I mentioned on our last show that the hyperbole surrounding the budget doesn’t correlate to the real issue in the budget that nobody is talking about: the single biggest driver in the budget that effects our debt, deficit and ability to meet the promise of the social programs I want to see funded are cost-laden entitlement programs: medicare, medicaid and social security. With an aging population and skyrocketing costs, we will never get our budget under control until we do the politically unpopular thing of tackling entitlements.
In that vein, we will never cure the problems that most of us face in health care until we have real, comprehensive health care reform. But the real purpose of this post is to say that we can’t have real health care reform until we listen to the advice offered by William J. Baumol, the most important person in health care you never heard about. Supportive of health care reform and Progressive ideas like the Public Option, he nonetheless warns us all that the underlying sickness in the health care system is out of control costs. And there really isn’t a cure.
As described in his 1966 book on the economics of the performing arts, the cost of labor continues to rise because its an industry that doesn’t benefit from increased efficiencies. For example, you still need the same number of people to play a Mozart string quartet today that you did a hundred years ago, or in baseball, you still need 9 players on the field — efficiencies like new bats, new balls, bigger gloves, haven’t changed the cost of labor (that’s one reason why we pay baseball players so much).
While productivity can be increased due to technologies in some other areas, like the auto industry, labor costs in health care continue to rise, and demand never lets up — in fact it increases. So when politicians argue that we can bring costs down through increased efficiencies, new technologies, electronic billing, using nurses more than doctors for primary care, etc., — the bottom line is that we still need the same number of people (if not more) when we are sick. It’s great politics to talk about getting health care costs under control, but it’s enormously complicated policy.
If we do nothing, as Republicans would have it, costs will indeed continue to skyrocket, not just because labor costs will rise with inflation, but also because the insurance companies they defend want to increase their profits. But if we are realistic about how costs will grow and why, then maybe we can slow the growth…by incorporating ideas like the public option, ending anti-trust provisions for insurance companies…or getting rid of insurance companies by introducing a single payer system.
— Jeff Kimball
PoliTalk 
You are correct that efficiencies can bring down the cost of healthcare, but you are incorrect in assuming that efficiencies are the only way to bring down cost. The true issue that no one is talking about is the AMA. The AMA has the power to limit the number of medical students into medical universities. Our wise Government gave the AMA this power. Stop limiting the number of doctors and the supply will increase and the costs will go down. Eliminate frivolous lawsuits and Doctors will have larger profits and there will be higher demand for Doctors and costs will go down. And dont forget that with less government regulation and sensless paperwork, costs can go down.
I find this post amusing because you assert that the only way to decrease cost is through efficiency, yet you apparently support a bill that adds no efficiency to the system and adds pages of inneficiencies.
Obama care does nothing to decrease costs while increasing government regulation. The only direction for cost under this plan is up, so while I do support heatcare reform, I applaud the Republicans for opposing the current bills on the table.
Thanks for the comment bagzzz. I really appreciate it. I respectfully need to say that you missed the whole point of my post, and that we agree that efficiencies CAN NOT lower costs in the system. I am making the argument that any politician who says they can control costs and pay for reform through efficiencies, cutting waste and/or malpractice reform has it wrong. My point is that if you look at the history of health care in America, labor is fixed, despite the enormous advances in technology and the practice of medicine. In other industries, like manufacturing, advances in technology have indeed lowered costs and gained efficiencies. But in the practice of medicine the labor costs are on a curve that are only going in one direction. The only change I see is when the huge wave of boomers aging now passes, and the population itself shrinks.
As you suggest, you can ask the AMA to cut the number of doctors, but be you conservative or liberal, can you imagine being sick — say having cancer and going to see a sarcoma specialist only to be told that the AMA cut the number of sarcoma specialists and that you in fact have to see someone who specializes in melanoma, or that the only sarcoma specialist in the area has a waiting list for several months because he/she is the only one in town now that the AMA cut the number of positions available. That sounds like rationing to me.
The billions in profits that health insurance companies make represent the single largest pool of money where efficiencies can be gained to pay for changes in the health system that are badly needed because of the way they contribute to the deficit and debt we now have.
