the choice of not getting care could mean agony, lost days of work, or even death in extreme cases. It's not "should I go back home for Christmas this year?" It's "cancer treatment, or I can't work anymore".

John argues that pricing for medical services should be more transparent, and this is a fundamentally good idea. But the idea that I know enough about my health to make complicated decisions on testing or treatment (even with my Wikipedia and WebMD printouts), is a bit of a stretch. That's why I (or my insurance company) pays the doctor...so they can make this judgment based on their education and experience. Further, I think John's example (an MRI here at 1pm vs across town at 2am) is extremely superficial. If it were that simple, of course a huge number of people would take the 2am option.

A more realistic example would involve a patient choosing to on a "good," "great," or "best" obstetrician to deliver their child. How many parents are going to feel very comfortable choosing only the "good" one? Or if a doctor gives you 3 choices of cancer medicine, each double the price of the one before it. That's a really rotten situation to be in for both doctor and patient, where the patient has to say "I guess I might not get much better by taking medicine #1, but it's all i can afford." Yes, it's a market based decision, but I think at least with our current, bloated system, doctors overtreat rather than undertreat most of the time. And that should in theory lead to better results for patients than undertreatment would, even if the costs still need to be brought under control in one way or another.

Not entirely relevant to the podcast, but also in the comments section: why is state-led healthcare in other countries so much cheaper than in the US, when the results are not worse in a relative sense? I think Germany spends something half the ratio of GDP in healthcare than the US, but I don't see Germans living half as healthy lives as Americans. It might be a poorer system, but it's not that much poorer where the added American cost would make up for the difference. Based on John's predictions would a free market-led healthcare system make our system cheaper than state-run systems in Europe? It would be hard to see that happening.

Russ Roberts writes:

Greg G,

If a survey of Americans and the French discovered that Americans were happier with their food and restaurants than the French, would you conclude that American food is better than French food?

Most Americans don't have any idea of what the French system is like. Most of the French have no idea what America is like. So neither of us has much of an idea of what the alternatives might be to what we enjoy now.

My guess is that many Americans are very happy with their own health care but think we have a bad system. There's probably survey data on this. I'll try to dig it up. Either way, as SaveyourSelf points out, in both countries, consumers are generally uninformed about the true cost of their choices. That's yet another problem with evaluating consumer surveys of satisfaction.

Greg G writes:

Russ

I don't believe that survey about French versus American food would really turn out the way you suggest in your hypothetical. But if it did, I expect and hope I would adjust my priors somewhat.

It seems to me you want to have it both ways about the wisdom of the individual. One one hand, leave everything to the marketplace because individuals have so much wisdom. One the other hand every time an overwhelming majority of individuals make a policy choice you don't like, it is because they are uninformed or worse.

Anyway, I hope this aggressive argument doesn't come off as disrespectful. I really do appreciate these podcasts and this forum. In my opinion you are one of the best interviewers anywhere. We all have more trouble seeing the flaws in the arguments we agree with than the ones we disagree with.

Greg McIsaac writes:

Commonwealth Foundation funds period health performance and satisfaction surveys. I think this is the most recent one:

http://www.commonwealthfund.org/Surveys/2010/Nov/2010-International-Survey.aspx

One of the questions they ask is:

Which of the following statements comes closest to expressing your overall view of the health
care system in this country?

1 On the whole, the system works pretty well and only minor changes are necessary to make it work better.

2 There are some good things in our health care system, but fundamental changes are needed to make it work better.

3 Our health care system has so much wrong with it that we need to completely rebuild it.

42% of French respondents chose statement 1, compared to 29% of US respondents;

47% of French respondents chose statement 2 compared to 41% of US respondents; and

11% of French respondents chose statement 3 compared to 27% of US respondents.

My conclusion is that most people don't like going to doctors or hospitals.

The survey asks several more detailed questions about care and insurance. In general the results from France and US were similar. The US respondents had shorter wait times to see specialists, but paid more and expressed more dissatisfaction with paperwork and actual insurance coverage.

Greg McIsaac writes:

Two items from NPR this morning that are relevant to this discussion:

1) Study of doctors who consult with patients over e-mail:

http://www.npr.org/blogs/health/2012/11/21/165584353/patients-with-online-access-to-doctors-may-make-more-office-visits

2) Interview of Mark Bertolini, CEO of Aetna, the first part deals with addressing the fiscal cliff, but he goes on to describe ways that the cost of health care could be reduced, especially for elderly patients, by changing the fee for service incentives:
http://www.npr.org/2012/11/21/165629956/fixing-health-care-waste-would-trip-deficit

michaelm writes:

I don't understand the constant need to refer to and compare the US system as some kind of 'free market ideal' versus the ostensibly more statist systems elsewhere when THE WHOLE POINT of this podcast is that the US DOESN'T have a free market in health care. Who knows? Maybe if we implemented some of the reforms Dr. Cochrane suggests we would see US healthcare costs decline to be more in line with international norms.

People seem to be missing the point of this podcast and refighting old battles over different issues.

txslr writes:

My neighbor is a doctor who was considering taking a job in New Zealand. She visited New Zealand and stayed with a family friend whose adult daughter suffered from menstrual cramps so severe that she was forced to miss work for from 3 to 5 days monthly.

My neighbor happened to have with her a prescription drug she takes for a similar problem. She gave the young lady a few doses of the medication which completely cleared up the problem.

The ecstatic woman went to her doctor and asked for a prescription to this wonder drug only to be told that it was not available in New Zealand because the government had decided that the cost/benefit ratio didn’t justify it.

The young woman was perfectly willing to pay for the drug herself, and the benefit was private (her ability to work, the absence of pain). But the government stepped in and told her she couldn’t purchase the drug because they want to keep health care expenditures low.

