Archive for October 2009
Ever since he taught my Econ 1 class, I’ve liked John Taylor. He always struck me as a practical guy, especially for a macroeconomist. So I was not surprised at what I found when I followed Arnold Kling link to Taylor’s analysis of the stimulus. Using Department of Commerce data, he calculates that a whopping 0.3% points of the 5.7% point recovery of GDP growth from the first to second quarter is attributable to the stimulus. Of all the positive impacts, private investment accounted for 75% of the total recovery.
So perhaps we could take back the $291B in stimulus money that hasn’t been spent yet. Probably the single easiest way to reduce the deficit.
Now, it’s worth repeating that I don’t object to increased spending per se. It might be perfectly normal given personal preferences and growing wealth. I do object to distortions caused by the current system. I have identified three areas where we could save money through eliminating distorting policies.
Barriers to Competition
Hospitals are a highly protected industry. I found this Forbes article an excellent overview of the problem. Generally, competition from so-called “specialty hospitals” improves care and reduces costs for both specialty hospital patients and community hospital patients (see this overview of the relevant research). However, like most businesses, community hospitals don’t like competition so they engage in anti-competitive practices and regulatory capture games.
Eliminating such abuses could save 2.4%, the cost reduction that the entrance of specialty hospitals into a market produces according to this study. That would be close to $20B/year. But I would go farther. I would require all hospitals to publish costs and outcomes for different treatments. Moreover, they would have to further disclose the price discounts they offered to insurance networks. A more transparent market would drive costs down even farther.
The standard objections to these measures are typical anti-competitive propaganda. Opponents say specialty hospitals duplicate infrastructure, which drives up costs. Tell that to PC manufacturers. They had to duplicate all their infrastructure but look at how costs have plummeted due to competition. Why are hospitals any different? Opponents say that doctors who own hospitals have a conflict of interest. Tell that to Apple who has to make phones that people really want if they are going to make any money. Why are hospitals any different? And the list goes on…
Drug Development Restraints
Excepting cosmetic procedures, almost everyone would prefer to avoid consuming hospital care if they could at reasonable cost. The biggest substitute for hospital care is taking drugs that prevent hospitalization. Unfortunately, the market for drugs (and medical devices) is tightly controlled, increasing costs and stifling innovation in the drug market. I contend that these factors increase hospitalization beyond the efficient level.
This review article claims that $100B/year worth of hospitalization stems from people not adhering to their medicine regimens. Obviously, formulations and devices that improved adherence would reduce this number. Moreover, I believe it also implies that there are a substantial number of other hospital admissions that could be avoided if more drugs were available.
As I’ve advocated before, eliminating Phase III trials (in favor of some sort of probationary approval) and reducing the term of patent protection would accelerate drug discovery and reduce costs. I also think that streamlining the approval of drug delivery devices in particular would help address the issue of adherence.
Inability to Commit to a Lower Standard of Care
Lastly, we the problem of end-of-life care. There has been a lot of angst over the so-called “Death Panels” discussed as part of health care reform. I admit that it gives me the willies. But I think the problem is that the government is pursuing an interest in getting you to die quietly.
But consider a private alternative. You’re somewhere between 40 and 60. You’re pretty healthy. You have a choice of two major medical insurance plans. One covers heroic end-of-life measures for terminal conditions. One doesn’t. The second one is 30% cheaper. Personally, an extra few months hooked up to machines in intensive care plus a vanishingly small chance of a miracle recovery isn’t worth it to me. I prefer to spend my money on safety and prevention thank you very much. But that’s just my personal choice. You could chose differently.
This decision doesn’t give me the willies. People make all sorts of decisions that statistically shorten their lives by this amount: where they live, what activities they pursue, and what jobs they do. This is a completely voluntary decision well in advance of the event. The only problem is that providers must be convinced that such agreements are enforceable. Otherwise the providers can’t count on the savings and premiums remain high. This is a problem the government can do something about: assign rights and enforce contracts.
All in all, I think these three measures might save a couple of hundred billion per year. They would certainly lead to a more efficient outcome.