TCS Daily

Krugman vs. Munkhammar, Round Two

By Tim Worstall - March 15, 2006 12:00 AM

Editor's Note: The first part of this article can be read here.

The Baumol Effect, health care, the chance to discuss Paul Krugman's latest ideas and to praise a fellow European. Does life really get much better than this for the sad geeky type that I am? As you may recall I've been looking at Johnny Munkhammar's book, European Dawn, and comparing and contrasting that with Krugman's ideas on health care.

Krugman, as becoming increasingly clear, thinks that the solution to the American health care crisis (if indeed there is such a thing going on) is to move to a system which is both single payer (something like national health insurance) and single provider (something more like the Canadian or U.K. systems, where the government both pays for and actually operates the system). In essence, he wants the people who make the DMV such a delight to be running the hospitals. (Maybe that's slightly unfair, but what fun, eh?).

Krugman argues that the Veteran's Administration seems to do a pretty good job so why not roll out that model for the whole nation? What I think he misses is that the VA doesn't actually exist in isolation. As Munkhammar tells us:

"A comparison between Swedish medical care and the Kaiser Permanente private Medicare organisation in the U.S. shows Sweden to have more specialist resources per 100,000 inhabitants, and yet Kaiser's reception waiting time was under two weeks for 80 percent of patients and its treatment waiting time under 13 weeks for 90 percent. In Sweden over 50 percent of the patients have to wait more than 12 weeks for a visit and then at least another 12 weeks for treatment. (Fölster et al 2003)"

There could be two reasons for this greater efficiency (or productivity, for that's what it is, greater output from the same or fewer resources): the chase for profits leading to it, or, as I think at least in part likely, the fact that Kaiser is part of a system with many approaches. There are myriad organizations in the U.S. system, some charitable, some profit making, some like the VA, directly government run, but the most important point I think is that people and organizations are able to both experiment and then benchmark themselves against the others. One of the reasons why the VA was reformed in the 1990s was precisely that people noted it had declined relative to the other providers, something we might not have noticed if the whole system ran in only one way.

It is perhaps worth pointing out that Krugman seems unaware we're not actually interested in measuring how much health care infrastructure we're providing; rather, how much health care we're getting, that is, we're interested in this efficiency question:

"...the United States does not stand out in the quantity of care, as measured by such indicators as the number of physicians, nurses, and hospital beds per capita. Nor does the U.S. stand out in terms of the quality of care: a recent study published in Health Affairs that compared quality of care across advanced countries found no U.S. advantage."

Thirteen weeks for treatment for 90 percent or 24 weeks minimum for 50 percent: if you were one of those waiting would you consider that a difference?

It's in this area that I think the Baumol Effect is so important. The basic cause is that wages rise with the average productivity across the economy while service productivity lags behind that of goods production. We thus expect services to become more expensive relative to manufactures (say) over time. The short hand example given by the originator, William Baumol, was that a symphony orchestra cannot play faster and keep its quality intact.

Quite true, but this ignores technology. Or perhaps it would be kinder to say that the adoption of new technology is the only method we have of overcoming this unfortunate fact. Markets have given us a number of technologies that do precisely that — increase the productivity of a symphony orchestra, as it were. Amplified instruments, radios, gramophones (unknown to those under 30 of course), CDs, iPods, all allow us hear the music, which is after all what we're interested in, without the actual presence of the orchestra. Rather useful that one no longer needs to round up The London Philharmonic every time you want to boogie down.

We do actually know how to increase the introduction of new technology into a system. Not just the new and big expensive stuff, but methods of organization (yes, they are technology as well), the little things which cumulatively make a difference. As above with Kaiser Permanente, organizations need to be working in a competitive market. There needs to be decentralization, a lack of bureaucratic control, the ability to experiment. Which is why I think that nearly the most dangerous part of Krugman's proposal is the single provider part of his model. With one national health care system, ruled from the center; the process of innovation — and thus the rise in productivity that comes from it — would be severely retarded.

I say nearly the most dangerous. If you really want to scare yourself about what will happen under a single, unified, federally run health care system, think of this: The people deciding what you get will be characters like Randy Cunningham. Or Ted long before Gravina Island has a 150 bed fully equipped hospital?

