A couple of weeks ago I posted on the problem of price transparency–or lack thereof–as one of the major problems in the health care market (here). The other major problem I referred to in that post was “the fact that consumers of health care typically don’t pay the bills directly, so they generally don’t take cost into account when deciding whether to consumer health care services”.
My colleague, Thom Lambert, has a great post over at Truth on the Market illustrating the problem very poignantly with his own health care saga. When consumers don’t take price into account, health care service providers don’t worry about competing on price, which means higher prices for everyone. Thom goes on to explain how tax policies and the Affordable Care Act make the problem even worse. Excellent read!
ABC News is reporting that Congress is set to take up a student loan fix, but it’s difficult to fix a problem you have yet to define–much less understand. But when has that ever stopped Congress before?
What is the “student loan problem” to be fixed? The immediate issue is that the interest rate for new federally subsidized loans is set to double on July 1, from 3.4% to 6.8%. Republicans are offering a plan that would keep rates from going up as much in the short-term, but could potentially increase several years down the road (assuming Congress wouldn’t step in to stop it then…as they’re trying to now). Democrats, on the other hand, simply want to extend the current 3.4% rate…ostensibly for just two years, while working on a long-term fix (a familiar tune). Democrats believe that, by keeping the price of student loans artificially low, they are helping the average person or family better afford college.
Microfinance (a.k.a., microcredit or microlending) has been highly touted among many development folks and people interested in helping to alleviate poverty in developing countries (and communities in the US). For instance, Opportunity International claims:
Microfinance is the provision of financial services such as loans, savings, insurance, and training to people living in poverty. It is one of the great success stories in the developing world in the last 30 years and is widely recognized as a just and sustainable solution in alleviating global poverty.
Suppose you want to make an investment in a long-term asset that pays off over the next 45 years. You go to the bank and ask for a loan to pay the up-front cost of the investment with the promise to pay the funds back once the asset begins paying returns. The bank offers to loan you the funds at an interest rate of X% that reflects the risk-adjusted cost of making the loan based on the riskiness of the asset and your likelihood of repayment.
In any normal context, you would look at the interest rate, look at the expected payoff of the investment, and determine whether or not the investment still made sense given the cost of borrowing the money. If the cost of the loan to make the investment was higher than the expected payoff, then you would either seek a cheaper loan or you would forgo the investment.
Kudos to the Obama Administration for taking the first step toward “reforms” that could actually have a helpful effect on health care costs in the U.S. No, it has nothing to do with the so-called Affordable Care Act. Rather, the Center for Medicare and Medicaid Services has, for the first time, released data not only on the amounts hospitals bill for Medicare-covered services, but the amounts the hospitals were paid as well.
One of the biggest hindrances to cost savings and efficiency in the health care sector is the lack of transparent pricing information. (The other is the fact that consumers of health care typically don’t pay the bills directly, so they generally don’t take cost into account when deciding whether to consumer health care services. But that’s another can of worms.) An article in the March 10, 2011, issue of The New England Journal of Medicine explains the important role price transparency could have in reducing the upward trend in health care costs. Likewise, the November 2008 issue of Health Affairs includes articles explaining how a lack of transparency in the price of medical devices increases hospitals’ costs (and hence, insurers’ and patients’ costs).
Price transparency, if nothing else, allows researchers, insurers, patients and (almost unfortunately) policy makers to identify high- and low-cost providers. And the variance can be very large, even within local markets. For instance, where I live (Columbia, MO), there are two major hospitals (or hospital systems): University of Missouri Health Care and Boone Hospital. A quick review of the Medicare data shows that University Hospital charges prices that are, on average across DRGs, 42.6% higher than Boone Hospital–with charges for some codes more than 100% and as much as 150% higher.
Of course, what a hospital charges and what it receives under Medicare agreements are different things. In every case, even when the price UMHC charges is lower than Boone’s, UMHC receives more money for each DRG paid, and on average receives 49% more in payments than does Boone. For no diagnosis category listed does UMHC receive less than 9% more than Boone (and the top DRG is 99% more).
Now, UMHC is a teaching hospital, part of the University of Missouri School of Medicine. Medicare guidelines recognize the additional cost and value of training new doctors and allows for higher reimbursement rates. However, one should ask the question of whether–on average–a 49% cost premium is appropriate. UMHC is also a Level 1 trauma center, which may be associated with higher costs–or higher cost treatments. However, the data are reported based on DRGs, which should control for much of the variation in the types (and costs) of medical services being reimbursed.
There are undoubtedly explanations for some of these observed differences. But without the data available, the questions cannot even be asked. And until such questions are asked, there is a lower likelihood of meaningful reform in the actual cost of healthcare. Perhaps this initial glimpse behind the curtain of healthcare costs will lead to even greater transparency in the future; not just after the fact (these data are for 2011), but for consumers who may be deciding how to spend their healthcare dollars.
As I wrote this, I couldn’t help but think of this movie clip. Enjoy!
There’s a nice article in the WSJ Online today reporting on recent research by Betsey Stevenson and Justin Wolfers at the University of Michigan. Their article takes to the task a popular assertion that, above some level of income, more money doesn’t really lead to greater happiness. Of course, that would violate on the basic assumptions underlying this blog. They write:
The income–well-being link that one finds when examining only the poor, is similar to that found when examining only the rich. We show that this finding is robust across a variety of datasets, for various measures of subjective well-being, at various thresholds, and that it holds in roughly equal measure when making cross-national comparisons between rich and poor countries as when making comparisons between rich and poor people within a country.
Moreover, Stevenson and Wolfers also find that the third rule of the blog is also substantiated; namely, more more is less better. Or, to use their terms, “while each additional dollar of income yields a greater increment to measured happiness for the poor than for the rich, there is no satiation point.” That is, someone earning $10,000 may get more sense of happiness from an additional $1,000 than does someone earning $1,000,000, but both experience an increase in well-being in a consistently proportional way.
So who cares? Well, I do for one. Hey, if you’re going to build a blog on a pretty basic concept, it’s nice to have the research back it up (unlike, say, some Keynesian economists).
You should too. Some government policies seem to assume (conveniently so) that once a person has a certain amount of income (call them “rich”), they do not value additional money anymore. Therefore, you can take money away from them and give it to people who do value the additional money (call them “poor”) and make society better off by creating a greater sense of well-being. This utilitarian approach would seem to justify redistributive social policies. The only problem is, it isn’t accurate–or at least it isn’t as simple as that (as the research above shows). And that’s even before taking into account the costly nature (both direct and indirect) of the mechanisms for redistributing the wealth.
So there you have it. No matter how much you make, no matter what country you’re in, more is better than less.
Economics has few “laws”. The most notable is the Law of Demand, which simply states that there is an inverse relationship between the price of a thing and how many units people are willing to buy (i.e., when the price goes down (up), people buy more (less)). The Law of Demand is basically just the culmination of the most basic observations of human behavior; specifically, The Basics with which I started this blog.
There are a few other things that sometimes get labelled as “laws” in economics textbooks. The “law of supply” only applies to things still actively produced, for which the necessary inputs are available; but in general, the more people are willing to pay for something, the more of it producers will try to produce. The “law of diminishing returns”–typically applied in the context of production–assumes there is at least one fixed input that constrains the marginal productivity of the rest. It’s more a rule of thumb than a “law.” But it is also analogous to Rule #3 in The Basics: More more is less better.