America’s Health Care Caste System, Part II

In reading James’ post I saw this comment from Malcolm Gladwell,

Instead, the United States has opted for a makeshift system of increasing complexity and dysfunction. Americans spend $5,267 per capita on health care every year, almost two and half times the industrialized world̢۪s median of $2,193; the extra spending comes to hundreds of billions of dollars a year. What does that extra spending buy us? Americans have fewer doctors per capita than most Western countries.

Immediately we should wonder if Malcolm Gladwell is really the right person to be commenting on health care anywhere. If America spends so much and there is all this money just waiting to be made how come there aren’t more doctors instead of fewer in comparison to countries that have nationalized health care systems? The outcome Gladwell notes strikes me as being inconsistent. Perhaps the problem is institutional/legal. That is maybe there are effective barriers to entry into the medical doctor field? This in turn would give market power to medical doctors who could raise their prices (please note I am not suggesting that all of the differences in costs between countries is due to this possibility).

I agree that our system is flawed and is going to probably get worse, but this idea that there is no moral hazard is also ridiculous. There are lots of things that are unpleasant and costly, but if you reduce the costs you should expect more people to engage in these things. Sure nobody looks forward to surgery, but similar arguments have been made about unwed mothers and welfare.1 Further, health care these days do not cover just things like unpleasant surgeries, but also elective things like child birth, plastic surgery, abortion, and gender reassignment. These are things people decide to do because they want to do them. Make them cheaper and you’ll get more of them, guaranteed.

Also this comment strikes me as inaccurate,

The moral-hazard argument makes sense, however, only if we consume health care in the same way that we consume other consumer goods, and to economists like Nyman this assumption is plainly absurd. We go to the doctor grudgingly, only because we̢۪re sick.

While it is probably true in a great many cases it doesn’t always have to be true. Case in point my wife. My wife is usually the first to suggest taking our son to the doctor whenever there might be a possibility he is sick, even if it looks like something such as the common cold. She has even used the argument, “We pay for it via your benefits we might as well use it.” Granted, my own personal anecdote does not prove the point, but I’m pretty sure this type of thinking it not unique to my wife.

This comment also suggests a problem with moral hazard,

I just went to the dermatologist to get moles checked for skin cancer. If I had had to pay a hundred per cent, or even fifty per cent, of the cost of the visit, I might not have gone. Would that have been a wise decision? I have no idea. But if one of those moles really is cancerous, that simple, inexpensive visit could save the health-care system tens of thousands of dollars (not to mention saving me a great deal of heartbreak).

How so? Well ideally we want those who have a high risk of skin cancer to go to the dermatologist and those with a low risk to not go (or at least not go as often). The problem is that nationalizing health care isn’t going to solve this problem and might actually make it worse. Think of the problems with teeth that Gladwell raised. If it turns out that everybody has nationalized health care that also covers dental care then alot more people are going to be going. If we accept this notion that we don’t know what is and is not frivolous then it stnads to reason that a certain percentage of visits will be frivolous. We live in a world of finite resources hence something is going to have to give which means either higher prices (and in the case of nationalized health care higher taxes or less of other government provided goods and services) or simply less dental care for everybody.

The problem is I think in large part education and information. Mr. Gladwell touched on it, but instead of focusing on that issue he decided to detour into nationalized health care. Which is cheaper? Brushing your teeth regularly, flossing and using listerine, or going to the dentist to fix the problems caused by poor dental hygeine? Similarly with moles. If you are fair skinned, spent a fair amount of time in the sun and notice some moles that look odd then going to see a dermatologist is probably a good move.

The focus on moral hazard suggests that the changes we make in our behavior when we have insurance are nearly always wasteful. Yet, when it comes to health care, many of the things we do only because we have insurance—like getting our moles checked, or getting our teeth cleaned regularly, or getting a mammogram or engaging in other routine preventive care—are anything but wasteful and inefficient. In fact, they are behaviors that could end up saving the health-care system a good deal of money.

Even if we grant all of this, this still does not mean that people will not abuse the system. Sure very few people like getting their teeth cleaned or getting a pap smear, but these are not the only things that a nationalized health plan would cover.

Finally near the end it looks like Gladwell is confusing adverse selection with moral hazard.

