Coyote Blog

One of the least reported issues related to health care cost inflation is the existence of artificial government restrictions on health care supply, often called "certificates of need".

The COPN [certificate of public need] law is supply-side Obamacare: top-down, command-and-control restrictions on which providers can offer which services. A certificate of public need is, essentially, a government permission slip. Without one, a Virginia doctor can’t put an MRI machine in his clinic. A hospital can’t build a new wing. A hospital company can’t add a satellite campus. And so on.

Getting such permission slips is a long and costly process. The owner of a Northern Virginia radiology practice, for example, spent five years and $175,000 asking permission to buy a new MRI machine. The state said no.

One reason the process takes so long is that competitors often fight such requests. When Bon Secours proposed the St. Francis Medical Center in Chesterfield, rival chain HCA fought it vigorously, arguing there was insufficient demand. The hospital was approved and enjoys a robust business. You’d think state regulators would laugh off competitors’ arguments, but sometimes they’re actually taken seriously. When a Richmond radiology practice wanted to move—not add, but move—a radiation device to its Hanover offices, the state said no in part because Virginia Commonwealth University’s Massey Cancer Center worried the project “could take some of their business.”

This is cronyism and protection of incumbent competitors, pure and simple.  It is often justified by the economically-ignorant as reducing costs because it reduces expenditures on expensive machinery.  But in what industry can you think of does restricting supply ever reduce costs?

In any other industry, the proper response to that would be: So what? If Kroger sets up across the street from Food Lion, we consider that good for consumers: They have more choice. And if they migrate from Food Lion to Kroger, that’s not a bad thing. It means they’re getting more utility for their grocery dollar.

Studies of the COPN system around the country have confirmed what seems intuitively obvious. A joint examination by the Justice Department and the Federal Trade Commission found that COPN regulations hurt competition, fail to contain costs, and “can actually lead to price increases.” Restricting supply raises prices? Imagine that.

This is a re-post of an article I wrote in 2012.  I am re-posting it to demonstrate that recent stories about doctor shortages and wait times are absolutely inevitable results of government interventions in the health care economy.

My son is in Freshman econ 101, and so I have been posting him some supply and demand curve examples.  Here is one for health care.  The question at hand:  Does government regulation including Obamacare increase access to health care?  Certainly it increases access to health care insurance, but does it increase access to actual doctors?   We will look at three major interventions.

The first and oldest is the imposition of strong, time-consuming, and costly professional licensing requirements for doctors.  At this point we are not arguing whether this is a good or bad thing, just portraying its inevitable effects on the supply and demand for doctors.

I don't think this requires much discussion. For any given price for doctor services, the quantity of doctor hours available is certainly going to increase as the barriers to entry to the profession are raised.

The second intervention is actually a set of interventions, the range of interventions that have encouraged single-payer low-deductible health insurance and have provided subsidies for this insurance.  These interventions include historic tax preferences for employer-paid employee health insurance, Medicare, Medicaid, the subsidies in Obamacare as well as the rules in Obamacare that discourage high-deductible policies and require that everyone buy insurance rather than pay as they go.  The result is a shift in the demand curve to the right, along with a shift to a more vertical demand curve (meaning people are more price-insensitive, since a third-party is paying).

The result is a substantial rise in prices, as we have seen over the last 30 years as health care prices have risen far faster than inflation

As the government pays more and more of the health care bills, this price rise leads to unsustainably high spending levels, so the government institutes price controls.  Medicare has price controls (the famous "doc fix" is related to these) and Obamacare promises many more.  This leads to huge doctor shortages, queues, waiting lists, etc.  Exactly what we see in other state-run health care systems.  The graph below posits a price cap that forces prices back to the free market rate.

So, is this better access to health care?

I know that Obamacare proponents claim that top-down government operation is going to reap all kinds of savings, thus shifting the supply curve to the right.  Since this has pretty much never happened in the whole history of government operations, I discount the claim.  When pressed for specifics, the ideas typically boil down to price or demand controls.  Price controls we discussed.  Demand controls are of the sort like "you can't get a transplant if you are over 70" or "we won't approve cancer treatments that only promise a year more life."

Most of these do not affect the chart above, since it is for doctor services and most of these cost control ideas are usually doctor intensive - more doctor time to have fewer tests, operations, drugs.  But even if we expanded the viewpoint to be for all health care, it is yet to be demonstrated that the American public will even accept these restrictions.  The very first one out of the box, a proposal to have fewer mamographies for women under a certain age, was abandoned in a firestorm of opposition from women's groups.  In all likelihood, there will be some mish-mash of demand restrictions, determined less by science and by who (users and providers) have the best lobbying organizations.

My longer series of three Forbes articles on this and other economic issues with Obamacare begin here:  Part 1 Information, Part 2 Incentives, Part 3 Rent-Seeking

Update:  Pondering on this, it may be that professional licensing also makes the supply curve steeper.  It depends on how doctors think about sunk cost.

I feel like I was way ahead of the pack on May 1 reminding everyone that the Left until recently held up the VA as a model for government health care.  I pointed to articles by Kevin Drum and Phil Longman in 2007, but since then others have highlighted articles by Paul Krugman and Ezra Klein that made the same point.  Klein said:

If you ordered America's different health systems worst-functioning to best, it would look like this: individual insurance market, employer-based insurance market, Medicare, Veterans Health Administration.

Paul Krugman said

Well, I know about a health care system that has been highly successful in containing costs, yet provides excellent care. And the story of this system's success provides a helpful corrective to anti-government ideology. For the government doesn't just pay the bills in this system -- it runs the hospitals and clinics.

No, I'm not talking about some faraway country. The system in question is our very own Veterans Health Administration, whose success story is one of the best-kept secrets in the American policy debate.

Supposedly, the reason for this success according to Drum and Longman was that ever-popular Lefty magic bullets, electronic medical records and preventative care.  On medical records:

"Since its technology-driven transformation in the 1990s...the VA has emerged as the world leader in electronic medical records — and thus in the development of the evidence-based medicine these records make possible." Hospitals that joined Longman's "Vista network" (his name for the VA-like franchise he proposes) would have to install the VA's electronic medical record software and would "also have to shed acute care beds and specialists and invest in more outpatient clinics." By doing this they'd provide better care than any current private network and do it at a lower cost.

