Tuesday, July 14, 2009

Dr. Dolittle

Are Animals Telling Us About the Economics of Health Care?

Health care spending has increased faster than overall spending in the economy, and has done so for decades. A variety of causes have been cited:
  1. Technical progress has made healthcare better (e.g., treating heart disease without surgery) at an especially rapid rate, and this has increased health care demand relative to other goods in the economy.
  2. The U.S. has been getting richer (with a hopefully brief and comparatively minor interruption in 2008-9), and health care is a luxury good.
  3. Americans are increasingly busy, so they have been substituting health care and related activities from the home to the market. Eg., in the old days maybe mom would have counseled a depressed child, now that child sees a mental health care giver.
  4. Medicare and/or private insurance and/or malpractice litigation cause patients and doctors to demand too much health care, because the patients and doctors do have to pay for the health care they receive and give. Of course, Medicare and private insurance have been around for a long time, so this theory is usually tweaked to explain why it has gotten worse.
  5. Medicare and/or private insurance have skewed technical progress. Again, because patients and doctors do not pay, they have greater demand for costly new technologies than they do for new technologies that could give the same health care at cheaper cost. Elsewhere in the economy, more of the technical progress goes toward obtaining the same results at lower cost (rather than spending more to get better results).
  6. The American Medical Association and other physician groups have blocked the supply of physicians by limiting medical school admissions, preventing nurses from doing some doctors tasks, etc.
  7. The federal government has stiffled the supply of physicians by creating the expectation that they will have to pay for part of the next health care reform. Potential medical school enrollees have long recognized this and chose other professions.

It is important to know the relative importance of these factors. To the extent that it is (1)-(3), health care spending growth is NOT A PROBLEM, but something to celebrate -- it reflects improvements in our situation. If the government were to reduce health care spending, that would be bad!

To the extent that (3)-(6) are to blame, some kind of reform might make things better. Although explanation (5) does imply that the health care industry needs some fixing, it still agrees with (1) that health care has not gotten more expensive -- it has just gotten better. (5) is just saying that, considering the cost, health care has gotten too good.

I think (1)-(3), (5) and the main factors.

Today Professor Mankiw shows how veterinary spending has increased just like spending on human health care, but Professor Mankiw only hints and the fascinating economics behind that comparison.

I do not own a pet, but I am pretty sure that pets are not covered by private insurance or medicare. So you cannot blame (4) for the vet services spending growth! Numbers (6) and (7) would seem to make vet services CHEAPER, by pushing some people from being physicians to being vets.

(1)-(3) are consistent with the common trend for vet and human health spending. E.g., both pet and human health care may be luxury goods. Busy mom may be at least as willing to shift her pet's care to the market as to shift child's care.

I bet a lot of the technical progress seen in vet care has been adopted from the human health industry. This fits with (1), but it also fits with (5). To see this, note that vet spending is 200 times less than human spending. Thus, I bet very few things are invented with the intention that they would ultimately be used on pets (who have no insurance), and then only later is the human applicability of these inventions appreciated. Rather, a health care innovator who is working on something potentially applicable to both humans and pets must realize that 99+% of his profits would come from the human application, and that humans have health insurance.

In short, the spillover of human technology to pets fits explanation (5) with the growth of pet spending: HUMAN insurance has distorted innovation away from cost reducing technical progress, even in the pet sector.

[Added: a number of people claim that the vet spending series is inconsistent with the view the third-party payers are the problem -- but my discussion agrument (5) shows why that's wrong.]

1 comment:

bbrown said...

There's also one big limit: the threshold at which saving a pet's life isn't worth the expense. For my children, that is pretty much personal bankruptcy. For my pets, it's about $300 for cats and about $500 for dogs. I think that that's an inherent limitation on health care spending for pets.