I just read something that unleashed my inner teenager, because I want to respond with a combination of OMG, LMAO, and WTF.
Donald Berwick, the person appointed by Obama to be in charge of Medicare, has a column in the Wall Street Journal that makes a very good observation about how relative prices are falling for products bought and sold in the free market. But he then draws exactly the wrong conclusion by asserting that further crippling market forces for healthcare will yield similar cost savings for programs such as Medicare.
Here’s the relevant passage from his Wall Street Journal column.
The right way is to help bring costs down by making care better and improving our health-care system. Improving quality while reducing costs is a strategy that’s had major success in other fields. Computers, cars, TVs and telephones today do more than they ever have, and the cost of these products has consistently dropped. The companies that make computers and microwaves didn’t get there by cutting what they offer: They achieved success by making their products better and more efficient. …Under President Obama’s framework, we will hold down Medicare cost growth, improve the quality of care for seniors, and save an additional $340 billion for taxpayers in the next decade.
I have no idea whether Berwick realizes that he has inverted reality, so I can’t decide whether he is cynically dishonest or hopelessly clueless. All I can say with certainty is that what he wrote is sort of like asserting “gravity causes things to fall, so therefore this rock will rise when I let go of it.”
To explain, let’s start by looking at why relative prices are falling for computers, cars, TVs and telephones. This isn’t because the companies that make these products are motivated by selflessness. Like all producers, they would love to charge high prices and get enormous profits. But because they must compete for consumers who are very careful about getting the most value for their money, the only way companies can earn profits is to be more and more efficient so they can charge low prices.
So why isn’t this happening in health care? The answer, at least in part, is that consumers aren’t spending their own money so they don’t really care how much things cost. As this chart illustrates (click to enlarge), only 12 percent of every healthcare dollar is paid directly by consumers. The rest comes from third-party payers, mostly government but also insurance companies.
In other words, Berwick’s column accidentally teaches us an important lesson. When consumers are in charge and responsible for paying their own bills, markets are very efficient and costs come down. But when government policies cause third-party payer, consumers have little if any incentive to spend money wisely – leading to high costs and inefficiency.
Defenders of the status quo argue that the market for healthcare somehow is different than the market for things such as computers. But here’s a chart (click to enlarge) showing that relative prices are falling in one of the few areas of the healthcare system where consumers spend their own money. And I’ve previously noted that the same thing applies with abortion, where prices have been remarkably stable for decades. Regardless of one’s views on the procedure, it does show that costs don’t rise when people spend their own money.
That’s common sense and basic economics. But it’s not a good description of Obama’s healthcare plan, which is explicitly designed to increase the share of medical care financed by third-party payer.
The White House presumably would argue that price controls will help control costs. And the President’s Independent Payment Advisory Board (a.k.a., the death panel) will have enormous power to directly or indirectly restrict care, but that’s probably not too comforting for the elderly and others with high healthcare expenses.
The right approach, needless to say, would be to restore market forces to healthcare, which is the core message of this video narrated by Eline van den Broek of the Netherlands.
[…] We also should reform Medicaid and Medicare to help address the part of the third-party payer crisis caused by the direct government intervention. […]
[…] We also should reform Medicaid and Medicare to help address the part of the third-party payer crisis caused by the direct government intervention. […]
[…] Then we also should reform Medicaid and Medicare to help address the part of the third-party payer crisis caused by the direct government intervention. […]
[…] Then we also should reform Medicaid and Medicare to help address the part of the third-party payer crisis caused by the direct government intervention. […]
[…] That’s just another way of describing how to deal with the third-party payer problem. […]
[…] Then we also should reform Medicaid and Medicare to help address the part of the third-party payer crisis caused by the direct government intervention. […]
[…] I’ve repeatedly written that the only way to fix healthcare is to get rid of the government-created third-party payer problem. […]
[…] narrated a video on the fiscal nightmare of Obamacare and written several times about the serious problem of government-caused third-party payer – including just as few days ago while nit-picking […]
[…] One of President Obama’s health appointees noted that quality increases and prices fall when markets are allowed to operate – yet he concluded that we should further restrict market forces in health care. […]
[…] This is the problem, not inequality. As I’ve explained before, American healthcare suffers from a third-party payer crisis caused by too much government intervention. […]
[…] This is the problem, not inequality. As I’ve explained before, American healthcare suffers from a third-party payer crisis caused by too much government intervention. […]
[…] from New York Times Has Accidental Encounter with Reality, Learns Nothing Earlier this year, I wrote about how a chairman Obama put in assign of Medicare done some really engaging observations about […]
[…] this year, I wrote about how the person Obama put in charge of Medicare made some very interesting observations about […]
[…] fact, Cato economist Dan Mitchell adds: Defenders of the status quo argue that the market for healthcare somehow is different than the […]
[…] fact, Cato economist Dan Mitchell adds: Defenders of the status quo argue that the market for healthcare somehow is different than the […]
[…] points to one of the least subsidized and regulated sectors of modern life, and yet the idea of a freer market for health-care products and services doesn’t occur to him. The key to emulating freer, more […]
The US is alone amongst the industrialised countries to not provide universal health care. I observe the following from the World Bank dataset (2006-2009):
USA: highest health spending % of GDP in the world, yet lowest life expectancy of the industrialised countries. (Japan +4 years, half the spending.)