Suppose that 65% of the people in New Zealand are happy with their health care system. What difference does that make to the woman who can’t function for days each month due to debilitating pain that could be avoided if she was left to her own devices?

SaveyourSelf writes:

@Greg G. You wrote "If our relatively less socialized healthcare system is much closer to ideal than France - and if individuals are the best judges of what is best for themselves - then why is the French system so much more popular among the French than the American healthcare system is among the Americans?

Greg. I believe I can answer your question, though not easily. I am finding it a strain to answer concisely. Each time I begin, I find I am writing the introduction to a rather long book. Perhaps a descriptive example—a verbal picture—can capture enough information in a small space.
1) Imagine you are 65 years old
2) Let us say the real-price of a primary care doctor visit is $50. We can derive this price in two different ways. First go to a doctor’s office and add up all his costs. Second go to a voluntary-informed-competitive marketplace and ask the price for a doctor visit. Both will be $50 or very close to it as long as the ideal market assumptions are all true and Justice is maintained between strangers.
3) Enter a politician. Any will do but LBJ is probably best. LBJ says that you worked hard your whole life and raised your kids and fought two world wars so you deserve primary care doctor visits for $0. He goes on to say you can have that remarkable price for the very low cost of one vote-- his.
4) Liking that deal, you vote for LBJ and try not to lose sleep at night wondering who will pay the $50 for your office visit or the long term consequences of violating Justice--harming strangers--in order to improve your own standard of living.
5) Following the dramatic reduction in the cost of your healthcare, someone performs a survey. The survey finds that elderly people who are getting healthcare for zero dollars like their healthcare a whole lot better than they liked that same healthcare when it was $50. Not coincidentally, this is exactly the same outcome you would expect if you asked the question “How do you like paying for your healthcare AND someone else’s healthcare?” and then compared it to “How do you like it when someone else pays for your healthcare?”

http://www.commonwealthfund.org/News/News-Releases/2002/Oct/Survey--Medicare-Beneficiaries-Report-Greater-Satisfaction-With-Insurance--Better-Access-To-Care-Tha.aspx

Your question is complicated. I hope my answer was satisfactory.

In summary:
1) The price quoted in a voluntary-informed-competitive market is very close to the actual cost of services when the ideal market assumptions are true and Justice is maintained. Because of that fact, we are safe to assume that if the market-price is not paid, then the service in question will no longer exist. If those services continue to exist even after a large portion of market participants stop paying the Free market price, then we know that the price has risen for the paying portion of the market because, again, the price must be paid.
2) The price quoted for government services is an empty number. It has no meaning in reality, but does have meaning at the voting booth.
3) The market-price and the empty-government-number are both described in the same language--dollar signs and numbers--with nothing to clarify which one has meaning and which one is meaningless.
4) Individuals, given two numbers that look identical and asked to pay one of them, will choose the lowest one.
5) Individuals' satisfaction for gifts is much higher than their satisfaction with the same items purchased at market prices.
6) The government, who's primary task, above all others, is to uphold the precepts of Justice--ie prevent harm between strangers--is in remarkably good position to CAUSE harm to strangers in order to advance the goals of the controlling elements of the government, whomever they may be, particularly if they are the majority.

[Note: The above scenario is a generalized fiction designed to answer a generalized question. Medicare patients’ have some out of pocket expenses. They are responsible for 20% of their visit fees. Many of them also paid taxes in the past which pays for some—but not all—of their future Medicare expenses. I am not knocking Medicare per se. The point of this example is to highlight why popularity is not synonymous with good societal outcomes in the setting of Injustice. ]

Bobby writes:

"I don't understand the constant need to refer to and compare the US system as some kind of 'free market ideal' versus the ostensibly more statist systems elsewhere when THE WHOLE POINT of this podcast is that the US DOESN'T have a free market in health care. Who knows? Maybe if we implemented some of the reforms Dr. Cochrane suggests we would see US healthcare costs decline to be more in line with international norms."

For me, Europe matters less for making arguments like, "these very statist systems are doing better than our more free market system and that proves free markets are bad" and more because of arguments like "these statist systems are doing way better than our current system. Let's address that, because it implies we could make big gains moving in a more statist direction and puts the onus on libertarians to prove we can make even bigger gains going in a free market direction."

In other words, I think the point is that libertarians can't ignore the success other countries have had in providing universal healthcare while still controlling costs (success compared to us, I mean), we've got to meet that head on. "Those systems *are* better than our current system, but here's why we libertarians have an idea for a system that's even better than either of them" is the right argument to make. Handwaving and wriggling and pretending like those other countries' programs aren't really successful at controlling costs while providing good healthcare outcomes (again, relative to us) is super unconvincing. "They have slightly lower cancer survival rates in most cancers! Wait times! We're fatter! They've all been tricked into liking their systems!" Not dumb points and worth raising, but as proof that European systems aren't really better than America's it's just weak stuff. That "spending half as much" figure talks, and I haven't seen anyone do a very good job of tearing it down by showing it's fudged or queues is imposing even greater costs or whatever(maybe I missed a podcast on that, though?).

So better to build the case for a libertarian system up than try to tear the relative success of the socialist systems down (again, relative to America's worst-of-both-worlds system). Better to try to find natural or real experiments in delivering free market healthcare solutions, experiments which can prove that, yes, the french healthcare system is way more efficient than the American one, but check out how much more efficient a free market system can be. Better to think long and hard about a way to provide universal access to medicine in a free market compatible way, or to frankly admit that taking care of the poor's healthcare needs isn't something our free market solutions can do. Better to demonstrate how, yes, the french system is pretty great, but it relies on innovation in the American system, and an even more free market American system (or, in the case of patent monopolies, maybe I should say "an even less centrally planned American system") will provide even more innovation. That's the sort of the podcast I was hoping for.

