The Sorry State of Health Economics

First a disclaimer. I have never taken a course in health economics. I have never taught a course in health economics. I have never even read a health econ textbook.

Recently, however, I acquired such a book. I skimmed the chapter headings, looked at the graphics and spent some time going over the subject index at the back.  It was a painful experience.

But before getting to that, let’s consider:

Fact 1: ObamaCare is based on advice given by some of the nation’s leading health economists.

First a disclaimer. I have never taken a course in health economics. I have never taught a course in health economics. I have never even read a health econ textbook.

Recently, however, I acquired such a book. I skimmed the chapter headings, looked at the graphics and spent some time going over the subject index at the back.  It was a painful experience.

But before getting to that, let’s consider:

Fact 1: ObamaCare is based on advice given by some of the nation’s leading health economists.

Fact 2: The advice reflected state-of-the-art thought in the field of health economics.

Question: What in the world were these people thinking and why do they think that way?

By way of background, let’s cover some basics.

The money price of care. One of the themes of my book Priceless is that there are no real prices in the conventional health care system. There are only artificial “reimbursement rates,” negotiated or imposed by third party payers. A considerable part of the book is devoted to explaining how this creates perverse incentives for all parties and when people act on those incentives they do things that make costs higher, quality lower and access to care more difficult than otherwise would have been the case.

How does a standard health economics textbook handle this issue? To find out, I consulted Health Economics: Theory, Insights and Industry Studies, by Rexford Santerre and Stephen Neun. I am told that this textbook is pretty run of the mill as far as health economics goes. Here is what it does: It tries to force health care into the traditional toolbox of economic analysis. It starts by analyzing demand, then goes to supply and then tries to put the two together. Initially, it shows price determined by the intersection of a supply curve and a demand curve — just what would happen in the market for wheat or corn. It then explains variations on market structure, including monopoly, monopsony, etc. All straight from conventional price theory and all totally irrelevant for what happens in most health care markets.

In the illustration of how supply and demand interact, the item being purchased was aspirin. Aspirin? Yes, aspirin. The very pill that hospitals charge $1.50 for, according to Steven Bill. Do you think the intersection of a supply curve and a demand curve can explain why a 100 pill bottle of aspirin would cost $150? The textbook had no answer for that.

Ah, but there are markets where conventional economic tools can be applied. These are markets where patients are spending their own money and providers compete on price and quality. So you would think that if economists were going to try to force the economists’ box of tools on health care, there ought to be a few examples of where that actually works.

Take cosmetic surgery, for example. I go to the index…Search under “c”…That’s “c…o…s…” hmm…It’s not there.

Okay, what about Lasik surgery? I go under “L”…That’s “L…a…s…” hmm…No Lasik.

Now I’m on a roll. What about walk-in clinics? No. Free standing emergency rooms? Nix. Domestic medical tourism? Nein. International medical tourism? Nada. Online mail house pharmacies? Zilch. Concierge medicine? No way. Reference pricing for joint replacements in California? Not a word.

In 552 pages ― crammed with type so small my dwindling eyesight can barely see the words ― these guys have not one example of a health care market where conventional tools of economics might actually apply.

The time price of care. Another important theme of Priceless is that our health care system is not fundamentally different from the health care systems of other countries, despite the spirited rhetoric that goes back and forth between the right and the left. At the point of consumption, we basically pay for care the same way the Canadians and the British pay for care. We pay with time, not with money.

How long does it take a caller to get an appointment with a doctor using a telephone? How many days does she have to wait before seeing the doctor? How long does it take to get to the doctor’s office and back again? Once there, how long does she have to wait? These are non-price barriers to care and there is mounting evidence that these non-price barriers are a greater deterrent to access than the fee the doctor charges ― even for low-income patients.

[By way of contrast, I can get my iPhone repaired on a moment’s notice with no appointment, very little waiting and there are even services that will send a repair person to my home!]

What I don’t understand is why this isn’t obvious to everyone. Look around folks. That exterior office is called a “reception area” if you are calling on a lawyer, an accountant, an engineer or any other professional. It’s only at the doctor’s office that we call it a “waiting room.” The reason why one-fifth of all emergency room patients leave without ever seeing a doctor is that we are rationing emergency room care…How? Certainly not by price.

So I check the index again. Time price? It’s not there. Waiting? Not there either. Rationing by waiting? Nowhere to be found. And here is something interesting. Although there is a very lengthy glossary of terms that every student of health economics will need to know, the word “rationing” is not among them.

Cost of care. Health Economics is organized the way a typical price theory book would be organized. First there is the theory of demand. Then, there is the theory of cost (supply). Then you put the two together in a market. And that makes perfect sense PROVIDED THAT the factors that affect demand are fundamentally different from the factors that affect supply. In most markets, that assumption is sound. In health care it is not.

As every doctor knows, if you shift a task from a doctor to a nurse, you lower the cost of care. But you also lower the amount Medicare will pay ― and therefore you lower the amount almost every other payer will pay. So much so, that it generally makes no economic sense to shift to nurses all of the tasks they have the professional training to perform.

Similarly, every hospital knows that it can bill Medicare two or three times as much for the same service if the doctor is a hospital employee rather than in private practice.

Factor inputs, therefore, are not independent of demand. To the contrary, how you produce a service determines what revenue you can expect to receive.

Managed competition. One of the great failings of the health economics profession is the fact that almost no one seems to understand what managed competition is or how it works. Health Economics is no exception. Although the book has a publication date of 2012 and although President Obama made clear as early as the 2008 campaign that health insurance would be sold through exchanges based on a managed competition model, this fact does not appear even once in 552 pages of text.

But I don’t mean to pick on these guys. You can’t find a decent explanation of managed competition and its perverse incentives anywhere outside of the NCPA’s publications and blogs. See my latest post here.