Wednesday, February 19, 2020

Health spending

Via the always excellent Marginal Revolution, which has its own commentary,  a splendid Random Critical Analysis post "why conventional analysis on health care is wrong."
Why does the US spend so much more on health care than other countries? Well, in part because we are a lot richer. We buy a lot of luxury goods. The fit of the line is impressive.

So, not mentioned in the original, is the spread of household income on the x axis. Particularly interesting in terms of the call that we should be more like Denmark, it's notable just how much lower household income is in Denmark, and the rest of Europe. Eyballing it, $32,500 per year vs. $48,000 per year.

Is it just that the price of health care is driven up by the US astronomically inefficient and uncompetitive system? Apparently not -- we consume higher quantities of health care.

This does not mean everything is all hunky-dory in the US health care and health insurance system. It just means the other countries are just as screwed up as we are, but being that much richer we choose to buy more of the screwed up overpriced good.


  1. The top figure appears to use public+private sector health-care on vertical axis, but then uses 'disposable income' on horizontal axis, so all the European countries that uses substantial taxes to pay for healthcare get automatically left-shifted creating the resulting graph. If horizontal axis were 'income' then US looks like the usual outlier it is widely considered to be.

    Not claiming Euro is better or worse than US. Just that the graph seems misleading in sense that it shifts points around substantially based on whether healthcare is public or private in that country.

    1. The Y axis uses Actual Individual Consumption (AIC) which includes government healthcare transfers. From the blogs link to eurostat:

      Actual individual consumption, abbreviated as AIC, refers to all goods and services actually consumed by households. It encompasses consumer goods and services purchased directly by households, as well as services provided by non-profit institutions and the government for individual consumption (e.g., health and education services). In international comparisons, the term is usually preferred over the narrower concept of household consumption, because the latter is influenced by the extent to which non-profit institutions and general government act as service providers.

    2. I caught that too. This is perhaps an example of going for good fit rather than good theory.

      The US is an outlier, as any traveler with open eyes can discern.

    3. The amount European countries expend on public health care does not shift the horizontal axis that much.

      For Spain that figure is around $1,700 per capita (not PPP adjusted). The gap in the horizontal axis exceeds $23,000

    4. Good point Anonymous. Maybe you run two regressions. One with public sector only and another for private sector health-care. As for public and private combined, I suspect the private reimbursements cross subsidize public health-care costs.

    5. Which brings up the question of whether this is something that just happens to correlate or if there's a real tie between the two numbers.

      Of there is a real connection, it says that passing a single payer health system with large individual tax increases will result in lower health spending and lots of claimed savings. So the question is then whether single payer with a massive corporate tax increase (which won't reduce disposable income) will result in a single payer without savings.

      I'll note I haven't read the 100 odd page post to see what it says about this in detail, just playing with the correlation.

    6. It seems that worrying about left-shifting is unfounded. Pre tax income should adjust as much as possible to balance the marginal utilities and costs of final consumption goods and services. The graphs above suggests to me gdp/capita is the main factor determining consumption, regardless of tax structure.

  2. his got me wondering and thinking about two things.

    1. If we are spending about what is expected (seems plausible) then all the theories about consumers just spending willy nilly because the costs are born by a third party (the insurers) are mistaken?
    2. The crazy stories about someone getting charged $80,000 for service X while the insured patient gets the service for $800 are still true but perhaps a small piece of the pie?  Small or not, this needs to be addressed because even if only a small number of people get hit with surprise bills, there are many people who are worried about it.  
    Personally, I'd make two laws.
    1. One price. Whatever a hospital or provider accepts from any one insurer, that price applies to all.  Or, at least that price applies for uninsured customers.
    2. Drug prices. Price cap based on some formula.  Something like 110% of the average paid by countries in the European Union.  Could be 100% or 120% or X%.  The group of countries could be tweaked.  The point is that this does two things.  We get the benefit of lower prices with some sense of order without having the US government engage in price negotiations. Second, the argument for unlimited pricing is that it encourages innovation, but this burden has fallen primarily on the US consumer.  This cap would push the drug companies to fight for higher prices in the EU, thus spreading the burden across a billion consumers instead of 300 million.   

    1. No. 1 really is food for thought:

      -In the US, the Liaison Committee of the AMA and existing medical schools, the cartel, determines the flow quantity of doctors. The stock quantity of doctors per capita in the US is below that of other civilized countries. The UK allows entry of most EU doctors.

      -Fee-for-service contracting is largely unknown in the UK and F, and strictly price controlled by procedure in G.

      If these and other things don't make the US an outlier, we can throw economic theory out the window. That I am not prepared to do just yet.