On preventative care:

How is a supposedly sclerotic government agency with 198,000 employees from five separate unions outperforming the best the private market has to offer? In a word: incentives. Uniquely among U.S. health care providers, the VA has a near-lifetime relationship with its patients. This, in turn, gives it an institutional interest in preventing its patients from getting sick and in managing their long-term chronic illnesses effectively. If the VA doesn't get its pre-diabetic patients to eat right, exercise, and control their blood sugar, for example, it's on the hook down the road for the cost of their dialysis, amputations, blindness, and even possible long-term nursing home costs....The VA model is that rarest of health care beasts: one with a perfect alignment of interest between patients and providers.

Neither of these have ever proven in real life to actually lower costs in anything but tiny pilot programs, and there is a lot of reason to believe that while preventative care can improve health outcomes, it tends to increase costs.

I have said for years that at the end of the day, the only ideas government planners have for cost control are rationing (which leads to queuing) and cost controls on things it buys from private markets, like doctor time (which leads to shortages and more queuing).  This is why every health care system that offers free care to all comers, whether it be socialist systems in other countries or the VA or even an urban emergency room, has long queues.

In fact, the situation, as I think we will find at the VA, is worse.  Not only is the old pie being allocated differently (shifting from price-sensitivity to queue tolerance) but the pie of available supply is likely getting smaller as resources are consumed by government red tape and price controls drive suppliers out of the market.  The next stories will be about the staggering waste of money on red tape in the VA system, and the stories after that will be about a few VA users jumping the queue because of political connections.

This stuff is so inevitable that it was all addressed years ago in my three part series of Obamacare.  In that series, the issues were not failing exchanges and the mess we have seen so far, but the issues we are more likely to see over the long term.  The VA is merely a preview, but we shouldn't have needed a preview because we could have looked at countries like England.  Of course, if the media had any desire to honestly tell these socialized medical stories we would not get fawning profiles of the horrendous system in Cuba.

My Forbes series:

• part 1:  Information issues when one tries to replace prices with command and control
• part 2: Incentives issues in government management of health care
• part 3: Rent-seeking and special favors for the connected in health care

This is from Kevin Drum in 2007:

As regular readers may know, Phil Longman thinks the VA model of healthcare is the best around. In the October issue of the Monthly, he takes his admiration to another level, suggesting that the best way to provide healthcare to the 45 million uninsured in America is via — what? I guess you'd call it a franchised version of the VA. Basically, the federal government would offer struggling municipal hospitals a trade: if you adopt the VA's management guidelines, the government will pay you to care for all those uninsured folks currently jamming up your emergency rooms and driving you bankrupt. Deal?

The supposed reason is that great panacea, electronic medical records, cited by the Left as the solution to all woes as often as the Right mentions the Laffer Curve.

"Since its technology-driven transformation in the 1990s...the VA has emerged as the world leader in electronic medical records — and thus in the development of the evidence-based medicine these records make possible." Hospitals that joined Longman's "Vista network" (his name for the VA-like franchise he proposes) would have to install the VA's electronic medical record software and would "also have to shed acute care beds and specialists and invest in more outpatient clinics." By doing this they'd provide better care than any current private network and do it at a lower cost.

Since that time, the Left has mostly stopped talking about the VA as a miracle solution, because it is becoming clear that the VA cuts costs the same way every state health care agency cuts costs -- by restricting capacity, leading to huge waiting times, and rationing care.  The scandal here in the AZ VA is just the latest

The chairman of the House Committee on Veterans Affairs said Wednesday that dozens of VA hospital patients in Phoenix may have died while awaiting medical care.

Rep. Jeff Miller, R-Fla., said staff investigators also have evidence that the Phoenix VA Health Care System keeps two sets of records to conceal prolonged waits that patients must endure for ­doctor appointments and treatment.

"It appears as though there could be as many as 40 veterans whose deaths could be ­related to delays in care," ­Miller announced to a stunned audience during a committee hearing Wednesday.

Supporters of government health care like t o waive their arms about magic bullets, but the only strategy that has ever reduced costs in government health care systems is rationing and queuing (which is also a form of rationing).  Resources are always scarce, but the question is whether we want our health care rationed by government beauracrats or by ourselves.  The latter can only happen if we get away from first dollar and single payer medicine and find a way to get real, transparent price signals (which is the way every other service in this country is managed).

Update, Via Greg Mankiw:

"In Britain, even though they're already paying for the National Health Service, six million Brits—two-thirds of citizens earning more than $78,700—now buy private health insurance. Meanwhile, more than 50,000 travel out of the U.K. annually, spending more than $250 million, to receive treatment more readily than they can at home."

Which is the exact same way we run our education system -- everyone has to pay for a basic crappy level of the government monopoly product, and then if you can afford it you pay again to get a better private product.

One of the real frustrations I have with Obamacare is that I believe we were on the cusp of a revolution in health care costs and payment systems, which the PPACA will likely kill.  As more and more of us adopted high-deductible health insurance plans, there was an increasing transparency in pricing, and new delivery models were emerging to serve this consumer-based, non-third-party payer health niche.

I think this even more as I read about the CMS revising its future health care cost inflation numbers to take into account a flattening of medical price inflation that has been occurring over the last few years.  The Left has hilariously claimed credit for this cost reduction via some kind of time-travelling effect of not-yet-implemented PPACA measures.  But Charles Blahous reads the CMS report more carefully and finds that the PPACA has nothing to do with these inflation reductions, and in fact is if anything slowing the cost reduction progress.

The obvious point that leaps out from this graph is that the chief CMS actuary found that the ACA would increase national health expenditures through 2016. Not content to let the tables speak for themselves on this point, CMS was explicit in the text of its memorandum that the ACA increased the near-term cost projections:

“The estimated effects of the PPACA on overall national health expenditures (NHE) are shown in table 5. In aggregate, we estimate that for calendar years 2010 through 2019, NHE would increase by $311 billion or 0.9 percent, over the updated baseline projection that was released on June 29, 2009. Year by year, the relative increases are largest in 2016, when the coverage expansions would be fully phased in…The increase in total NHE is estimated to occur primarily as a net result of the substantial expansions in coverage under the PPACA…”

...CMS is now projecting slower health care expenditure growth than they were in 2009 and 2010. CMS’s current projection of 2016 health spending totaling 18.4% of GDP is 1 percentage point lower than its June 2009 estimate (19.4%) and 0.9 points lower than its February 2009 estimate (19.3%).