The US spends about 50% more than France, Germany, Norway, even Cuba!
Life expectancy in the USA and Cuba is the same!
-Yet we can all guess what entity is running health care on that Caribbean island. In France, Germany, Norway, Colombia & Japan 75-85% is public spending, whereas in the US it’s about 50% (of total health spending).
Learning from these countries, it seems a little bit of government is not always such a bad thing.
Government subsidy or meddling/interference always ends in either shortages or higher costs, as well as increased red-tape.
Dblade,
“When you actually get into surgeries, or dental work for example, costs are astronomical and need insurance just to make them palatable.”
Where do you think the insurance companies get the money to pay these claims? From the policy holders, of course. The gov’t plans get their money from taxes, which I also pay. Which means I’m ultimately paying for my own health care. So if I’m paying for my own health care, why can’t I be in charge of it?
Except that the costs in other sectors went down due to one-time, massive increases in productivity. These costs also were achieved at the total destruction of a large amount of american jobs. For health care to do the same on the scale of computers, TVs, etc, would mean automating or importing a lot of health sector jobs while gutting one of the few hiring sectors in the US economy.
As for rising prices, I think insurance is cushioning the blow quite a bit. Paying out of pocket for care is insanely expensive. Most of the things you mention are elective, cosmetic, or preventative care. When you actually get into surgeries, or dental work for example, costs are astronomical and need insurance just to make them palatable.
I think it’s conservatives who need to be mugged by reality.
But free market competition DOES reduce prices. Look at the real dollars price trends for:
Abortion
Cosmetic surgery
Vets
Laser Vision correction
These are all outside the “third-party payer” system, are skilled labor intensive and in each case prices have fallen continuously over years and even decades. The last is particularly dramatic as NOMINAL prices have dropped to one-eighth their introductory amount in less than two decades.
It requires a highly credentialed mind to be able to ignore such facts.
RCA is not providing the TVs, nor Philco the radios, nor Southwestern Bell the telephony. Close a non-performing too-expensive hospital? Impossible. Of course, the gov’t did not years ago mandate that these or any similar companies provide their products without charge to anyone who might show up.
If more Filipinos were allowed to come and practice, the labor costs could indeed be reduced. As for the tech (MRI, CAT, etc.) these are all very similar to other high-tech products and costs can come down on similar principles assuming an absence of interference. Capital costs of hospitals, not so much. Expect the quality and aesthetics of facilities to reduce in the coming years.
Let us not forget the effects of global free-riding on the pharma.
Clueless
It the Underpants Gnomes understanding of business/economy.
Phase 1: Collect Underpants
Phase 2: ?
Phase 3: Profit
[…] stupid are the Obami? Consider one Donald Berwick, from Wall Street Journal, via Dan Mitchell, International Liberty: The right way is to help bring costs down by making care better and improving our health-care […]
As a one word comment said earlier, Lasik surgery is dramatic example of medical costs going down. Back in the late 1990s lasik was running about $3000 per eye if I remember correctly. Today it’s $300-$600 per eye. Lasik is generally not covered by insurance, so there has been a strong incentive to reduce costs.
“I have no idea whether Berwick realizes that he has inverted reality, so I can’t decide whether he is cynically dishonest or hopelessly clueless.”
Berwick is a friend of a professional acquaintance of mine.
