Arnold Kling, whose excellent book on health care I highly commend to you, has been blogging about my article. A commenter offers a perspective I hadn't seen before:
There is a perspective of the U.S. health care system that I have rarely, if ever, see applied to discussions of this subject. The U.S. health care system is currently, and has been for more than 30 years, in what could be termed a build-out mode. A great deal of national income is and has been diverted to the health care industry - both from governmental programs such as Medicare/Medicaid and from voluntary diversion of returns to labor in the form of employer paid health insurance.The net effect is that the baby boom generation that has produced the national wealth of the last 30 years or so have also funded this health care system build-out, if only through tolerating current income diversion, in anticipation of the surge load that generation will place on the system in the future. It is now, as that generation begins to become an increased load on the health care system they've funded, that the U.S. begins to truly test whether the build-out was adequate.
The value to economists and others of applying this perspective is multi-fold:
First, the baby boom generation has already paid for the overwhelming majority of the U.S. health care system build-out, in anticipation of their own future load to the system, out of their past/current earnings. The current health care system is far more capable, in terms of capacity, quality of care and availability, than would have been the case had the baby boom generation not tolerated income diversion to that purpose.
Second, most discussions/projections anticipate that the health care system build-out phase (cost increases) will or should continue at a similar pace in the future. That is probably not the case. The current system will be transitioning from build-out to maintenance phase, which can and will be less expensive than the build-out phase. That transition may be "forced" to some degree due to the income production capacity of the younger generations and their tolerance for income diversion, as indicated by Megan and others, but I doubt that the catastrophic projections are realistic.One of the lessons I learned from Arnold's "Crisis of Abundance" is that most of the current U.S. health care system is under-loaded at current demand. Each of the citations of excessive procedures, duplicative procedures and other apparent inefficiencies are artifacts of a current system that has excess capacity. That excess will become fully loaded and consumed as the baby boom generation retires. But it is highly unlikely that further capacity expansion will be desirable - the future income diversion will most likely only be to maintain, not expand the system.
I have no idea whether this is true or not--though I would caution that the evidence seems to be that health care capacity that is built, is used, and doctors can easily generate their own demand. But it's an interesting idea.
Agreed, this is very interesting perspective to consider. My first gut response though is that his viewpoint is that of design, rather than organic growth. I can contribute the soil and water and sun and time resources to growing a tree on the banks of the Hudson for 100 years, but the tree won't know that I want it to grow into a bridge I can use to cross the river.
To put it in more concrete and less crazy metaphorical terms, take your own example of how there's tons of pediatricians and not enough gerontologists. That's not really generic "built-out and underused capacity", it's resources that have been spent on one thing that we won't need when the change comes.
But it definitely warrants further consideration.
Not only is the build out not necessarily geared toward meeting the needs of senior citizens, it is comprised of non-permanent resources. Machines break. Personel retire. For his argument to be valid, I think it would require a very rigorous and in-depth analysis of what capacity exists, and how it is expected to fare with time. I'm not saying he's wrong, just that the devil is in the details.
The comment runs the risk of making it sound like health care spending growth is to make excess capacity/room for the baby boomer retirement that is starting to take place.
The capacity that exists is pretty much used up - hence waiting periods.
Many cost and efficiency savings can probably still be made in terms of adminstration.
But it almost seems like this post is setting up the argument for some to claim, "you have to pay for my health care because look at the wonderfully large health care system that I build up and passed on to you."
sam,
Yes, it's stating that viewpoint rather explicitly. But it's disagreeing with your assessment that "The capacity that exists is pretty much used up"
He seems to be saying that, due to having over-built the system, it's now being used inefficiently. Of course it doesn't really appear 90% idle, but if you give someone a 3,000 square-foot house, they're not going to just live in a 500 square-foot corner of it, even though they could, and say "look, I'm not using the other 2,500!"
The argument is that when real demand shows up, we already have the capacity for it, we've just been using that capacity in silly ways while we're waiting around bored. I lack the data to say one way or the other, but it's an interesting line of thought.
Njorl wrote: Machines break. Personel retire.
Yes on the latter; people need to be replaced or the jobs won't get done.
The former, however, doesn't really support the point. First, equipment that is underused won't break as soon. Second, medical equipment isn't like a Chinese microwave, where a failure means you toss the worthless shell and buy a whole new unit. Medical equipment must be built, tested, and repaired to the satisfaction of extremely stringent FDA criteria. As such, even simple machines (e.g. a CPAP) are generally sourced from North American or European manufacturers and tend to be startlingly expensive. Until obsoleted or utterly destroyed, they will be repaired or refurbished and resterilized, and then used again -- indefinitely.
With larger machines, e.g. an MRI, there's also the issue of actually getting them in and out of their installation location.
On a more fundamental level, if there really was overcapacity in the health sector, shouldn't we expect to see either descending prices or buisness failures (among the medical supply companies, if not necessarily hospitals themselves)?
Neither of these is occurring.
Medical finance is sufficiently unusual (and sufficiently dependent on charitable contributions) to account for some perverse behavior, but not enough to ignore the discipline of the market entirely.
Am I missing something?
This makes a fundamental error, and that is that current health care policy responds to typical market supply/demand curves. But there is strong concern that it won't. Much excess medical inefficiencies aren't due to boredom on the part of doctors, it's a result of an emotional response to do everything we can and cover every possibility when ordering tests.
