Tyler Cowen ponders a puzzle of health care reform:
1. The buyer bargains down price and suppliers in turn lower quantity.
2. The buyer bargains down price and the monopolizing suppliers respond by expanding quantity. The monopsonist moves us to a more competitive solution. Note that under this option the direct institution of more competition could have the same effects.
If #2 is true, you might expect supply restrictions to be an important issue. That is, the people who favor monopsony should also favor greater competitiveness on the supply side. Yet this does not seem like a current priority. I hardly ever see talk of deregulating medical licensing, allowing paramedics and nurses to perform more basic medical functions, or abolishing other entry restrictions. I do recall that an earlier version of Obama's plan, struck down by Congress, would have created a nationwide insurance market. There was no big fight, either in the administration or in the blogosphere.
Those who favor monopsony might have another model in mind. In this model there are many medical suppliers but each supplier still has a fair degree of ex post monopoly power. Search costs, non-transparency, lock-in, and consumer irrationality can generate this kind of result. And in these models allowing for more entry needn't much help the basic problem.
Under #2, which other policies will help set this market right? What are the possible policy substitutes for monopsony?
What a Texas town can teach us about health care.
June 1, 2009
Here is the NPR summary:
It seems nearly impossible to read about or listen to a discussion about health-care reform for any length of time these days without someone mentioning the New Yorker article by Dr. Atul Gawande, a surgeon and writer who examines the reasons why the small Texas city of McAllen has some of the highest health-care costs in the country and significantly more than El Paso, Tex., a city in the same region with very similar demographics.
The answer, Gawande found, was that the doctors in McAllen were over ordering all kinds of medical tests and treatments.
The New Yorker piece apparently became required reading in the White House and was cited by Budget Director Peter Orszag when responding to Virgina Postrel. Here is the Budget Director's take-away:
This is the sort of market behavior that a powerful, centralized system might avoid. However, the Health Care Value blog makes this point about controlling costs:
Well, there is that.
At a deeper level, the Gawande/New Yorker comparison of McAllen with El Paso and Grand Junction, Colrado may founder on patient demographics and prior access to health care. The Health Care blog runs numbers for the Medicare populations in the three areas and makes these points:
According to Gawande, McAllen Texas has a physician culture that promotes high cost, low quality care. By comparison El Paso is portrayed as having a similar patient population to McAllen with lower costs of care. Grand Junction, Colorado, however, the antithesis of McAllen according to the article, is credited with having a physician culture that promotes low costs and high quality. Ultimately Gawande warns that by failing to change the physician culture nationally, “McAllen won’t be an outlier. It will be our future.” But is McAllen really an outlier, a harbinger of physician income-enhancing practices run amok?
A fair comparison between McAllen and Grand Junction would include a more precise analytic methodology than could be offered in Dr. Gawande’s article. Such an analysis is important: the correct diagnosis of the health care cost crisis is an essential step in selecting an effective prescription. If McAllen is not an outlier and Grand Junction is not a paragon, then the solution is not to simply tamp down variation by exporting Grand Junction values to McAllen. If the physician practices reported by Dr. Gawande in McAllen lead to explainable patterns of costs according to current norms, then those practices are part of a national phenomenon right now, not in a nightmare future.
And eventually we come to charts indicating that the Medicare patients in McAllen seem to have a lot more medical problems than their counterparts in El Paso and Grand Junction. However:
Many of the disease rates for the McAllen population are more than double those for Grand Junction. If the Medicare population in McAllen is truly that much sicker wouldn’t we expect the payments to be greater? A comparison of expenditures for Medicare enrollees without a diagnosis of diabetes or heart disease in the last year shows that costs for these standard populations are statistically very close (Exhibit 5).
Exhibit 5: Medicare Monthly Payments per Patient without a Diagnosis in the Year for Diabetes or Heart Disease, 2006
|Row Labels||Medicare Enrollees||Monthly Per Person Payments|
|El Paso, Texas||47,960||$2,564|
|Grand Junction, Colorado||11,160||$3,307|
By eliminating diabetes, ischemic heart disease or heart failure from the population payment measures the Grand Junction advantage is completely removed. Grand Junction is just as costly as McAllen for populations without one of these conditions.
I guess that leaves plenty of other ailments for which people might be treated. On the other hand, my reservation about this chart is that it is much harder to overtreat a healthy person.
So, is McAllen an example of a flawed market culture in which doctors overuse and overbill the system in order to prop up their own incomes, or are its higher expenses due to a poorer and sicker population? I hope Peter Orszag gets the right answer.