Friday, February 17, 2017

Cost Disease, With Update

Update: As per my comment section, there are excellent comments on SSC at this post as well.  In fact, there are over a thousand comments, so I just don't read them.  The indefatigable Alexander does read his comments, however, and published the highlights in a subsequent post, including one from Megan McArdle. Taking the two posts together would be just about worth an entire semester of economics. They might contain just about everything you need to know.


Dr. Scott Alexander over at Slate Star Codex has a post Considerations on Cost Disease riffing off a piece by Tyler Cowan. Alexander is usually lengthy, but it is because he's thorough.  He actually saves you from reading half-a-dozen other articles. He tries to give many sides a fair shot at explaining the phenomenon.  He does his research, provides intriguing examples, and frames thing in ways I hadn't quite thought of. Do you think today's student would prefer the college education they are getting today, or the essentially similar one their parents got in 1980, plus $72,000? (Pretty obvious answer) Then he goes on to discuss exactly why that choice is not available - that no matter how much we look to the market to solve our problems, plenty of things simply elude market forces.  Not always government, either.

More than once I would read a paragraph and think "Oh, but he's neglecting the competitive forces that in play here but not there," only to find two paragraphs later that he has indeed considered exactly that, plus a few other things I hadn't thought of. He wonders why there are diminishing returns, why other countries pay for health care or education much at a fraction of our costs, and whether there is much we can do about it. He has a remarkable ability to question his own assumptions. A sample:
Fifth, might the increased regulatory complexity happen not through literal regulations, but through fear of lawsuits? That is, might institutions add extra layers of administration and expense not because they’re forced to, but because they fear being sued if they don’t and then something goes wrong?

I see this all the time in medicine. A patient goes to the hospital with a heart attack. While he’s recovering, he tells his doctor that he’s really upset about all of this. Any normal person would say “You had a heart attack, of course you’re upset, get over it.” But if his doctor says this, and then a year later he commits suicide for some unrelated reason, his family can sue the doctor for “not picking up the warning signs” and win several million dollars. So now the doctor consults a psychiatrist, who does an hour-long evaluation, charges the insurance company $500, and determines using her immense clinical expertise that the patient is upset because he just had a heart attack.

Those outside the field have no idea how much of medicine is built on this principle. People often say that the importance of lawsuits to medical cost increases is overrated because malpractice insurance doesn’t cost that much, but the situation above would never look lawsuit-related; the whole thing only works because everyone involved documents it as well-justified psychiatric consult to investigate depression. Apparently some studies suggest this isn’t happening, but all they do is survey doctors, and with all due respect all the doctors I know say the opposite.

This has nothing to do with government regulations (except insofar as these make lawsuits easier or harder), but it sure can drive cost increases, and it might apply to fields outside medicine as well.

And also, because it's just a good quote: 
I mentioned politics briefly above, but they probably deserve more space here. Libertarian-minded people keep talking about how there’s too much red tape and the economy is being throttled. And less libertarian-minded people keep interpreting it as not caring about the poor, or not understanding that government has an important role in a civilized society, or as a “dog whistle” for racism, or whatever. I don’t know why more people don’t just come out and say “LOOK, REALLY OUR MAIN PROBLEM IS THAT ALL THE MOST IMPORTANT THINGS COST TEN TIMES AS MUCH AS THEY USED TO FOR NO REASON, PLUS THEY SEEM TO BE GOING DOWN IN QUALITY, AND NOBODY KNOWS WHY, AND WE’RE MOSTLY JUST DESPERATELY FLAILING AROUND LOOKING FOR SOLUTIONS HERE.” State that clearly, and a lot of political debates take on a different light.

Oh, and SSC often has brilliant commenters, but this particular thread starts out with some people whose ability to do anything but recite cliches is suspect, so just don't.  JUST DON'T.


Christopher B said...

Megan McArdle wrote a pice about the same original article, and pointed out the one thing the areas Cowan considered (health care, education, housing as I remember) have in common was that government/society simultaneously restricts the supply and subsidizes the purchase of all of them.

Assistant Village Idiot said...

That is so, and he hits on some of that. If you catch the followup post where he highlights some of the best comments that comes up as well. Also, once a basic something is in place, we (sometimes as individuals, sometimes as government, sometimes as businesses) subsequently pay 10% more for something that is a 1% improvement. Or twice as much for something that is only a 10% improvement. Think restaurants or cars. Keep doing that for forty years and you are spending a lot more for something that is only somewhat better.

james said...

I wonder how we could study this. I think you'd need to review expenses and products for an industry, together with the input industries, for at least 20 years' worth of history. A lot of data won't exist anymore, of course (keep records for 7 years), and I doubt whether some industries would be cooperative (e.g. academic credentialing).

On the bright side, probably you wouldn't need to delve into a lot of detail--bigger picture classification would probably do. But you need a lot of it. Health care costs drive up the cost of academic credentialing, and probably vice versa to some extent.

jaed said...

I actually think you need to dig pretty deep. Example: in medical practices, as insurance has become more comprehensive and all-encompassing (so that almost all visits to a doctor involve insurance, even if the patient is paying the whole tab), administrative costs have gone up. A couple of generations ago, a pediatrician employed a nurse and a receptionist who also did the books. Now there will be two or three people dedicated to coding and otherwise dealing with a variety of insurers plus Medicaid, and probably more personnel dealing with IT, and so on, most of which is deadweight.

So the bill is higher than it was in the days when the mother wrote a check, or was billed 30 days net for a visit for strep throat. But the insurance company and the patient only see a single unified bill for "medical services", so the cause is obscured.