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Reforming Our Beliefs Concerning Health Care

By Arnold Kling - June 21, 2007 12:00 AM

"It is not that rulers have been unaware of poor performance. Rather the difficulty of turning economies around is a function of the nature of political markets and, underlying that, the belief systems of the actors."
-- Douglass C. North, Economic Performance Through Time, the 1993 Economics Nobel Prize lecture

Douglass North points out that economic outcomes are shaped by institutions, which in turn are shaped by beliefs. Because beliefs change only slowly, outcomes are much more difficult to change than textbook economics suggests. Building on my previous essays on North's economics, this essay will look at health care reform from the perspective that beliefs are the core issue. Our beliefs about health care, including a belief that health care "ought" to be free for the patient, are what shape our health care system and make reform difficult.

Belief Systems and Economic Development

As an economic historian, Douglass North has focused on the changes in belief systems that are necessary in order to produce a modern economy. For example, he writes,

The contrast between the institutions and beliefs geared to confronting the uncertainties of the physical environment and those constructed to confront the human environment is the key to understanding the process of change...The collectivist cultural beliefs that characterized the former environment produced an institutional structure geared to personal exchange whose cohesion and structure were built around strong personal ties. In contrast the individualistic framework that evolved in response to the new human environment relied less on personal ties and more on a formal structure of rules and enforcement mechanisms.

--Understanding the Process of Economic Change, p. 101

Today, we can still see tribal societies, in which economics, politics, and religion are dominated by clan relationships. For such societies, it is difficult for people to trust outsiders, and therefore the transition to a modern economy based on trade with strangers has been stunted.

I have argued, in North-like fashion, that prosperity depends on three ethics. I describe these as a work ethic, a public service ethic, and a learning ethic.

Each of these ethics tends to be reinforcing. That is, if most people believe that the way to get ahead is to work hard, then most people will work hard, and more wealth will be created. On the other hand, if people believe that wealthy people should not have to work, then people will attempt to gain wealth without working, leading to a zero-sum economy. If most people expect public officials to be honest, then dishonest officials will be identified and punished. On the other hand, if people expect corruption, then corrupt officials will survive, and only a simple fool will be honest. Finally, if people value learning in all of its aspects, then everyone will be encouraged to learn. If people believe that learning threatens tradition, then learning will be suppressed.

Health Care and Collectivism

In the passage just quoted, North describes collectivist ethics as suited to societies that are struggling with uncertainties in the physical environment. Individualistic ethics -- the rational, calculating, man of economic textbooks -- are suited to an environment in which we are confident of safety in the physical environment and have moved on to satisfying higher economic needs. (Of course, North argues strenuously that for modern societies to function we need to have ethics that lead us to act according to social norms, not merely on the basis of short-term self-interest.)

Illness deprives us of the sense of physical safety. Disease and injury are a throwback to the circumstances in which our physical environment is threatening and overwhelming. Thus, health problems tend to trigger our collectivist instincts.

We seem to recoil from the idea that health care choices should be made on an economic basis, by comparing costs and benefits. Instead, we treat health care as if it is a black-and-white issue: when you need it, you must have it; when you do not need it, you do not want it.

As I studied health care spending in the United States while doing background research for my book, Crisis of Abundance, I found that many common, expensive medical procedures are not black-and-white. Instead, they fall into a gray area, where benefits are highly uncertain. Other economists have noticed this, also. For example, in recent testimony, Peter Orszag, Director of the Congressional Budget Office wrote,

hard evidence is often unavailable about which treatments work best for which patients or whether the added benefits of more-effective but more-expensive services are sufficient to warrant their added costs. In many cases, the extent of the variation in treatments is greatest for those types of care for which evidence about relative effectiveness is lacking. Together, those findings suggest that better information about the costs and benefits of different treatment options, combined with new incentive structures reflecting the information, could eventually yield lower health care spending without having adverse effects on health—and that the potential reduction in spending below projected levels could be substantial. Moving the nation toward that possibility—which will inevitably be an iterative process in which policy steps are tried, evaluated, and reconsidered—is essential to putting the country on a sounder long-term fiscal path. But even if it did not bring about significant reductions in spending, more information about comparative effectiveness could yield better health outcomes from the resources devoted to health care.