I don't know, I am a very recent and very wishy-washy libertarian, so maybe with time I'll come around to thinking libertarians have a really strong argument on healthcare. But as is, it looks too much to me like statists have a proven way to improve the US health care system (imitate systems from other first world countries) and libertarians have broad theory and analogies to airlines. I with the libertarian argument was more concrete and less hypothetical.

Greg G writes:

@Greg McIsaac
The French system looked more popular to me in that survey but, even if the results are only similar as you characterize them, the fact that they get those results at a lot lower cost counts for a lot.

@michaelm
I missed the part where anyone described the U.S. system as a "free market ideal." If there really was such a person I will join you in disagreeing with them on that point.

@ txsir
You ask:
"Suppose that 65% of the people in New Zealand are happy with their health care system. What difference does that make to the woman who can’t function for days each month due to debilitating pain that could be avoided if she was left to her own devices?"

Maybe that won't make a difference to her but that doesn't mean an anecdote should trump the will of 65% of the people. There are many faults with constitutional democracy. Its great strength is that it is a lot better than any other system we have been able to come up with for making public policy. I doubt there is any set of rules that is fair in every situation.

@SaveyourSelf
I agree that many people like socialized medicine because they get more than they pay for. Many others like it because they don't realize how much they are paying for it. The same is true of the police department and fire department and the court system and the military.

This debate really comes down to whether or not basic healthcare ought to be treated like those things, or not. Reasonable people can disagree on this but in the end we decide using the methods of constitutional democracy. That is a good thing in my opinion.

WP Knabe writes:

Mr. Cochrane's paper and podcast were both highly illuminating. I have but one objection/suggestion. Many times the statement was made government controlled markets don't work. And I agree, they don't work as well as a free market. However, when we discuss health care proponents for the ACA or more look to single payer systems in Canada and Europe and see a market that works well enough for them. They also quote those systems give as good or better care than the US at a fraction of the cost.

If you really want to change people's mind on this issue you have to prove the statements regarding price and quality of single payer are inaccurate and/or demonstrate what the true cost is, eg lower growth and lower standard of living.

Bill

Chambana writes:

This was one of the worst Econtalk episodes. Although I am an avid listener and consider this podcast to be the best program on general economics, I am appalled by the poor quality of Prof. Cochrane’s analysis.

Having said that, kudos to Russ for committing to interview an expert on “the other side”. Yet, that -- in itself -- is an unfair statement. IMO, balanced and objective debate demands two experts (i.e., knowledgeable health economist) advocating opposing normative conclusions. I may be wrong, but nothing in Cochrane’s resume suggests that he should be part of the serious health care debate.

This may be harsh, but I am sure that Prof. Cochrane would (righteously) object to a health economist, no matter how recognized in his/her particular field, advocating some philosophical direction in finance/financial economics.

Forming an objective policy on a topic requires serious analysis of empirical evidence, not just proclamation of “one-fits-all” philosophical view. Unfortunately, Prof. Cochrane has demonstrated only sparse knowledge of the topic. In a brief survey of his paper, I did not observe any citation of serious and ample work done in health economics. Coming from a serious academic, such as Prof. Cochrane, this is somewhat disrespectful to the field.

If it were as simple as “copying and pasting” lessons from the airline or car insurance industry to health economics, surely we would not have the field of “heath economics”, just like we would not have the field of “financial economics”.

Problem with libertarian economist is that they are a priori committed to one-dimensional view of the world, which then sets them up for a failure when the empirical evidence falsifies their view. In a kneejerk reaction, libertarians then either a) neglect evidence, b) deny its existence, c) dispute the validity of all statistical evidence due to problems with data collection and analysis, or d) cherry-pick some elements from which they extrapolate conclusions which fit their world view.

Because I am not a health economic, I won't go into individual issues already raised by other commentators here, but will refer you to the video link of Jonathan Gruber who addresses some of the issues in health care and health insurance.

http://video.mit.edu/watch/health-care-reform-in-the-us-what-will-it-look-like-and-what-does-it-mean-9548/

Todd Kreider writes:
That quote about MRIs and Moore's Law was said by me in the podcast but I was quoting from John Cochrane's paper.

Sorry about the error.
Well, everything I wrote applies to him.

I understand that innovation isn't maximized under Obamacare, but it seems due to Moore's Law that innovation will not be stifled nearly to the extent often claimed by those like John Cochrane.

Lio writes:

To all commentators: Stop taking the French health care system as a model. It is a money pit! We, French, are sitting on a time bomb! Our unemployment rate varies between 8 and 12% for 40 years (almost 10% on average) and the growth rate of GDP lost 0.5% on average every 10 years for 30 years. We are on the decline, and the outlook is not good. If Americans follow our example, then they sign their death warrant. Greece is an example not to be followed, and that we, French, follow closely enough unfortunately, as Spain did, for example. The French have the illusion that their health care system is fabulous because they do not pay anything directly. Everyone is looking to take advantage of this system: patients and professionals. Spending increases year after year, and accounts are always unbalanced. This is very expensive, collectively. The truth is that we become poorer and the richest people gradually leave the country. Continue to vote for presidents like Obama for the next 50 years and you'll end up looking like Greece or France. Good luck!

Greg Worrel writes:

Greg G writes:

that doesn't mean an anecdote should trump the will of 65% of the people.

Thank you Greg G for summing up the cold-hearted attitude of those who advocate for centralized decision making and against liberty and free markets. If the majority can vote pain and suffering on others then it is just tough luck for those in pain. Of course when it comes to costs, why should any suffer at all when it is possible to vote to take what is needed from those who have? But then if doctors are scarce then why should any of their time be allowed to be spent on the suffering of small groups who don't have the votes to get care?

