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Selling the Same Thing for a Different Price is Normal Market Behavior

Understanding the price of ketchup may go a long way towards explaining why mainstream health reformers give such bad reform advice.

Per capita health spending varies a great deal. It varies by geography, it varies by health status, it varies by demographics, and it varies by individual patient characteristics. Academics and government officials decry this variation. They think that health care spending and utilization should be the same everywhere. Despite ritual hand waving about the importance of clinical differences, their policy recommendations generally attribute variation to inefficiency, overuse, and waste.

Guess Where Fair and Transparent Hospital Prices Exist?

Britain has long had an active cash market for medical care provided by private hospitals, which helps people get around the long waits in the National Health Service, and also serve people from abroad.

Nuffield Hospitals advertises firm, fixed, all-inclusive prices good for 60 days after an initial consultation. For more complex procedures, one pays for the initial consultation and the hospital develops the price from that. The Nuffield price generally includes post-operative care, rehab, and required readmissions.

Like Walmart, Nuffield will match competitor prices under reasonable conditions — “If you find an alternative private hospital in your local area offering a better price for the same surgical intervention, sold with the same service conditions, we’ll lower our price to equal it.” The conditions require the other private hospital be within 15 miles of the Nuffield hospital, exclude NHS private patient prices and require a written quote.

Bupa offers private insurance, elder care, and private hospitalization. Beneficiaries of its Health Cash Plan pay providers, send Bupa the bill and receive the Bupa contract amount in cash. Bupa advertises no pre-authorizations to see specialists and 24/7 phone consultation with nurses and GPs.

Sorry Dartmouth, Geographic Variation in Medical Procedure Rates is Not Unique to the U.S.

The Dartmouth Institute maintains that large variation in the use of various medical procedures demonstrates the inefficiency inherent in the way that the U.S. health care system is organized. The mere fact that variation exists also means that the U.S. system is inequitable. If procedure rates vary, some people have too little access to medicine while others have too much.

Members of the Dartmouth group also claim that “geography is destiny for Medicare patients.” Its Dartmouth Atlas Project claims to show that although Medicare spends more in areas where there are more hospital beds, physicians overall, and specialists per capita, people do not get better care.

If one believes these claims, then the solution to U.S. health care spending is to remove decision making power from individual patients and physicians. Instead, government should have the power to forcibly equalize treatment and resource use everywhere in the country. Fortunately, a large amount of evidence suggests that the Dartmouth Institute interpretation leaves much to be desired and that it is possible that government control is more likely to be the problem than the solution.

For example, this 2010 Dartmouth Atlas Surgery Report from the Dartmouth Institute made much of the national variation in Medicare hip replacement rates in 2000-01. Noting that the rate ranged from 1.2 per 1,000 in the hospital referral area of Alexandria, Louisiana, to 6.7 per 1,000 in the hospital referral area of Boulder, Colorado, it concluded that

[b]ased on the data presented here, it appears that patients in some regions and among some populations may not be getting adequate access to the procedures, while patients in other regions and among other populations may be undergoing the procedures at higher rates than necessary.

Reaching such a conclusion from local hip replacement rates requires assuming that the U.S. population is composed of identical people identically distributed over a featureless geographic plain that is everywhere the same.

Government Health Spending Growth Outstrips Private Sector Growth in Both the UK and the US

Here are some data suggesting that health spending increases are, as theory suggests, difficult for the public sector to control. If true, a long run strategy that seeks to control expenditures by increasing the fraction of health spending under government control is more likely to increase expenditures than reduce them.

The two charts below show different measures of inflation-adjusted spending by the public and private sectors in the United Kingdom and the United States.

The first chart is from the Nuffield Trust for Research and Studies in Health Services, a British foundation devoted to “evidence-based research and policy analysis for improving health care in the UK.” It shows that inflation-adjusted UK public spending on health has increased by more than 200 percent since 1997. Inflation-adjusted public spending increased by 68 percent between 2000 and 2012. Private spending increased by 26 percent. Over the same time period, the population of the United Kingdom rose from about 59 million to 64 million, an increase of almost 7 percent.


Government Health Metrics: A Solid B+ Even Though Some Medicaid Patients Cannot Get an Appointment

In accordance with federal law, Colorado hired Health Services Advisory Group (HSAG) to do an on-site review of Denver Health Medicaid Choice plan performance in 2013. Denver Health is one of Colorado’s biggest Medicaid contractors. It runs a hospital, a pharmacy, 9 satellite primary care clinics, 4 dental clinics, and 16 school-based health centers. HSAG’s report on Denver Health’s performance was published in April, 2014. All Medicaid clients with a Denver address are automatically enrolled in Denver Health Medicaid Choice unless they choose another Medicaid option. Denver Health scored well overall. It met 87 percent of all of the evaluative standards. Paperwork on coverage, utilization management, provider certification, and denial of claims documentation was in near perfect order. According to its annual Strategic Access Report, 99.8 percent of Medicaid members were within 30 miles of a Denver Health clinic and there were 54 bus stops within a quarter of a mile of its clinics. It had direct access to care for members with special needs, 24-hour emergency access, preventive health programs, and numerous “committees, workgroups, staff trainings, and evaluation of metrics regarding provision of interpreters and understanding of culture with respect to health care.”