As it stands today, our health care system is designed to ensure that cost-benefit analysis is not taken into account. Instead, the collectivist instinct is that individuals should be insulated from having to pay for medical procedures. This belief that medical care ought to be free to the consumer is what underlies our peculiar institution of health insurance that is more like a prepaid health plan than real insurance. Because consumers are insulated from cost, neither they nor doctors are in the habit of comparing costs and benefits when it comes to medical procedures.

Doctors Should be Wealthy

Even though we believe that medical care should be free for those who receive it, we realize that health care providers need to be paid for their services. In fact, another one of our bedrock beliefs about health care is that doctors deserve high status and wealth. I sometimes think of our health care system as a suction device for drawing money into the pockets of physicians. That is, many of our institutions and practices seem designed more to guarantee an affluent lifestyle for doctors than a high-quality outcome for patients.

There is nothing wrong with someone earning a living based on their skills. However, the regulatory environment tends to give doctors more than a market rate of return. Licensing laws serve to restrict supply, yet it is highly unusual for a doctor to lose his license on the basis of incompetence. Pay for performance is rare--doctors are compensated on the basis of procedures, regardless of whether the procedure was appropriate or successful. And with consumers insulated by insurance, the necessity or price of a procedure is rarely questioned.

Can-do Spirit

Another belief that we have about health care is that effort is rewarded. If someone is not yet cured, then we think that the doctor needs to try harder. We have a "can-do" attitude about diagnosis and treatment. Doctors, for their part, hold themselves to very high standards and set high expectations.

We also expect immediate action when we are sick. The idea that one person's illness might be low priority and that he or she should accept delay in treatment is unthinkable in this country.

Beliefs vs. Reform

Our beliefs about health care are an obstacle to reform. The collectivist instinct that we have about health care makes it difficult to introduce cost-benefit analysis into medical decision-making. Our belief that doctors should enjoy wealth and prestige makes it difficult to enact cost-containment measures or to reform the way in which physicians are compensated. Any attempt by government or managed-care systems to restrict access to health care services would run afoul of our can-do spirit.

My preference would be for Americans to become more receptive to cost-benefit analysis of health care decisions. Ideally, we would shed the collectivist instinct for health care. We would approach the issue of health insurance as a problem of insurance, not insulation. That is, we would shift from a goal of insulating consumers from the cost of all medical expenses to a goal of protecting consumers from the financial burdens of unusually expensive illnesses.

My reading of Douglass North is that real health care reform in the United States will not happen because of some wonk's clever plan. It will not happen as a result of an election. It will only happen when we change some of our beliefs about health care.

Arnold Kling is author of Learning Economics.

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30 Comments

Short term self interest IS in the best interest of society
"(Of course, North argues strenuously that for modern societies to function we need to have ethics that lead us to act according to social norms, not merely on the basis of short-term self-interest.)"

The alternative leads to socialism.

Maybe, Arnold, you need to explain this further?

short-term self-interest
In game-theoretic terms, we constantly face choices between co-operating and defecting. It is in our short-term interest to defect, but in our long-term interest to co-operate.

In the short run, it is in my interest to drive aggressively. But roads don't work well if everyone does it.

In the short run, it is in my interest to stab my co-workers in the back. It might be in my interest to shirk responsibility at work. It might be in the interest of a merchant to cheat its customers.

If hardly anyone is defecting, then defectors stand out and are punished. But if everybody is back-stabbing, or everybody is shirking, or everybody is cheating, then it's very hard to shift to a new equilibrium in which there is enough co-operation for society to function.

Socialism means that behavior is enforced top-down. Ethical behavior means that people play by unwritten rules that work to everyone's benefit. North would argue, and I would agree, that without ethical behavior there cannot be a capitalist system.