Why did CMS lower its estimates of future health spending? It wasn’t because of the ACA. We know this for a fact because CMS has released a memorandum detailing the reasons for changes in their ten-year outlook since April 2010. Here are the factors CMS cited, and the percentage of the improvement each was responsible for:

1) Medicare/Medicaid/other programs “unrelated to the ACA” (50.7% of improvement).

2) Other factors “unrelated to the ACA” (26.1%).

3) Updated data on historical spending growth (21.8%).

4) Updated macroeconomic assumptions (6.1%).

Now, that adds up to 104.7% of the total improvement. The reason these four factors add to more than 100% is that a fifth factor, the “impact of the ACA,” worked against the improvement. Per CMS, adjusting the April 2010 projections for the subsequent impact of the ACA shows it further increasing spending over ten years (equal to and opposite from 4.7% of the total change).

Note:  I did not like the way I first wrote this post so I have re-written it extensively.  

Progressives are passing around this chart from Brookings as an indicator of "what is wrong" with the US healthcare system.

This is how Kevin Drum interprets the chart:

In other words, the supposed advantage of PRT—that it targets cancers more precisely and has fewer toxic side effects—doesn't seem to be true. It might be better in certain very specialized cases, but not for garden variety prostate cancer.

And yet, new facilities are being constructed at a breakneck pace. Why? Because if they build them, patients will come. "They're simply done to generate profits," says health care advisor Ezekiel Emanuel. Roger that.

This is an analysis that may be true, but let's take a moment to consider how strange it is.  Forget health care for a minute.  Think about any other industry.  Here is what they are effectively saying:

1. Industry competitors are making huge investments in a technology that has no consumer value
2. The competitors in this industry are all making investments in this technology so rapidly that the industry is exponentially over-saturating with capacity.

And from these two facts they conclude that the profits of industry competitors will increase??

Let's for a moment say this is true -- an enormous investment that has no customer utility and that is made by so many players that the market is quickly over-saturated actually increases industry profits.  Let's take a moment to recognize that this is BIZARRE.  We have to be suspicious of some structural issue for something so bizarre to happen.  As is typical of progressives, their diagnosis seems to be that private actors are somehow at fault for being bad people to make these investments.  But these same private actors, even if they wanted to, could never make this work in any other industry, and besides there is no evidence that hospital managers are any worse people than, say, cookie company managers.  The problem is that we have fashioned a bizarre system through heavy government intervention that apparently makes these pointless investments sensible to otherwise rational actors.

One problem is that in any normal industry, consumers would simply refuse to buy, or at least refuse to pay a very high price, for services that have little or no value.  But in health care, we have completely eliminated any consumer visibility to prices.  Worse, we have eliminated any incentive for them to care about prices or really even the utility of a given procedure.  This proton beam thingie might improve my outcomes 1%?   Why not, it's not costing me anything.  Perhaps the biggest problem in health care is that the consumer has no incentive to shop.  Obamacare does nothing to fix this issue, and in fact if anything is taking us further away from consumer shopping and price transparency by working to kill high deductible health insurance and HSA's.

There is only one other industry I can think of where capital investment, even stupid capital investment, automatically translates to more profits, and that is the regulated utility business.  And that is what hospitals have become -- regulated utilities that get nearly automatic returns on investment.

In a truly free market, if these investments made no sense, one would expect very soon a reckoning as those who made these nutty investments go bankrupt.  But they obviously don't expect this.  They expect that even if it turns out to be a bad investment, they will use their political ties to get these costs built into their rate base (essentially built into reimbursement rates).  If any private or public entity refuses to pay, you just run around screaming to the media that they want to deny old people care and let sick people die.  Further, the government can't let large hospitals go bankrupt because it has already artificially limited their supply through certificate of need processes in most parts of the country.

The Left has proposed to fix this by creating the IPAB, a group so divorced from accountability that it can theoretically make unpopular care rationing decisions and survive the political fallout.  But the cost of this approach is enormous, as it essentially creates an un-elected dictatorship for 1/7 of the economy.  Which tends to be awesome if your interests and preferences line up with those of the dictator, but sucks for everyone else.  Which category do you expect to be in?  (Oh, and let's not forget how many examples we have from history of benevolent technocratic dictatorships - zero.)

The much more reasonable solution, of course, is to handle these issues the same way we do in cookies and virtually every other product -- let consumers make price-value tradeoffs with their own money.

Kevin Drum preahces against the evils of teen tanning, which he follows with a conclusion that obviously Republicans are evil for opposing a tanning tax

Indoor tanning, on the other hand, is just plain horrifically bad. Aaron Carroll provides the basics:indoor tanning before age 25 increases the risk of skin cancer by 50-100 percent, and melanoma risk (the worst kind of skin cancer) increases by 1.8 percent with each additional tanning session per year. Despite this, the chart on the right shows the prevalence of indoor tanning among teenagers. It's high! Aaron is appalled:

This is so, so, so, so, so, so, so bad for you. Why don’t I see rage against this in my inbox like I do for diet soda? Why can’t people differentiate risk appropriately?

And who would fight a tax on this?

I am not going to get into the argument here (much) about individual choice and Pigovian taxes (by the way, check out the comments for a great example of what I call the Health Care Trojan Horse, the justifying of micro-regulation of our behavior because it might increase government health care costs).

I want to write about risk.  Drum and Carroll are taking the high ground here, claiming they are truly the ones who understand risk and all use poor benighted folks do not.  But Drum and Carroll repeat the mistake in this post which is the main reason no one can parse risk.

A key reason people don't understand risk is that the media talks about large percent changes to a small risk, without ever telling us the underlying unadjusted base risk.   A 100% increase in a risk may be trivial, or it might be bad.  A 100% increase in risk of death in a car accident would be very bad.  A 100% increase in the risk of getting hit by lightning would be trivial.