Love the reply — very thoughtful — keep the posts coming and share your replies with your friends and family. — Jeff
Hey Glenn, saw this link on Anne’s Facebook page. Really interesting. The harsh reality is that people need to stop being so selfish around these entitlement programs. Many of those against heathcare reform, and in particular single payer programs used the UK system as an example. Sure it’s not perfect but I have to say it works more often than it doesn’t and there is zero risk that you wont be covered. Imagine the benefit to small business owners if the issue of health cover is removed from their liabilites?
Jeff,
Thanks for your reply and I can see why you thought I missed your point. In fact I agree with you that there are not any efficiencies to be had from machines that can replace labor. Since I agree with you there, I mistakenly did not comment. I should be more careful about that.
I think you missed my point about the AMA. For costs to go down, (and quality to get better) we should INCREASE the number of doctors Currently… right now… the AMA is restricting the number of doctors entering medical school. I know because a friend of mine is a doctor. When he was applying for medical school the standards fluctuated every year based on the number of students the AMA allowed into school. So the scores he needed in the first attempt were very high and so he studied like crazy and raised his scores only to find out that he could have used the same scores when the standards were lowered the next year. The fluctuation was due entirely to the number of expected doctors they were retiring that year. This manipulation of supply and demand is a big reason for skyrocketing health care costs. No one is talking about this and that is the main reason the title of your blog attracted me.
I disagree that replacing private health insurance with a government plan will reduce costs and the arguments are very well spelled out here http://www.heritage.org/research/healthcare/wm2505.cfm
What about the other ways to decrease cost like tort reform and simplifying existing government regulations?
Thanks for the kind reply. It is nice to have debate with someone that does not call you names.
Hi Bagzzz,
You two are having an interesting discussion. Do you have anything that backs up your AMA claim? I did some digging and the only thing I found was this article http://tinyurl.com/m6bnzm that makes your case, but has the AMA denying it in the comments. I am really interesting in better understanding their role if any.
One of the harsh realities of med school is that the number of med schools is limited so no matter how many new students apply, there are only so many slots just as there are on any other college program.
However, I think you and Jeff are both missing a bigger issue in the debate, which frankly, I see as a major fly in the ointment for any approach in adding 30 million more people to the health care system… the number of doctors.
Currently most people who have health insurance have a primary care physician. If we were to use that model and let’s say each physician has 300 clients each (give or take), we would need another 100,000 doctors to support 30 million more patients. Currently it takes 10 years to train a new doctor.
In 2004, according to the AMA there were 853,187 doctors in the US which includes specialties. So unless we get real and talk about a significant shift in health care delivery methodology, I don’t see how we can treat 30 million more people regardless of who is paying.
Again, great debate. That’s what we try to do here at PoliTalk. Leave out the name calling and try to get real about politics.
–Glenn
I will admit that I am not a medical expert so do not know all the intracacies. I have done a coulpe hours of research in response to your question though. I have come up with a couple intersting things that should motivate further reaserch into this issue. I still think it it the real health care issue no one is talking about.
To begin with, the source of your link was a 1962 Milton Freedman book. After researching that I discovered that he was right. I found a 1959 document that spells out how the AMA has the power to limit the number of doctors. However, it is not that transparent today.
In the AMA response, they said they do not have the power to limit the number of physicians. Since 1960, the demand for doctors has increased at a far greater rate than the openings in medical schools. Not even the AMA denies that and their official positioin is to call for more doctors. I find this laughable since this is in direct conflict with the interests of its members.
So what is causing the limitations? According to the AMA, it is the Government.
So one of the biggest lobbying groups in Washington DC with the most credibility on medical issues cant convince our government that we need more doctors?
I also called my doctor friend and he comfirmed that the test scores and other standards required to get into medical school change every year. The reason is that medical schools have a limited number of openings and it is not the same number every year. So I am very sure that the issue is not a standards issue (as the AMA claims) because the standards change. Also it is not a capacity issue, because the numbers change and because capacity can be increased – especially since we are talking about a 40 year period.
So it is pretty obvious to me that the government has a hand in the high cost of medical care. Yet another reason I would prefer to keep the government out as much as possible.
