Credence Goods: The Unique Economics of Health Care

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By Rumplestatskin, a professional economist with a background in property development, environmental economics research and economic regulation. Follow him on Twitter @rumplestatskin. Cross posted from MacroBusiness

I was prompted to write this follow-up on health economics after seeing a recent post by blogger Noah Smith, who weighs in with some reasonable views after some intense criticism of the ‘freakonomic’ Chicago-boy Steven Levitt. In a meeting with UK PM David Cameron, Levitt and his co-author apparently made some rather absurd remarks about health care.

They told him that the U.K.’s National Health Service — free, unlimited, lifetime heath care — was laudable but didn’t make practical sense.

“We tried to make our point with a thought experiment,” they write. “We suggested to Mr. Cameron that he consider a similar policy in a different arena. What if, for instance…everyone were allowed to go down to the car dealership whenever they wanted and pick out any new model, free of charge, and drive it home?”

Rather than seeing the humor and realizing that health care is just like any other part of the economy, Cameron abruptly ended the meeting…

This nonsense reminds me that what constitutes economic debate in the US is often laughable at best.

Health care is obviously not like most other parts of the economy. As I said last week medical services are credence goods – goods which we don’t know whether we need, and even once we’ve consumed them, still don’t know if they were good value. In economic terms, these goods suffer from the worse of possible information failures, particularly with respect to the asymmetry of information between the seller (in this case the doctor) and the consumer.

For these goods the demand curve may slope any which way, and people are often left to use price as the only signal of quality (or quantity for that matter). This means that a socially optimal level of medical service provision cannot be determined using basic marginal economic analysis.

Not only that, but there are substantial positive externalities to most health care services. Vaccinations are the obvious example, but the same principle applies more broadly.

Once you’ve accepted that health care and medical services don’t fall neatly into preexisting economic models, you need a better way to think about the potential efficiency of any health care system. Rarely is this step taken in public debate.

One way to assess any health system is in terms of the two main sets of incentives – those of the patients, and those of the medical service providers (doctors and suppliers of medicines, equipment and accessories).

We often hear about the patients, with the archetypal case of the lonely hypochondriac making a few extra trips to the GP or emergency department when the service is provided free of charge. Sure they exist, but as I’ve said before, pricing these visits deters both the time-wasters and those with genuine medical needs. Making prices for patients reflect production costs in health care systems has the benefit of reduced health expenditure, but comes at a cost of poorer health outcomes.

But in general no one wants major medical services even at a zero price. Here’s a comment from Noah’s blog making that point

Most medical treatments are painful, unpleasant, and time consuming, and are only desired when non treatment is worse. While making treatment costly will deprive some of access, it will do little to make treatment more undesirable than it already is.

On the other side of the ledger we have the incentives of doctors and other businesses involved in the supply of medical services – drug companies, suppliers of medical equipment and so on.

Here there are usually financial incentives to over-treat or over-prescribe. As just one example, new evidence from Australia’s two-tiered system shows that in private hospitals there are more medical interventions for low-risk births than in public hospitals.

Indeed, there is some evidence of these interacting incentives following the announcement of the $7 GP co-payment in the Australian federal budget. Some medical centres have been text-messaging patients to remind them that they are not charging fees, possibly due to lower patient numbers. On display is the doctor’s incentive to earn a living providing medical services, interacting with the uninformed patient reacting to a price that doesn’t even exist yet.

As a final point, we rarely hear about the monopsony buying power of the single medical provider which can be significant. A single national (or State level) healthcare entity is in quite a position of power in negotiating supply contracts when they are the only game in town. In the world were drug companies a heavy political hitters, having incentives within the government to reduce drug costs to economise on health spending seems an important consideration.

If we are going to have an intelligent debate about efficient health care we have to remember three key points

1. We must consider benefits as well as costs (including externalities)

2. There are serious moral judgments necessary about the scope and priorities of health care

3. Medical services are credence goods, hence there are unique incentives at play

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  1. digi_owl

    The freakonomics guys comparison between public medicine and car dealerships are absurd on more than one level.

    You can never just walk into a hospital and request to have the latest and “greatest” procedure done (In all honesty, that is more the case of a for profit system. In large part thanks to all the advertisement and such).

    Instead it would be like presenting what you needed/wanted to do, and the dealer providing you with the “best” car for the job in his educated opinion (Or not at all if he considered it absurd).

    1. Ben Johannson

      It might be helpful if the Market Freaks would at least explain how we would draw a supply curve for “health care”. Rather than waste David Cameron’s time perhaps they could devote those huge, hip brains to explaining how the signaling is supposed to work.

      Unless of course they can’t.

      1. mellon

        When people have access to all medically necessary health care at no cost, total costs fall substantially because people go to doctors early on, saving lots of money by catching this faster.

