When Patients Change, Do Providers Change Too?

Harvard’s David Cutler visited Cato yesterday to participate in a small group discussion about cost-effectiveness in medicine, and also in a panel on improving quality in Medicare. (You can watch the latter event here in a couple of days.) My colleague Arnold Kling blogs about issues discussed at both events. 

I am struck by one issue that emerged, which has to do with price-sensitivity, provider behavior, and health outcomes. Cutler argued that when patients are more price-sensitive (i.e., when they have to pay for more of the cost of their medical care), they tend to cut back both on care that would have done nothing for them, and on care that would have helped them. He postulates that if we were to move all Americans into health savings accounts (HSAs), thereby making patients more price-sensitive, we would see worse health outcomes than we see now. 

I am skeptical of that prediction. I think that if the move to HSAs were confined to a small, randomly selected subset of the population (call it “Rand II”), Cutler’s prediction would be more plausible — though by no means certain. There is precious little evidence that suggests — and it does no more than suggest — that for some patients, greater price-sensitivity leads to worse health outcomes. 

However, even if we assume that Rand II would show that greater price-sensitivity leads to worse health outcomes, it does not follow that we would get the same result were the entire population made more price-sensitive. The reason is that with a population-wide shift, the supply side of health care markets would respond to the enormous change on the demand side. Faced with patients who are less eager to consume medical care, providers would have to do a lot more to sell their services, including:

  • conducting research on the usefulness of their services,
  • improving the quality of their services,
  • lowering their prices, and
  • educating patients about the value of their services.

These responses should enable patients to make smarter decisions about what to consume and what to avoid. Instead of having patients cut back equally on beneficial and useless care, they would cut back on useless care more, having more help discerning between the two. Downward pressure on prices should make cutting back on beneficial care even less frequent.

MIT economist Amy Finkelstein demonstrates that the supply side of medical care does respond to demand-side changes. For 30 years, economists believed that the expansion of health insurance (which reduced price-sensitivity) had a relatively small impact on the growth of health spending. That belief was based on the effects of a demand-side study (Rand I), which was too small to induce or measure any supply-side responses to the change in price sensitivity. Using a data set that does capture and allow her to measure supply-side responses, Finkelstein estimates that the effect that the expansion of health insurance had on health spending is six times greater than the demand-side-only experiment Rand I suggests. 

Casual observation suggests that supply-side responses are helping price-sensitive patients make better choices right now. At the same time that HSAs and other insurance options are making millions of patients more price-sensitive, insurers and entrepreneurs are furnishing more of the price and quality information that patients need.

It would be foolish to claim that the supply-side response to price-sensitive consumers would be so great that patients would have perfect information and would never make mistakes. Yet most opponents of making patients more price-sensitive make the equally foolish assumption that there would be no supply-side response to the new incentives coming from the demand side. I say “most” because Cutler and others are not in this group. If I understood Cutler, he acknowledges that there will be such supply-side responses, and that we have no way of knowing whether or how much they would improve health outcomes.

True enough. But it’s something like 50 percent of the debate over HSAs and health outcomes. T’would be nice to have opponents of HSAs and the like acknowledge and engage it.

Don’t Tread on Me

Attorney General Alberto Gonzales does not like it when members of Congress poke their noses into the affairs of the executive branch. 

Consider today’s Washington Post report on this week’s release of the transcript from an April House Judiciary Committee hearing on such matters as domestic surveillance and treatment of potential terrorists. During the hearing, Gonzales repeatedly evaded lawmakers’ questions.

Here’s a snippet from the exchange between Gonzales and Rep. Jerrold Nadler (D-NY):

Nadler: Can you assure this Committee that the United States Government will not grab anybody at an airport or anyplace in U.S. territory, and send them to another country without some sort of due process?

Gonzales: Well, what I can tell you is that we’re going to follow the law in terms of what—

Nadler: Well, does the law permit us to send someone to another country without any due process, without a hearing before an administrative, an immigration judge or somebody? Just grab them off the street and put them on a plane, goodbye without — we’ve done that. Does the law permit us to do that? Do we claim that right?

Gonzales: I’m not going to confirm that we’ve done that.

Bush and Gonzales have this message for the Congress: Go back to investigating steroid use among athletes or something, but don’t tread on us!

Barack Is So Dreamy

The growing political infatuation with Sen. Barack Obama (D-IL) is fascinating, in part because it’s cropping up across the political spectrum.

The Dems’ weakness in the knees is understandable, given the appealing alternative Obama offers to the party’s otherwise underwhelming roster of standard-bearers. On the Right, David Brooks’ Oct. 19 NYT column “Run, Barack, Run” (subscr. required) titters with excitement over a possible Obama ‘08 presidential bid. And in our corner of the political universe, a few libertarians have confided that they are also smitten with Illinois’ junior senator.

All of these valentines are surprising, given that they’re directed at a senator who has been in Washington for less than two years, and who has no gubernatorial experience. But perhaps it’s the unknown that’s appealing. Like a Rorschach test, we can look at Obama’s not-yet-established political profile and see the outlines of our own beliefs — whatever those beliefs may be.

His surface appeal is understandable; the senator comes across in interviews as thoughtful, bright, caring and articulate. Just as impressively, he doesn’t immediately start mouthing the usual ideological foolishness that has become standard in the puppet theater of D.C. politics.