    2. Regarding #1: I think this used to be a significant factor but as deductibles and co-pays have risen dramatically many people with insurance aren't functionally insured. If you require a $2,000 knee surgery and have a $5,000 deductible you're going to eat the whole cost.

      Re: #2, the crazy stories. This is a function of the chargemaster, another leftover from the good old days when insurers would pay a percentage of charges. That's pretty much dead and gone because hospital-insurer contracts don't work that way any more to a significant extent.

      Before I was blessed with Medicare I paid BCBS $950/month for an HMO bronze plan with a $6,000 deductible. I had lab work done and the lab bill was $500. After "contractual adjustments" I owed $50.

      So all my insurance did for me was to haggle down my out of pocket cost. Without my insurance I would have been on the hook for $500. I didn't need insurance; what I really needed was a Persian rug merchant to haggle prices for me.

      There was a recent ruling by the Texas Supreme Court that everyone should read: In Re North Cypress Medical Center. This was a case of outrageous billing for an uninsured patient. The court ruled that the hospital should open its books and prove that the charges represented not usual and customary CHARGES but usual and customary REIMBURSEMENT from third party payers.

      Texas has also enacted surprise billing legislation but it plays to mixed reviews.

      The Texas Department of Insurance collects and publishes charges and actual 3rd party allowables. Quite a spread between the two.

      FWIW I publish my cash prices (yes I accept cash and also barter) on the Internet. I can't publish my contracted insurance rates due to gag clauses but I can give individuals a cost estimate if I have their insurance info. That would be for my services only. I can't estimate facility, radiology, anesthesia or other fees beyond my control. Fortunately I have my own procedure room so I can tell someone exactly what the cost would be. Usually it's about 1/3 of hospital outpatient and 1/2 of an ambulatory surgery center.

      As an aside, after over 4 decades in medicine it grieves me to see what our system has degenerated into.

  3. Hello Professor,

    there is a nice commentary/criticism by Scott Sumner over at EconLib (The Library of Economics and Liberty) regarding that post by RCA (and picked up by Tabarrok:

    One comment Sumner makes:
    " I’m not sure. I’m also not sure why “net adjusted household disposable income per capita” is the correct income measure."

    I thought I would point this out.

  4. I hesitate to injected anecdote into the analysis, but my sense as a Canadian is that we allocate health care by rationing (unsurprisingly, given it is free at the margin). In my experience our system is excellent for acute injury. If you go to the ER with an actual emergency, you’ll be treated quickly, and without paying. It’s also very good for chronic conditions eg blood pressure, diabetes control. But it is poor for intermediate / ‘life-style’ issues. My sister tore her rotator cuff – it would have been three years to get it surgically repaired in the public system, so she went private. I had tendonitis in both elbows, and my family doc referred me to a specialist – it was almost two years before I got a call back from the specialist for an appointment. I had a lingering low-grade lung infection, and had to go to a walk-in clinic (arrive at 6:00 to get a slot, as the available spots fill up before the clinic opens at 7), because the lead time to get into my family doc is 9 weeks. I could go on with other examples. Also, the government limits the number of doctors by limiting billing numbers, so it can be very difficult (years) for new arrivals to get a doctor, and in the meantime they have to use ER or walk-in clinics. I personally would be willing to pay more for better care.

    1. A Canadian who gets it! How much of your tax bill is for health care? I believe it's about $12,000 for a family of four.

      There is no coverage for prescriptions or durable medical equipment (eg, wheelchairs, insulin pumps, etc). Many Canadians purchase separate medication insurance.

      Wait times are so bad that they passed legislation whereby each province has to post average wait times, broken down by facility, service, physician, etc. Go to some of these sites and look at the wait time to get your child's tonsillectomy done.

      The government has a fixed budget for physician costs so many new doctors complete their training but there is no money to pay them.

      Comparison of government statistics can be misleading. In the US an infant born alive is a live birth. In other countries they are considered a live birth until they have survived 24 hrs. That changes the infant mortality rate. There are also major differences in lifestyle. Dietary differences are huge. The American diet is very unhealthy compared to the Mediterranean diet.

      However, when you look at conditions that are independent of lifestyle or defining when a baby is dead the picture changes. Cancer survival rates in the US are superior to every other system. You can't fudge whether someone has cancer or when they're dead.

      The US definitely pays more for medication. There a product called Synvisc, used for injection into arthritic knees. It's made in the US, but it costs far less in other countries. An enterprising group of orthopedists decided to buy Synvisc in Europe to save money. They were slapped with charges of illegally importing drugs.

      The cost of my BP medication here is about $100. In Italy I bought it for $30.

