Economics and Heath Care ReformBy: Stephen Marsh
It is the economic matters that make it so tempting for policy makers. They are:
- The system seems inefficient;
- There is a huge amount of rent seeking going on;
- Costs have been growing much faster than inflation.
The system appears inefficient.
The same procedure might have Medicare paying $150.00. It might get billed to insurance companies at amounts that have them paying between $250 to $2,500.00 for the same thing. You can get an MRI for under $100.00 in Japan. I routinely see the same MRI billed for at between $2,500.00 and $5,000.00 in the United States. Insurance is sold, by agents, who are paid commissions. Bills are processed and audited. Executives get paid bonuses.
More tempting, if you total up the entire bill for health care in the United States and then compare us to France or Canada, it seems you could have universal health care and have lots of money left over. Especially if you reduced the money some of the people in the system make.
Of course … the quality of health care differs (there are places in Canada where you won’t get anesthesia while delivering a baby if you don’t show up during normal business hours). Waits for some services differ. But, when they started with the Massachusetts health care initiative (now referred to as Romneycare), it had two goals: personal responsibility and reduced overall expense. All generated by the “obvious” inefficiencies.
At this time I’m reminding readers that I said “appears” rather than “is.”
But it is that appearance that is economically tempting.
There is a lot of rent seeking going on.
The simplest definition of rent seeking is the expenditure of resources attempting to enrich oneself by increasing one’s share of a fixed amount of wealth rather than trying to create wealth. Since resources are expended but no new wealth is created, the net effect of rent-seeking is to reduce the sum of social wealth.
Rent-seeking generally implies the extraction of uncompensated value from others without making any contribution to productivity. The origin of the term refers to the gaining control of land or other pre-existing natural resources. In the modern economy, a more common example of rent-seeking is political lobbying to receive a government transfer payment, or to impose burdensome regulations on one’s competitors in order to increase one’s market share.
In health care a good example is rural clinics which can be run by PAs and GPNs and the like being required to have a “supervising” doctor who is not required to supervise any patients, be within two hundred miles of the clinic or do anything but receive part of the money.
In a different field, I still remember a doctor’s deposition where he stated in outrage to the attorneys “What don’t you understand? I wasn’t there. I have nothing to do with that. I’m in a different building. All I do is get the money. That is all my name on the paperwork shows. I have no duties. I’m not responsible. All I do is get the money.” All he did was engage in rent seeking, successfully.
There are huge struggles going on between various groups trying to cut each other out of rent seeking. In a move I call “the revenge of the general practice doctors” GP MDs are suddenly discovering that they can force the specialists who get referrals from them to rent from them and give up a part of their practices as “rent.” So a General Practice doctor (Many of whom made less than $90,000.00 year before they figured out how to make this work) can make considerably more (when you realize that the same doctor made only $40,000.00 while still in school, and that specialist nurses in the step down units might well make $70,000.00 a year, you can understand why the GPs felt underpaid).
Orthopedic Surgeons whom I depose regularly make about two to four million dollars a year (and if you think that is too much, just wait until you break a leg and want to get it fixed now rather than wait 2-3 days). Other types of doctors obviously make a lot less. One of the keys to moving from the ninety thousand dollar a year figure to the six to nine million dollars a year numbers is finding a way to successfully engage in rent seeking (something I will note the surgeons I depose have not found a way to do). Doctors are not foolish. Nor are others in the health care arena who are seeking to do the same thing. Many will find a way to rent seek.
(Warning: do not think that only people in health care do this. Adam Smith believed that whenever two or more business men were in the same room they were going to conspire against the common good and engage in collaborative rent seeking).
Almost every regulator looks at that and thinks, gee, a PhD in philosophy takes longer to get than an MD, requires higher test scores and more work, and people are willing to get them in order to earn $35,000.00 a year. European countries pay doctors $60,000.00 a year (excepting England, where a good specialist Orthopedic Surgeon can make 100,000 euros a year according to a head hunter I had lunch with one day in Paris who was curious about the odds of getting a few American surgeons to come to England). European countries do not have a shortage of doctors. The Philippines did not have a shortage of doctors at even lower wages for some time (until they figured out they could retrain, get an RN degree and get a green card or H1 visa to work in the United States as nurses for $50,000.00 a year or so and started leaving their practices to become nurses in the Americas).
To say the least, the entire thing is tempting. Notice I did not say any of the regulatory steps or aspirations are justified or correct. This essay is descriptive, not prescriptive. I don’t doubt that everyone feels the other guy is paid too much and they are not paid enough. Rent seeking activities (a) are tempting as a cost cutting target (cut out the rent seeking profits and refund them to the payors) and (b) color vision (they make everything look like rent seeking — the problem Stalin got into when he started looking for malefic influences behind all of his economic woes). You can sink yourself hunting rent seekers.
Finally, costs are growing faster than inflation.
That is huge. Health care as 5% of the GNP — scarcely noticed. Though think of that as one dollar out of every twenty you make. At 20% — it is one dollar out of every five you make, and everyone notices it. The cost gets attention.
Now, I’m not blaming anyone for the obesity epidemic (with the associated diabetes -> renal failure -> dialysis cycle) or all the other things driving health care costs up. I’m not providing explanations or blaming pharmaceutical companies, rent seekers or anyone else. I’ll leave that to policy makers and politicians.
But the undeniable fact is that the cost of health care costs are going up and they have passed the pain threshold and are headed towards the unsustainable threshold. Just the drug benefit for Medicare alone is predicted to cause more damage to the United States than all the wars we have fought put together because of its economic cost and impact. Even Forbes …
This causes politicians to become pressurized. After all the electioneering “they are going to take Grandma’s Medicare away” sorts of things, there is real fear that at some point we will not be able to pay for health care, third rail of American politics or not.
So, what do we do about it?
“I know, I ought to focus on the politics involved, or tell everyone how to solve the problem, instead” — I’m afraid that what we should do about it is something I will leave up to the commentators.
What do you think about the economic forces that are tempting policy makers and politicians. What do you think the solution should be? Can be? Is there a solution?