I have just written a blog on what my healthcare plan would look like. http://bagzzz.wordpress.com/2010/02/05/the-bagzzz-healthcare-plan/
Glenn I forgot to respond to your fly in the ointment problem. Taking your numbers, about 10% of Americans are not covered. That does not mean they are not being treated. Currently they go to Emergency Rooms if they cant afford treatment where they cannot be turned away, or they go to urgent care clinics if they can afford coverage. Notice how the people who have to pay out of their pockets pick the most efficient way to do so? If a primary care doctor sees 300 patients in 200 working days and sees 8 patients a day, they are seeing a person an average of 5 times a year. I would argue that currently uncovered patients are young and healthy and dont need to see a doctor that much. Also if everyone is covered, there will be less demand for doctors in emergency rooms and those doctors can become primary care doctors. I think there is cause for concern to add that many people to the system without adding more doctors, but not to the great extent your numbers suggest.
So you are saying that adding 30 million people to the list of insured does not have an impact given the current supply of doctors? While my numbers may be off or way off. I have to believe that if 30 million people that did not have insurance before and suddenly have it may want to take advantage of it.
I read your plan. I like it. I like it because it changes the relationship between the buyer and the seller. I think if more people took responsibility for their health, we would be a healthier nation. Right now the healthcare market disconnects the buyer (the patient) from the seller (doctor/hospital/pharmacy etc.) because we don’t feel the real costs of not keeping in good shape.
Sadly, in Massachusetts, the poster child of healthcare, I cannot buy a catastrophic policy. They require me to pick from plans that have the highest premiums in the country. If I don’t buy them, they penalize me at tax time.
Hi, Guys, thought I’d add this one to the mix:
http://runningahospital.blogspot.com/2010/02/how-to-get-enough-votes-in-senate.html
I agree with all of Mr. Levy’s points in terms of finding areas of agreement to push forward SOME kind of health reform, but I’m not sure I can buy into the idea of taxing those (of us) who already pay more than their share of the tax burden in order to cover those 30 million (give or take) who for whatever reason are currently uninsured (or uninsurable).
I’d like to see some demographics on that 30 million: how many have no health insurance because they choose not to carry it? What percentage truly can’t afford it and therefore need some help from government to regulate the market to provide an affordable (rather than the dreaded “public”) option? I think then we’ll start to get into the real issue of what health care reform will actually cost.
One other thought I’ve heard floated is the concept of making health insurance more of a catastrophic coverage (i.e. for hospitalization), similar to life insurance or car insurance. Pay for primary care out of pocket and let individuals decide where and from whom to buy their health care based on what they need and what they are willing to pay (based on quality, price, location, or any criteria the individual considers important). This would of course require health care providers to publish their prices and to compete for customers in an open market. Why can’t that be part of the conversation?
Your thoughts??
MAW
I’d like to jump in on the conversation between bagzzz et al.
There is one huge flaw in bagzzz’s reasoning. It assumes that increasing the supply of doctors will decrease the cost of medical care. My degree is in economics, so I am well acquainted with the concept of supply and demand. However, increasing the supply of doctors will only decrease the price of health care if insufficient supply is the cause of the high prices. In economic terms, bagzzz is making the assumption that there is reasonable price elasticity of supply, but that an artificial limitation is preventing the market from establishing equilibrium, resulting in artificially inflated prices.
I suggest that the price elasticity of demand in the field of medicine is relatively low, that is, I suggest that adding more doctors will not significantly lower the cost of health care.
I suggest that the reason for the high and increasing cost of health care is three-fold. 1) the high and increasing cost of the education that medical professions require, 2) the high cost of running a medical practice, in terms of equipment purchase, upkeep and replacement, facility expenses (office space is costly!), as well as support staff salaries, and 3) the high and increasing cost of malpractice insurance, due, I believe, to increased litigation over the last 30 years or so.
Your average general practice physician doesn’t really make all that much. It’s your specialists that make a lot of money — Cardiologists, Neurosurgeons and the like — and when you think about it, why shouldn’t they? They didn’t just go to college, medical school, and residency for their M.D., they went longer for their specialty! Don’t you WANT the best and the brightest to be the one operating on your heart or brain? I sure do, and the best way to attract the best is to pay them well.