        That’s one of the many reasons why single payer is SO much less expensive for society as a whole than for pay or for profit health care.

        Read a discussion about this fact with extensive references here: Myth: User Fees Ensure Better Use of Health Services

    2. diptherio

      Levitt is an idiot. Imagine if everyone could just go down to Victoria’s Secret and pick out any lingerie they wanted and take it home for free…it’d be chaos (sexy chaos, but chaos still)…therefore universal health provision is a misguided policy. It’s ridiculous. Next time some brainwashed liberal asks me why I don’t listen to Planet Money, I’ll relate this bit of absurdity

        1. mellon

          I’ve never liked the arguments they make at “Freakonomics”.

          Almost as if they were trying to divert people’s attention from truths by replacing them with fictions.

    3. shinola

      Levitt is a prime example of someone who “knows the price of everything but the value of nothing”.

      Waaay back when, I had an econ. prof. who advised us students that if you want to make a lot of money, almost guaranteed, go into the medical business. After all, people will pay anything when their life or health is at stake. “Market rules” do not apply.

      1. Art Eclectic

        They might pay anything, but they won’t DO anything.

        The real reason you can’t apply normal market economics is because people won’t take care of their health. The car analogy totally applies here, most people will not take care of basic maintenance (eating sensibly and exercising) so they rely on pills and medicine to make up for their own lack of attention.

        Sure, some people get a bad luck of the draw genetically and those people we spend a lot of money on to keep healthy, which is the honorable thing for a society to do. While we think it ethically appropriate to euthanize downer animals and those that are extremely ill, there doesn’t seem to be any enthusiasm to do the same for humans. So, we accept a certain amount of extensive care will be given to some.

        One of the inherent problems with a socialized health care system is that there’s a certain tolerance level that gets breeched when taxpayers are subsidizing their fellow’s refusal to follow a basic maintenance schedule. Note that there’s not much support for replacing the livers of alcoholics or treating lung cancer for smokers. There comes a point where all we are doing is enabling people who refuse to take care of themselves. Eventually, that anger builds that whole thing falls apart.

        1. Binky Bear

          This is of course a morality tale bereft of actual supporting data because such data would inevitably prove more complicated and morally ambiguous than the simpleton notions such moral narratives are meant to convey, e.g. “It’s your own fault due to your moral failings.” It relies on a “just desserts” conception of the universe that from everyones’ personal experience is simply untrue but some people seem to find reassuring as they whistle past the graveyard. Further it relies on ex post facto rationalizations as it searches about for some fact point to hang its moral tale from, so like voodoo curses and chain letters it can always be made to seem true to the average chucklehead. The truth remains that everyone will get sick, everyone will be injured at some time, and everyone absolutely will die.
          The real high costs seem to be incurred at the end of life when huge efforts and large labor pools are employed to wring a few extra moments of life out of the carcass of the soon to be expired. This is, of course, a cash cow for everyone involved on one end and they will ignore legal directives, court orders and the pleas of the soon to be bereaved to milk one more procedure out of the soon to decease. That’s what death panels were; a threat to a profit center.
          Maintaining people in varying states of poor health is mainly labor and materials costs. Once stable most conditions are managed with periodic testing and drugs, hopefully generics manufactured by a reputable firm and not reformulated profit centers (like mixing two generics, giving the mix a name and charging hundreds for it, ahem hctz and lisinopril) or Sino-Indian sweatshop pills. This is cheap and low margin but still a steady check for lots of people and companies.

          1. mellon

            Hope I’m not too sleepy, well, here goes..

            All the whining about the cost of medical care is really just that, whining, because the fact is, if we take away the insurance waste and the complexity waste and the we can’t bargain from strength waste and the drug industry jacking up prices waste *we’re left with our current level of consumption which is a lot less than other countries*, (although many people really need to go to the doctor because they have not been able to afford to go for years, and still can’t, now) we actually end up paying most providers less when you consider all the headaches they have to go through to get paid, the point I am making is that the apologists for the current system (hello) will always try to blame everything on anything they can cook up that sounds plausible EXCEPT the truth, trying one lie after another on to see your reaction.. but the true cost drivers which are the things I mentioned. I think we would literally save half of the money we spend if we made those changes. no less than half. That is a hell of a lot of money. Its enough to give everybody a lot better healthcare than now, literally. Also, the rate of increase would stop. There is no light at the end of the tunnel, in fact the likelihood is high that the really ugly stuff has yet to begin, they have to because people are wising up and their need is to control the dialogue. Once the issues start being discussed they have to upset the table. Because the issues aren’t their strong point, their aggressive spin has dug them into a deep hole of lies. That’s the real reason they want to pretend to argue and sashay into some pretext to kill Obamacare, so we dont see the death spiral that will start soon as prices are revealed to be unmanageable.. If we see how it fails and was designed to fail, people will learn something they didn’t know before thats dangerous to the waste-based system. And realize they wasted years of our time. Knowing that.