So that's Krugman's proposal. Let's strip all of the competition out of the system so that we don't get those future increases in productivity and while we're at it, hand it over to just about the only people in the country known to be even more wasteful with tax money than the greedy capitalists. Good one, Paul!

There's one part of the proposal that simply boggles the mind:

"The second source of savings in a system of public health insurance is the ability to bargain with suppliers, especially drug companies, for lower prices. Residents of the United States notoriously pay much higher prices for prescription drugs than residents of other advanced countries, including Canada. What is less known is that both Medicaid and, to an even greater extent, the Veterans' Administration, get discounts similar to or greater than those received by the Canadian health system."

Yes, it's well known that the American drug consumer pays for most if not nearly all of the development costs of new drugs. Those higher prices are indeed a hidden subsidy to drug consumers around the world. In the very poorest countries drugs are priced at marginal cost, just the cost of manufacture, and as we move up the wealth ladder prices rise, making contributions to the research and testing costs. As we reach the top, the U.S. being the richest large nation, Americans pay the most. You may or may not like this but it is a subsidy from the rich to the poor, from the richest nation to those poor souls who lost out on the chance to be born American. What worries me though, and what confuses me, is that Paul Krugman is supposed to be a liberal. He's supposed to like taking from the rich to give to the poor.

So why does he want to stop a drug subsidy?

Tim Worstall is a TCS contributing writer.



Instruction in Better Health Habits
The person who takes successful charge of his health, like Kaiser Permanente, must exhibit decentralization, a lack of bureaucratic control, and the ability to experiment. Such take-charge action is in direct competition with the established insurance, regulation, and tax driven health care system.
Medicare spending varies widely from state to state, yet increased spending shows no correlation with better health outcomes for seniors. At the same time, seniors are experiencing increasing longevity and health. There has been a 25% reduction in the number of seniors with disability from 1980 to 1999.
Obviously, this increase has taken place outside the health care system. Analysts claim it is the result of increased education, income, and wealth levels, and most especially education. Educated people we know are better able to analyze and solve problems. The older we get, the more concerned we are with health and longevity. It is thus a reasonable conclusion, and common experience, that people study how to live longer and be healthier.
Apparently people are applying what they have learned and living longer and healthier. Government, science, the media, and the medical establishment provide a lot of useful information which many seniors are increasingly able to analyze and apply successfully. Perhaps those who do not are mainly what Medicare sees.
Of course, the number of adults as well as seniors with advanced education is growing continually. Thus the younger age groups should be experiencing better health and longevity as well. But not enough of them to seriously reduce health costs.
The problem is lack of knowledge and the incentives to apply that knowledge. Those with bad health habits need incentives to use good health habits.
Medical savings accounts are designed to provide monetary and good health habits incentives. But many are not persuaded.
A good health insurance exam to detect good and bad health habits using computer assisted diagnosis would tell those insured what they need to do to improve their health. Unhealthy people with the worst health habits could be given a chance to improve their habits and health over a year’s time with the reward of reduced premiums or increased coverage in accordance with the improvement.
Those healthier but in need of improvement could be reexamined every two years. And the healthiest with the best habits every three and five years.
No-fault health conditions would not be penalized. We do not choose our ancestors. We try to avoid accidents. Yet we may be exposed to poisons and carcinogens accidentally. The best of care does not always avoid bad results.
While those who engage in risk behaviors should pay premiums in accordance with risk, there is room for a little socialism. There should be no penalty for pregnancy or for dangerous work in the military, police, fire fighters, and the like.
The need for CAD to aid health insurance exams will encourage doctors to subscribe to CAD programs and use them in their practices to improve patient care and shift them more towards prevention.
Those who call upon pubic health care could be required to take such an exam either before or after treatment. The knowledge and resulting better health will be sufficient reward for many to adopt better health practices.

Instruction in good health habits will help all. Young healthy people will learn how to stay healthy and those whose habits put them at increased risks of poor health will see where they are headed and given a chance to avoid illness.
A 1997 OECD study found that 46% of American adults 16-64 were functionally illiterate: unable to fill out an employment application. Print media cannot reach them. Video instruction programs requiring mandatory watching for reduced premiums should help here. It works for traffic offenses.
These features will work but poorly for maybe a third of the population because they either do not care, are risk takers, or are fatalists. Yet who can doubt they will work better than our current system of ignorance.