The reality is that health care is expensive for the patient because it’s expensive for the provider.
Now, what to do about it? Obviously, we’re in need of reform, but single payer isn’t a great idea in my mind. Take one look at how inefficient Medicare is, and apply that to everyone. No thanks. My mother has been a medical biller for 15 years, and she can tell you how hard it is on the doctors’ offices to bill Medicare, and actually get them to pay, so there would be increased support staff cost at the doctor’s office, resulting in increased charges.
I like the idea of removing restrictions on buying insurance across state lines, but this would only work if there was one national standard for what must be covered by insurance plans, which raises concerns about taking away power from the states.
Better still…abolish insurance requirements. It’s silly to require insurance plans to cover certain things anyway. For example, I don’t particularly want an insurance plan that will cover reconstructive surgery after a mastectomy, because I’m a male, and my likelihood of getting breast cancer is pretty small.
If insurance plans are not required to cover certain things, then in theory, people could purchase only the coverage they need. This may or may not lower the overall cost of health insurance, but it would allow for more granularity on the actuarial side of things, meaning more accurate and fair setting of premiums to risk categories. To use my example again, women should bear more of the cost burden for reconstructive surgery after a mastectomy, because they are vastly more likely to have that need.
If I can buy coverage a la carte, I’m able to decide for myself what risks I want to mitigate, rather than subsidizing risks that don’t apply as much to me as to others. This is one industry where some level of deregulation would greatly benefit consumers.
MAW
I agree… catastrophic coverage is the way to go – especially if coverage is mandated by the government. There is no justifiable reason to force citizens to buy more than catastrophic coverage. A person who has catasrophic coverage is placing absolutely no burden or risk of burdon on society. I know I posted it before, but my plan is detailed here.
TSG – I agree with you that the demand curve is not that elastic presently. That is because medical costs are paid for by third parties. If the end user paid for the expenses out of pocket, that curve would be more elastic. That is why a big part of my plan requires all but catastrophic care to be paid for out of pocket or out of a HSA.
An increase in the number of doctors is still good because if they can’t compete on price, they must compete on quality, so the government should stop limiting the number of doctors either way. I still think there is an artificial limitation on the number of doctors allwoed to enter the market and there is certainly no downward pressure on cost as a result.
I completely agree there are several reasons for the high cost of health insurance. I own an insurance agency and my major in college was economics/management.
Here’s what I see:
1) We need to allow insurance companies to sell across state lines. Increase competition.
2) Governments need to stop controlling/mandating the specific coverages so tightly. All of these good intentions – wanting everyone to have everything covered – drive costs through the roof.
3) Individuals need to have greater direct contact with their premiums. Right now, many (if not most) people have the vast majority of their premiums paid either by their employers and/or taken out of their pay like taxes. As a result, they don’t always have a solid idea of how much is really being paid for their insurance. More direct involvement (sending out a monthly check, for example) will tend to lead to more control/awareness.
4) As we have more disposable income as a people, we have generally realized that having “stuff” isn’t really very important without being healthy. We want to live — well and long. And so, demand along with technology has provided amazing advancements that allow us to live longer and more actively than in the past. This is great, but it’s naturally expensive. We want the very best, the latest technology, etc. That comes with a cost. And it’s a decision we have said “yes” to, so far with our dollars. It’s not right or wrong, it’s a value judgment/decision.
5) Co-pays and deductibles should be considerably higher than the typical $20. That would drive the consumer to be much more discerning about whether or not a trip to the doctor/prescription is really necessary. The lack of economic pain they feel right now leads people to over-use the system.
6) Health insurance has mutated into something it was never designed to be. We actually *expect* to use it. That’s a *maintenance* policy, not an *insurance* policy. If we treated homeowners insurance and auto insurance like we do health insurance, the premiums would be 5-10x what they are.
Glenn’s comments about catastrophic coverage, etc. get to the heart of what insurance should be. It’s supposed to be a safety net, not a maintenance policy. If you want everything covered, with little to no deductible, it shouldn’t be a shocker that the premiums will be extremely high.
That’s my $.02
Great discussion!
An interesting recording of Ronald Reagan back in 1961 about health care: