The New Voodoo Economics

Or perhaps Obamanomics. Tyler Cowen writes,

MEDICARE expenditures threaten to crush the federal budget, yet the Obama administration is proposing that we start by spending more now so we can spend less later.

This runs the risk of becoming the new voodoo economics. If we can’t realize significant savings in health care costs now, don’t expect savings in the future, either.

I think this is right. I’d love to see the success ratio of programs that started out by spedning more money, then later spent less. I’m thinking the list of successful programs is going to be really dang small.

It’s not the profits of the drug companies or the overhead of the insurance companies that make American health care so expensive, but the financial incentives for doctors and medical institutions to recommend more procedures, whether or not they are effective. So far, the American people have been unwilling to say no.

Not so sure about this. Not that I don’t think it is happening, I just don’t think the U.S. health care problem can be summarized so…neatly. Dave Schuler has gone a long way to convincing me that there is indeed a supply problem. Heck, we actually import nurses from places like the Phillippines vs. training our own even though U.S. nursing schools have long waiting lists for admission. I also think that the incentives are screwy. For example, a young person might think that obtaining health care is a suckers game. So long as he doesn’t have much in the way of assets why not gamble that he’ll not need health care and spend that money elsewhere? Then, there is employer provided health care which comes with a nice tax break. People would have much leaner health care benefits packages if they had to pay for it with after-tax dollars.

Still this is not a big problem for the next several paragraphs in the story. These look at using comparative-effectiveness studies as a way of redcing Medicare expenditures. A great idea actually. Yes its limiting what procedures people can get. Yes its a type of rationing. So what. It is also an attempt to say, “We aren’t going to subsidize every possible medical procedure out there.” And the market/price mechanism rations resources.

Prof. Cowen closes with,

The demand for universal coverage sounds like a moral imperative to “take care of everybody,” but in reality it would make only a marginal difference when it comes to the overall health of the American population. The sober reality is that universal coverage is another way to spend money, which may or may not be a good idea.

The most likely possibility is that the government will spend more on health care today, promise to realize savings tomorrow and never succeed in lowering costs. It is rare that governments successfully cut costs by first spending more money.

Mr. Obama has pledged to be a fiscally responsible president. This is the biggest chance so far to see whether he means it.

I agree here. If we are going to get health care savings we need to get them now, not later.

FILED UNDER: Economics and Business, Government, Health, US Politics, , , ,
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. steve says:

    “I think this is right. I’d love to see the success ratio of programs that started out by spedning more money, then later spent less.”

    This is pretty common. Buying a mule so that you dont have to pull the plow by hand, then upgrading to a tractor, etc. Buying a computer so you dont have to do all records by hand. Investing in a vaccination program so you dont have to treat the polio. Electronic records have the potetial, IMHO, to save lots of money. I could certainly stop ordering so many redundant tests.

    “Not so sure about this. Not that I don’t think it is happening”

    I think Cowen was pretty impressed with the Gawande article. I was also. Of course, there are very may reasons why our health care costs so much, but this is a central one. Patient incentives and physician incentives do not line up in the direction of saving costs when insurance is involved. As long as physicians get paid for procedures, they have the incentive to provide as much care as possible. If they are providing care of marginal value, then the downside risks will outweigh the benefits, and quality will go down.

    “It is also an attempt to say, “We aren’t going to subsidize every possible medical procedure out there.”

    Yes! TG for non-partisan libertarian economists. Those who oppose any changes are going to claim rationing. Cowen has described what is really going on.

    What he has pointed out here and in other posts, though he understates it IMHO, is that it will take a lot of political will and savvy to cut costs. End of life issues will bring out the evangelicals/Catholics. Telling the McAllen’s of the world that they cannot spend twice as much as everyone else, while generating worse outcomes, will make for cable news scares about how government is rationing care and running medicine.

    Steve

  2. Mr. Obama has pledged to be a fiscally responsible president. This is the biggest chance so far to see whether he means it.

    You mean after TARP? And the Stimulus Package? And the GM and Chrsyler Bailouts?