No Subject
" Government, science, the media, and the medical establishment provide a lot of useful information..."

And a lot of conflicting information.

And the reason for such conflicting information is that people are different. There can be no standard diet or standard exercise program that will provide the same results.
You value what you pay for. If you don't value your health, why should I pay for it?

No Subject
"In Sweden over 50 percent of the patients have to wait more than 12 weeks for a visit and then at least another 12 weeks for treatment. "

Anyone who would find treatment within 12+12 weeks is considered lucky. I waited 267 weeks for my standard 1 hour knee ligament operation. That's normal. The official statistics lie.

Krugman should visit the reality sometime soon, before he has another bright idea.

drug subsidy
More to the point, if someone does not pay for the development of new drugs, no new drugs will be developed. So Krugman would will us a system that would not produce new drugs. Yee Hah.

Bill Smith

Beware comparison with DMV
My experience with DMV has greatly improved over the last several years - or maybe it's just that private monopolies and oligopolies, like the med insurance companies, have become so much worse. I got thru the DMV and registered 3 vehicles, all with problems, in 15 minutes last week. Meanwhile, it's taken months, so far, to try to get a billing thru a private ins. co., because of a zip code problem they say, with no end in sight.

I'd rather deal with the DMV. Sometimes they're obnoxious, but they have no vested interest in stiff-arming me to save money.

drug development
"More to the point, if someone does not pay for the development of new drugs, no new drugs will be developed. So Krugman would will us a system that would not produce new drugs. Yee Hah.

Taxpayers pay for most drug research. Pharmas spend 3 times as much on ads and lobbying as they do on research.

Vested interests
Actually, the DMV has a fairly large vested interest in stiffing you for the money. Gathering tax revenue for the politicians to spend is the main reason why the DMV even exists.

As to the private company, they have reason to stiff you, but they have a countervailing interest in keeping you as a customer. Stiffing customers is not a good way to get repeat business, and companies that don't get repeat business quickly become former companies.

Here's the deal: Free social welfare benefits in return for your economic and personal freedom!
In Sweden, the hot topic of the day is adding candy and soda pop to the list of consumer goods currently worthy of a "sin tax" (excise duty), such as alcohol, tobacco, and petroleum fuel products. Since candy and soda are unhealthy and apparently irrestable to the weak-willed, Swedes need to be steered around them by the taxman if the social health care system is to survive. Better yet, the proceeds the tax raises can go straight into the social health care system. It's a win-win for everyone, especially fat kids flirting with diabetes.

Sounds reasonable, doesn't it? Yet the terms of this deal should give one pause. In return for "free" health care and other social welfare benefits, working Swedes pay roughly 65% of every krona they earn in one tax or another. Simply put, they've given up 65% of their economic freedom for "free" social welfare benefits.

But that's not all, folks; personal freedom is next up on the block! In return for free social welfare benefits the state, Swedes must suffer the outrages of being socially engineered by Swedes who know what's better for Swedes than Swedes do. And we're not just talking about taxing candy and soda pop. No, we're also talking about legally enforced gender quotas for the boards of private limited companies (under consideration) and ******* porn story time for second graders (this really happened!).

I digress, but the point remains that free stuff from the state is never free. The price for erection to resurrection social welfare is the lion's share of one's economic and personal freedom.

So look, you fellow Yanks: Nothing ís free, especially when the state provides it. The costs of freedom are risk and virtue, with virtue mitigating much of the risk. But if you can't handle risk and virtue, then perhaps you're better off exchanging your freedom with the state in return for the state financing your vice, thereby providing you security. Just remember, even though it's really you financing your own vice through taxes, when the state can no longer afford to pay for your vice, it will begin to ban it, and you'll end up far worse off than you started - sans most of your freedom. Think about it.

Equality and Health Care for All
The main drive to switching over to a single payer/provider system are concerns that the vested interest of your health care providers is to maximize their own profits. This leads to unequal health service and for many Americans, no health insurance. Public Policy Virginia has done held some great conferences on health care outlining this issue and mobilizing people to act in the interest of their own and everybody's (even if they work jobs that do not provide health insurance). People should never have to risk not paying for health insurance because they cannot afford it, and insurance providers/employers should not have a vested interest in profiting from your (lack of) health.

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