        2. mellon

          Bet you didn’t know that we have a huge problem with toxic chemicals that made people morbidly fat, and caused sterility and numerous other health problems. They are so common they are in practically everybody at levels known to effect health.

          ***Why don’t they tell us this?***

          **Here’s why- Free trade agreements are giving corporations rights to prevention of any new science-driven regulation. To a freeze in all regulation at the signing of a given FTA.** I’m not kidding!

          Perhaps the country should take up a collection to pay the chemical industry billions of dollars to allow us to write laws to prevent our country and world from being poisoned. Get ready, that’s what its coming to.

        3. mellon

          I just posted a bunch of links about obesogens – which are a serious problem thats being downplayed because free trade agreements give corporations entitlements to prevent science from effecting laws. This particular problem is making people fat and sterile. And it could get much worse and because they are persistent in the body its hard to fix. But they wont discuss it. Hopefully Yves frees it up, its probably tied up because I put a whole bunch of links to and pubmed central full text papers on bisphenol a and other obesogens and obesity . There are dozens of them. Non stick coatings and food packaging liners and plastic pipes and thermally printed receipts and dozens of other common things contain them. We need to end investor-state because its literally threatening the planet’s survival by blocking evolutionary changes in laws due to new knowledge.

        4. Yves Smith Post author

          “People don’t take care of their health”? That’s hogwash. The entire dietary supplements industry and various diet fads are based on people taking care of their health. Now there are lots of people who don’t have the time and money to take care of their health, but blanket assertions like that are really off base.

  2. bmeisen

    “… Once you’ve accepted that health care and medical services don’t fall neatly into preexisting economic models …”

    Don’t they fit into the insurance model for public risk? Whenever potential liability extends substantially beyond the financial resources of a commoner then insurance should be mandated.The model by which car owners, gas station owners, condo owners are required to buy insurance. The requirement that nuclear power plant owners and TBTF banks are exempted from. I bet that even Cameron sees the risk associated with uninsured sick and/or injured citizens as a public risk. An interesting question is why the private model of health insurance has failed in the US while private car insurance succeeds. That is the counterexample that Leavitt should have tried.

    1. Ben Johannson

      Auto insurance is quite straightforward and easy to understand. The tens of thousands of medical goods and services, institutions and doctors one would have to include in calculating maximum utility not so much. Knowledge required is so vast an individual would effectively need to obtain the equivalent of a medical degree, and even then there’s the inability of the medical sector to signal supply properly. So while you can mandate that everyone buy insurance there’s no easy remedy for controlling prices via the standard models of a utility-maximizing individual and profit-maximizing firms because there is no effective competition.

    2. diptherio

      One major difference between mandatory car insurance and mandatory health insurance is that no one is forced to buy a car, but everyone is born with a body. You can at least opt out of mandatory car insurance by not driving. The only way to opt-out of mandatory health insurance is by not living. Big difference.

      1. Katniss Everdeen

        The biggest difference is that when people buy car insurance, most actively AVOID having to use it. You drive safely and try NOT to have an accident that would require making a claim. And you don’t expect the insurance company to pay for every oil change or new set of tires.

        The same is true for house insurance. People go to great lengths to NOT have their house burn down.

        “Healthcare” insurance is just the opposite. People get “insured” one day, and expect to use the insurance the next. There’s absolutely no incentive NOT to use your “insurance” as much as you can. You don’t get points for choosing chicken soup and bed rest instead of an office visit and pricey antibiotics–the “good driver” discount.

        And powerful advertising pounds everyone relentlessly to seek “care” for “conditions” that they might previously have ignored.

        Health “insurance” is not “insurance” in the true sense of the word. It’s a system of funding and RATIONING “healthcare” that’s just called “insurance.”

        1. Eureka Springs

          Maybe this is true for you, Katniss, but I agree with the premiss in the post. If suddenly insured tomorrow with tri-care (my hope for our country) I for one would not be in a rush to so much as walk into a hospital, much more allow an invasive procedure or stack up a tray of pills. But hey, a real physical might be nice… after all I’m nearly fifty and haven’t had one in my adult life… about half of which I was insured.

          That said, If I purchase insurance on myself, my car, my house etc., I do expect to be able to use it immediately if need be. And so do those contracts which are specific to the minute of purchase.

