Thursday, August 20, 2009

The cause of America's high health care costs

Harvard economist and John Bates Clark Medal-winner Martin Feldstein identifies the cause of America's high health care costs:
Budget considerations aside, health-economics experts agree that private health spending is too high because our tax rules lead to the wrong kind of insurance. Under existing law, employer payments for health insurance are deductible by the employer but are not included in the taxable income of the employee. While an extra $100 paid to someone who earns $45,000 a year will provide only about $60 of after-tax spendable cash, the employer could instead use that $100 to pay $100 of health-insurance premiums for that same individual. It is therefore not surprising that employers and employees have opted for very generous health insurance with very low copayment rates.

Since a typical 20% copayment rate means that an extra dollar of health services costs the patient only 20 cents at the time of care, patients and their doctors opt for excessive tests and other inappropriately expensive forms of care. The evidence on health-care demand implies that the current tax rules raise private health-care spending by as much as 35%.

The best solution to this problem of private overconsumption of health services would be to eliminate the tax rule that is causing the excessive insurance and the resulting rise in health spending. Alternatively, Congress could strengthen the incentives in the existing law for health savings accounts with high insurance copayments. Either way, the result would be more cost-conscious behavior that would lower health-care spending.
I have previously made the case for greater use of health savings accounts here.


  1. While it is true that one break in the heath care system is the disconnect between the supply and demand, it is the single issue nor the major issue. The health care system is the most complex system of our economy. Simple analogies to wine, cheese, or CDs are entirely inadequate. Health care product span the spectrum of product types with simple generic antibiotics at one end to life saving medications at the other. The decisions are not similar to other consumer products where we can talk to our neighbor who has tried that brand. In many cases, a life time of study in our spare time would leave us unable to adequately understand understand them. In many cases after hours with their doctor, individuals at the pharmancy find their perscription regected by the formulary. And they are in no position to decide that the uninsured price is to high as the major sinus infection is creating massive pain in their forehead and teeth. Simple comarisson to markets like food products are wholly inadequate. Food is an easy entry market and enjoys major competion. If prices for bell peppers were to sky rocket, ever person with a backyard would quicly begin growing and selling them. Medications, doctor services, medical tests, and health insurance do not enjoy this level of competition. A health savings account is a great idea for some health products like over the counter medications that are not critical but does not appropriately address the vast spectrum of products and the wide variation in the factors that affect both supply and demand.

  2. it's exactly because of the complexity that the government should stay out of it. its like the fed. they think they're smart enough to centrally manage the economy but it's impossible, its too complex. its no wonder they have screwed it up, our economy is in ruins, and we're 10s of trillions in debt.

  3. The problem is in the assumption that because legislatures screw thing up that the free market is always better.

    The deregulation of the finanical industry and the repeal of the Glass-Segall Act is the reason for the economic tragedy. The belief that people acting in their self interest always works is incorrect. The Fed did stay very much out of the economy under Greenspan. The SEC's failure to do their job was part of the problem. Fannie Mae and Freddie Mac are private companies and were instrumental in the mortgage crisis. Ginnie Mae and the FHA didn't fail. And the FDIC is functioning well.

    Products with economics of scale and in markets that are not "easy entry" are guaranteed to result in a monopoly where the demand side has no market power. There is a reason that we reluctantly created anti-monopoly laws.

    The deficit went negative during Clinton's administration and the debt was being reduced. Under the Bush administration, 4 Trillion dollar was added to the deficit. And, the fundamental policies of the Bush administration was to deregulate and reduce taxes.

    An example of too much regulation, like in the airline industry, isn't a case for no regulation. An example of too little regulation, like the energy markets, isn't a case for massive regulation.

    Simple arguments that the government should ALWAYS stay out of it is just more oversimplification. If this were true, society would never have created government in the first place. We don't need less or no government, we need better government.

    The fed can't stay out of the economy, unless we propose to go back to bartering. It is the centralized monetary system that affords us the efficiency that we enjoy. Someone prints money. Someone decides how much to print.

    But the efficiency also puts the system at risk of efficiently collapsing. The DJI efficiently dropped from 14000 to 6600.