However, I’m not sure Brooks is correct when he writes that Obama “has a compulsive tendency to see both sides of any issue” and that he is wonderfully free of narrow-mindedness. Consider the senator’s April 2005 speech to the National Press Club, in which he claims Social Security reformers and HSA proponents are motivated by a belief in Social Darwinism:

There’s something bracing about the Social Darwinist idea, the idea that there isn’t a problem that the unfettered free market can’t solve. It requires no sacrifice on the part of those of us who have won life’s lottery — and doesn’t consider who our parents were, or the education we received, or the right breaks that came at the right time.

But I couldn’t disagree more. If we privatize Social Security, what will we tell retirees whose investments in the stock market went badly? We’re sorry? Keep working? You’re on your own?


And yet, this is the direction they’re trying to take America on almost every issue. Instead of trying to contain the skyrocketing cost of health care and expand access to the uninsured, the idea behind the President’s Health Savings Accounts are to leave the system alone and give you a few extra bucks to go find a plan you can afford on your own. You deal with double digit inflation by going to the doctor less. Instead of strengthening a pension system that provides defined benefits to employees who’ve worked a lifetime, we’ll give you a tax break and hope that you invest well and save well in your own little account.

Of course, the supporters of private accounts and HSAs are not Social Darwinists who want to throw the sick and feeble to the wolves. The various Social Security reform proposals that have been floated include safety nets (not to mention choice), and HSA plans require the purchase of catastrophic health insurance. A thoughtful criticism of those policies would question their workability and the adequacy of the safety nets — yet, that is not what Obama offered in his speech. It thus seems that either (1) the senator is not really thoughtful about Social Security and health care policy, or (2) he is not the open-minded non-ideologue that Brooks claims.

But perhaps this is being too hard on Senator Obama. His Press Club remarks and other such comments may be instances of him playing the political games and mouthing the ideological mantras that are required of politicians. Perhaps the man behind the Politician Obama curtain is every bit as dreamy as his admirers claim.

And indeed, Democrats interested in the Oval Office have sometimes proved to be great benefactors to free markets and limited government. Would Ted Kennedy have been such a champion of transportation regulation reform in 1977 if he hadn’t wanted to take a shot at the White House in 1980? Would Bill Bradley have been such a strong proponent of the 1986 tax reform if he weren’t angling for a 1988 presidential bid? Would Bill Clinton have signed welfare reform in 1996 if he weren’t worried about winning a second term later that year?

Perhaps a Presidential Candidate Obama will soon be whispering sweet nothings into our ears in the form of Social Security or Medicare reform. Or perhaps a President Obama would nurture a more thoughtful and humble federal government and a civil society that re-embraces the fundamental American ideal of individual liberty.

Or perhaps I’m just lost in the magic of his eyes…

Bonds on the Ballot

Bloomberg is reporting that American voters will be asked to approve a record $80 billion in bonds next Tuesday to fund an array of state and local spending projects. The previous record was $47 billion in proposed debt in 2002.

As I argued in an op-ed yesterday, state and local revenues have been rising rapidly, so voters should be very suspicious about loading even more debt onto the next generation of taxpayers. For background on state debt see here, and here.

The Quick and the Ed NOT a Bunch of Droolers …

I never thought I would see the day, but I’ve been charged with “drooling” over a Democratic candidate’s policy position. I guess it’s true, and I guess I am that big of a nerd. I do some additional Spitzer-drooling on NRO this morning.

Sara Mead over at The Quick and The Ed says she can’t get excited about education tax credits like me and Ryan at Edspresso – no drooling from her. The primary problem comes down to this:

“If you’re a moderate on these issues, you should actually find tax credits more troubling than straight-out vouchers, mainly because tax credits for private education have even less public accountability for how public funds are used than do vouchers.”

But the thing is, school choice through tax credits provides an education system more accountable to parents and the public than charters, voucher, or anything else.

Personal-use tax credits allow parents to spend their own money on schools that they choose … and school accountability to parents is the most effective kind of accountability. Donation tax credits let people choose the kinds of Scholarship Granting Organizations they think do the best job educating lower-income children. In both cases, the people with the most interest in holding schools accountable for results are the ones with the power to actually hold them accountable – parents and the people funding the schools.

On top of this direct accountability to parents and the public, families and communities can choose the kind of school that works best for them, without making other people who disagree with their preferences pay for it. As it stands, we have to duke it out in the political and legal sphere over issues like separate but equal schooling for girls and boys. Some people want it, some don’t. Right now, it’s winner-takes-all, loser-tough-luck. Shouldn’t these decisions be ones for the parents, not the courts, the state, or the school district? And shouldn’t people who think same-sex education is wrong be able to withhold their support from it?

Education tax credits let individuals, families, and communities support the kind of educational environment they think works best. What’s wrong with diversity and freedom? Personally, those are the kinds of principles that get me drooling.

On Media and Habeas Corpus

TV.  People call it the “boob tube.”  People banish it from their homes to demonstrate how smart and superior they are (oh, and elitist).  People argue endlessly about who should be able to own TV stations because, with too much media in too few hands, other people might hear or learn the wrong things.

The inferiority of TV.  Its subjection to the control of media titans, who play footsie with political power.  These things are demonstrated to be absurd by things like this: a former sportscaster on a throwaway cable news channel imploring his audience and the President about habeas corpus, the Military Commissions Act, and American history - for nearly nine minutes.  This is the kind of thing that happens in our supposedly vapid, short-attention-span media world.

Now, I’m not a fan of Keith Olbermann, nor an opponent of the current administration (though I criticize policies unreservedly when I think they’re wrong).  I make these disclaimers to encourage you to consider the arguments Olbermann makes, looking past some of his personal invective.  He states quite strongly things that our careful scholars are suggesting and exploring here, here, here, here, and here

People, when you’re not reading Levy, Moller, or Lynch - watch TV!