There is another way to organize insurance, however, and that is to make it actuarial. Car insurance, for instance, is actuarial. How much you pay is in large part a function of your individual situation and history: someone who drives a sports car and has received twenty speeding tickets in the past two years pays a much higher annual premium than a soccer mom with a minivan. In recent years, the private insurance industry in the United States has been moving toward the actuarial model, with profound consequences. The triumph of the actuarial model over the social-insurance model is the reason that companies unlucky enough to employ older, high-cost employees—like United Airlines—have run into such financial difficulty. It’s the reason that automakers are increasingly moving their operations to Canada. It’s the reason that small businesses that have one or two employees with serious illnesses suddenly face unmanageably high health-insurance premiums, and it’s the reason that, in many states, people suffering from a potentially high-cost medical condition can’t get anyone to insure them at all.

Moral hazard deals with insurance changing behavior. Adverse selection deals with the problems posed by people of different risk levels. The guy with the sports car and lead foot would like to get the same insurance premiums as the soccer mom with the mini-van. So the insurance company has to try and put people of different risks into different catagories. Thus, the employees who have a disease are ineligible for insurance. Why? Becuase they already have the diseas, there is no more risk no more uncertainty there.

Yet none of this necessarily addresses why health insurance in the U.S. is so high. Could part of it also be that at the same time out-of-pocket expenses are declining? Oh wait, I’m sorry that would be evidence for moral hazard which clearly Mr. Gladwell has concluded is a myth.

Do you think that people whose genes predispose them to depression or cancer, or whose poverty complicates asthma or diabetes, or who get hit by a drunk driver, or who have to keep their mouths closed because their teeth are rotting ought to bear a greater share of the costs of their health care than those of us who are lucky enough to escape such misfortunes?

This is somewhat misleading. Yes some people have had a misfortune in that they were born with genetic pre-dispositions towards certain medical problems, but at the same time things like rotting teeth, cirrhosis of the liver, and obesity are not simply random accidents that strike indiscriminantly. Even something like skin cancer can be traced back to personal behavior. Gladwell is mixing all sorts of different things up and then dismissing them without really understanding them. What a horrible article.
______
1The idea here was that nobody would want to become an unwed mother, so why not extend welfare benefits to unwed mothers. Sounded pretty good, so benefits were extended and now we have quite a few more unwed mothers. See this post by Megan McArdle for some more on this.

FILED UNDER: General
Steve Verdon
About Steve Verdon
Steve has a B.A. in Economics from the University of California, Los Angeles and attended graduate school at The George Washington University, leaving school shortly before staring work on his dissertation when his first child was born. He works in the energy industry and prior to that worked at the Bureau of Labor Statistics in the Division of Price Index and Number Research. He joined the staff at OTB in November 2004.

Comments

  1. SomeGuy in St. Louis says:

    I do not agree that socialize medicine is that much superior to the current US system. If you read some of the health care information from Canada, where the National Courts, have said that the current system is in crisis or the British system (NHS), read the website
    The Welfare State We’re In http://www.thewelfarestatewerein.com/.

    A recent article in the NHS category on July 19th, says

    Four out of five London GPs will not take on new patients

    From the Guardian coverage of the Healthcare Commission annual report on the NHS:
    Fifty-eight per cent of NHS dental practices are not taking on new patients compared with 40% in 2001. But most people who do not have an NHS dentist would like one.

    In London, patients found it equally difficult to register with an NHS GP, with four out of five practices unable to take on new patients.

    I guess these Brits, will be pulling their teeth with pliers in the future.

    I have a running argument with a German born American about national health care, last week I told him about the Doctors in Germany going on strike. The next day he told about relative in Germany going to health spa, per national health care, misallocation of health care Europe’s ??

    A month or so ago a NRO writer, wrote an article in the Wall Street Journal, about his wife having a stroke on a trip to England, he said that the care minimal at a NHS hospital.

    Doctor do more testing in this country, and over test because they don’t want to get sued (i.e John Edwards). You can ’t sue doctor with national health care because they work for the government.

    In closing, a quote I read today, “If you think health care is expense, just wait til it’s free”

  2. anjin-san says:

    For years I have been hearing the supposed collapse of the Canadian or British health care system used as an argument against any form of socialized medicine in the US. Documentation is generally sparse to non-existent. If the Economist tells me the British system is falling apart, it will have some credibility. Sources like the link above are pretty suspect.

  3. Uneven Steven says:

    The reason that America has fewer doctors than other nations is that in the late 1990s, the AMA was concerned that an oversupply of doctors would lead to lower salaries for all doctors.

    Because fuding for Graduate Medical Education (GME) is provided primarily by Medicare, the AMA was able to lobby successfully in 1997 to reduce the number of residents that would be trained.