        2. Yves Smith Post author

          Huh? I happen to be in the bizarre position of having a terrific and inexpensive policy, and I do none of the things you claim people with insurance do. I see a MD and an eye doctor once a year, and never go in when I have a virus. Even when I have sprains, I don’t bother going in, I know the drill and it’s a waste of my time to see an MD to tell me “rest, ice, elevation, and compression.” I even broke a toe and splinted it myself rather than seeing an MD.

      1. Carla

        Exactly. The former is what we all need, and the latter is really the last thing we need.

  3. JLCG

    I used to be a doctor.
    Let me state the simplest case of abuse brought about by social pressure. Patients want a handicap sticker for their car. Many times the physician, me , observing the patient thinks that the there is no need for a handicap sticker but the physician is placed in the uncomfortable position of having to argue with the patient and behind that immediate care is the specter of ill will and a possible lawsuit.
    Now the drug producers advertise constantly suggesting to people what medication they should receive and placing on the doctor the burden of arguing with the patient or yielding. And the physician yields.
    Besides the value of health is not measurable. It cannot be the basis of a contract and contracts are what the “market” is.. In remote times doctors were not paid fees but honoraria because what a doctor does cannot be the subject of price haggling.
    I shall leave out the matter of luxurious hospital accommodations, parking structures near hospitals, several restaurants, tropical gardens under a glass roof. Luxury everywhere.
    Then there is the cartel of supply of doctors and now the extraordinary proliferation of adjuncts to the physician, counselors, assistant physicians etc.. Medical care has absorbed an enormous number of women into its entrails.
    Medicine cannot be the matter of a “market” because in our lives there is nothing marketable. Our desire of living eternally determines all our actions.

    1. abynormal

      “in our lives there is nothing marketable”
      a child psychiatrist tried this argument on me Once: “insurance for an automobile is demanded then why not healthcare?” i asked the ‘dear’ sir…”and would we be a more responsible society if we purchase additional insurance specifically covering his ‘possible’ failures? like the ones that spray a school with hot lead?”.

      “Both terrorism and insurance sell fear — and business is business”
      Liam McCurry, Terminal Policy

    2. Katniss Everdeen

      “Medical care has absorbed an enormous number of women into its entrails.”

      What in the world is that supposed to mean, and how is it relevant to, well, ANYTHING???

      1. abynormal

        im out of here for the day but looking forward to his reply to your question!
        “Fire is catching” mockingjay

  4. David Lentini

    “Medicine cannot be the matter of a “market” because in our lives there is nothing marketable. Our desire of living eternally determines all our actions.”

    I agree, but I suspect the high priests of modern economics would not. If humans aren’t marketable, then they can’t have a value; that would mean that modern economists are no better than anyone else, a conclusion they just can’t accept.

  5. Skeptic

    “This means that a socially optimal level of medical service provision cannot be determined using basic marginal economic analysis.”

    One of the major items totally ignored in any medical analysis is Placebo. I have read that Placebo can account for up to 50% of medical success! Thus the medical folks may be billing for effects the human body achieves itself. What a wonderful business! The patient provides the cure and you provide the bill.

    Here is a good example:

    (Yes, yes, I do know that Placebo does not apply to all medical conditions. Thank you.)

    1. Whine Country

      Your comment has set us back over 200 years with that thinking. Ben Franklin told us: “God heals and the doctor takes the fee”

  6. washunate

    I completely agree that government has a role to play in healthcare. But I’m not sure that makes this statement true:

    “Health care is obviously not like most other parts of the economy.”

    Rather, I think it makes healthcare a lot like most other parts of the economy. It is more efficient (not to mention more fair and more sustainable) for government to invest in a basic infrastructure of capacity – the ‘public commons’ – whether we’re talking medicine or education or transportation or whatever.

    But much of what we spend on healthcare (like most other parts of the economy) in the US is personal consumption, not a basic need. Plus, a significant cause of public health issues are other public policies, from the drug war to agribusiness subsidies to the assault on public education to the dismantling of our passenger rail system to the overstressed, authoritarian nature of the American workplace.

  7. 12312399

    “1. We must consider benefits as well as costs (including externalities)”

    ugg, it bugs me to no end that most professional economists completely ignore positive and negative externalities—-something covered halfway through Econ 101.

  8. LAS

    A lot of medical centers have treated medicine as a market to the extent that it is convenient for them; they make markets in services that the rich patient can buy. Only last night on the news there was a blurb about Columbia-Presbyterian Hospital offering this cosmetic procedure that freezes your fat cells to promote weight loss (there were some disclaimers about the results but no reservation about taking your money). These same health centers also bill the heck out of Medicare and complain like anything about how Medicare has to pay them more, including Medicare has to pay their residents’ salaries, administrative expenses, etc. Medicare is a juicy plum that has distorted the market. Despite many well-meaning efforts and some fabulously wealthy doctors, real health care for the broader population has been deteriorating for years while also growing in expense at twice GDP.

