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.



Elite University Admissions in a Winner-Take-All-Society

Megan McArdle is surely correct when she notes how much is expected today of young people who aspire to attend elite universities. Her own experience as a teenager was different:

…the things that we achieved were basically within reach of a normal human being who was going about the business of growing up: playing a sport, perhaps badly; taking classes; occasionally volunteering as a candy striper. Most of us took the SAT without the benefit of test prep services, and the “test prep” we got in class consisted of–learning vocabulary and algebra. People like me, who were painfully unathletic and had hashed some early high school classes still had a shot at an Ivy League School

These days, a nearly-perfect GPA is the barest requisite for an elite institution. You’re also supposed to be a top notch athlete and/or musician, the master of multiple extracurriculars. Summers should preferably be spent doing charitable work, hopefully in a foreign country, or failing that, at least attending some sort of advanced academic or athletic program.

She then raises a provocative question:

This entire thing is absurd. I understand why kids engage in this ridiculous arms race. What I don’t understand is why admissions officers, who have presumably met some teenagers, and used to be one, actually reward it.

Robert Frank and Phil Cook’s Winner-Take-All Society was written almost two decades ago, but its acute analysis of situations such as this remains relevant and informative today. Admission to an elite university is a classic winner-take-all-market. First, competition is intense because the number of competitors has grown (i.e., there was a time when you competed for a Harvard slot only against a narrow sociodemographic segment of Northeasterners — now all manner of people all over the world apply). Second, rewards are distributed based on relative rather than absolute performance and even a narrow advantage over other market participants can have enormous consequences. Third, the rewards are concentrated in the hands of a small number of winners. That is, if 10 applicants are fighting for a single slot at Harvard, there is no scenario under which they can each come out with 10% of the reward they seek, or even a scenario where the best candidate gets 30% of the reward, followed by the next person getting 20%, third place receiving 15% and everyone else getting 5%. Instead one person gets 100% of the reward and everyone else gets nothing.

This situation has generated what McArdle decries: An arms race that families hate yet at the same time are afraid to retreat from unilaterally. If no parent signed their teenager up for SAT prep courses, interview training and essay coaches, and no adolescent invested thousands of hours in resume-stuffing extracurricular activities, all parents and all adolescents would be better off and no one’s chance of getting into an elite university would be affected (Recall that in a winner-take-all-market, it’s relative performance that matters). The problem of course is that in a winner-take-all-market such as elite university admissions, once even a few people engage in these competitive behaviors it costs everyone else not to engage in them also. Hence begins an arm’s race that the participants are damaged by but will not unilaterally exit. Continue reading “Elite University Admissions in a Winner-Take-All-Society”