    This seems like a pole vaulter failing to clear the bar at 15′ and then at 15’6″ and asking that his final attempt be set at 22′ (about 2 feet above the current world record) and expecting him to make it.

  3. Steve Verdon says:

    This is pretty common. Buying a mule so that you dont have to pull the plow by hand, then upgrading to a tractor, etc. Buying a computer so you dont have to do all records by hand. Investing in a vaccination program so you dont have to treat the polio. Electronic records have the potetial, IMHO, to save lots of money. I could certainly stop ordering so many redundant tests.

    Oh I don’t doubt this for private entities. Investing in a mule to increase production and also reduce labor effort…sure. But the government doesn’t have the same objective as a private individual or even a private firm.

    This seems like a pole vaulter failing to clear the bar at 15′ and then at 15’6″ and asking that his final attempt be set at 22′ (about 2 feet above the current world record) and expecting him to make it.

    Actually Charles, if he does succeed with health care then yes, he’d likely have good reason to claim the mantle of fiscal responsibility. Of course, the task is not unlike what you described, going form 15.5 feet to 22.

  4. Steve, I think we are pretty much in agreement. To me this is just classically bad management. All I see are assertions. Where is the plan? Where are the goals? Where are the incremental steps? Where is the process?

    Imagine for a moment that President Obama had to make a business case to a private firm to get the money and management approval to proceed. The fact that “We won” suffices for a business plan is what really scares me about this man and his administration.

  5. odograph says:

    This is pretty common. Buying a mule so that you dont have to pull the plow by hand, then upgrading to a tractor, etc. Buying a computer so you dont have to do all records by hand. Investing in a vaccination program so you dont have to treat the polio. Electronic records have the potetial, IMHO, to save lots of money. I could certainly stop ordering so many redundant tests.

    Oh I don’t doubt this for private entities. Investing in a mule to increase production and also reduce labor effort…sure. But the government doesn’t have the same objective as a private individual or even a private firm.

    How long did it take for the fluoride in my drinking water to produce a net savings?

  6. How long did it take for the fluoride in my drinking water to produce a net savings?

    I don’t know. Is this a trick question, because it’s about 8 or 9 levels of magnitude below what we are talking about now, so what exactly is your point?

  7. Steve Verdon says:

    How long did it take for the fluoride in my drinking water to produce a net savings?

    Well…are you a fluoride conspiracy kook?

    And I’m not saying there are none, but want to see the success ratios. And fluoride to water vs. reforming all of health care makes me think of the phrase, “one thing is not like the other.”

    ….so what exactly is your point?

    I think it is one for the success column. But I agree with your point, not at the same level. The scientific evidence in favor of adding fluoride to water is pretty rock solid and its not a horrendously complicated plan, and aside from a few kooks, isn’t likely to have too many detractors. I’m thinking while health care reform is obvious (like adding fluoride) the details are going to produce lots and lots of bitterness, arguments, back-stabbing, so on and so forth.

  8. odograph says:

    Fluoride was just an easy and clear example of “command and control” that had a health benefit, and one with clear cost-benefit advantage.

    That it was an old conservative hobby horse, with cries of “socialism,” was an added bonus.

    I’m sure that you could think of a few more examples Steve, inside and outside of health care. Encouraged (if not mandatory) vaccinations in schools?

  9. G.A.Phillips says:

    Voodoo lol, more like Poodoo……

  10. Drew says:

    “I’d love to see the success ratio of programs that started out by spending more money, then later spent less. I’m thinking the list of successful programs is going to be really dang small.”

    Investments create future savings. Raw spending does not, and in the political arena that is what we typically get. I’m thinking the null set.

    To your point, Dave Schuler has pulled me a long way towards his thoughts on supply. I still think his view is overstated and oversimplified. But he’s challenged my previous views, got my ear and provoked me to reassess my thinking. And that’s what this is all about, right?

  11. Drew says:

    odo –

    The problem is that scale is going to be weigh, weigh lopsided.

    nyuk, nyuk, nyuk

  12. odograph says:

    Well, once we’ve established that government can do either smart or dumb things (that at least some were net positive from a total costs standpoint), we only have to look at these specifics to see if they are smart or dumb.