    We are approaching a crisis – a point where there are thousands of communities and under-served populations across the U.S. These are communities with entirely inadequate primary care physician and dental services, not even the basics within 30 miles of where people live. No dentist for the kids, etc. There is also just plain old refusal to serve the poor in some urban centers (because their Medicaid reimbursement is too little or they’re poor or other reasons). Federal health centers have had to be created in neighborhoods with community involvement because there were no doctors or dentists to serve the population. Many communities are still missing these vital services because Congressional funding is inadequate to meet the needs across the nation for start-up grant funding.

    The scandal that is in the news today about the VA and its wait lists is hardly unique to VA hospitals. It is NO better outside the VA in the communities. We have too many Park Avenue specialist doctors and too few primary care physicians who will actually touch you and manage your care. Market forces have failed our health delivery in this country. I’m sure we’re going to hear a lot more complaints like the VA wait list scandal in the future.

  9. Jim in SC

    My mother had four vertebroplastys in the mid-2000s. The problem is not that there was no benefit–actual, I think, not placebo–the problem is that the procedure re-distributes pressure along the spine so that other vertebrae become more likely to break. This is the way her GP described it to me. So she would get relief for a little while, but problems recurred after a few months.

    The air around the radiologists office was like something around a tent revival. I am sure that they believed what they were doing was a miracle.

    1. Whine Country

      I referred to Ben Franklin’s quote from over 200 years ago: “God heals and the doctor takes the fee” in reply to Skeptic’s post about the placebo effect. What seems to be missed in the discussion of the market and whether health care can held to the “laws” of economics is to first take a very hard look on whether it is indeed a “business”. Whether you believe in God or not, the sad truth is that no one can “heal” another human. The only possibility that exists is that the medical “professional” may be able to assist, whether by consultation or by intervention, in helping the individual to heal thyself. So for the great majority of the years from when Ben Franklin made his cogent observation, medical practitioners were defined by society as “professionals” and thus had a code of conduct befitting a profession. Simply put medicine was defined by society as a profession and not a business, thus subject to different rules. As to a doctor having to talk a patient out of using a drug advertised by drug manufacturer, that could hot happen because advertising was strictly prohibited by professionals. Much of the problems we face today (think lawyers, accountants, engineers, etc) stem from the fact that when you transition a profession into a business, you bring with it the potential ill effects of the lack of true independence and present a conflict of interest that is not always in the patient’s (or clients) best interests. The bottom line is that you go to a medical practitioner for his or her unbiased opinion and intervention skills for the sole purpose of having that person help you heal yourself. How does advertising, to the general public, assist the individual patient in any way other than to call into question the skills of the licensed professional? Enough theory. I lived through the period before and after professionals’ animal spirits were let free and we became free to “do business”. I spent my career as a professional accountant (CPA). Early on my firm was sanctioned by the authorities for daring to so much as list our address as “1201 Russ Building”, which was, according to the post office the correct designation. According to the authorities, we were only allowed to show our address with the traditional number and street name, and our choosing the former was meant to aggrandize our status and was a form of strictly prohibited advertising. That was how is was. What a difference today! In my own profession’s case, please someone tell my how we could have the financial crises where almost overnight our largest financial companies were found to be literally insolvent and facing bankruptcy and there was not one peep from anyone in the accounting profession? It is unbelievable and should have been thought to be impossible but it is a fact. The sad fact that when accounting transitioned into a business, the conflicts of interest faced by accountants overwhelmed the most critical element in the profession: independence. While this may not sound relevant to the medical issue, I say it is right on point. A profession is a profession. Treating professionals as businesses leads to bad results. That is not a theory but an observation from someone who has lived through both worlds and seen it up close and personal (I had many doctor, lawyer and engineer clients as well as some other “professionals”). Ben Franklin was right! So was the USA when for the great majority of those 200 plus years they defined what a profession was and made the definition such that whatever “market” they were a part of was one first and foremost principally for the benefit of the patient or client.

      1. Whine Country

        Oops! This wasn’t meant as a reply to Jim in SC’s post but merely as a general comment.

  10. Dave of Maryland

    One way to assess any health system is in terms of the two main sets of incentives – those of the patients, and those of the medical service providers (doctors and suppliers of medicines, equipment and accessories).

    No. Do the work. Find – if you can – and read the great medical treatises of the past 2000 years. Since 1910 we in fact have had industrialized medicine, an ideological and crippling parody of what medicine used to be. It came in on the same tide as Prohibition, and, like the ant-boozers, has the force of law.

    There are many other schools of medicine. It is time to stop being impressed by a machine that takes a pulse, when doctors a century ago, using their hands, could easily tell if the pulse was strong or weak, high or low, and describe the heartbeat with any of a dozen other adjectives.