My relationship with this person is in the area of health care. He has talked about Berwick on several occasions.
My take away from those discussions is that Berwick is clueless rather than venal.
I’m not sure which is worse.
[…] Dan Mitchell: President Obama’s Medicare appointee, Donald Berwick, who suffers from a profound case of British style single payer health care envy, has correctly diagnosed the problem while coming up with a treatment plan that will kill the patient. How ironic. […]
[…] April 30, 2011 by Dan Mitchell […]
[…] Obama’s Medicare Appointee Has Accidental Encounter with Reality, Learns Nothing I just read something that unleashed my inner teenager, because I want to respond with a combination of OMG, LMAO, and […] […]
“… he is cynically dishonest or hopelessly clueless …”
Yes
rob, the “official” name of the death panels under the legislation is the Independent Payment Advisory Board (IPAB).
They didn’t call it a death panel, but, that is what it is.
JohnMc reminds us, “Health care is NOT electronics. There is no Moore’s Law analog to the delivery of care.” But hey, it was the gov-lover who chose the examples: “Computers, cars, TVs and telephones.” And a car isn’t primarily electronics. There’s no Moore’s Law analog to the delivery of food either yet food prices have been on a long-term decline.
“It still takes one human (or multiple) caring for another human. There are no means to pack more humans on the head of a pin,” said John Mc. That last crack is clever but misleading. At one time, long before any Moore’s Law (which isn’t a physical law of any kind, by the way), every telephone call had to be connected by a live operator. Consider the skeptic who pooh-poohed the idea that one day telephones would be ubiquitous in American homes, even among the poor, “It still takes one human connecting a call for another human. There are no means blah, blah, blah.” Then along came direct-dial service. (Remember phones with dials? No computers, no chips, it was all done by relays and mechanical thingies.)
Just as direct-dial telephony made the user into his own telephone operator, there’s plenty of already existing technology that can assist the patient or patient’s family in being their own health carer in most circumstances. Remember when measuring blood pressure required a physician? Then a nurse? Now it can be done by oneself for free at a pharmacy’s self-service kiosk. Diabetics draw their own blood, measure their blood sugar themselves, and administer their own insulin shots. While self-serve appendectomies and DIY open heart surgeries are still the stuff of speculative fiction tales, minimally invasive surgical technology – made possible by all that pooh-poohed stuff driven by Moore’s Law cost reduction – is expanding in scope and driving down costs sharply.
Advancements in tools are bending the curve but the government JohnMc is so infatuated with works hard to bend it back – for our own good, supposedly, claiming such nonsense as “there is a physical floor to how low one can go in reducing costs and that is the variable rate labor costs for delivery of services.” Ha. Somehow in a free market that “physical floor” of “labor costs” keeps moving progressively lower and lower as new methods and technologies are brought to market. This is reality and health care isn’t exempt from it.
SPM speaks as if no treatment is elective, even while conceding “Not getting a service is often not a good option in other areas of healthcare.” Yes, it’s sometimes not a good option. On the other hand, many people go to the doctor for minor problems that would get better on their own, since it seems so cheap, or they feel they need to get their money’s worth since they’ve already paid for insurance.
And as far as other non-medical payments are concerned, many people are not particularly price sensitive.
I’d like to see a study of rising healthcare costs which isolated the amount of the increase which came from either increased efficacy or ability to treat new conditions. I’m sure it’s been done. Seems to me that there are a ton of highly intelligent and motivated people working on those two aspects of the healthcare delivery system and that prices go up because they are succeeding in creating better and newer treatments.
To a certain extent, it’s almost the inverse of Moore’s Law, where the treatments get better, but only because the capital required to create them and the training required to deliver them increases, which means you can’t really take advantage of learning curve effects. The whole push for price controls seems to have the potential side effect of “trapping in amber” current methods and treatments, which is exactly what consumers shouldn’t want.
The free economy does not furnish a better product at a cheaper price only because it rewards the most responsive providers, it also punishes the less competitive by eliminating them from the market place. How will that element fit into Berwick’s plans?
Athena, the 12% number comes from actual out-of-pocket expenses from the population as opposed to insurance premiums paid on their behalf. A sizable percentage of the population that is insured does not pay 100% of their premiums, the self-employed do but people who receive health insurance as a benefit do not.
