• Private vs. public health care cost control [FAQ]

    This is a FAQ entry. See the main FAQ index for others.

    There is overwhelming evidence that public programs exert greater control over health care spending than private insurers.

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    • -Data that demonstrates that government monopsony enhances clinical efficacy will be much more compelling. E.g. studies that show the same demographic cohort, with the same disease, and the same severity who get better treatment because the way government pays providers changed the way that they treated patients.

      Equally dead after treatment of varying intensivity [Dartmouth] doesn’t satisfy this criteria. The study below is closer to the mark, but it only says that more care = less death when you actually measure patient survival as an “outcome” that you are concerned with.
      http://www.annals.org/content/154/3/160.abstract

      -AFAIK there’s never been any serious contention that the government can’t impose lower prices on providers for a given procedure than private payors can. What I have heard: The government does a bad job setting prices, and the said prices result in windfalls and shortages that distort capacity relative to demand, which is bad for everyone in the long run – RBRVS being the poster child for the above.

      -How certain is it that data on Medicare advantage isn’t confounded by selection bias? E.g. people that chose medicare advantage differ from those that enroll in traditional medicare in ways that affect total spending per enrollee.

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      • This topic is impossible to study with methods anywhere near ideal.

        Yes, people do claim the government is less able to control costs. I see such claims all the time. I’ve responded to some on this blog.

        • re: “This topic is impossible to study with methods anywhere near ideal. Yes, people do claim the government is less able to control costs.”

          This is an old page, but since it is in a “FAQ” I’ll comment. They claim it for rational reasons. As nobel laureate Hayek and others would point out, a central planner simply can not even in theory have the the information available to be able to know what a price should be, therefore it will be set wrong. It will be too high and lead to waste, or too low and lead to shortages. There is no magic crystal ball that can somehow avoid this. In real free markets price control happens from the bottom up where savings are found by someone actually working to create a product who discovers a way to reduce costs, and competition (in real competitive markets) leads prices to drop after costs are reduced.

          Unfortunately some intelligent people manage to twist their thinking into overly complicated knots looking at data about a complex system that is hard to untangle to try to obscure simple realities.

          Central planners can’t predict innovation and magically know how a price should be set, no matter what they might tell each other to rationalize it. At most they can pretend to do so by looking at various trend curves that are the result of aggregates of past innovations changing prices, but that isn’t reality. The reality also changes when government sets the prices which effects the incentives for (or against) innovation. They often have what Hayek would describe as a “pretense of knowledge” based on having a lot of data, which isn’t necessarily the same thing. Often healthcare economists seem to ignore actually considering how executives and people operating withing the healthcare realm actually decide things, or to learn about how in areas outside healthcare real free markets operate to see how they solve some of the issues that aren’t handled well in healthcare due to government intervention.

          Ronald Coase recently raised the concern that many ivory tower economists seem to know little about how the business world works.. and by that he means *real* free market businesses, not the twisted world of healthcare which obviously is nothing remotely close to a free market. Economists really need to hang out with entrepreneurial types more and business people in functioning mostly-free markets to learn from them to see how they manage to avoid the problems that crop up in healthcare when the government stays out of the way.

          Unfortunately there is a very distorted system where the data may be misleading because there aren’t good controlled experiments since governments intervene in healthcare throughout the world. So, yes, perhaps in some cases with a system broken by government intervention, a pretend-market won’t control costs as well as even more government intervention. Unfortunately the solution is massive deregulation unlikely to happen as long as people keep rationalizing their particular tinkering with a badly broken system as being an improvement on the existing system. Instead in reality regulatory capture will likely steer things in a direction not accounted for by the wishful thinking of those who use central planning style thinking.

          • I should have attached the caveat that government will most likely set the price wrong, not that it definitively will, They can hit it lucky occasionally by accident, or in some very simple areas where there isn’t much change going on where it is close enough. The problem is there is no rational way to justify the price they set as being anything other than arbitrary, no matter what sort of convoluted logic you use to try to avoid confronting that reality.

        • I’d suggest people look up the classic essay “I, Pencil” describing the myriad things that go into the supply chain for something as simple as a pencil. Fluctuations in a vast number of things along that chain can effect the end price (though some are obviously damped by the existence of substitute competing products and alternatives which do make the price more predictable in large free markets). Regardless the prices are set by myriad factors that aggregate into the final result, which some with a central planning mindset dismiss to easily and simplistically think central planners can easily control that process by setting the price centrally accurately or in a way that controls that chain rather than say shifting it to produce other things instead and a shortage resulting.

          Or no shortage happens, but say R&D suffers since investment money flows into niches that will have higher expected returns, and you never are directly aware that you caused it by setting a price too low. Or you let that price rise, so more of that is produced, leading resources to be steered away from some other task. Lookup Bastiat on the “seen” vs. the “unseen”, or Henry Hazlitt’s writings about it.

    • I don’t take issue with any of the data, but I do think an interpretive point is called for. The studies shown are all statistical correlations. They are created by various complex, contingent economic and social conditions. If you think we can’t, or shouldn’t, change those underlying conditions then our planning and policy recommendations can rely on the correlations, with the caveat that we need to be on the lookout for changes that happen anyway or are even inadvertently caused by our interventions.

      This is all standard thinking about the use of statistics and you know it well, but the way you presented the data here suggested some kind of universal, immutable truth that government controls costs better than the private sector.

      I would simply present the evidence from the 90s as an indication of how the private sector could control costs better. Managed care was ultimately thwarted by social factors (dislike of referrals, dislike of small networks, the public trust in doctors which led them to side with providers over insurers). Those social factors are hard to change but not immutable. In fact, now that ACA has passed I am sure we will see some attitudes change that allow private insurers to control costs better.

    • Very disappointing to see that Diane Archer post included as part of an FAQ.

      “The CBO has scored a public option as cheaper relative to a private-only exchange system.”

      Sure, CBO did score that, but this seems a bit lazy. Price controls would lower spending, that is not a big surprise. We didn’t even need to waste the CBO’s time on that one. But there is no free lunch, what is the real cost of imposing more price controls on the system?