    We have machine medicine and are dying from it.

    1. scraping_by

      I’ve actually experienced both. Grew up in a small town with a real live old country doctor who did many of his diagnoses on his back step wearing his pajamas, then spent my adult years in large urban areas going to major medical centers.

      Since it was mostly injuries, I didn’t mind meeting someone I had to take on faith was a physician, who quick slapped my bones together and sent me away with some Schedule 1 narcotics. The old guy was more likely to tell me to go back home and clean it up, let it air, and don’t worry, it would heal up fine.

      Doc Sam was part of a social fabric, the semi-tribal small farming town. It would be hard to reproduce that in the larger society even if economics didn’t make it a crime against money. True, mere competence is not enough, but many of the reforms needed to make health care like the face-to-face past aren’t in the debate.

    2. Carla

      Well, U.S. life expectancy at birth in 1910: 48.4 for men; 51.8 for women.

      In 1998: 73.8 for men; 79.5 for women.

      In 2010: 76.2 for men; 81.1 for women.

      In 2010, in the U.K., a newborn baby boy could expect to live 78.1 years and a newborn baby girl 82.1 years.

      2010 in Japan: 79.55 for men; 86.30 for women.

      1. abynormal

        even wsj isn’t hiding rural life expectancy stats…but this headline screams louder

        Here’s the full U.S. Health map, from IHME. Click over to “life expectancy” to compare all the counties in the U.S.

        1. Carla

          No argument about poor vs. wealthy communities; those differences no doubt existed in 1910 as well. Of course, it’s an outrage.

          The national stats include all races and incomes. I was simply trying to point out that something has improved U.S. life expectancy by more than 25 years for men and almost 30 years for women in the last 100 years.

          While I am probably just as frustrated as Dave of Maryland by industrialized medicine, particularly (in my case) the health insurance industry and big pharma, I’m don’t think going back to a pre-1910 medical system is necessarily the answer.

          1. mellon

            The last few years life expectancy has been falling in many parts of the US due to declines in health status and declining access to health care.

            Its clear that the steady increases in life expectancy over the last few centuries are ending, at least in the US.

  11. E.L. Beck

    Excellent piece, especially the reminder of “the asymmetry of information between the seller (in this case the doctor) and the consume,” and, it might be added, between patient and pharmaceuticals, medical-device manufacturers and most of all, health services (clinics, hospitals, etc.).

    Yet, as realized here, costs -are- incurred and some sort of pricing structure must be in place, setting aside for a moment the equally thorny debate of how healthcare service costs are covered. So why not strip away the veil and require transparency of pricing? Why not require the untangling of healthcare service networks altogether, where doctors, hospitals, pharma and device makers all conference behind closed doors, excluding the one party that is the most critical, the patient? Then require all of these entities to publicly post pricing for services rendered, allowing patients to shop the services required?

    Public menu pricing would, of course, require even more transparency. Advisement as to what combination of services would be necessary for a given procedure and the efficacy and merits of competing cures/treatments for the same diagnosis would be required, opening up options far beyond what one’s physician may suggest at any given time, without the whiff of back-door, flavor-of-the-month incentives being quietly pushed by pharma or some device maker.

    This approach, I would think, would drive straight at the heart of the matter, which is to get healthcare costs under control. The healthcare market is dysfunctional, as there are far too many protected fiefdoms that exist with this market. Eradication of those fiefdoms would mercilessly drive down costs.

    An off-the-cuff sketch:

    1. scraping_by

      But for the patient, medicine will never be like the supermarket. The fees paid are less like exchange and more like extortion.

      If the idea of covering costs is freed from the commercial model, there are many other modes of getting it done. Most just as good, many better. It’s a question of keeping first things first and broadening the mind.

      1. mellon

        I think the clear thing is the government is trying to prevent a collapse of prices in the US irregardless of how much it hurts the country, because they are afraid – in sort of a domino theory way, that the falling prices would spread.

        Pricing is a matter of principle that they don’t want to budge an inch on. For example, if they were to give people in the US some kind of sweetheart deal on drug pricing or health care just because people were dying because they could not afford drugs that were priced at whatever the market would bear, everybody else we engaged in trade negotiations with would point out that their people were dying too, and want to be able to do it too.

  12. Ruby

    Healthcare economics simplified:
    1) the medical community does not want you well…but they don’t want you dead either
    2) for healthcare consumers, more is presumed better regardless of overall care effectiveness (quantity = quality)

  13. impermanence

    The notion that you can fix, rehab, and/or replace everybody’s body parts is foolish. This has been brought to you by the same folks who tell you that security is derived from the construction of a military that can destroy the planet several times over.