Good stuff from Peter Suderman at Reason

 In March, journalist Steven Brill published a lengthy piece in Time magazine on high medical bills, comparing hospital “chargemaster” rates—the listed prices—to the rates paid by Medicare. And over the weekend, Elisabeth Rosenthal compared U.S. prices for a variety of health services to the lower prices paid by other countries.

Both pieces offer essentially the same thesis: The U.S. spends too much on health care because the prices Americans pay for health care services are too high. And both implicitly nod toward more aggressive regulation of medical prices as a solution.

Part of the reason these pieces get so much attention is that most Americans don’t actually know much of anything at all about the prices they pay for health services. That’s because Americans don’t pay those prices themselves. Instead, they pay subsidized premiums for insurance provided through their employers, or they pay taxes and get Medicare or Medicaid. Even people who purchase unsubsidized insurance on the individual market don’t know much about the particular prices for specific health services. They may open their wallets for copays to health providers, or cover some expenses up to a certain annual amount, but in many if not most cases they are not paying a full, listed price out of pocket.

What that means is that, in an important sense, the “prices” for health care services in America are not really prices at all. A better way to label them might be reimbursements—planned by Medicare bureaucrats and powerful physician advisory groups, negotiated by insurers who keep a watchful eye on the prices that Medicare charges, and only very occasionally paid by individuals, few of whom are shopping based on price and service quality, and a handful of whom are ultra-wealthy foreigners charged fantastic rates because they can afford it.

This is the real problem with health care pricing in the U.S.: not the lack of sufficiently aggressive price controls, but the lack of meaningful price signals.

Much more at the link.  If they really want an interesting comparison, compare the prices of medical care not covered by insurance (actually pre-paid medical plans) in the US, and those that are -- e.g. for plastic surgery vs. other out-patient surgeries.

Kevin Drum is lauding the transparency an Oregon health insurance exchange which was initiated some apparently welcome price competition into a market for now standardized products.  My response was this:

I applaud any effort by this Administration and others to improve the transparency of pricing in the medical field.  I would have more confidence, though, if all of you folks were not pushing for 100% pre-paid medical plans that will essentially eliminate price-shopping by individuals, and in so doing effectively eliminate the enormous utility of prices.  Prices will soon be meaningful for one thing -- insurance -- in the health care field and absolutely meaningless for everything else in the field.

By the way, at the same time you are improving competition on price, you are eliminating by fiat all competition on features (e.g. what is covered, what deductible I want, etc).  This "success" is like the government mandating one single cell phone design, and then crowing how much easier shopping is for consumers because there is now only one choice.  A simple world for consumers is not necessarily a better world.  I am sure Medieval peasants had a very simple shopping experience as well.

Most of the Left wants to measure access to health care by the percentage of people who have health insurance, implying that those without insurance have no access to care.  But in fact the uninsured in the US have access to better health care than most other people in the world.

And it will soon become apparent that the converse is not true either - even with insurance, in a top-down rules-driven government-controlled health care system, one may not have access to health care.    For example, one of my employees was complaining that she was having trouble with workers comp getting care for her injury.  This is a follow-up email I received today from my insurance agent (redacted only for privacy issues):

I talked to [valued employee of my company, call her Jane] this morning regarding her lack of attention from [our workers comp insurer].

I then followed up immediately with [representative of workers comp insurer] working on her account, in Sacramento, CA.

It seems the problem is her injury occurred in CA and she's now in MO.  The doctors in MO don't want to see her due to the paperwork and issues required under the CA laws. 

Jane advises she gets relief from going to a chiropractor.  I told her to keep going and I would get [insurance company] to approve those visits, which [workers comp insurer rep] said she would.

So, it comes down to [our insurance company] trying to find an Orthopedic Doctor who will take her and comply with the CA requirements, which the Drs. don't like.

There is no issues on coverage, it's a political issue.

Already, Medicare and Medicaid patients have trouble finding doctors to treat them.  Enjoy the cozy feeling of being "insured" via Obamacare.  Let's hope that when you are sick, there is a doctor who will see you.

An interesting set of data I read the other day:

In 2011, the Arizona Health Care Cost Containment System, Arizona's Medicaid program, paid for 53 percent of the state's 84,979 births, while private insurance paid for 42 percent, according to state statistics. The remainder were paid for by individuals....

Sen. Sylvia Allen, R-Snowflake, estimated that including pre- and postnatal care, it costs Arizona about $7,500 per birth for a delivery with no complications. Using those estimates, the 2011 deliveries would have cost Arizona taxpayers nearly $338 million....

In 2010, 58 percent [of Arizonans] had private insurance and 18 percent were on Medicaid.

So, 18% of Arizonans are having 53% of all births.  Another way to put this is that the 18% of people who get this procedure from the government for free account for half the demand, despite the fact that these folks are the ones who, if rational, should be the least likely to have a lot of births because they presumably have the most difficulty affording an extra mouth to feed.

God forbid I start sounding like some crotchity Conservative, but I continue to be amazed that pregnancy is treated as an "emergency procedure."  It strikes me that unlike, say, cancer, individuals can choose to avoid this condition fairly easily if they can't afford it.  I certainly know my wife and I put FAR more deliberation into having children than we did any other decision in our lives.  There is a terrible tension here - no one wants to turn away an expectant mother and endanger her child, but freely giving away an expensive procedure without any sort of restrictions nearly begs for a baby boom.  Those who try to argue that Obamacare won't increase health care expenses (in other words, arguing that demand curves don't upward) only have to look at these numbers.

PS-  Apparently, our state legislature is appalled by these numbers.  This is the same legislature that has proposed about a zillion abortion restrictions over the last year.  It will be interesting to see if fiscal issues change anyone's thinking on the abortion issue now that there is suddenly a $7500+ incentive to allow an abortion.

Update -- Thinking about this, I think the 18%/53% comparison is directionally correct but the difference is exaggerated due to Medicare.  I doubt Medicare delivers many babies, but a large part of the AZ population is on Medicare.  If the numbers were reset to show the percentage of Arizonans of child-rearing age on Medicaid, the number would be north of 18% but likely well below 53%.