This can be plausibly contributed to a number of causes, from Kling's own theories of health care insulation to politician's calls for universal health insurance (does a 20-year old single male with no history really need insurance more than other possible benefits, like an education?). What about California's dictates that all health insurance cover fertility treatments? It is not market excess supply which is causing all this excess treatment, but a combination of emotional and political factors. We can't just assume that these same impulses won't play a part in the future debates on Medicare. Instead, they seem to dominate much of the current debate.
That said, the commenter has a point when the discussion of build-out is limited to medical innovation. But that is only one part of the overall issue. Njorl is correct that much of the current capacity isn't necessarily durable.
I would caution that the evidence seems to be that health care capacity that is built, is used, and doctors can easily generate their own demand. - Megan
But that's exactly the point. The contention is that what's happening now is that doctors are "generating their own demand" for use of expensive infrastructure by ordering unnecessary MRIs, performing unnecessary operations, etc. With more necessary MRIs and necessary operations coming down the pike, there will be less need to perform unnecessary procedures to recoup the cost of expensive infrastructure. If I need to perform 50 MRIs a week to pay for that machine at the reimbursement rates the insurers have agreed to, then I will be prescribing 60 MRIs a week, regardless of how many people really need them (presuming that insurers will routinely deny payment on 50 of the procedures and successfully resist paying for 10). If I have 50 patients who actually need MRIs, I won't need to prescribe so many unnecessary ones.
That, in any case, is the contention; you may of course disagree with it.
On a more fundamental level, if there really was overcapacity in the health sector, shouldn't we expect to see either descending prices or buisness failures (among the medical supply companies, if not necessarily hospitals themselves)?
Mass General has recently purchased a proton accelerator, at a cost of over $100 million, for treating cancer, despite the lack of any evidence so far that proton beams work any better than X-rays for radiation therapy. They do this because this is the way they stay Mass General and attract top-of-the-line patients. It's effectively a form of advertising. The costs are passed on throughout the system.
As Megan says, "doctors generate their own demand".
I understand the "build-out" to be not of buildings and machines, but of knowledge/techniques.
The cost of any given gizmo (pills are gizmos too) declines over time, as patents expire, and as mechanical content is replaced by (exponentially ever-cheapening) digital content. Surgery is getting vastly refined, resulting in for example, much reduced hospitalization times.
MRI prices are heading towards X-ray prices, etc.
And the currently labor-intensive bits are steadily being replaced by automation, most excitingly by robo-surgery, electronic health records, and more.
There are two other points that the above doesn't address. One is pricing. The structure of our system doesn't encourage price competition (how much did your last problem cost and did you check around for a cheaper solution?) That needs fixing. If we do fix it, prices will likely rationalize very quickly.
The other is demand. We may successfully prolong the boomer period past its natural end in 35 years or so. That means that boomers will want care for whatever lays you low if cancer, Alzheimer's and circulatory troubles don't. Right now we're concerned that the national health bill is heading in the direction of 20% of GDP. If GDP per capita doubles in that same 35 year period, how much of it should we be willing to dedicate to health care? If the price of everything else keeps heading downward (recent breakthroughs in energy! technology give me hope that that price will head down again in a few years) then we'll be spending GDP on something...
It is not enough to save for tomorrow's healthcare; one must also spend to create it. It is too late to wait until you need it.
First, I am the commenter that posted the perspective at http://econlog.econlib.org/archives/2008/01/thoughts_on_med.html - in response to Megan's forum/questions and Arnold's posts. Thank you, Megan, for referring to it here.
Second, the comments I've read here are very interesting in their own right, as was Megan's original forum and Arnold's posts/comments.
Third, I would emphasize that it is merely a perspective, not a complete analysis. To apply an often used metaphor - the "Pig through a Python" metaphor often applied to the future boomer load to the system - I am merely recognizing that the "Python" may already be far larger and more robust than most conventional analysis gives it credit for.
Regards Michaels observation above, you've caught the essence much of the debate on both Medicare and other third-party based systems - they have a distorted demand/supply relationship. I didn't miss that point, by the way. I merely didn't address it in this comment. You've already addressed (answered) much of that aspect yourself (state mandated coverage for certain, non-critical treatments, etc.). But to address both Michael and "heedless", the dominant artifact is that the health care system "market" is currently set up within a system of guaranteed payment to the suppliers - either through Medicare (small portion) or other insurance. Such a guaranteed payment system in any market removes conventional supplier disincentives to grow capacity well beyond realistic demand.
As a further clarification, by "build-out" I wasn't referring to just medical innovation to date. I was actually referring more to the "bricks and mortar" aspects of the U.S. health care system - capacity and availability.
Also, I am a boomer, although a fairly young one. I won't begin to load the system for several years yet, and I am currently contributing to it. But I am also an economist. My concern at this point is not that I won't have health care in the future, it is that there may be only health care available. Megan and others have noted that, by calculation and relying on current estimates, there will be only 2 Gen X and Gen Y workers supporting me in my golden years. Fear not (or at least fear less), we've already taken care of the most urgent concerns of our golden years. Furthermore, such loading implies it's time to consider putting the "Pig" on a diet. My perspective implies it's probably time to start putting the "Python" on a diet. If the current build-out rate (16% of GDP and growing) isn't attenuated, not only will there only be 2 Gen X/Gen Y workers supporting the boomers, they will both be working in the health care industry, not just for it. The "Pig" will be nothing more than an hors d'ouvre, and the "Python" will command more feeding.
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