    Although this should be obvious to anything thinking person, our fear of death is so profound that the resultant fantasies create an intellectual environment that will accept such non-sense [similar to how people accept the idea of representative democracy and other chimeras].

  14. Peter L.

    Curious about what others think about this statement, even though this point doesn’t reflect directly on the post:

    For these goods the demand curve may slope any which way, and people are often left to use price as the only signal of quality (or quantity for that matter). This means that a socially optimal level of medical service provision cannot be determined using basic marginal economic analysis.

    Steve Keen in his Debunking Economics points out that according to proofs by William Gorman in 1950’s, and later rediscovered as the Sonnenschein-Mantel-Debreu theorem, the aggregation of individuals all behaving rationally do not necessarily add up to a downward sloping demand curve. Evidently, the aggregation of individual rational agents can result in a demand curve of any polynomial function.

    So . . . Keen says that this result means socially optimal distribution of goods cannot be determined, even under narrow neo-classical definitions, without bizarre assumptions such as the idea that only one person and only one good exist in the economy. (Keen even quotes from a book by Mas-Colell in which, to get around these problems, it is assumed that “a benevolent central authority … redistributes wealth in order to maximize social welfare.” Quoted on page 59, of the second edition of Keen’s book.)

    So, not only does Levitt not recognize, or seeks to obfuscate, the real world difference between health care services and widgets, even if there was a reasonable analogy, neo-classical economics itself undermines the idea that it would be better to have a “free market” in any good. Thus Levitt either misrepresents or misunderstand both what neo-classical economic theory actually says, and real world aspects of health care services.

    I’m still trying to understand this stuff, and this little comment in the article caught my eye for that reason.

  15. cripes

    For those still worried about excessive use of medical services by the insured (or not), let me remind them this is not the problem in the United States. While we spend double the cost in comparable OECD countries, we see doctors less often and receive less from all that money spent. In addition, we have enrolled millions in crappy ACA plans and Medicaid, without training more doctors for these patients.
    If you are worried about the money, then follow it.
    The quotes below are from:
    You can read in horrifying detail where all this money goes and how crappy the medical services provided are.
    Relatively Few Physicians and Physician Visits in the
    United States
    •In 2008, the U.S. had the fewest practicing physi-
    cians per 1,000 population (2.43) among the 10
    countries where data were available, and was below
    the OECD median (3.00).
    •There were four doctor consultations per capita in
    the U.S., which was tied with Switzerland for the sec-
    ond-fewest among the 12 countries, and well below
    the OECD median (6.4 per capita). Only Sweden
    had fewer consultations (2.9); Germany had nealry
    twice as many (7.8).

  16. kevinearick

    Human Engineering & Occupation

    Don’t get me wrong; I like lots of people, who do lots of really stupid things, but I write for young people, who want to be productive. And before this demographic collapse is recorded, more humanity will be prematurely destroyed than in all the wars of History.

    History repeats because the majority always chooses knowledge, as if humanity were the integral and not the derivative. Keep trying to subdue the planet, into bondage, and xpect a different result. Individual learning is always changing the axes, if you care to look, beyond the public eye.

    Empires assume planetary exploitation, as an asset against which credit is extended, in a positive feedback control mechanism, the momentum of which leads them to issue debt as income, expecting producers to provide whatever technology is required to feed the hoard of consumers, in what can only be a demographic ponzi, paying interest on interest, and the planet mows them down, every time.

    They never see a bubble because they assume debt slavery of labor, breeding the economic transmission mechanism, debt slaves chasing stock rotation, will automatically reboot the system for them with sufficient pressure. Media is an advertisement, all of it, and the salesmen quickly learn to believe their own lies, extrapolating yesterday’s data in a self-absorbing filter to plan the future, to maintain the status quo.

    The sad fact is that those in the majority do not care to bear responsibility for themselves, let alone others, preferring to believe that it takes a community to raise a child, that experts know best, increasing their debt as income as their society devolves accordingly. The more they pay experts to do their thinking, the faster they devolve into income inequality, as if who collects debt faster is the issue, and are surprised at the outcome every time.

    Jerry Brown’s crew approves the latest and greatest technology only to immediately find it not feasible, and blames the world for climate variability, while rolling out the prototype from San Francisco globally. All the while Yellen assures the world that labor slack will contain inflation, while promising full employment, on declining participation. Those most responsible for producing war always claim to abhor it.

    When those who can get credit don’t want it, and those who need it can’t get it, who remains?

    That’s it; keep installing robots at Amazon, to buy time for Wal-Mart and Sears, for the lower middle class to compete with, to support the upper middle class, to pay for Hillarycare, hoping Abenomics does not trigger WWIII, and build an artificial island at the doorstep for the navy, expecting to win, be last to lose, either way. How fast and with what moron technology the self-absorbed kill themselves matters why?