The Federal Government’s Dismal Record on Corporate Income Taxes Drives Firms Offshore

Many companies in the healthcare sector are undertaking so-called tax inversions to move their headquarters overseas. Here’s an explanation of why the trend has picked up.

Because the U.S. federal government is refusing to respond to international competition for the headquarters of successful multinational companies, U.S. multinationals are moving their headquarters out of the U.S. in order to protect their shareholders from high U.S. corporate tax rates. The shareholders needing protection include large numbers of retired and working U.S. citizens who have investments in company stock, either directly or through various collective investment vehicles.

As the following graph from a Baker & McKenzie presentation at a 2013 meeting for tax experts shows, the U.S. federal government was a lot smarter about the realities of global competition back in the 1980s. In the 1980s, it responded to international competition by reducing the U.S. corporate tax rate. Since then, it has increased the U.S. rate even as other countries have been lowering theirs, driving corporate headquarters out of the country.


Political Control of Obamacare Insurance Pricing Harms Those with Lower Incomes

When Obamacare kicked off, Colorado State government had grouped its ski resort  counties into a single rating area. This makes sense geographically. But everything is more expensive in the ski resort counties, and under Obamacare pricing rules resort county residents ended up with the highest health insurance exchange premiums in the country. The resulting town meetings were spirited, county commissioners threatened to sue, and Colorado Insurance Commissioner Marguerite Salazar began looking for ways to redraw the rating areas to lower the political angst.

Before Obamacare, someone in the mountain towns might economize on health costs by buying a high deductible health insurance policy and making regular contributions to an HSA. He might use a local physician, hospital, or clinic. He could also save money with in-state medical tourism. A few hours of driving would let him seek lower priced care in Denver’s more competitive health care market.

Yet Another Reason Why Obamacare Health Insurance Prices Make so Little Sense

Proponents of government run health care have an inexplicable disdain for geographic variability. They often seem to assume that physicians, treatments, and outcomes should be constant across the entire United States. Any variations in price, treatment modality, or expenditure ranks as a sure sign of an improperly run health care system.

The problem is that normal human activities vary even over relatively compact geographic areas, and the variations often reflect the exigencies of daily life rather than administrative boundaries. For example, when a company took the trouble to analyze credit and loyalty card data about its customer’s shopping habits, it found that even a relatively compact area like a city had distinct variations in its shopping and retail use patterns.

The maps below are reproduced from a Boston Consulting Group article about what the company learned about its pricing power. In the beginning, the company had the single pricing zone for all of Georgia shown in the left hand map panel. The right hand map panel shows how its pricing zones changed after customer habits were considered. Of interest is the fact that Atlanta ended up with multiple pricing zones. High population density makes it harder to move around, limits customer mobility, and people’s ability to access goods and services. The report notes that in Atlanta, stores serving the same clusters of customers often are “located along commuting corridors.”


ObamaCare: The Perfect New-Keynesian Policy Prescription?

University of Chicago finance professor John Cochrane believes that slow economic growth “trumps every other economic problem.”

He and a number of macroeconomists believe that the Keynesian model drilled into your head in Econ 1 has a number of shortcomings that make it produce lousy economic policy, even in its New-Keynesian version. Shortcoming number one is that the New-Keynesian models do a very poor job of explaining reality. Just how poor a job is shown in the graph below.


Does Public Health Coverage Augment Private Coverage or Crowd It Out?

Expansion of government health care programs like Medicaid is sold with the explicit argument that expansion will cover the uninsured. However, expansion may also cause people who are already insured to cancel their insurance or let it lapse so that they can take advantage of a less expensive to them government program. Academic studies of the size of the crowd-out effect arrive at a variety of conclusions ranging from Lo Sasso and Buchmueller’s estimate of a 50 percent crowd-out rate for SCHIP to an 8 percent rate for Dague et al.

Wisconsin runs its own population survey of health coverage. It samples from all Wisconsin households with landline phones (weights adjusted to represent what is known of the cell only population). The response rate is 47 percent, and 2,462 households were interviewed in 2011.

Here are two graphs showing what the survey has found over the last decade. What is most striking is that if the overall rate of coverage has increased, the increase is small. The increase in public coverage of children of about 25 percentage points mirrors a similar loss in private coverage; and the same effect ― but slightly smaller ― is observed in working-age adults.