My son is in Freshman econ 101, and so I have been posting him some supply and demand curve examples.  Here is one for health care.  The question at hand:  Does government regulation including Obamacare increase access to health care?  Certainly it increases access to health care insurance, but does it increase access to actual doctors?   We will look at three major interventions.

The first and oldest is the imposition of strong, time-consuming, and costly professional licensing requirements for doctors.  At this point we are not arguing whether this is a good or bad thing, just portraying its inevitable effects on the supply and demand for doctors.

I don't think this requires much discussion. For any given price for doctor services, the quantity of doctor hours available is certainly going to increase as the barriers to entry to the profession are raised.

The second intervention is actually a set of interventions, the range of interventions that have encouraged single-payer low-deductible health insurance and have provided subsidies for this insurance.  These interventions include historic tax preferences for employer-paid employee health insurance, Medicare, Medicaid, the subsidies in Obamacare as well as the rules in Obamacare that discourage high-deductible policies and require that everyone buy insurance rather than pay as they go.  The result is a shift in the demand curve to the right, along with a shift to a more vertical demand curve (meaning people are more price-insensitive, since a third-party is paying).

The result is a substantial rise in prices, as we have seen over the last 30 years as health care prices have risen far faster than inflation

As the government pays more and more of the health care bills, this price rise leads to unsustainably high spending levels, so the government institutes price controls.  Medicare has price controls (the famous "doc fix" is related to these) and Obamacare promises many more.  This leads to huge doctor shortages, queues, waiting lists, etc.  Exactly what we see in other state-run health care systems,  The graph below posits a price cap that forces prices back to the free market rate.

So, is this better access to health care?

I know that Obamacare proponents claim that top-down government operation is going to reap all kinds of savings, thus shifting the supply curve to the right.  Since this has pretty much never happened in the whole history of government operations, I discount the claim.  When pressed for specifics, the ideas typically boil down to price or demand controls.  Price controls we discussed.  Demand controls are of the sort like "you can't get a transplant if you are over 70" or "we won't approve cancer treatments that only promise a year more life."

Most of these do not affect the chart above, since it is for doctor services and most of these cost control ideas are usually doctor intensive - more doctor time to have fewer tests, operations, drugs.  But even if we expanded the viewpoint to be for all health care, it is yet to be demonstrated that the American public will even accept these restrictions.  The very first one out of the box, a proposal to have fewer mamographies for women under a certain age, was abandoned in a firestorm of opposition from women's groups.  In all likelihood, there will be some mish-mash of demand restrictions, determined less by science and by who (users and providers) have the best lobbying organizations.

My longer series of three Forbes articles on this and other economic issues with Obamacare begin here:  Part 1 Information, Part 2 Incentives, Part 3 Rent-Seeking

Update:  Pondering on this, it may be that professional licensing also makes the supply curve steeper.  It depends on how doctors think about sunk cost.

Over the last 50 years, real per capital health care spending has increased substantially.   Certainly there are multiple reasons for this, but the most obvious one is seldom ever mentioned -- that the US has seen huge increases in personal wealth over this period, and unsurprisingly people choose to spend a lot of this extra wealth on their own health and life expectancy.  In an age where consumerism is often derided as shallow and trivial, what could be more sensible than spending money on more and better life?

Many have pointed to the increased technological intensity of health care to explain rising costs.  I suppose this could be true, though in almost every other industry in modern times, increased technological intensity has reduced rather than increased costs.

One issue that does not get enough attention is the prosaic act of shopping.   I spend my own money, and I care about price.  I spend someone else's money, I don't give a rip.  Josh Cothran did a visualization of who is spending health care money.  Just look at the 1960 and 2012 charts, and pay particular attention to the orange "out-of-pocket" number.  Another way to rewrite these charts is to say consumers care about prices for spending in the orange band only.

Update:  Health care cost inflation.  Note cosmetic surgery, a field with significant increases in technological intensity over the last few decades, but for which almost all costs are out-of-pocket

source

Don't say I have not been warning you.  For years.  Philip Klein via Peter Suderman:

...Bloomberg highlighted a comment from a supporter of the [soda] ban, who wrote, "Anyone who pays taxes and thus bears the health care costs of obesity should support this."

In a free society, individuals are able to take risks and make decisions detrimental to their own well-being -- be it smoking, drinking, excessive eating or anything else -- because they'll bear the ultimate costs of their decisions. But when government assumes a greater role in the health care system, suddenly there's a societal cost to individual risks. This provides an opening for those who believe in a paternalistic role for government to make their regulations seem pragmatic. Bloomberg used the "health care costs to taxpayers" argument during his previous drives to ban smoking in bars and restaurants and to outlaw the use of trans fats.

I have written a lot about government-provided health care as a Trojan Horse for government micro-management of individual behaviors.  The logic is that once the government is paying for your health care, your decisions that once only affected yourself now affect public costs.  Here is a great example:

Touting new recommendations from an Institute of Medicine panel on obesity on Tuesday's NBC Nightly News, science correspondent Robert Bazell proclaimed to viewers: "...a sea change in how we perceive obesity. No longer a question of individual responsibility, but a need to change what's called an 'obesity-promoting environment.' Calling on corporations, government and individuals to act."...

Bazell further pushed the findings: "With the cost of treating obesity-related illnesses approaching $200 billion a year, many on the panel say the nation is ready to act."

I wonder how many feminists who were pretended to be libertarian rather than just pro-abortion by arguing "keep government policy out of my body" are all-in on this type of food consumption regulation?  I would bet a lot.

Update:  Here is an idea -- let's deal with the perceived issue of people eating poorly by ... licensing nutritionists to make their advice scarcer and more expensive.  And here too.

I am exhausted with folks who have never tried to shop for health care telling me that it can't be done, despite the fact that I do it all the time and achieve substantial savings.  This is a meme developped and maintained solely to support government power by declaring that there is a market failure in the pricing mechanics in the health care industry that can only  be solved through regulation and price controls.  I wrote in response

I agree that the pricing in health care is often arbitrary and capricious.  Of course some suppliers are going to try to soak third party payers.  But I don't think simply changing the payer (from private to public) or having a government bureaucracy set prices for  millions of line items is the solution.  My diagnosis is that health care lacks the one thing we have for most every other product or service:  shopping.