  4. bryan says:

    I second Uneven Steven’s point, and also note that admissions to medical schools are very tightly controlled, unlike, say, law schools, which seem to take anyone with a pulse. (that’s a joke, btw)

  5. Anderson says:

    Steve, I find most of this post unpersuasive.

    People are not economists’ stick-figures who make rational choices. No one is smoking or lying in a UV bed thinking “well, it’s okay because my insurance will pay for it.”

    Your examples of elective activities are likewise odd. People will have more children if the costs of delivery are lower? Again, not a factor that enters most people’s heads. And I don’t think any national plan is going to cover gender reassignment or elective plastic surgery.

    And I just don’t see anyone besides fetishists thinking “hey, my dentist visits are cheap, I think I’ll go once a week!” Gladwell is quite persuasive that frivolous visits aren’t nearly the problem with existing insurance that non-visits are with no insurance.

  6. M1EK says:

    This is all spectactularly unconvincing compared with the real-world experience of this libertarian:

    http://mattwelch.com/archives/week_2005_04_03.html#003088

    I also echo the comments about how we’ve been hearing about the imminent collapse of the (British or Canadian) health care system for decades now. Hell, I fell for that stuff myself back in the early 1990s and was confident they were on their way out and would be forced into our model.

  7. Edward C. Walsh, Esq. says:

    These comments are patently the product of insurance industry flacks trying to head off any discussion that might foster pressure for real health insurance for the entire population. Boy, do they sound scared, as well as rather dumb. What a bunch oh corporate hookers! E. C. Walsh

  8. Steve Verdon says:

    People are not economists’ stick-figures who make rational choices. No one is smoking or lying in a UV bed thinking “well, it’s okay because my insurance will pay for it.”

    Of course not, but that is not the full range of health care services that are provided via insurance these days. There are lots of things that really shouldn’t be covered, but are. Making these things “free” (in the sense that tax payers are paying for them) can cause problems. Ignoring this becuase going to a tanning bed everyday is not a good idea.

    Your examples of elective activities are likewise odd. People will have more children if the costs of delivery are lower? Again, not a factor that enters most people’s heads.

    I beg to differ. You see people opting not to get their teeth cleaned, but they’ll crank out the kid with costs an order of magnitude more? Please.

    And I don’t think any national plan is going to cover gender reassignment or elective plastic surgery.

    Yeah and Senators and Representatives about 90 years ago thought it was ridiculous to put a 10% cap on income taxes. It would never get that high! Nobody wants to be an unwed mother, but we seem to have plenty of them running around too. Medicare spending was supposed to only be a fraction of what it is now.

    And I just don’t see anyone besides fetishists thinking “hey, my dentist visits are cheap, I think I’ll go once a week!” Gladwell is quite persuasive that frivolous visits aren’t nearly the problem with existing insurance that non-visits are with no insurance.

    Yes he was, just too bad he really didn’t understand his topic.

    M1EK,

    I’m not saying the current U.S. system is good or great, but what I am saying is I doubt very seriously that nationalizing health care will suddenly make it lots better.

    As for Matt Welch, he didn’t provide much detail. For example, the protruding disk thing could be seen as a big expense at any point hence the higher premiums. Also, did he go for a plan with a low deductible? That right there screams at insurance companies, “Hi, I’m probably going to suck up lots of health care at any minute now!” So that too can raise the monthly premium. So can advancing age as well (how old is Mr. Welch). Then there are things like weight, smoking, etc. Without knowing these things it is hard to tell if Mr. Welch is getting screwed of not.

    As for France, yes I’ve heard their system works fairly well. But it also isn’t entire state funded. You can still have to come up with part of the cost yourself. Hello there Mr. Deductible…what a nice way of dealing with moral hazard…oh wait I thought it was a myth. And France does spend alot on their health care (over 10% of their GDP) and they don’t have the same problems with obesity as the U.S. does, although they do smoke…but who knows maybe that actually helps in that people die younger and end overall consuming less health care resources.

    So maybe France’s system is better and we’d be better of with it. But I’m a bit cautious on these miracly solutions that if we just did it that way or this way nirvana would result.

  9. M1EK says:

    Dude, Matt Welch was just one example of even a libertarian willing to raise his hand and say “I’d rather have what they have in France”. I’m another. And I argued vociferously against nationalized health as a youth.

    The fact is that what we have now just plain sucks. We have all the bad care and long waits of socialized medicine, and none of the low costs. I’m in the middle of a 4-month wait for a rheumatologist right now, as a matter of fact, and YES, I have one of those high-deductible HSA plans, and NO, it doesn’t make things any better. And NO, I can’t get in quicker by paying cash.