This appears where we are headed. Voting block against voting block. Many apparently think that this brand of cold heartedness beats the cold heartedness of free markets which drives down the costs for all and incentivizes innovation.

Russ, it seems you have your work cut out for you in educating people about the value and importance of free markets.

Greg G writes:

@ Greg Worrel

It would be too easy to come up with a counter anecdote about someone suffering because they couldn't afford care in a free market system and then conclude that that shows libertarians are cold hearted. The truth is I don't have much respect for that type of argument from either side.

As for txsir's story about the woman who was denied her preferred medicine for menstrual cramps, I happen to agree that she should be able to purchase it on her own. I just don't think the story proves the free market will solve our biggest health care problems. It is not at all clear to me how denying her the ability to purchase the drug with her own money even advances he state's alleged motive of saving itself money.


@Lio

If the concern is that the French system is "a money pit" it's worth remembering that the relatively less socialized American system is a much bigger money pit.

Thomas A. Coss writes:

With over 30 years in healthcare, this brilliant piece is also absolutely correct and to which I would add Residual Claimancy.

In the end, you and I as patients which we will all some time be, are also the clinical residual claimant to the clinical outcome. Only you can do your own healing, and in the end, only you will do your own dying. The notion that that someone else will make the decision the outcome of which I must bare, should cause all people to be concerned, then say "no". I know precisely where I would go if I were to need heart surgery, or chemo therapy, and they're not in the same place, or the same state. T.A. Coss, RN

txslr writes:

Chambana,

So Paul Krugman should only write about international trade and Tom Friedman should write about...nothing?

Matt writes:

Russ - please include my voice among those asking for more of these rare, market-oriented analyses of the health care spending crisis.

If I ever again need a retelling of the other side of the story, I'll simply read the NY Times, watch ABC News, listen to NPR, etc.

Tony Clifton writes:

First, thank you for this podcast. Commuting on the train 3 hours a day I have got to listen to a lot of your podcasts. I learned about this podcast though a Planet Money podcast.

In College I generally did well in Physics, Chemistry, Biology, Calculus, earning a degree in Science. Economics; however, I always did terribly. I could never understand how everything fit together - I'm a systems guy - I could never understand the system.

After witnessing the meltdown of the global financial system from outside the US while running operations for a US based internet company in EU I got more interested.

I am with you on free markets and health care - but I have to live in the REAL WORLD.

When I am in the UK I get incredible health care, I don't fill out any forms, I don't worry about pre-existing conditions or getting denied coverage. I am sick - I go to the doctor and get treatment. I also don't wait in lines or wait long times for appointments. My NHS insurance payment comes out of my paycheck (it is a transparent line item) - it is similar to what I pay in the US but is graduated so lower income individuals pay less for their coverage.

In the US I have to fill out multiple forms, my wife is denied coverage for reproductive health, I am billed multiple times for deductables, and various amounts from providers for anything above my private health insurances negotiated limits - it's all opaque. When I first moved to the UK I was dealing with previous US claims for almost a year.

I have Cadillac Health Insurance, I make six figures and my health care experience in the US is terrible compared to what I experience in the UK.

Health Care, Healthcare, Health insurance whatever you want to call it is a complete mess in the US as compared to most other advanced countries.

The Market may well be the best mechanism for distributing scarce resources but in this case it is not working very well. The US can do much better.

If our goal is to provide good health care, at the lowest cost, for the most amount of people we are not pinko communists for looking at the UK or other OECD countries with better outcomes for ideas.

How about a basic health care system for all with supplemental health insurance on top - for those that want it. There are many ways to get there but a public / private model does not mean we are socialists.

The free market has not gotten us there in the last 40 years - since Nixon put us on this employer sponsored health insurance model - why do we have to keep doing the same thing.

Why cant we admit there are some things that the market cannot resolve. That does not mean it is not the greatest system for prosperity - it just means we don't need to treat markets as our religion - we don't have to be fundamentalists about ideas.

While we are here - at the top of the podcast there was a litany of things that the US market does better than EU from cars to cell phones and airlines.


Fact -

My internet coverage in the US is 25% as fast and twice as expensive as my internet connection in the UK

My iPhone connectivity is faster and half as expensive in the UK as what I pay in the US.

You can buy automobiles from US manufacturers (in UK) that get 40+ MPG, cost the same as in the US, and are not all SUV's in the UK. They don't sell these models in the US because there is not market demand.

You can get EU flights on carriers such as easyjet and ryanair for


There is something wrong with the Free Market in the USA if the more regulated markets are delivering better value.

Russ Roberts writes:

Tony Clifton,

We don't have a free market in health care in the United States. Nothing remotely like it. That was part of the point of the podcast. But you could take your argument to mean simply that the more top-down approach of the UK certainly seems to work as well or better as the weird mix of government and free-market we have here. The argument would be that going to the UK system would at least be an improvement.

Maybe. But perhaps your demands on the health care system have not tested it fully. For example, getting diagnostic tests such as an MRI is evidently much slower in the UK, as this article from the Guardian points out:

Patients could die because of rising NHS waiting lists for tests and treatment, the leader of Britain's hospital doctors has warned. Delays in identifying conditions such as cancer may mean that a patient's illness reaches the stage where surgery or drugs cannot save them, Dr Mark Porter told the Guardian.

Porter, chairman of the British Medical Association's consultants committee, said the growing delays were "inhumane" because the ensuing uncertainty added to patients' fear and suffering.

His remarks will add to the pressure on David Cameron, who has offered several recent personal guarantees that patients will not have to endure long waits to be treated.