      I don't know how this happens but I suspect in a country with socialized medicine they can negotiate prices with drug manufacturers. In contrast, one of the provisions of the Medicare Part D legislation was that Medicare couldn't leverage its huge patient population to negotiate prices. A gift, no doubt, from K Street.

      Speed, quality, price. Pick any two.

  5. Be careful here. Running regressions on health care spending on income can lead to inflated and misleading r^2's. The reason is simple: health care spending is a source of income.

    Suppose I have two totally random and statistically independent series - h for health care spending, y for non-health care sources of income. Total income is Y = h + y. If h and y have zero covariance, h and Y still have a positive covariance, which is an increasing function of the variance of h relative to the variance of y.

    A similar argument applies to logs. Use the identity Y = (1+h/y)*y which holds for all y > 0. Then ln(Y) = ln(1+h/y) + ln(y). If the covariance of ln(y) and ln(h) is zero, the covariance of ln(Y) and ln(h) still is positive and an increasing function of the variance of ln(1+h/y).

  6. Seems like one related reason healthcare is more expensive in the US is an explanation related to Baumol's Cost Disease: we need to pay people more to work in the medical industry in the US because there are other attractive employment alternatives here because we are richer.

  7. The linearity is mostly the USA, as the chart indicates. Looking at the USA, the gain in life expectancy for each dollar spend have been decreasing. The gain is now about half the growth rate. Thus, closing the loop the chart really says the USA is moving left on the chart and the R squared coefficient will suddenly collapse in a fit of sticky prices.

  8. One solution: ideology-based health care.

    Note that they will also discriminate based on behavior. I can't think of a faster way to empty out the hospitals.

    Deplorables, you've been warned.

    1. This could be an effective approach to bending the cost curve. Moreover, it could be elegantly deployed. "Society" can assess, with some precision (not sure about accuracy), who qualifies. For example, society can tally how many times one has been called that in social media.

    2. Like the Chinese social credit system? Say and do the correct things or you lose your health care.

      Also someone could kill your reputation with bots on social media.

      We might have better drivers if we were allowed to shoot paintballs at cars driven by bad drivers. Someone cuts you off? Tag him with a paintball. Then everyone will know what kind of driver you are by how many paintball hits you have.

  9. I think this post misfires.

    Other nations get about the same healthcare results, but spend far less. Japan notably, but they are not on the chart.

    The US spends a huge amount on terminally ill, elderly patients. An adult conversation about euthanasia appears impossible.

    I recommend the US go to universal conscription, and VA for everybody. Limit VA outlays to 15% of GDP. People who want additional care can buy it on open market.

    1. Having worked at 2 VA hospitals I believe I'd rather be treated in Wuhan

  10. great post! I think another intuitive way of making the same point is by comparing the level of health spending on pets and people in the U.S. Both have risen at more or less the same rate over the past thirty years. People like health care as a good - for themselves and Rover - and spend more on it as their income rises. One can argue that the spending is wasteful or doesn't accomplish much but the same can be said for an uncountable number of other things people spend money on.

  11. One can call social security corrupt, incoherent, foolish policy, or manna from heaven——but at least it is relatively easy to understand the nature of the problem—-(not the “cure” of course). But Health Care? If there is a less understood “industry” worldwide and in America, I have no idea what it is. I just bought a book by Marty Mackary “The Price We Pay”. I hope it is helpful.

  12. Two observations:

    (1) I think this calls into question the measurement of "quantity of healthcare". Since doctors salaries in the US are enormously higher than in other developed countries (, I suspect that the measurement of healthcare PPPs is inaccurate and underestimates the higher prices of healthcare in the US.

    (2) Household disposable income per capita is not a good measure of per capita resource availability for this matter as healthcare is at least partially covered by the government in most countries including the US. Per capita Net National Income per capita would be a better measure and by this measure American divergence over other developed countries is smaller than GDP and much smaller than Household disposable income.

  13. Something to contemplate as I ramp up on healthcare, I'm an investor.

    The US (17%) spends much more on healthcare vs say France (11%), Finland (9%) and Denmark (10%). But it spends far less on "special expenditures" at 19% vs close to 30% for those three.

    It's total spend (health + special) here is not out of line vs other countries but the mix is. The US view seems to be that more hospitals, doctor vists, specialists and surgeries translate to better outcomes but that I don't think is true. Longevity is a function of various other factors, not to say that longevity is the goal, but that's a commonly cited fact in support of the idea that the US spend on health is too high.

    You don't live longer in Sweden because you get better drugs, surgeries, you live longer because you want to given how you are treated by others and how you treat yourself. Flimsy but seems about right.


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