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Health Care & Education: Slow Productivity Growth + Subsidies = Jacked Prices

14 Sunday May 2023

Posted by Nuetzel in Education, Health Care, Priductivity

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Abundance Agenda, Alex Tabarrok, Baumol's Disease, Beethoven’s String Quartet No. 14, CHIPS, competition, Consumer Sovereignty, Education Cost, Education Grants, Education Productivity, Employer-Paid Coversge, Eric Helland, Exchange subsidies, health care costs, Health Care Productivity, Industrial Concentration, Mark Perry, Medicaid, Medical Technology, Medicare, Obamacare, Peter Suderman, Relative Prices, Slow Productivity Growth, Student Loans, Subsidies, Tax Subsidies, third-party payments, Willian Baumol

This post is about relative prices in two major sectors of the U.S. economy, both of which are hindered by slow productivity growth while being among the most heavily subsidized: education and health care. Historically, both sectors have experienced rather drastic relative price increases, as illustrated for the past 20 years in the chart from Mark Perry above.

Baumol’s Cost Disease

These facts are hardly coincidental, though it’s likely the relative costs education and health care would have risen even in the absence of subsidies. Over long periods of time, the forces primarily guiding relative price movements are differentials in productivity growth. The tendency of certain industries to suffer from slow growth in productivity is the key to something known among economists as Baumol’s Disease, after the late William Baumol, who first described the phenomenon’s impact on relative prices.

Standards of living improve when a sufficient number of industries enjoy productivity growth. That creates a broad diffusion of new demands across many industries, including those less amenable to productivity growth, such as health care and education. But slow productivity growth and rising demand in these industries are imbalances that push their relative prices upward.

Alex Tabarrok and Eric Helland noted a few years ago that it took four skilled musicians 44 minutes to play Beethoven’s String Quartet No. 14 in 1826 and also in 2010, but the inflation-adjusted cost was 23 times higher. Services involving a high intensity of skilled labor are more prone to Baumol’s Disease than manufactured goods. As well, services for which demand is highly responsive to income or sectors characterized by monopoly power may be more prone to Baumol’s disease.

Tabarrok wonders whether we should really consider manifestations of Baumol’s Disease a blessing, because they show the extent to which productivity and real incomes have grown across the broader economy. So, rather than blame low productivity growth in certain services for their increasing relative prices, we should really blame (or thank) the rapid productivity growth in other sectors.

The Productivity Slog

There are unavoidable limits to the productivity growth of skilled educators, physicians, and other skilled workers in health care. Again, in a growing economy, prices of things in relatively fixed supply or those registering slow productivity gains will tend to rise more rapidly.

Technology offers certain advantages in some fields of education, but it’s hard to find evidence of broad improvement in educational success in the U.S. at any level. In the health care sector, new drugs often improve outcomes, as do advances in technologies such as drug delivery systems, monitoring devices, imaging, and robotic surgery. However, these advances don’t necessarily translate into improved capacity of the health care system to handle patients except at higher costs.

There’s been some controversy over the proper measurement of productivity in the health care sector. Some suggest that traditional measures of health care productivity are so flawed in capturing quality improvements that the meaning of prices themselves is distorted. They conclude that adjusting for quality can actually yield declines in effective health care prices. I’d interject, however, that patients and payers might harbor doubts about that assertion.

Other investigators note that while real advances in health care productivity should reduce costs, the degree of success varies substantially across different types of innovations and care settings. In particular, innovations in process and protocols seem to be more effective in reducing health care expenditures than adding new technologies to existing protocols or business models. All too often, medical innovations are of the latter variety. Ultimately, innovations in health care haven’t allowed a broader population of patients to be treated at low cost.

Superior Goods

Therefore, it appears that increases in the relative prices of education and health care over time have arisen as a natural consequence of the interplay between disparities in productivity growth and rising demand. Indeed, this goes a long way toward explaining the high cost of health care in the U.S. compared to other developed nations, as standards of living in the U.S. are well above nearly all others. In that respect, the cost of health care in the U.S. is not necessarily alarming. People demand more health care and education as their incomes rise, but delivering more health care isn’t easy. To paraphrase Tabarrok, turning steelworkers into doctors, nurses and teachers is a costly proposition.