A Guardian analysis of official NHS data on England's six main waiting time targets shows that five are increasingly being breached. The number of patients waiting more than six weeks for a diagnostic test such as an MRI scan has quadrupled in the last year, an extra 2,400 people a month are not being treated within 18 weeks, and 200,000 patients waited longer than four hours in A&E this year compared with the same period in 2010, the data reveals.

The growing number not being tested or treated within the required time limits was of particular concern, Porter said. "If patients are now exceeding those times, then those patients' treatment options are being limited, and if that happens then there's a potential for patients suffering harm.

"It may be that someone's disease progresses beyond the point where surgery might usually give a cancer patient a potential cure, but the patient then receives palliative care only," he said.

Here in the United States, for many people, an MRI is available within hours or days. I don't know if anyone waits six weeks.

The delays do not prove that the UK system is worse. I merely point them out to show that your pleasure with accessing the system in the UK vs. the US may not capture the whole picture.

Johannes writes:

Mr. Cochrane rightfully highlights inefficiencies in the US health system. However, he than suggests a solution which actually is no solution to the problem at hand. If the society would like to provide good health care for everyone with no discrimination against preexisting conditions, he cannot just argue that this is inefficient and we should not have that (Democracy trumps Economics!).

He can point out the costs of providing good health care to everyone (or forbidding insurers to discriminate); however, that is different from bashing the government for providing an inefficient service.

If he thinks he can provide a solution that would make the US health system more efficient while fulfilling the requirements (of society), he is welcome to do so. However, his presented free market idea is no such thing. Thus, we are stuck with either a government system or a highly regulated private system (which obviously needs improvement in the US).

Jonathan Rothwell writes:

This was an excellent conversation. Consider me a convert to the idea that the most urgent reforms to the healthcare system entail making it more market based, along the lines suggested by John Cochrane.

Thank you Russ and John. I hope these ideas are put into practice, but there is little reason for hope anytime soon, given current legislation and our unimaginative and ideologically entrenched political leaders.

Harun writes:

I want to know what the plan is to reduce the labor costs in the US to the labor cost in Europe, i.e, which person is going to tell American doctors they can only make what French doctors make.

Good luck with that cost curve, when labor is a large component.

Drug prices: The US should simply pass a law that would require global pricing for all FDA approved drugs. Then watch as Pharma raises prices in monopsony countries over time, reducing free ridership. If they do not do this, then we really should be paying 1/2 price for Lipitor.

Give it some phase in time, so they can re-negotiate with Europe or leave the markets where the state has squeezed them too hard.

Only include OECD countries, so they can subsidize sales to Africa, etc.

However, I suspect that the idea that we can just get Swiss prices so simply is illusory. It would work if we could start from ZERO, but we cannot do that. Instead we just layer on another layer of stuff and hope.

Also, I'd like to know if anyone has sued the UK's NHS and been compensated for medical malpractice. I will enjoy seeing trial lawyers in the US face this sudden lack of cases and the consumer complaints that will follow.

Harun writes:

"my wife is denied coverage for reproductive health"

Let me just note that Taiwan has national healthcare and also denies this.

It is not a function of single payer or not to fund birth control or abortions.

It depends on the country and their views.

Finally, all these claims that Czech Republic has cheaper healthcare need to keep one thing in mind:

Are your doctors and nurses compensated the same as US doctors? Do they pay the same medical malpractice insurance?

Probably not. Salaries in Taiwan for doctors and especially nurses are many times lower than the USA and there are few lawsuits.

Thus, they are magically cheaper.

Lio writes:

@Greg G

"If the concern is that the French system is "a money pit" it's worth remembering that the relatively less socialized American system is a much bigger money pit."

I am curious about the data that allow you to say that. How do you come to that conclusion?

Wes writes:

I am a regular listener to EconTalk, and although I have ideological disagreements with Russ' outlook I usually find the discussions here illuminating.

Like the previous show on healthcare with Atlas, this show was shameful.

If you are going to have a guest whose position on the issues largely coincides with your own it is your intellectual duty to strengthen your position by considering the most plausible objections to the view you advance. This doesn't mean tossing your guest softball "objections" that are already addressed in the paper under discussion.

The obvious counterexamples of state-sponsored health care systems which provide universal care of comparable quality at a lower price (frequently mentioned in these comments) seem like a good place to start.

Dismissing the moral considerations that guide public debate about health care also weakens the position presented here. They are waved off as if they were beneath consideration.

While I am sympathetic to many of the positions presented here I felt the yes-man presentation robbed them of much of their impact.

László Sándor writes:

Maybe you can invite Amitabh, Amy, or Chad on too?
(With their permission, of course, as it would definitely count as "circulation"?)
http://economics.mit.edu/files/8500

Russ Roberts writes:

Wes,

I'll try to be tougher but I do think the objections I raised are common objections. The quality of care in state-run health systems is not obviously equal to that in America. The delay for MRI's is one example I gave above. But it's obviously a complex data question that isn't answered in a straightforward way.

On the moral considerations, I'm not sure what you mean. Can you give me an example?

Tony Clifton writes:

@Russ R
"Maybe. But perhaps your demands on the health care system have not tested it fully. For example, getting diagnostic tests...."

Fair point, what I can say anecdotally is recently our UK business unit voted to swap their supplemental health coverage (on top of NHS) for an increase to their pension scheme. I being American - also reading articles like the one you mentioned was the only vote out of 25 for retaining the private insurance.

Really from experience in Germany and UK people on the ground don't even talk about health care - because it is invisible, it is there when you are sick, there are no forms, no pre-existing conditions, no duplicate billing. If you want a faster MRI you can purchase supplental health insurance.

But health care is different here.

If you have a sprained ankle and want an MRI you are not going to get one without supplemental health insurance.

If you are obese and need a hip replacement - you are not going to get one from NHS until you lose weight. If you don't want to lose weight you will need supplemental insurance or to move to the USA.