It does not take very much time in the US healthcare system to exceed your annual premiums, much less your deductible. A day in the ICU is generally billed out at about $10,000. It does not take too many of these before a Medicare beneficiary has exceeded their lifetime contributions to the Medicare system, much less their monthly premium.
I broke my wrist, went to the ER, had a plate & screws surgically implanted to fixate the fracture and spent a total of 30 hours in the hospital after surgery. The bill for that was $45,000, the insurance adjustments (the agreed discount a hospital gives an insurer) got that down to $13,500, and I paid my full $2000 deductible. The insurance company made nothing on me for the rest of the year.
Some of this may be the BS fudging of hospital charges, which are theoretical in any event, and insurance adjustments, which are marketing ploys plain and simple. Our healthcare delivery system is very good. Our healthcare insurance system is a byzantine and arcane game that is no fun to play.
Where do you get the figure that consumers pay only 12% of their health care costs? The insured surely pay high premiums monthly just to have insurance, whether they visit the doctor or not, and hardly get back what they pay in premiums in the average year.
Berwick seems to have dropped right out of an Ayn Rand novel, he’s a Disinterested Person in terms of Medicare because it is likely he will never use it. The 501(c)(3) he founded and managed to get funded to the tune of $12 million agreed to cover he and his wife for life with private insurance. Byron York pointed this out almost a year ago.
http://washingtonexaminer.com/politics/gop-spoiling-fight-over-berwick-appointment
I guess this remove from the issue, namely the knowledge that he will never be subject to the decisions he makes will in some circles makes him a Solomonic figure able to decide fairly and objectively how many ways the baby may be reasonably sliced. In my opinion, the unwillingness to subject himself to government healthcare disqualifies him from guiding that system in any meaningful way. I don’t particularly care about his degrees (I have an MD as well), his experience or his writings, his actions in removing himself from the Medicare system are sufficient reason to mistrust him in his current position. For a fan of the NHS, he’s certainly placed himself in a position to not be subject to any US version of NHS.
There is a difference between healthcare and MP3 players, but market forces will influence both if the government will pull back and allow them to work. What market forces there have been in cosmetic procedures and LASIK and other out-of-pocket care has been pretty effective, the LASIK I had in 1999 was more expensive and less efficacious than the LASIK that can be had today. The halfhearted attempts to allow market forces to work in HSAs and other measures have been almost designed to fail or be either inconsequential or not able to prove a benefit, probably the only reason they have been allowed in the first place.
I doubt market forces will ever drive the cost of healthcare to a tenth or a hundredth the cost that it is now the way that Moore’s Law does for semiconductors, but the absence of a Moore’s Law equivalent in any field does not disqualify it from the beneficial effects of competition.
LASIK?
Addendum to Greg — agree totally that the armies of administrative personnel required to process all the healthcare forms is driving costs up.
When I first started working in the 80’s I worked for a company that was generally considered to have top-notch healthcare coverage (it was called medical at the time). I paid the bill at the doctor’s office and then submitted for reimbursement. I generally received 80% back. It worked — I knew what the doctor charged. Yes, it was more work for me but the doctor didn’t have to pay someone to do it and then pass the extra cost on to me.
Now there is an interesting concept — at least for doctor’s offices — pay the bill upfront and then submit for reimbursement yourself and pay less (no need to pay the staff) or pay an additional fee to have the staff submit for you. That might not work as well for hospital care but it probably would for the day-to-day stuff handled at doctor’s offices.
Heck today even with an HSA I have to allow the doctor to submit to the insurance company so that they can provide the contracted rate that the doctor then has to bill me (unless I’ve reached my deductible).
JohnMc has it right — the comparison is not correct by either Berwick or in this column. While competition certainly has helped drive electronics costs down that industry has also benefitted not only from Moore’s law advancements but from the ability to offshore. A better comparison might be to the cost of electricians, plumbers or mechanics who use a combination of technology and hands-on labor (just as in healthcare) to get the job done.
The example of Cosmetic Surgery is also not quite a correct comparison because most cosmetic procedures are generally elective while cancer treatment or getting a broken bone set is not. If the cost is too high for a cosmetic procedure a consumer just chooses not to get the service. Not getting a service is often not a good option in other areas of healthcare. Living with wrinkles is totally different than living with clogged arteries.