Ethics
Good point. Socialism, by its nature, assumes, that people are inherently unethical and thus must be guided and controlled where Capitalism assumes, even requires, men be rational and ethical beings for who control is not needed.

A interesting point which I have tried to make, less eloquently I must say, but falls, for the most part, on deaf ears….

Life is more fun being ethical also. Perhaps that is why Capitalism is so much fun?

You imply short term self interest is not ethical?
I agree ethical behavior is in everone's best interest and requird for free markets. And the market is the most effective means of enforcing such ethics.

I think you should redefine the term "short term self interest" to "immediate self gratification".

You may physically enjoy a night of drinking and debauchery, but regret the consequences for years.

"In the short run, it is in my interest to stab my co-workers in the back."

I don't understand how this would be in anyone's "short term self interest".

I agree with you
about short term vs. long term and North's thesis that change only comes through change in the belief structure.

However, when you offer this bit,
"My preference would be for Americans to become more receptive to cost-benefit analysis of health care decisions."

you open up a much larger field. People make all kinds of decisions based on incomplete or outright erroneous information. It explains for example why many are terrfied of radiation and nuclear power plants but are not in the slightest perturbed by getting behind the wheel of a car.

So the question then becomes, where is the information to come from to provide people with the capability of meaningful cost benefit analysis?

back stabbers
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"In the short run, it is in my interest to stab my co-workers in the back."

I don't understand how this would be in anyone's "short term self interest".
---------

Say for instance I take full credit for a report that we both worked on.

Short term benefit, I look good to the bosses.

not entirely so
But your comparison is actually a good one.

"you open up a much larger field. People make all kinds of decisions based on incomplete or outright erroneous information. It explains for example why many are terrfied of radiation and nuclear power plants but are not in the slightest perturbed by getting behind the wheel of a car."

Here it is a fear of the little known or unknown coupled with horrendous examples, by the anti-nuke nuts, of what could happen if things go wrong. This is off-set by the fact that something like 99% of Americans have driven and lived through it. While nuke bombs and nuke plant accidents have caused less devestation in their entire existance than the highway death toll in the U.S. alone over a single decade, and most Americans know this, they still don't trust nuke power because they don't understand it.

Co-worked defends his short term interest and tells truth in front of boss.
If the consequences of decietful short term actions are immediate, such as someone defending themselves from attack by stabbing back, then short term self interests will quickly become ethical.

The government has too often protected too many from the negative consequences of unethical "short term self interests".

I think Marjon's right
and that Arnold is drawing the wrong conclusions from his game theory analysis. The only way that I can act in my self-interest to the detriment of society is if I am allowed to escape the consequences of my actions.

Let's looks at Arnold's examples and see how they'd play out in the real world:

- You stab a co-worker in the back. Sure, you got the nice promotion and the corner office but you also got the enmity of everybody at and below your level in the company. You'll never be trusted by your co-workers, you'll never get their help and you'll ultimately learn all about payback when you're standing in the unemployment line.

- Your company cheats its customers. A nice quarterly profit followed by a reputation for cheating customers, a drastic drop in market share and then bankruptcy.

It's not just ethics that drives me to follow the rules, it's also fear of the consequences for not playing fair, for not making the right choices and for not following the rules. Part of being on the "straight and narrow" is that it's the right place to be, but part of it is not wanting to join Paris Hilton in a jail cell.

However, our social safety net actually encourages irresponsible and unethical behavior. Let's suppose you choose to not have health insurance for whatever excuse you happen to like. There's no real downside, the government requires hospitals and doctors to take care of you. Some call that compassionate, some call it charity but it's actually theft.

If the government takes some of my money to build roads, schools, fund police and fire services, or maintain a standing army then I think a fair argument can be made that the government took the money for "the public good". However, what "public good" is served by subsidizing irresponsible freeloaders? As much as I might not like to admit it, whether I live or die makes no difference to the country and, I'd venture to suggest the same holds true for 99.99999% of the population. I can see the argument for spending money that might enhance the tax base, I can't see one for encouraging deadbeats.