    I’m certainly not asserting that they are automatically smart. In fact, once they get through the congressinoal meat grinder, I have low hopes.

  13. steve says:

    “Investments create future savings. Raw spending does not, and in the political arena that is what we typically get.”

    They have specifically proposed cost-effectiveness research, which conservatives promptly labeled as government rationing. We are just supposed to somehow magically know which treatments are most cost effective? Let the markets decide? Does not work. Physicians are incentivized to provide more costly care.

    Electronic records have the potential to cut costs, perhaps primarily by making care safer. These systems are too costly for individual providers. Actually, the only half way decent system is that used by the VA. Just as the internet would probably not have occurred without government resources, electronic records will need a big push that will not come from private entities.

    Other examples: Interstate highway construction, port maintenance, food safety monitoring, building inspection, public education, courts, water and sewer systems. TBH, I am not exactly sure what you are looking for anyway. Clearly government does a lot of stuff, through raw spending and investment that save us money in the long run. Clearly, infrastructure tends to fall within your question and electronic records is just another kind of infrastructure.

    Steve

  14. Franklin says:

    Not that I don’t think it is happening, I just don’t think the U.S. health care problem can be summarized so…neatly. Dave Schuler has gone a long way to convincing me that there is indeed a supply problem.

    I haven’t been following the health care debate that closely, but someone did point out something to me the other day that I hadn’t really realized before:

    I guess one of the reasons that medical bills are so much higher than the negotiated price that insurance companies pay (sometimes 10x as much) is that the hospitals can write off the loss when a patient doesn’t pay the exorbitant inflated cost. Which probably just means we are, again, already paying for the health costs of others but in an inefficient manner.

    P.S. I don’t know if the people against flouridated water are necessarily kooks. I’d still like to see more studies like the one in China where kids in a non-flouridated-water city had 10 more IQ points than the kids in a flouridated-water city (although it should be pointed out that the level was significantly higher than we use in the States). If this has any merit, I’d prefer brains over teeth.

  15. Franklin says:

    Sorry, misremembered on the fluoridation study, only an IQ drop of 4 or so, but statistically significant:

    “The percentage of children with IQ scores less than 70 increased from 0 in the control group to 4% in the high fluoride group. The percentage of children with IQ scores greater than 109 was 41% in the control group and decreased to 30% in the high fluoride group. Overall, children in the high fluoride group had a four-point reduction in IQ score as compared to the control children. Measured fluoride in the urine was almost five times higher in the high fluoride exposed children than in the controls (5.1 mg/L versus 1.5 mg/L in controls). All of these associations were statistically significant.”

  16. Steve Verdon says:

    Electronic records have the potential to cut costs, perhaps primarily by making care safer. These systems are too costly for individual providers. Actually, the only half way decent system is that used by the VA. Just as the internet would probably not have occurred without government resources, electronic records will need a big push that will not come from private entities.

    Other examples: Interstate highway construction, port maintenance, food safety monitoring, building inspection, public education, courts, water and sewer systems. TBH, I am not exactly sure what you are looking for anyway.

    I can see the electronic records argument. Its simple and the potential benefits are pretty good, at least looking at it right now.

    As for the rest of your list, look at it, they are simple and obvious:

    Fluoride: sound science, simple implementation.
    Vaccinations: sound science, simple implementation.
    Public roads: clear benefits, simple implementation.
    Sewer system: clear benefits, simple implementation.

    While there can be some side issues with corruption (bridge/road to nowhere), the basics are pretty simple. The incentive structure, pretty simple. Traffic is a problem, but even that has a fairly straight forward solution.

    Health care…man health care is mess. We currently have a hybrid public/private system. We have a huge incentive problem. There are loads of special interests–old people, doctors, nurses, sick people, etc. As such, it is going to be quite a bit more complicated than merely laying some assphalt, digging a ditch or putting fluoride in the water. And many times more expensive.

    And last, many of these things (roads, internet, etc.) are essentially public goods. Or they have an obvious external benefit (vaccines). About the only case where that isn’t necessarily the case is fluoride. Health care would seem to fall more into the fluoride catagory, not a public good, questionable external benefits.