Now, you try to head off this argument with a few folks who claim shopping is impossible in health care.  But that is absurd.  There is a large and growing community of us who have real health insurance, rather than pre-paid medical plans, which means we have high deductibles.  We pay all of our regular expenses out of pocket, and maintain health insurance for large, unpredictable, potentially bankrupting expenses.

I must admit that shopping for health care seemed odd and a bit intimidating at first, having lived for years in the world of gold-plated, pay-for-everything corporate health care accounts.  But it really is not that hard.  I have consistently knocked down the cost of everything from x-rays for my kids' fractures to colonoscopies by a half to two-thirds.  I am now used to doctors and providers having that second price book under the counter they go to if they know you don't have a third-party payer they can soak.  We always research and ask for generics.  We think twice before accepting the need for an expensive test, like a MRI, and price shop it if we have to have one.  I push back on my dentist who tries to x-ray my teeth every few months.  I have many friends that saved a ton of money on oncology treatments by just doing a little shopping.

I am exhausted with academics and writers who have never tried to shop for health care telling me it is impossible.  Many of us do it, and there are more and more resources out there for us.  Sure, there are certain things I am not going to have the time or ability to price shop -- if I am lying on my back having a heart attack, my wife (hopefully) is not going to check rates at the hospitals.  But it is a fraud to extrapolate from this minority of health care situations to all health care expenditures.

The other argument is used is that at the beginning of a health care interaction we may not know exactly what care is needed.  So what?  The same is true of auto repair, but I don't blithely allow the repairs to proceed at any cost just because I didn't know up front what the diagnosis would be.  I get an estimate when each new problem is found, and I have on several occasions interrupted a car repair, told them their price was too high on certain repairs, and went elsewhere for the repair or deferred it entirely.

Let's suppose there is some sort of market failure for 10-20% of health care charges where price shopping is impossible.  Then let's discuss government regulatory approaches for those situations.  But for the other 80-90%, we should be structuring a health care system where consumers provide the price regulation, as they do in nearly every other industry, by shopping.

As a note, some people are exhausted by the idea of shopping.  My first response is, so what?  Get over it.  We are not going to take over a whole industry just to free you from a bit of hassle.  The second response is that research shows that only a small percentage of buyers need to be price shoppers to enforce price discipline.  I generally trust that Amazon has low prices and don't always check them, because I know there are much, much more rabid people who do care and do check.

Over time, I have found physicians who are both sympathetic and cooperative with this approach and actively help us minimize the cost of our care.  Its just amazing -- somehow we accept this image as a doctor being above all this cost stuff, in fact with considerations of price and cost being corrupting to their mission of keeping us healthy.  Imagine a car mechanic that took that attitude -- "I'm the expert here and you will pay whatever it costs to do what I say you need to do."  Would you fire the mechanic and find a better and cheaper one, or would you suggest that what we really need is a massive new government bureaucracy to set prices for every imaginable repair a car might need.

Sometimes I suspect much of the support for government health care is from people who see shopping and taking responsibility for their own care as too much of a hassle.

The most frequent justification I see from the Left for increasing government involvement and control of the health care system is that the US spends more per capita on health care than any other country but apparently gets little extra benefit from the spending in terms of health outcomes**.

Intriguingly, the exact same statement can be made of the American education system, which is already nearly fully nationalized.  We spend more per capita than any other country and get only middling results.  I wonder why those who use high spending with modest results as a justification for rethinking the health care system do not come to the same conclusion for the public education system?

To some extent, the US spends more on education and health care because we think are critical and because we are wealthier.  We spend on items way down the Pareto chart where we get less bang for the buck because we can.   And to my mind, it's no coincidence that both health care and education are dominated by third part expenditures.  Take the price value decision making out of the ultimate consumers hands, and, well, the whole price-value equation is bound to get screwed up.

** There are several reasons US often looks bad in these health comparisons.  The first is that we have a lot of life-shortening habits (eating, smoking, driving, crime) completely out of control of the health care industry.  So our lifespans are shorter, but control for those exogenous factors and our health care system looks among the best.  Check out this data, which shows that correcting for crime and accidents, US has the highest life expectancy in the world.

The other problem is the data is often cherry-picked by academics sympathetic to the state health care model.  As seen in the link above, we have the highest cancer survival rates in the world, and the highest life expectancy for people who reach 65.   Even our supposed out-groups, such as black males, have higher cancer survival rates in the US than the average in most European countries.  But you seldom see these metrics included in comparisons.

I also refer you to an oldie but goodie, showing how a study failed to correct for differences in lifestyles between countries.

I have been warning you, its coming.  When government pays the health care bills, they can then use that as an excuse to micro-regulate our every behavior.  Because its no longer an individual choice, it affects public costs.

“Denmark finds every sort of way to increase our taxes,” said Alisa Clausen, a South Jutland resident. “Why should the government decide how much fat we eat? They also want to increase the tobacco price very significantly. In theory this is good — it makes unhealthy items expensive so that we do not consume as much or any and that way the health system doesn’t use a lot of money on patients who become sick from overuse of fat and tobacco.  However, these taxes take on a big brother feeling.  We should not be punished by taxes on items the government decides we should not use.”

As an aside, given that Scandinavians tend to have among the world's highest tolerances for taxes, when they get fed up, it must be getting bad.

Well, it turns out that the laws of supply and demand do indeed apply in the health care field.  Obamacare and before it Romneycare combine government subsidies of demand with cost controls mainly consisting of price caps on suppliers.  The results are exactly what any college student could predict after even one week of microeconomics 101:  shortages.

First, from the WSJ

A new survey released yesterday by the Massachusetts Medical Society reveals that fewer than half of the state's primary care practices are accepting new patients, down from 70% in 2007, before former Governor Mitt Romney's health-care plan came online. The average wait time for a routine checkup with an internist is 48 days. It takes 43 days to secure an appointment with a gastroenterologist for chronic heartburn, up from 36 last year, and 41 days to see an OB/GYN, up from 34 last year....

Massachusetts health regulators also estimate that emergency room visits jumped 9% between 2004 and 2008, in part due to the lack of routine access to providers. The Romney-Obama theory was that if everyone is insured by the government, costs would fall by squeezing out uncompensated care. Yet emergency medicine accounts for only 2% of all national health spending.

