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?
I suspect that one of the more important articles on health care was delivered in the New Yorker a few weeks back:
What a Texas town can teach us about health care.
Atul Gawande
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 |
McAllen, Texas | 28,680 | $3,147 |
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.
I just wish someone would press Gibbs on the question of which single-payer plan is Obama's favorite.
Posted by: Danube of Thought | June 28, 2009 at 04:48 PM
A doctor friend of mine says that you need more competition in the health care industry. The way it is now is the industry (Insurers, HMO's, etc.) are so focused on profit that the MD is at the pointy end of the process and quality care is suffering. You need a player who comes in and rebates for making good choices in diet, exercise, preventative care like yearly prostate, colon, mammograms, etc. Also, the big problem is catastrophic illness and care that sucks the bank dry. I have a very high deductible but still pay more than I use in any given year. I'd like to be rewarded just like in my driving for a good record.
Posted by: Jack is Back! | June 28, 2009 at 05:04 PM
I simply don't understand Cowan's #2. How is it that the suppliers are "monopolizing?" And why would the prospect of smaller revenue call forth additional output, or additional suppliers?
Posted by: Danube of Thought | June 28, 2009 at 05:25 PM
"Forcing Prices Down Does Not Normally Increase Supply"
Yes, it seems they have the cause and effect reversed. Is this an Algore involved? They did the same thing with CO2 and temperature.
Posted by: Strawman Cometh | June 28, 2009 at 08:20 PM
I agree that there has to be some notice if a doctor is over testing. Now if a doctor under tests, eventually he'll get a lawsuit. But what's to prevent a doctor from ordering all the tests he wants? Actually come to think of it, a doctor doesn't get money from tests necessarily unless he is a co-owner of the lab. So there already is little incentive for that. The danger is unnecesary medcial procedures not testing, but I think there is already procedures in place to prevent that, as that would be more obvious. So just make sure the lab and the doctors have separate owenership to take care of the former.
Other than that, so what if the doctors take a little more tests. I don't know where this idea of overtesting comes from. From everyone I know you practically have to be dying of something to get a doctor to test for anything. They always make you feel like a hypochondriac first.
For instance, when I was younger I went through a period where I suddenly had continual dry cough and burning lungs that persisited for months. The doctors told me it was asthma and basically laughed at me and sent me on my way. Then when I heard that Chris Reeves' wife, a non-smoker like me, died of lung cancer, I heard that younger non-smoker women do get lung cancer, and the symptom is a sudden continous dry cough. Which is what I had. Did any doctor test me for lung cancer when I told them my symptoms? Nooo.
Well turns out I didn't have lung cancer but a reaction to my bathroom cleaner. But still, the point is, did they know that at the time? No. I'm lucky I didn't have lung cancer because the doctor would have figured it out after I was dead I suppose. And I have heard of many other similar examples. So where are all these over testings done? I think it's a myth. Better over testing than undertesting.
Posted by: sylvia | June 29, 2009 at 12:11 AM
"Forcing Prices Down Does Not Normally Increase Supply"
I suppose it's the Wal Mart theory, that if you sell a lot of products for lower prices, you'll make a greater profit.
Posted by: sylvia | June 29, 2009 at 12:20 AM
And another thing, I'm tired of hearing about prevention saving us money. Prevention will save us little if not nothing. We found out that you have to be very chubby to live long, so are we going to force people to eat more and exercise less? Also cancer treatments, let's be honest, do not save lives that often, they just prolong it for a few years. Testing for cancer in advance does not do that much to prevent illness. Look at Tony Snow. He knew colon cancer was in his family and got tested for it religiously. Then when they found the cancer he got the best treatment. He lasted what, a year after that?
We do not have the means to really prevent anything yet. Contrary to popular opinion, our medicine is not that advanced yet. So all of that idea of saving money through that is a pipe dream.
Posted by: sylvia | June 29, 2009 at 12:27 AM
It reminds me of the old saying. Fast, good, or cheap - pick two.
However, with the government involved in the process, we'll be lucky to get even one.
Posted by: FB | June 29, 2009 at 09:18 AM
I suppose it's the Wal Mart theory, that if you sell a lot of products for lower prices, you'll make a greater profit.
That has utterly no relation to the statement you were responding to.
As for McAllen -- could the "overtesting" be the result of a spate of lawsuits? It would be interesting to compare the malpractice insurance rates and number of malpractice suits filed per year.
Posted by: Rob Crawford | June 29, 2009 at 10:16 AM
2. The buyer bargains down price and the monopolizing suppliers respond by expanding quantity.
(on the high volume existing services/products for which a reliable demand already exists. Meanwhile they stop development on new technologies and pharmaceuticals, which cost a fortune to develop and have an unknown market and a price point yet to be negotiated.)
Posted by: GSD | June 29, 2009 at 10:23 AM
I have doubts about the study from another perspective, albeit anecdotal, from a Texan who travels widely across the state.
McAllen is a winter mecca for thousands of retirees from the mid-west. Winter Texans, as they are called, form a huge caravan of travel trailers from September through early November, becoming sem-permanent residents for several months, while still claiming actual resident status back in Minnesota or Michigan or Ohio. Having been in McAllen/Harlingen and needing to see a Dr. for a minor injury the waiting room was full of retired, older folks, many of whom, I'd suspect of being on Medicare. I'd expect the distortions caused by the influx of an older, semi-resident population would be significant and I've not seen any comments in the studies that take this demographic into account.
McAllen is hardly equivalent to El Paso, much less Grand Junction.
Posted by: gdb in central Texas | June 29, 2009 at 10:37 AM
gdb, why expect the NYT or a supporter of govt run national health care to worry about demographic data that would screw up their "narrative"?
My late aunt and uncle 'wintered' in Texas for a couple of decades. 'Al' was a diabetic who refused to quit drinking a six-pack or more a day. 'Audrey' was a long-time smoker. The lived in the Midwest the rest of the year, with 'family doctors' who had 40+ year medical histories on them. What do you want to bet that if they went to the doctor in Texas they would get a lot of tests to find out stuff their home town family doctor already knew and had at hand?
Nope. Nothing skewing the data here.
Posted by: JorgXMcKie | June 29, 2009 at 12:16 PM
I wish I could remember where I read this but apparently McAllen, TX is also the closest US destination for a sizable population of US citizens who have retired to Mexico.
Posted by: tyree | June 29, 2009 at 02:08 PM
Sylvia almost has it right but gets it wrong in the end. Frankly one thing that should be explored is INCREASING the number of tests that are run if they could credibly help. One of the biggest costs to hospitals is capital equipment. If hospital administrators had their heads screwed on straight they'd be demanding that every device be using for the maximum duty cycle it is designed for. If you double the number of times/week an MRI machine is used you can charge half as much and still pay for the thing in the same time frame.
Posted by: RC | June 29, 2009 at 02:41 PM
That was interesting inside info above from the Texas posters about the one town being a tourist town, which would surely skew the stats and might explain the extra testing because doctors aren't supposed to rely on other doctors tests usually.
But come to think of it, doctors do often have labs they partner with. I know my doctor's office has a new lab in the building. So I could see an incentive to over test if there are over laping finances. I have no problem in developiong guidelines just as as reference to make sure there is not some blatant crazy over testing going on for financial gain. If so, no one should have to pay for that. But short of obvious overtesting and testing abuse, doctors should have a large leeway. So a tricky balance there.
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