It All Gets Back to Incentives
Matthew Yglesias notes an approach to the health care issue he had not considered before,
A little while back, Brad Plumer put on the table a proposal to reduce health care costs I hadn’t heard of — build more medical schools. Apparently there are only 125. Since I’m a
dorksuper-cool guy, I spent Wednesday night getting some beers with a friend and talking about health care policy, and put forward the idea that we should try and import some huge quantity of Indian doctors (I have this picture of India consisting of 100 million doctors, 200 million engineers, and 800 million dirt-poor subsistence farmers; probably that’s not quite right…) which is along the same lines.
However, Matthew then discards this solution due to the following reasons,
There is, however, something of a catch. I recall having read several times articles about the odd fact that when you do regression analysis on Medicare costs by region it turns out that supply of health care is positively correlated with per capita Medicare spending. What seems to be happening is that in areas where there’s a higher ratio of doctors (or hospital beds) to patients, they take advantage of Medicare’s entitlement structure to simply gin up additional business by prescribing enough treatment to use up the local health care capacity.
So, the problem is two fold.
- Not enough doctors.
- Institutional structure that provides perverse incentives.
So the solution is obvious:
- Reform the institutional structure to remove the perverse incentives.
- Increase the supply of doctors.
Of course, the second part is also due to an insitutional problem. Namely the fact that the AMA acts as a gate keeper and provides a very nice barrier to entry. Basic economics tells us that this increases the market power of doctors and that their prices will increase. Further, reforming the institutional structure so that there is no longer a perverse incentive probably isn’t going to sit well with somebody like Matthew. After all, the problem he is noting is an old one, and most of us boring dorky economics guys call it moral hazard. In this case, the government has set up a system that is easily abused for the profit of some (doctors, hospitals and the staff) and losses for others (tax payers). This kind of problem is a problem for a great many government policies such as reducing income inequality. The problem is basically a principal-agent problem. So we see this problem applies to health care, auto insurance, even something like income redistribution. More simply, the problem is that when the government is seen as picking up the tab (i.e., individuals do not bear the full marginal cost) there is a tendency to over use a resource. To prevent this you’d have to have deductibles, and possibly a deductible that is paid for each new procedure, treatment, etc.
Of course, doing things like having deductibles makes the government plan look like a market plan, and since market provided health care is a bad thing, a priori, this can’t be the right solution either (if you are like Matthew). After all, one of the goals of nationalizing health care is to make it so people can gain access to health care irrespective of the cost, right? If people have to pay $250 every time they want a different test you could have people opting not to go to the doctor which in the end is just like people not having insurance. The thing many proponents of nationalizing health care don’t seem to realize (or at least don’t appreciate the full ramifications of) is that health care resources are just like all other private goods: they are limited. Increase the demand (e.g. Medicare) for those resources and the price will increase. The solution for the proponents of nationalizing health care is to then ration health care. Make people wait in line, make certain procedures impossible, and so forth to keep the monetary costs down. For some reason, to the proponents of nationalizing health care, waiting in line is not a cost, having to wait for treatment is not a cost (i.e., spending weeks on crutches waiting for treatement), and not having certain procedures is not a cost. I find the last one rather amusing. The complaint of the proponents of nationalized health care is that not everybody has quick and easy access to health care, but with nationalized health care people might not have any access at all to certain procedures.
The basic problem for the proponents of nationalizing health care is that people are going to try and wring as much benefit out of what ever system is put in place. Thus, the proponents of nationalizing health care need to address the incentive problem in a serious manner. Failing to do that means that they are simply engaged in fantasy.