There are no ads on TV telling you what symptoms you need to tell your doctor to get prescribed the newest drug.

The main idea is Health is fundamentally different than buying a big screen TV.

The US model of mixing consumerism - massive advertising for drugs and treatments, making up and marketing designer diseases, monitizing disease and illness, it's a complete mess. The private model that has evolved in the free market is a complete mess - it is not creating the same value as these other systems in terms of health outcomes. Maybe that is because it is not optimized for health outcomes; rather it is optimized to maximize revenues and profits.

The market has not solved it - so the answer I hear is starting over with less regulation. That is the reason why economics is not understandable. It is a religion my friends. In the real world you don't get to throw out the information that does not fit your world view, you have to chose the least worst solution.

If the UK or Germany has universal health care that is less expensive and as good or better most of the time than what you get in the US why don't we copy what works and make it our own, make it even better.

We have not even talked yet about the positive social effects "all boats rising" of citizens not having to worry about how they are going to pay for healthcare. Just like education, universal healthcare needs to also be seen through the lense of maximizing our countries human capital.. all of our human capital.

Tony Clifton writes:

@Harun

"Let me just note that Taiwan has national healthcare and also denies this.

It is not a function of single payer or not to fund birth control or abortions.

It depends on the country and their views."

Let me clarify - my wife occasionally suffers from severe uteral pain and cramping. My health care provider continually denies payment for any doctor visits where this service is coded as a furtility treatment. How can cramping be furtility treatment?

It only makes sense when you realize my health provider (not naming any names but they have a shield) is playing a game with billing in order to deny coverage. When you catch the error you spend hours on-the-phone going between the provider and insurance carrier trying to resolve it. But that is also by design - to get you to give up - waste your time until you pay that additional $1200 charge out of pocket.

I wish this was an isolated issue but it's not. Billing games, making it hard to resolve billing issues, hiring "third party companies" to review and deny claims for pre-existing conditions - like having a vagina. Welcome to the American form of Health Care systems where the only value "view" is mammon. It's a complete mess.

Mark writes:

@Tony Clifton

"The US model of mixing consumerism - massive advertising for drugs and treatments, making up and marketing designer diseases, monitizing disease and illness, it's a complete mess. The private model that has evolved in the free market is a complete mess - it is not creating the same value as these other systems in terms of health outcomes. Maybe that is because it is not optimized for health outcomes; rather it is optimized to maximize revenues and profits.

The market has not solved it - so the answer I hear is starting over with less regulation. That is the reason why economics is not understandable. It is a religion my friends. In the real world you don't get to throw out the information that does not fit your world view, you have to chose the least worst solution."

I think you're missing much of the point of the discussion--it's not a free market. Saying "the free market system isn't working" is basically nonsense because it's not a free market system.

We have neither a state-controlled system nor a free system. In a way, we actually have the worst of both worlds because we get the consumerism from capitalism and the perverse incentives from government intervention.

Raja writes:

Had to fight feelings of nausea listening to this podcast. Every excellent - and, by the way, trivially obvious - idea that Cochrane brings up is the exact OPPOSITE of the direction our country, and world, are currently heading. When future archaeologists decode the monkey-brained scribblings of our ruined civilization they may wonder why humans were so eager to throw away their own freedom...

+n to Russ's comment that this kind of discussion diversifies the overall conversation, which leans 100% the other way, rather than creating some kind of free market echo chamber. In contrast, the subsequent podcast adds little value to the overall discussion. I've never heard an extended discussion of free market reforms to the healthcare market on any venue other than Econtalk. I would imagine most so-called "conservatives" or libertarians have never even considered some of these topics, or peeked at how deep the rabbit hole really goes ...

Allan writes:

I'm generally a fan of EconTalk, but on this one I agree with Justin that this podcast doesn't provide much value.

It takes no great brilliance to find a thousand things wrong with the medical services delivery system in America. I'm pretty sure the private sector could reduce prices. Would this end up smelling better or worse than what the banks accomplished in the housing market? Housing and illness (and for some, education) are the largest sums of money most people deal with in their lifetimes.

The crash in the mortgage system left people homeless. What would a similar crash in the medical services sector look like?

I can't stand the syllogism that people are too irrational to involve government (he used the phrase "fight it out in the streets") therefore the private sector is the only solution. People don't suddenly become more rational when the system is moved under the private sector umbrella, you just end up with a different cocktail of risk. Explosive risk, if you look at the mortgage sector.

Some people seem to like the way the private sector fails over the way that the government fails. I don't have a strong preference for either type of failure.

The intellectually substantial task with the medical system in America is to unwind the ugly hairball while keeping one eye on the Hippocratic Oath. Oh yeah, economists don't have such an oath.

An analysis I like is that one of the husky voices that opposes progressive reform (my own list of progressive reforms includes privatizations well judged) are the employers who enjoy having a docile workforce. This was argued in the Economist a decade ago as I recall. For this reason health benefits are tied to employment circumstance and we discourage workforce mobility across state boundaries (the "present condition" problem).

This isn't a state of affairs the government wants. It's a state of affairs that greedy elements of the private sector want, and they pay well to get it. We can remove the government from the middle of this transaction. We would still have the greedy interests in the private sector seeking other ways to perpetuate the system they presently enjoy. I tend to regard the private sector when sufficiently motivated as resourceful in achieving their main ends.

Long term (if the mathematical series converges, which I doubt when the largest pots of all are in play) private markets eventually squeeze this nonsense out. Meanwhile, what of the Hippocratic Oath? How compatible is that with bending our knees to the altar of failure?

Allan writes:

One more thought crossed my mind concerning this podcast.

