Health Economics

I am slow to post about health care because I don’t know the answers. But then I don’t think anyone knows the answers. There are many excellent ideas for trying to improve health care, but we just don’t know how different changes will work in practice at the level of entire health care systems.

Much of the political heat over health care reform has to do with the perception on both sides that the Affordable Care Act (Obamacare) is a move in the direction of redistribution. As a mode of redistribution it has many of the same issues as other modes of redistribution.  Redistribution is good, but when financed on a massive scale by the government, it can also be a budget buster. The extent to which this budget-busting aspect of a large amount of additional redistribution can be muted by extra efficiencies wrung out of the health care system is simply unknown.

An aspect of our public policy even before the affordable care act has been favoring health care expenditures relative to other forms of consumption.  In particular, people have long been able to pay for health insurance–but not most other forms of consumption–with pre-tax dollars. I think this can be justified by the fact that most of us are seriously bothered by thinking of others suffering without adequate medical care much more than we are bothered by thinking of others not being able to take family trips or having a small house or car. So it is worth something to us if others tilt their spending toward health care more than they would without any push toward health care spending in the tax system. As an example of a less subjective externality from health care, I think people’s psychological problems often cause them to act in ways harmful to their friends, extended families and coworkers, so I think it is appropriate for policy to tilt people’s spending toward any form of psychological care that can be shown to be effective at improving how people treat others around them along with whatever other effects it has. (Tilting should not be allowed to totally suppress price signals that indicate that some forms of psychological care require many more resources to provide than others.)

This principle of subsidizing what benefits others besides the one choosing how much health care to use is helpful in showing what forms of health care should not be favored. For example, plastic surgery for people who already look OK has at best mixed effects on how others feel. Am I misremembering the former Italian Prime Minister Silvio Berlusconi wanting to subsidize plastic surgery for the benefit of his own viewing pleasure? But those who are in social competition may feel worse off, and I think this externality is stronger than the Berlusconi externality. So, depending on the strength of different externalities, it may make sense for public policy to discourage plastic surgery for people who already look OK rather than encourage it. The ethical status of envy of others’ plastic-surgery enhanced looks–let alone the Berlusconi externality–is not an easy question, but at least one can say that the argument for using policy to tilt people towards spending on plastic surgery is muddy at best, and the default should be no tilt.

On wringing efficiencies out of the health care system so that we can hope to afford the large amount of additional redistribution in the Affordable Care Act, to me it seems crucial to have a great deal of experimentation rather than a one-size-fits-all approach. On the constitutional question of what the Federal Government can do and what States should be left to decide, Greg Mankiw refers to a previous Mankiw post saying that from an economic point of view taxes, subsidies and fines can all be equivalent. The 16th amendment to the constitution gives the Federal Government breathtaking power:

The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.

But what the Federal Government can do in relation to the States is not the same as what is should do.  Supreme Court Justice Louis Brandeis, in a dissenting opinion in 1932 said: 

It is one of the happy incidents of the federal system that a single courageous State may, if its citizens choose, serve as a laboratory; and try novel social and economic experiments without risk to the rest of the country.

This has come to be known as the “laboratories of democracy” principle, which I have always found very attractive. In the case of the Affordable Care Act, I believe that whether we are ultimately able to wring efficiencies out of the health care system depends on how much state-level experimentation is allowed. And that in turn is largely a matter of how the next President (whoever that turns out to be) interprets the Affordable Care Act. So even though I think it unlikely that the Affordable Care Act can be repealed, given the difficult designed in by our founders of getting any new legislation through Congress, it matters whether a President is elected who will give many waivers to states to try different experiments with health care. I hope that journalists–and others who get the chance to ask questions of the two major candidates–press them on this question of how freely they would give waivers for states to try various experiments if, as is most likely, the Affordable Care Act is not repealed.    

There is an obvious role for the economics profession in such state-level experimentation on how to deliver health-care. The government needs to ensure that there is adequate data collection in relation to these various experiments, and economists need to analyze that data. More generally, with health care spending at 17.4% of US GDP and rising, we need more economists working on health care issues than ever. In addition to current health economists redoubling their efforts, it is high time for economics departments around the country to give more prominence to health economics in graduate training than they have, so that there will be more health economists in the future. And I hope that where they reasonably can, empirical economists (and theorists) who do not now think of themselves as health economists tilt their research agendas toward figuring out health care. I stand by my statement that no one knows the answers for health care. But I hope someday that will no longer be true.