    There is a reason that governments, laws and regulations have been around for more than 2000 years. It's because anarchy is worse.

    Every market is unique. Some need no regulation, some need considerable regulation. It depends on how the market effects us as a whole. The movie industry doesn't need much regulation. Comcast should be able to charge whatever they want. Miles of Texas land was polluted by mercury by another industry. Unregulated, the fishing industry will drive fish to extinction. Flourocarbons created a hole in the ozone layer. Carbon emmisions have created global climate change. Without sewage facilities...well. Free market fire departments was tried and it doesn't work.

    Yet.......I ask......

    How many politicians does it take to screw a light bulb?

    There are poor legislatures in all parties, Democrats, Rebuplicans, Libertarians, Independents, and the like. Because one party has legislatures that suck, doesn't mean the other party doesn't.

    We don't need no politicians, we need better politicians. We don't need less regulations, we need better regulation. We don't need no taxes, we need the right amount of taxes. We don't need no government, we need better government.

    As I listen to the debate, I find that the most common arguments are the worse arguements. The shorter arguments are the worse arguments. The loudest arguments are the worse arguments.

    We cannot talk about a complex system by using platitudes. Until were talking about the gray area in between the black and the white, there really isn't anything to talk about.

  4. my point of view is not so much there should be no regulation. i just think the states should do it, not the federal government. the federal government was never meant to be so intrusive. everything they regulate is a disaster:

    - banks, disaster
    - housing, disaster, fannie and freddie, bankrupt
    - social security, soon to be bankrupt
    - health care: medicare, bankrupt, medicaid bankrupt, health care costs skyrocketing due to government regulations mandating benefits, preventing competition, forcing business to provide tax exempt HMOs. millions can't get health care without insurance because the prices are so high.
    - the fed, a creation of the federal government, has reduced the value of the dollar by 95% since 1913. they create moral hazard by constantly bailing out the banks. they caused the 1929 recession. hoover and fdr made it into a depression after they tried to "fix" it. we had a similar recession in 1920 that only lasted a year because harding refused to interfere.

    "deregulation of the finanical industry...."

    not true. it was the fed and the GSEs (fannie and freddie). the fed caused it by pumping easy credit into the economy for years. fannie and freddie created moral hazard by the implied government guarantee of a bailout if things went wrong. without the trillions being pumped into the economy there would not of been the fuel to feed the stock market fire.

    "The belief that people acting in their self interest always works is incorrect."

    no one said the free market always works. thats why there are failures. but when the government removes risk through guarantees and regulations through institutions such as the fdic, the sec, fannie and freddie and the fed, and then bails out the mega failures caused by that, thats not a failure of the free market. thats a distortion of the free market.

    "Products with economics of scale ..."

    i dont know of any market that so hard to enter you cant have some competition. theres no such thing as a real free market monopoly. only a government can create a true monopoly (e.g. utilities). some consider microsoft a monopoly but of course they aren't. there's linux, apple, and google, etc.

    "The deficit went negative during Clinton..."

    i agree bush was an idiot and a traitor to true conservatives everywhere. however clinton is no hero. there's plenty of evidence that his policies are not the sole reason for the lowing of the federal budget deficit. and he was a big proponent of the CRA, which sowed the seeds of the housing market debacle.

    "Simple arguments that the government should ALWAYS stay out of it is just more oversimplification..."

    no one is promoting anarchy. thats a straw man. what conservatives say is government should not interfere in the economy, they just screw it up. the federal government should protect our freedoms and protect us from harm, that is all. let the states do the rest.

    "The fed can't stay out of the economy..."

    what? without the fed we'd go back to bartering? again, a straw man defense. the country did fine with gold backed currency before, without a fed and all the other central banks we had that failed. fiat currency systems always eventually fail.

    "Carbon emmisions have created global climate change."

    i dont agree with that theory at all. more likely its solar activity. there are too many people who stand to gain financially (gore) and politically (dems) to say yet whether its fact or a scam.

    "Free market fire departments was tried and it doesn't work."

    local and state governments do a pretty good job of not being corrupt and providing efficient services such as fire departments. however that same can't be said of the federal government. everything they do that deviates from their main purpose, defend the nation, seem to go wrong.