Ross Douthat on health care cost containment and innovation

“Trickle-down” is not the only way to finance health-care innovation.

Ross Douthat’s essay against “Medicaid for all” – which boils down to opposition to any form of health-care cost control other than loading the cost on the patients – drew praise from, inter alia, Rich Yeselson:

Millian. You fairly explicated your interlocutors’ best arguments before astutely rebutting them. A model essay.

Agreed as to the format: when Douthat is finished, you know what he wants, why he wants it, and what the stakes are.  In particular, he is frank in saying that his preferred alternative would continue to create great financial stress for the non-rich when they get sick.

Douthat makes two strong points:

1. It’s easy to waste money on health care that could be better spent on something else.

2. The much-maligned U.S. healthcare system does, or at least pays for, a massive amount of health-care innovation; the competing systems spend less money in part by free-riding. Cost controls here could slow innovation worldwide, at a high price in avoidable suffering. (This is the drum Megan McArdle keeps pounding.)

To #1, I would reply that lots of consumer spending is “wasted;” see Robert Frank’s Luxury Fever.  Both the intra-personal hedonic treadmill and the interpersonal process of Veblenian competitive expenditure greatly reduce the marginal welfare gain of a dollar moved from health-care spending to something else consumers (have been persuaded by marketers that they) want. I don’t think we have any reason to think that the marginal healthcare dollar buys less happiness than the marginal dollar spent on anything else; the opposite might easily be the case.

#2 – innovation – is a much more troubling point for fans of cost containment. But it’s a convincing point only if there’s no alternative to unchecked spending on healthcare for the rich as a means of financing innovation. Right now the National Institutes of Health spend approximately 1% of total (public-plus-private) healthcare costs. It’s hard for me to believe that we couldn’t save 10% in healthcare costs, put half of that into more research – thus sextupling the research budget – and get back much more innovation than we’d lose. (And that’s ignoring the possibility that we might ask other rich countries to contribute something to the process.)

Is there any reason to think that patents are really the right way to finance the development of new pharmaceuticals, imaging devices, and medical equipment? Seems radically implausible to me, given prizes and publicly financed development of innovations which are then put into the public domain as alternatives.

Even if the rest of Douthat’s argument were more convincing than I find it, his casual acceptance of widespread financial stress as an acceptable side-effect of an approach whose benefits  – as he admits – are mostly speculative, strikes me as somewhat hard-hearted.  Increasing inequality has made financial stress much more common than it used to be, even in the face of rising GDP per capita. Financial stress is bad for health, and even for effective IQ. It seems to me that the presumption against financial-stress-increasing policy choices ought to be fairly overwhelming.

All of that said, Yeselson (and Chris Hayes) are right. It’s good to have a conservative writer whom it’s possible to engage in serious policy debate.



Optimal Income Inequality?

The NY Times has published an impressive piece by Thomas Edsall about consumption and income inequality.   If you read this long piece, I have the feeling that most of the RBC community will embrace David Autor’s points.   If you agree with every word he writes, what is the policy prescription?   I would suggest that the Heckman Equation is the best answer.

When I lecture about “progress”,  I ask students to think about their demand for a time machine.  Which subgroups of the population would prefer to live now versus living in the past?  For the urban poor, would they prefer to be in 2013 Los Angeles or 1913 Los Angeles? How much would they be willing to pay not to live their lives in 1913 Los Angeles?  I would pose the same question to the urban rich.  Since there are no markets for time machines, we can’t use revealed preference methods to measure “progress”.

Economists continue to debate balancing the effort incentive effects due to inequality (think of a golf tournament’s non-linear payoffs to first place versus 5th place) versus the envy and “unfairness” introduced by inequality.   Our colleague Robert Frank has argued that we have “keeping up with the Jones” preferences.    How strong is this desire?  How many of us are focused on our own absolute level of well being versus relative well being?   Perhaps more importantly, how do we bring back Horatio Alger ?  Can you move from rags to riches in modern America or must you move to France?

UPDATE:  I agree with the first comment below.  Why Nations Fail and 13 Bankers highlight that economists are thinking about the links between the concentration of resources and political power.