I agree that more transparency and competition are needed in healthcare. I also agree that Berwick’s argument is full of holes. However we need to be careful not to refute it with arguments that are just as full of holes.
Sorry no, JohnMc you’re wrong. Or at best partly right, and getting less so every day.
Yes there is a labor cost in health care from the primary providers. But that is a VERY small part of the overall cost, and getting less so all the time. Every item mentioned that gets cheaper every day also requires labor, and somehow those things *still* keep getting cheaper.
In a perverse sense JohnMc is more correct than I bet he wants to be, though. Each and every increase in gov’t involvement in health care increases compliance costs, however. My PCP is a one-man practice. I like him, he’s great. I don’t mind paying for his time. But he can’t run his practice without an entire *room* full of admin/clerical types, to manage the paperwork- and the number of admins/clerks he has to hire to free up his time so he can spend it with *patients* keeps increasing.
A “progressive” will never believe that the invisible hand can do a better job of controlling a market than he can, and even if he did, he isn’t about to admit it because it would cost him and countless other bureaucrats/Democrat voters their jobs and their political power over us the great unwashed. cf, Orwell, Animal Farm.
There actually is another healthcare system in the US which provides amazing care and is a true market based model. That is the veterinary healthcare system. Of course, the moral issues are not comparable, but have you ever been to a state of the art vet and seen the care that dogs and cats receive on a mostly cash basis?
My opinion is that Berwick is monomaniacally fixated on govt control and he really cannot see the absurdity of what he said.
Sincere, high IQ, I am sure, but functionally a moron.
Right off the bat, neither one of you are right because the metaphor is not apt in any regard for or against. Health care is NOT electronics. There is no Moore’s Law analog to the delivery of care. It still takes one human (or multiple) caring for another human. There are no means to pack more humans on the head of a pin.
Advancement in tools can bend the curve. But there is a physical floor to how low one can go in reducing costs and that is the variable rate labor costs for delivery of services.
Wow. It’s frightening to think that our government leaders, who are supposed to be so intellectually and even morally superior to middle-class Americans – indeed, leaders who are so extraordinary that they regularly cross-compliment each other as “the best and the brightest” the country has to offer – either lack the basic critical reasoning skills that at least one 14-year-old Wisconsin girl has recently been shown to possess; or, these same leaders are so breathtakingly cynical and skillfully mendacious that they convincingly tell the American people lies so baldfaced and obvious that what we previously might have thought to be the effortlessly smooth and shameless deceits of the two tailors in “The Emperor’s New Clothes” now appear by comparison to be as clumsy and ham-handed in their cons as carny roustabouts or three-card monte dealers.
I don’t know which it is, or even which is more frightening: that our current leaders are sad and silly simpletons, or cynical manipulators who rape the truth without a quiver of conscience.
I’ve changed my mind. I prefer newspapers keep printing Paul Krugman and his “do what I consider the right thing no matter what the cost” argument to these unicorn chasing nuts who insist that the more you spend, the more you save.
At least Krugman’s fantasy frames the debate accurately, even if he’s in denial about the consequences.
It’s as if the last 96 years never happened with these people.
[…] https://danieljmitchell.wordpress.com/2011/04/30/obamas-medicare-appointee-has-accidental-encounter-w… […]
There actually is a market in health care where prices are set by demand and willingness to pay. It is still small but should be kept in mind as it may end up a bit like the private gardens in the Soviet Union. Doctors are dropping out of Medicare and charging cash for services in a completely free market. The busiest hip replacement surgeon in Newport Beach CA takes no Medicare and is paid cash by his patients. His charge, as I understand it, is about what Medicare actually pays, or 1/5 of the “retail” charge.
Many internal medicine specialists and general practitioners are setting up “retainer” practices in which their patients pay a monthly or annual charge for all the health care services they will require.
Private practice is returning to Canada in spite of the fact that it is “illegal.” In both cases, the physician must forgo the government plan, which does not permit private care, but many seem willing to do so.
[…] DAN MITCHELL: Obama’s Medicare Appointee Has Accidental Encounter with Reality, Learns Nothing. […]
Jim … the original ‘death panels’ were TO provide consultation payments, within hr3200 sec 1233. But were then removed after the whole labeling of death panels came up, by the SFC.
Controlling costs and controlling expenditures are not necessarily the same thing. “I am not going to pay for that,” is a way to control expenditures and that is what the death panels will do.