The emergency room data is fascinating, as crowded emergency rooms supposedly overwhelmed by the uninsured was such an important image in the campaign to pass Obamacare.  More on this from Q&O:

Hospital emergency rooms, the theory goes, get overcrowded because people without health insurance have no place else to go.

But that’s not the view of the doctors who staff those emergency departments.
The real problem, according to a new survey from the American College of Emergency Physicians,isn’t caused by people who don’t have insurance — it’s caused by people who do, but still can’t find a doctor to treat them.

A full 97 percent of ER doctors who responded to the ACEP survey said they treated patients "daily" who have Medicaid (the federal-state health plan for the low-income), but who can’t find a doctors who will accept their insurance…."The results are significant," said ACEP President Sandra Schneider in prepared comments. "They confirm what we are witnessing in Massachusetts — that visits to emergency rooms are going to increase across the country, despite the advent of health care reform, and that health insurance coverage does not guarantee access to medical care."

As I have been saying for a long time, the Obama health care nuts do not have any secret, magical idea or plan for cutting health care costs.  In fact, as I have written here and here, we should expect Federalization to exacerbate the bad information and incentives that make health care more expensive.  The only idea they have, in fact, is the only one that anyone ever has in government for this kind of thing -- price controls

Over the weekend, The Washington Postpublished a Q&A-style explainer on the Independent Payment Advisory Board—the panel of federal health care technocrats charged with keeping down spending growth on Medicare.

The details are complicated, but the gist is simple: If spending on Medicare is projected to grow beyond certain yearly targets, then it’s IPAB to the rescue: The 15-member panel appointed by the president has to come up with a package of cuts that will hold Medicare’s growth in check. If Congress want to override that package, it only has two options: Vote to pass a different but equally large package of cuts or kill the package entirely with a three-fifths supermajority in the Senate.

The Post lays out the basic framework above. But what it doesn’t explain in any detail is exactly how those cuts will be achieved. And that, of course, is where the difficulty begins: Here’s how The Wall Street Journal’s editorial board explained it last month: “Since the board is not allowed by law to restrict treatments, ask seniors to pay more, or raise taxes or the retirement age, it can mean only one thing: arbitrarily paying less for the services seniors receive, via fiat pricing.” Medicare already centrally sets the prices it pays for the services of doctors and hospitals. Given the board's limitations, the most likely cuts we’ll see from IPAB, then, will be arbitrary, quality-blind reductions in these payments (though hospitals will be exempt from cuts for the first couple years).

We know what happens next: Providers stop taking on new Medicare patients, or drop out of the system entirely. In Medicaid, which pays far lower rates than Medicare (which pays somewhat lower rates than private insurance), this is already common: As one emergency physician recently told The New York Times, “Having a Medicaid card in no way assures access to care.” If IPAB cuts Medicare provider payments down to the bone, it could end up transforming Medicare into a seniors’-version of Medicaid.

My column is up at Forbes, and is the fourth in a series on Obamacare.  An excerpt:

Its amazing to me how many ways supporters of government health care can find to rationalize the bad incentives of third-party payers systems.  Take, for example, the prevelance today of numerous, costly tests that appear to be unnecessary.  Obamacare supporters would say that this is the profit motive of doctors trying to get extra income, and therefore a free market failure.   I would point the finger at other causes (e.g. defensive medicine), but the motivation does not matter.   Let’s suppose the volume of tests is truly due to doctors looking for extra revenue, like an expensive restaurant that always is pushing their desserts.  In a free economy, most of us just say no to the expensive dessert.  But the medical field is like a big prix fixe menu — the dessert is already paid for, so sure, we will got ahead and take it whether we are hungry or not.

It should be no surprise that while US consumer prices have risen 53% since 1992, health care prices have risen at nearly double that rate, by 98%.  Recognize that this is not inevitable.  This inflation is not something unique to medical care — it is something unique to how we pay for medical care.

Contrast this inflation rate for health care with price increases in cosmetic surgery, which unlike other care is typically paid out of pocket and is not covered by third party payer systems.  Over the same period, prices for cosmetic surgery rose just 21%, half the general rate of inflation and just over one fifth the overall health care rate of inflation.

This is why I call free market health care the road not traveled.  There are many ways we could have helped the poor secure basic health coverage (e.g. through vouchers) without destroying the entire industry with third-party payer systems.  Part of the problem in the public discourse is that few people alive today can even remember a free market in health care, so its impossible for some even to imagine.

Update: Coincidently, Mark Perry has a post that addresses just the issue I do in my article, that is the positive effects of high-deductible health insurance and out of pocket health expenditures on pricing transparency and reduced costs.  The high deductible health plans at GM seem to be having a positive effect on the health care market.  A shame they will probably be illegal under Obamacare.  Of course, since GM is owned by the government, it can get any special rules that it wants, unlike the rest of us.  But that his how things work in the corporate state.

For the last three weeks, I have been writing about the information, incentive, and rent-seeking issues that will doom Obamacare -- for example, how its impossible for a centralized board to set prices, and why a complete end to individual shopping will doom us to both rising prices and increasing frivolous demand.

I really didn't have to bother, though, because it is unnecessary to hypothesize -- we can just look at Massachusetts, which embarked on a proto-Obamacare several years ago.  John Calfee has a great column in the WSJ today.  Some excerpts

• On costs

Massachusetts reformers deferred cost control to the vague prospect of a "Round 2" of reform—much as congressional Democrats did a year ago when they passed ObamaCare. Meanwhile, economists John Cogan, Glenn Hubbard and Daniel Kessler reported in the Forum for Health Economics & Policy (2010) that insurance premiums for individuals (alone or in employer-sponsored group plans) increased 6% to 7% beyond what they would have without the reform. For small employers, the increases are about 14% beyond those in the rest of the nation. Four years after reform, Massachusetts still has the highest insurance premiums in the nation, and the gap is getting wider.

In 2010, insurance firms announced premium increases of 10% to 30% in the individual and small-group market. Gov. Patrick, on the verge of a tough re-election race, had the state insurance commissioner deny the higher rates.