Last night I was skimming through Super Crunchers by Ian Ayres precisely because its the only case I can think of where Russ Roberts devoted the beginning minutes of a subsequent talk to a less than laudatory one-sided rebuttal. I had just finished reading Automate This by Christopher Steiner and it seemed like a good time to go back and contemplate how the burr got so deeply under Russ's saddle with this book and author.

There was an anecdote where Ian Ayres suggests something to the effect that football coaches should perform randomized trials on key game decisions, if the strategy with the best outcome is not reliably known. He reports people responding with horror that "football is too important" and then he muses: well that's funny, we do that with life and death in the field of medicine. (I thought I would quickly locate this passage with full text search in Google books, but none of the keywords I recall brings up any result. Perhaps that page was excluded. There's a faint chance I crossed wires with something else I was reading.)

I wonder when I listen to glib reformers of the medical system how many would be struck down with an aneurysm on the spot if the coach of their favorite football team took a risk half as large in the dying minutes.

It seems to me that Russ has somewhat the same objection to Ayres that I have to the invisible hand. Ayres seems to believe that you massage the numbers [then by some miracle of the black box] insight emerges. We have a giant literature concerning the risks of trusting miracles not understood (my most recent encounter with this was The Thief of Bagdad). Even if you have strong evidence in retrospect that the black box grants wishes and remains benign, as soon as you begin to count on this assumption, the newly introduced feedback loop negates all previous conclusions.

Russ frequently mentions this effect in connection with the housing market: people naively allowed themselves to rely on the retrospective truism that housing markets never go down.

I was also reading A New Kind of Science recently (I'm on a skepticism binge). Wolfram is right that some systems are inherently black boxes where you can only know the outcome by allowing the system to run. He then proceeds to express surprise for another 1000 pages that we haven't invested more energy in studying systems of this nature. He rants on about the principle of computational equivalence which basically says that any system you consider which contains an irreducible component (even of almost trivial construction) anything at all can potentially happen. Within economics, it took Hayek to upscale analytic paralysis to intellectual fashion. I don't entirely trust this genie (no matter how many gifts he bestows) and I never will. I don't entirely trust Ayres's magic spreadsheets and I never will.

The narrative I prefer is this: you start with a prudent choice of tools [then an amazing amount of blood, sweat, and tears transpires] before insight emerges.

What makes this podcast weak for me is how little of it appears between those modest square brackets. Ideology is no substitute for hard work.

Roman Lombardi writes:

Here is an interesting article about an insurer taking it's fight with a health care system to the mat by trying "out" them on their pricing...this is good for consumers...

Chris J writes:

I read the comments before I listened to the podcast, and I expected it to be filled with bad analogies. Although airlines are clearly different from hospitals, I think the specific analogies used were excellent and applicable. Overall, I thought it was a great podcast.

The most important point in the podcast, and the one you never hear in mainstream media, is that our current system of incentives guides healthcare suppliers to invent non-economic solutions, because consumers are totally insulated from costs, and pricing information is lost (that is, the solutions would not be profitable if the consumers had to pay for them with their own money, even if all the consumers had enough money to choose to pay). I think that is a true tragedy.

My wife is a doctor at a research hospital, and I see many of her colleagues socially. The vast majority favor a single-payer system, generally because they feel it is more "moral." I think what they don't understand is that in trying to create a system which gives less wealthy people more access to healthcare now, they are creating a system which gives everyone less effective healthcare in the future. They go from a system of have vs. have-less present, to a situation where the have-less is universal and in the future.

The one argument I think could have been emphasized more is that no one knows how much any given treatment is worth except the person receiving it. A discretionary knee operation has vastly different value to a professional basketball player and an office worker. Any "universal" healthcare scheme is unable to incorporate that information through pricing, and thus unable to innovate in the most efficient direction.

As always, great and thought provoking podcast!

Adam writes:

I was just at an HFMA conference today. One of the speakers discussed some of the "low hanging fruit" in cost reduction. He indicated that there was a 30% cost reduction available to organizations that where simply willing to adopt the practices of the current market leaders (which probably have improvements to make for themselves).

The question I left with is why has this industry not captured this cost reduction decades ago (and likely, why will they continue to not capture it)? The only plausible answer I can postulate is a lack of incentives. In the face of payment reform, many providers are now actually analyzing cost, but why didn't this happen in the 80s when other industries developed activity-based costing and variance analysis? This is old news to all other industries.

I think what many of the commenters might be missing is that the problem is much more serious than anyone really realizes. The causal comment that was made in the podcast about Certificates of Need is so pervasive, and so unbelievably distortive and damaging that it's something out of Atlas Shrugged (The Equalization of Opportunity Bill). Hospitals have had no incentive to care about the cost of care at all for the last 30 years, and it shows.

More top-down solutions will not solve the cost or quality problem. The current system kills the equivalent of 1.5 747's crashing every day as a result of poor medical treatment alone (it is the third leading cause of death in the US). The ACA will only lead to more monopoly privilege and protection for incumbents.

Why does checking my blood pressure cost $300 when my 4s iphone costs $99? Why do cosmetic surgeries continually increase in quality/safety and decrease in price, while diabetes treatments explode in price and have no measurable effect on patient outcomes?

Even though the podcast was a "free-market love fest" as others have described it. This type of discussion is curiously absent from the current policy debate (as mentioned explicitly during the podcast).

I am deeply concerned and offended that we are willing to continue to murder so many human beings on the alter "healthcare is different". As if healthcare would even be relevant if the free-market hadn't already provided the sustenance necessary for the average human to survive long enough to need it.

Michael M writes:

Russ-

Let me say, as I tell many of my friends, your podcast and website are a great service to our culture. The extended interview format is so refreshing compared to our tweeted and sound- bitten world. Keep up the good work.

I am a family doc, a PCP, with 26 years private practice experience. This podcast naturally caught my ear.