    An economy is not like a car, speeding from red light to red light, in a straight line. It’s much more like a ship, navigating tide, current and wind, but, then again, what else do you expect from the hypocrites in Virginia? Didn’t the taxpayer, with debt as income to leverage more debt, just bail GM out? Now, Toyota is building junk; who’d a thunk?

    Legacy is going to profit on the destruction of the middle class, and there is nothing you can do about it, except to stop collecting and eating crap, to feed the doctors, so they can breed more automatons for public education. Expect the doctors to turn off the machines as a form of extortion, and blame the government they bred, while they search for you, first with carrots and then with sticks.

    War is negligible relative to the cost of the feast and famine cycles preceding it. The point is not just to survive, but to prosper. War is a function of willful ignorance, knowledge as artificial intelligence. You are the tip of the spear, for better or for worse.

    Family Law, a contract, made to be broken, is the snake. Everything and everyone else downstream in that process is a derivative. Don’t waste your time. Be on your way and don’t look back. Before the critters plan their future, they lock themselves in the past, on their way to oblivion.

  17. Jacob

    “They told him that the U.K.’s National Health Service — free, unlimited, lifetime heath care — was laudable but didn’t make practical sense.”

    Britain’s National Health Service is being dismantled via privatization. Most Americans are unaware of that because nothing is said about it in the American media.

    1. mellon

      Thank you Jacob for pointing that out. Also the US is behind the attack on the NHS. Read Allyson Pollock’s work, she has written on this extensively.

      In Canada, Scott Sinclair at has written what may be the most readable descriptions of the free trade agreements which for the most part apply to us too. He explains the attack on public services and puts in in context globally.

      >“They told him that the U.K.’s National Health Service — free, unlimited, lifetime heath care — was laudable but didn’t make practical sense.”

      It makes too much sense, and saves too much money and that’s why they hate it.

      Please read this paper also.

      >Britain’s National Health Service is being dismantled via privatization. Most Americans are unaware of that because nothing is said about it in the American media.

      That’s intentional. There also is a longstanding media quarantine on any news of single payer at all.

      Its as if we lived in a country with major press censorship.

  18. cripes

    Privatization of public resources in the US is proceeding at an alarming and dangerous pace. They’re raping the commons, looting the treasury and mugging every last worker–an enclosure project enclosing the entire planet.

    It’s even more astounding that Europe, considering their Social Democratic legacy and general state of more evolved political consciousness, is falling prey also. Maybe it’s not that people in Europe, or even the US, actually want or believe the transparent rationales for this looting (gubmint doesn’t work, bizniz is efficient, markets, etc), maybe it’s just because the oligarchs have taken over almost everywhere, and are pushing through their agenda–everywhere–regardless of popular opinion, and using what’s left of the charade of a free press and democratic institutions as cover. And if that doesn’t work, there’s joblessness, homelessness or a gun.

    Medicaid, of all things, is on the privatization chopping block, with insurers slavering over the 900 billion market they plan to loot over the next decade. Like it isn’t skimpy enough now.
    It just gets more blatant all the time.

    1. mellon

      Well, I don’t know how much you finance folk know about this but computer scientists will tell you that the rate of technological growth is expending exponentially and that by midcentury we’ll have machines that think. So, long before then a very large percentage of jobs will have vanished and we have no idea what we’re going to do because the whole concept of paying people to do things they dont want to do with their time is based on people being the way to do most stuff. But that assumption is vanishing and with it will vanish the system that values people so much more based on money, either that or they will try to literally beat everybody’s spirit down. But, the real news and the reason they are being so jumpy about everything and trying to take over is because they better than anybody sense that the system is changing and so they are quite literally trying to lock in their ill gotten gains forever, because the income from work for the middle class is vanishing. Now, what is more likely, society figuring out some gradual process of adjusting to the changes or them being able to block awareness of them. I dont know but I think its unsustainable. for them, A good chunk of it comes down to fun, one world, the good world, is fun the other is hell.

  19. BigRed

    I agreed in the beginning that the comparison is idiotic but now I think that there is actually something to it, just not in the way the Freakonomists thought.

    Think about how healthcare (should) work: you present with symptoms, the doctor diagnoses, and depending on the diagnosis and your personal circumstances she prescribes a treatment. In particular, prescription medication, surgical procedures etc. are typically not something you can just go out and purchase.
    Now transfer this to cars: instead of going down to the car dealership and picking up any car “for free”, whenever one wanted, one would go to the car dealership, describe one’s situations and needs, and a trained professional would assign a car that fits the circumstances. Might just lead to people driving safer cars, cars with lower fuel consumption, or maybe even fewer cars, because they don’t need them.

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