• On frivolous demand

But the number of emergency room visits, which everyone expected to drop once people had to purchase insurance, is still going up. Surveys show roughly half the visits are unnecessary. Surveys also indicate that finding a primary care physician is becoming more difficult.

• On the end game of a centralized price-control regime

Last month Round 2 arrived. Gov. Patrick introduced a bill that will impose de facto price controls on everyone from solo primary care doctors to prestigious academic hospital systems. An 18-member board will decide how and how much providers should be paid, and the bill gives regulators the power to force private insurers to accept these fiats. Some 30 states experimented with such rate-setting in the 1970s and '80s. Except for Maryland, all of them—including Massachusetts—deregulated in the 1990s because costs rose even as quality and choice declined

• On politicization of decision-making

Insurance firms protested that they increased premiums because they had to deal with entrenched providers, especially hospitals, most notably the academic giants of Boston and Cambridge. Then the state prepared to introduce highly intrusive price controls over those providers—only to discover that this would provoke formidable political opposition while encountering myriad practical difficulties

To the last point, what happens to prices when providers know that a) consumers aren't shopping any more; b) consumers will take the service at any price, because they aren't paying; and c) insurance companies have to pay the bill, not matter how high, based on government rules.  Of course prices go up, because the entire price-discovery mechanism has been eliminated by government fiat.  Then the government has to step in with a doomed-to-failure price-setting plan.  In the end, those with political connections get the prices they want, and those who do not get throttled to make up the difference.

In my Forbes columns over the past few weeks, I have been writing about information and incentive problems with any sort of Obamacare type system.  One of the points I made last week was this:

One of the key selling points of Obamacare was that it would reduce cost, in large part through smart public-spirited people making optimized decisions from the top in Washington.  Ignoring the fact that no other agency that has promised such angels of public service has ever delivered them, we discussed in the last few weeks how this task is impossible.  But we should have known that already through our past experience with the political process.  Political decisions are made politically, not by optimizing some public good equation.    Does anyone believe that come election time, Congress won’t vote to add mandates to procedures to placate powerful groups in their base, irrespective of the future costs this would incur?

Need an example?

In 2007 breast cancer was the third leading source of cancer mortality in the US, but it was by far the largest recipient of government cancer research dollars, nearly double that spent on any other type of cancer.    In 2009, out of hundreds of medical procedures, only two procedureswere on the mandated must-carry list of all fifty states – mammography and breast reconstruction.  It is no accident that both of these are related to breast cancer.  With its links to women’s groups and potent advocacy organizations, breast cancer is a disease that has a particularly powerful political lobby.    Similarly, we should expect that, at the end of the day, pricing and coverage decisions under Obamacare will be made politically.  Not because anyone in this Administration is particularly bad or good, but because that is what always happens.

This post from Q&O is a tad old but gets at just this point with a real-life Obamacare example

The opening line in a New York Times piece caught my attention.  It is typical of how government, once it gets control of something, then begins to expand it (and make it more costly for everyone) as it sees fit.  Note the key falsehood in the sentence:

The Obama administration is examining whether the new health care law can be used to require insurance plans to offer contraceptives and other family planning services to women free of charge.

Yup, you caught it – nothing involved in such a change would be “free of charge”.   Instead others would be taxed or charged in order for women to not have to pay at the point of service.  That’s it.  Those who don’t have any need of contraception will subsidize those who do.  And the argument, of course, will be the “common good”.   The other argument will be that many women can’t afford “family planning services” or “contraception”.

But the assumption is the rest of you can afford to part with a little more of your hard earned cash in order to subsidize this effort (it is similar to other mandated care coverage you pay for but don’t need).  Oh, and while reading that sentence, make sure you understand that the administration claims it has not taken over health care in this country.

The next sentence is just as offensive:

Such a requirement could remove cost as a barrier to birth control, a longtime goal of advocates for women’s rights and experts on women’s health.

So now “women’s rights” include access to subsidies from others who have no necessity or desire to pay for those services?  What right does anyone have to the earnings of another simply because government declares that necessary?

It is another example of a profound misunderstanding of what constitutes a “right” and how it has been perverted over the years to become a claim on “free” stuff paid for by others.

Administration officials said they expected the list to include contraception and family planning because a large body of scientific evidence showed the effectiveness of those services. But the officials said they preferred to have the panel of independent experts make the initial recommendations so the public would see them as based on science, not politics.

Really?  This is all about politics.  The fact that the services may be “effective” is irrelevant to the political questions and objections raised above.  This is science being used to justify taking from some to give to others – nothing more.

For years I have warned that government-funded health care will be used as a Trojan horse for a nearly infinite body of legislation under the pretext that X [where X = nearly every activity or individual choice] has implications for health care costs.  Here is the latest chapter of this ongoing saga:

New stand-alone fast food restaurants have been banned from setting up shop in South Los Angeles, due to rising health concerns by the city council.

This story also mixes in a good portion of corporate statism as well, as it represents pretty transparent protectionism of current competitors against new entrants:

Perry's new plan bans new so-called "stand alone" fast food restaurants opening within half a mile of existing restaurants.

So McDonald's, who is likely firmly entrenched in the area, is unaffected, but potential new entrants challenging McDonald's are out.

For even further points, one can see another powerful constituency at work.  I suppose commercial real estate developers complained about potential loss of tenants, so this was added:

Such stand-alone establishments are on their own property, but those same restaurants are OK if they're a part of a strip mall, according to the new rules.

Obviously the same food is much more nutritious if served in a leased building rather than on a piece of land the restaurant owns itself.

Read the whole thing, its a great example with a lot of fact-free pronouncements by politicians about market failures.  via Matt Welch

I have warned many times:

When health care is paid for by public funds, politicians only need to argue that some behavior affects health, and therefore increases the state's health care costs, to justify regulating the crap out of that behavior.

So, don't be surprised to see a lot more of this:

"Too many lives are lost in motorcycle accidents," Christopher A. Hart, NTSB vice chairman, said in announcing that helmets had been added to the board's annual "most-wanted list" of safety improvements. "It's a public health issue."

My column this week at Forbes.com is on government health care and the incentives and pressure it creates to micro-manage individual behaviors and diet in order to (in theory) reduce government health care costs.