The Role of Subsidies

In the clamor for scarce educational and health care resources, natural tensions over access have spilled into the political sphere. In pursuit of distributing these resources more equitably, public policy has relied heavily on subsidies. It shouldn’t surprise anyone that subsiding a service resistant to productivity gains will magnify the Baumol effect on relative price. One point is beyond doubt: the amounts of these subsidies is breathtaking.

Education: Public K -12 schools are largely funded by local taxpayers. Taxpayer-parents of school-aged children pay part of this cost whether they send their children to public schools or not. If they don’t, they must pay the additional cost of private or home schooling. This severely distorts the link between payments and the value assigned by actual users of public schools. It also confers a huge degree of market power to public schools, thus insulating them economically from performance pressures.

Public K – 12 schools are also heavily subsidized by state governments and federal grants. The following chart shows the magnitude and growth of K – 12 revenue per student over the past couple of decades.

Subsidies for higher education take the form of student aid, including federal student loans, grants to institutions, as well as a variety of tax subsidies. Here’s a nice breakdown:

This represents a mix of buyer and seller subsidies. That suggests less upward pressure on price and more stimulus to output, but we still run up against the limits to productivity growth noted above. Moreover, other constraints limit the effectiveness of these subsidies, such as lower academic qualifications in a broader student population and the potential for rewards in the job market to diminish with a potential excess of graduates.

Health care: Subsidies here are massive and come in a variety of forms. They often directly provide or reduce the cost of health insurance coverage: Medicaid, the Children’s Health Insurance Program (CHIP), Obamacare exchange subsidies, Medicare savings programs, tax-subsidies on employer-paid health coverage, and medical expense tax deductions. Within limits, these subsidies reduce the marginal cost of care patients are asked to pay, thus contributing to over-utilization of various kinds of care.

The following are CBO projections from June 2022. They are intended here to give an idea of the magnitude of health care insurance subsidies:

Still Other Dysfunctions

There are certainly other drivers of high costs in the provision of health care and education beyond a Baumol effect magnified by subsidies. The third-party payment system has contributed to a loss of price discipline in health care. While consumers are often responsible for paying at least part of their health insurance premiums, the marginal cost of health care to consumers is often zero, so they have little incentive to manage their demands.

Another impediment to cost control is a regulatory environment in health care that has led to a sharply greater concentration of hospital services and the virtual disappearance of independent provider practices. Competition has been sorely lacking in education as well. Subsidies flowing to providers with market power tend to exacerbate behaviors that would be punished in competitive markets, and not just pricing.

Summary

Baumol’s Disease can explain a lot about the patterns of relative prices shown in the chart at the top of this post. That pattern is a negative side effect of general growth in productivity. Unfortunately, it also reflects a magnification engendered by the payment of subsidies to sectors with slow productivity growth. The intent of these subsidies is to distribute health care and education more equitably, but the impact on relative prices undermines these objectives. The approach forces society to exert wasted energy, like an idiotic dog chasing its tail.

Peter Suderman wrote an excellent piece in which he discussed health care and education subsidies in the context of the so-called “abundance agenda”. His emphasis is on the futility of this agenda for the middle class, for which quality education and affordable health care always seem just out of reach. The malign effects of “abundance” policies are reinforced by anti-competitive regulation and payment mechanisms, which subvert market price discipline and consumer sovereignty. We’d be far better served by policies that restore consumer responsibility, deregulate providers, and foster competition in the delivery of health care and education.

Sins of American Health Insurance

22 Wednesday Feb 2017

Posted by Nuetzel in Health Care

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COBRA, competition, Cross Subsidies, Employer Coverage, Future Insurability Coverage, health care costs, High-Risk Pools, Individual Coverage, Insurability, John Cochrane, Medicaid, Obamacare, Portability, Tax Deductibility, Wage controls

The advances in Health-Care seems to be putting some distance between the doctor and patient.

Health insurance in the U.S. suffers from many dysfunctions, but a couple of basic steps in its institutional evolution lie at the root of its worst shortcomings. I say this after coming across another great post by John Cochrane the other day, this time with some of his thoughts on fashioning an Obamacare replacement. He lays out a few basic principles, one of which is that “health insurance is not a payment plan for small expenses“, or shouldn’t be.

The best parts of Cochrane’s post, I think, relate to two longstanding features of the health insurance market in the U.S.:

“The original sin of American health insurance is the tax deduction for employer-provided group plans — but not, to this day, for employer contributions to portable individual insurance. ‘Insurance’ then became a payment plan, to maximize the tax deduction, and then horrendously inefficient as people were no longer spending their own money.