The comments following the show have been quite good - on both sides. I find myself mostly alligned (sp?) with Greg G.There are too many analogies that distort rather than enlighten. Health care decision making is not very comparable to commodities purchasing. I am not going too add here to the numerous comments regarding the analogies (hospitals/airlines etc) but I do want to register as someone who believes these analogies can be very misleading.

There were other things that were very uninformative or misleading by your guest. For example, searchng for an eficient means to obtain Amoxicillin at 2AM while on vacation. He makes it sound so simple. It is not . There is NO agreement that antibiotics are helpful in that situation and they CAN be harmful. Sure , one can reduce the problem to just needing a service provider to give the medicine. I see that as oversimplifying. This is not to say that I do not sympathize with a worried parent about a child screaming in pain, for I do.(And I raised 3 of my own) Rather, Cochranes story only underscores the point that behavior(of the parent) is abruptly changed by circumstances. Thus, many folks grow quite anxious rapidly in that situation . Doctors, or midlevel providers, often respond by giving you the antibiotic while knowing very well that it is unlikely to help much.The provider is motivated by retaining the patient even though they are not at their best b/c of the anxiety.


But I ramble on. My point is, it ain't so simple. So I will stop there for now about antibiotics and doctors .

I am surprised one fact did not emerge from the discussion. That is, much, not all, but still a great deal of the ridiculous fees that hospitals and doctors charge have to do with paying for the cost of those patients who cannot(mostly) or will not(a smaller group)pay for services. I have often explained to friends that we already do have a means of paying for the uninsured - mostly through the insured .

That said, it may surprise you that I favor the ACA. The government, inefficient and bumbling as it is, has to step in because the private sector constantly excludes a large segment of the population in developing insurance products. It is similar to fire insurance. I will not belabor that point as I sense your listeners know some of the history of private vs public fire departments and so on.

The profit motive in the health insurance business never seemed to find a way to include the lower income , or higher risk, members of our society.

I could go on but will end here. Thanks again Russ

vikingvista writes:

Some other ways the health care market uses economies of scale to work around an absurd regulatory regime:

1. Some practices are effectively run by RN's and PA's, sometimes with a single MD or DO supervising dozens of such low level providers, with the patients never seeing an MD or DO.

2. MDs frequently work as independent contractors and increasingly low but flat scheduled guaranteed rates, by transferring their 3rd party professional billing rights to entities with large billing departments (3rd party payments often take months with uncertain results).

3. Corporate ownership of numerous imaging departments across the country, allowing radiographic images to be more efficiently distributed among a smaller pool of radiologists.

Wes writes:

@Russ

I hope my comments did not come across as overly harsh, I am a huge fan of the podcast

It is true that you did raise some objections to Cochrane's claims, but by your own admission on the podcast these were elements of his proposal he was well prepared to respond to.

I think for someone with his position, the harder question to answer is why countries with state-run systems deliver comparable outcomes (by most statistical measures of health care success) to more citizens at a lower cost. Examples like the MRI study in Britain show problems with those systems, but they do not by themselves that the countries in question are failing to provide a decent standard of health care.

You can present arguments about why these statistics or misleading or the systems pose unappealing consequences. But to basically balk (as Cochrane does) at the idea that government can provide anything effectively seems to fly in the face of our data about state-run systems.

The moral argument for universal health care goes something like this: unlike many other basic necessities of life (food, clothing, shelter), your need for health care can be dramatically higher than that of others for reasons entirely beyond your control. You could get sick, get in a traffic accident, and face incredibly costly health care unexpectedly. If you are born a woman, you probably need health care more often than a man.

When we are thinking about what kind of society we want, I think we would want to have one in which our economic destiny is shaped by such factors as little as possible. Basically it is a matter of fairness and social equality. I like to think of it this way: when you are thinking about how you are going to distribute health care, and you did not know which position you were going to occupy (that of a sick person or a relatively healthy one), what kind of scheme would you agree to?

C S Ewerse writes:

I am another huge fan of Econtalk but was very disappointed by this podcast. I have a background in Economics and am keenly interested in health care economics. I have worked in the US health care sector and experienced health care in the UK and Germany so I have been able to compare the reality of the different models against Health Economic theory.

I was disappointed because my main background is Financial Economics so I am keenly aware of the nature of asymmetric information plays in the Health Care sector. Therefore, I found the Professors use of the Airline industry as a good comparison extremely weak. Weak for a number of reasons but moreso on the characteristics of health care as a product/service i.e.:

1. Asymmetric information means it is hard for a patient to be able to ascertain one who is a good Doctor or not.
2. Nature of some products/service and health care in particular means it is hard for the consumer or patient to even ascertain after the event if a good job was done or product was provided. It may be years before that is found out and even that would be hard to be sure that X caused Y. One sees these in many financial products like pensions etc.
3. Cheaper price for some goods can have a perverse affect on the consumer/patient i.e .leads them to believe the good is of a lower quality. I have forgotten the exact Economic term for this. *

I make these points because it is crucial to understand when, where and how more market based solutions work. I am not a great fan of the UK government owned and government run system because I have seen and experienced the level of its service. The German based system of mixed provisions backed by mainly public insurance but also private insurance works relatively well in my opinion – good service like the US without the same level of costs and problems of uninsured. This being most probably as choice and mixed provision ensures better services which the UK system tries to simulate but fails.

So overall, I found the arguments to be too simplistic and lacking rigour. And the lack of international comparisons (not just the easy Canadian/UK ones) was even more a shame.

*this is less of an argument where cost and prices are hidden to the consumer via insurance payments.


Anthony writes:

I don't particularly agree with Cochrane, but the man is certaintly well spoken, thats for sure. I just wish more of his views aligned with mine.

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