Worse, nobody who hopes to get a job with benefits then buys long-term individual insurance. This provision alone pretty much created the preexisting conditions problem.”

The last two sentences are insightful commentary on the inadequacy of coverage for pre-existing conditions, though “creating the pre-existing conditions problem” should probably read “foreclosed any easy solution to the pre-existing conditions problem“. During World War II, the government authorized the tax deduction for employer-provided health plans as a concession to labor interests frustrated by war-time wage controls. Cochrane should be forgiven for making this sound like a deal with the devil. Today, employer-provided coverage is almost always limited to one’s job tenure (plus 18 months under COBRA, since 1985). In the 1940s, the benefits might have been generous, but portability was probably the last thing on their minds, especially in light of the long job tenures of the day and the fact that many employers, at that time,  offered coverage to vested retirees. The dominance of employer-provided coverage after WW-II pretty much ruled out lifetime insurability in a world with relatively high job mobility.

The tax deduction also helped to institutionalize the faulty notion that “good” health insurance should cover a panoply of services involving small, recurring expenses that are properly considered normal health upkeep. Instead, insurance should cover large, unexpected expenses for services necessary to treat injuries or severe illness. In addition, the coverage and the premium should, at the buyer’s option, include a guarantee of future insurability at standard rates. This option should not be mandated, but a refusal to opt-in must come at the risk of potentially large future health care obligations.

Cochrane also says:

“Cross-subsidies are a second original sin. Our government doesn’t like taxing and spending on budget where we can see it. So it forces others to pay: It forces employers to provide health insurance. It forces hospitals to provide free care. It low-balls Medicare and Medicaid reimbursement.

The big problem: These patches and cross-subsidies cannot stand competition. Yet without supply competition, costs increase, the number of people needing subsidized care rises, and around we go.”

Competition and choice must exist in health care delivery and in the health insurance market to keep costs under control. But if person A is an identifiable health risk and person B is not, and if healthy B is forced to pay the same premium for health coverage as sickly A, then A is cross-subsidized by B. Competition will encourage B to bail out of the risk pool. If B is prohibited from doing so, costs will soar because the cross-subsidies create incentives for A to over-utilize services, even making allowance for A’s greater need. Thus, forcing A and B into the same risk pool ultimately exacerbates the plight of both A and B by raising costs. That’s where we find ourselves today.

Enabling competition and dismantling cross-subsidies can only occur if all consumers are able to purchase not just health insurance, but long-term health insurability. To avoid a painful transition, publicly-funded high-risk pools might be necessary for the existing type As of the world, who are already burdened by poor health and might not be able to afford the premium necessary for insurance. Going forward, those who refuse a future-insurability option must understand that if they fail to opt-in prior to developing a serious health condition, they will have to rely on Medicaid, private charity, or a risk-rated policy, if they can afford it.

Will Republicans abolish the ill-founded tax deduction? Almost certainly not. They are likely to extend it to the individual side of the market, despite the fact that this will have an additional inflating impact on health care costs. At least it will reduce the current advantage of employer-paid coverage, potentially broadening the market faced by individuals. Also, Republicans might take steps to restore choice, promote competition, and eliminate cross-subsidies. As Cochrane notes, there are also ideas in play to improve portability. Questions remain about many of the details, however, including Medicaid reforms. On the whole, I’m hopeful that we’ll see most of Obamacare’s short-sighted provisions and rules rolled back and replaced by legislation to encourage the development of the market for insurance coverage and for future insurability.

Obamacare Swampland: Mendacity Made the Sale

27 Friday Mar 2015

Posted by Nuetzel in Obamacare

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CBO, Edmund Haislmaier, Exchange enrollments, Exchange subsidies, health care costs, Kaiser Family Foundation, King v. Burwell, Medicaid expansion, Obamacare, Scott Atlas, uninsured Americans

obamacare-breaking-bad

Perhaps I’d quit writing about Obamacare if President Obama would quit lying about it. No, probably not, because the flaws of Obamacare are so numerous that they deserve to be exposed again and again. In fairness to Obamacare, the president lies about many other things, but tonight’s topic is his latest assertion about the supposed success of the health care law. On the occasion of the five-year anniversary of the passage of the ACA, the president said:

“… one thing couldn’t be clearer: This law is working, and in many ways, it’s working even better than anticipated… After five years of the Affordable Care Act, more than 16 million uninsured Americans have gained the security of health insurance – an achievement that has cut the ranks of the uninsured by nearly one third.”

Actually, the Administration claims that the ACA is responsible for an additional 16.4 million insured Americans, 14.1 million of which are presumed to have gained coverage since the start of open enrollment in late 2013. The latter figure was extrapolated by HHS from Gallup survey data, and its full attribution to the ACA is gratuitous. Even if we stipulate to the integrity of the extrapolation, it is severely at odds with information reported on actual enrollments, as noted here by Edmund Haislmaier:

“Taken together, the administrative data tell us that the number of Americans with health insurance coverage increased by around 9.7 million individuals during 2014—not the 14.1 million estimated by Health and Human Services.”

Not only are the incremental insureds severely overstated, but Obama now asks us to judge the “success” of the law based on an implied 35% reduction in the number of uninsured, which still leaves well over 25 million people uninsured. Lest anyone forget, the original projections for exchange enrollments were far higher than even the rosy numbers reported by Obama. The so-called “target” population remains mostly unserved. The vast bulk of the coverage gains have come from Medicaid, which is free to eligible enrollees. Exchange enrollments have been light relative to expectations despite the promise of subsidies. (About half of the enrollees receiving subsidies will have to pay some of those benefits back to the IRS, according to the Kaiser Family Foundation. While the other half of subsidy recipients will get refunds, on average, the taxes owed by the first group will pose hardships.)

As noted above, a number of previous posts on Sacred Cow Chips have covered the flaws inherent in Obamacare. These fall into two general categories of destructive effects: 1) on the market for health care insurance; and 2) on actual access to, and delivery of, patient care. See here, here, and here for discussions of various clumsy and shortsighted ways in which the law attempts to regulate care. Scott Atlas points to another fundamental truth about Obamacare: it fails the poor and middle class by inhibiting access to care and making employer-based coverage less likely. Edmund Haislmaier has another excellent article on four key design flaws in the ACA as it relates to health care coverage. The negative employment effects of the law will continue to play out.

The cost of Obamacare to taxpayers is staggering, despite the CBO’s recent reduction in its estimates due entirely to lower than expected enrollments:

“The CBO now projects that the law will cost nearly $2 trillion over the next ten years. Obamacare’s subsidies alone will cost $1.1 trillion. In 2010, the agency put the cost of the entire law at $940 billion over its first decade.”

The author at the last link above also notes that the employment effects of Obamacare will be costly to taxpayers:

“Obamacare hasn’t just failed to expand coverage as projected — it’s caused more people to lose their insurance than its architects intended. The CBO now estimates that 10 million people will lose their employer-provided health benefits by 2021. That’s a tenfold increase over the agency’s 2011 projections…. Employers might cut back on their workers’ hours so that they’re considered part-time — or stop hiring workers. Some firms may dump their health plans altogether, thanks to Obamacare’s many other cost-inflating mandates and regulations. The fine may be cheaper than the cost of coverage.”

Some of the statist cheerleaders of the administration offer anecdotes and testimonials from the new class of happily insured. Given the (expected) subsidies and some of the expanded coverage provisions, these individuals certainly think they have something to be happy about, but anecdotes are easy. A great many anecdotes have also been heard about lost individual coverage, severely limited and even lost access to physicians and care, lost work hours and reduced employment opportunities. Further disappointments lie ahead, even for the newly insured. Provisions of the Affordable Care Act (ACA) that are least likely to be popular have been delayed by executive fiat.

We have a destructive health care law that should be replaced at our earliest “convenience”. That will be either when Obama leaves office or, more optimistically, in June if the Supreme Court rules against federal exchange subsidies in the King v. Burwell case.

This is unlikely to be my last post on Obamacare, if the history of Obama’s mendacious claims about the law is any guide: “If you like your coverage, you can keep your coverage“. “If you like your doctor, you can keep your doctor“. “The individual mandate is not a tax“. “No family making less than $250,000 a year will see any form of tax increase“. “I will not sign a plan that adds one dime to our deficits – either now or in the future.” The ACA will “cut the cost of a typical family’s premium by up to $2,500 a year.” “I don’t believe that government can or should run healthcare“. All lies about Obamacare issued from the lips of President Obama. And I could go on…

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