It's in my self-interest to look out for me. It's in my self-interest to save money, to buy insurance and to be prepared for unexpected events. It's in my self-interest to obey the laws and to continually better myself by improving my skills. How is that bad for society?

Conversely, how is rewarding those who've spurned their "free" public education, those who choose not to have health, auto or flood insurance, those who spend all of their disposable income on beer and cigarettes, and those who choose not to speak the prevailing language? Is it my fault that they're poor, illiterate and unemployable? Why yes, evidently it is.

Supply and Demand
>>You wrote: There is nothing wrong with someone earning a living based on their skills. However, the regulatory environment tends to give doctors more than a market rate of return. Licensing laws serve to restrict supply, yet it is highly unusual for a doctor to lose his license on the basis of incompetence. Pay for performance is rare--doctors are compensated on the basis of procedures, regardless of whether the procedure was appropriate or successful. And with consumers insulated by insurance, the necessity or price of a procedure is rarely questioned.

How exactly do licensing laws restrict supply? What, they make it difficult to become a doctor? It should be difficult.

I maintain that supply and demand determine a doctor's compensation. If there is a demand in a certain area of medicine then the supply (although slowly) will increase to meet the demand. The problem of course is lag time, especially if new training or new doctors are needed. But short-changing the licensing of doctor's is certainly NOT the solution.

Demand for OB/GYN, no supply.
They are leaving their practices in droves.

Wonder why?

There seems to be a surplus of trained medical personnel in India, Europe and the Philippines yet they all must pass a state licensing boards before being able to work in the USA.

Any reason not to create an international standard, administered by the ISO, for example?

Huh? Short term interest of a merchant to cheat its customers?
>>In the short run, it is in my interest to stab my co-workers in the back. It might be in my interest to shirk responsibility at work. It might be in the interest of a merchant to cheat its customers.

I don't think the term "short term" is the correct one here. Are we talking about time? Or are talking short-sightedness?

Anyone who has an ounce of justice (i.e., actions without regard to motivation to do the act) in his veins would realize that there is no legitimate interest (short term or long term) of a merchant cheating his customers.

Cheating is wrong (whether short or long term). There is no game theoretic justification for it.

Man is not just an economic animal, he is a rational animal, and exercise of that rationality operates beyond the scope of the economic.

these comments are frustrating
From these comments, it is evident that I have failed to convey what is in a way the whole point of Douglass North's work. He points out that self-interest is in society's interest when *and only when* the institutions (culturally-reinforced behaviors) are conducive to this being the case.

If you lived in a corrupt, lawless underdeveloped country, your self interest would lead you to gravitate toward corruption and lawlessness, not toward creating wealth.
In our American society, self-interest in the market *does* tend to serve everyone's interest. And I am not suggesting that where self interest is dysfunctional we need more government (in third world countries, government is a big part of the problem, not the solution).
Hayek spoke of spontaneous order. When what emerges is a well-ordered society, then self interest serves to raise the standard of living for everyone. But when what has emerged is a badly-ordered society, self interest serves to perpetuate the problems.

Supply...
>>There seems to be a surplus of trained medical personnel in India, Europe and the Philippines yet they all must pass a state licensing boards before being able to work in the USA.

Is the state licensing to difficult to pass?

Ok-this is the point - but...
>> From these comments, it is evident that I have failed to convey what is in a way the whole point of Douglass North's work. He points out that self-interest is in society's interest when *and only when* the institutions (culturally-reinforced behaviors) are conducive to this being the case.

This statement goes way too far. It suggests that institutions are necessary for ethical behavior. However, unless there is a complete breakdown in the rule of law and a civil condition, people can still act justly towards each other. They do not need culturally-reinforced behaviors to make them act this way.

If there is such a breakdown, then, sure, there is no justice and we are back to might makes right. But that is a far cry from lacking the "proper" institutions.

Lack of institutions is no excuse for unjust behavior and compelling such behavior is certainly not necessary for one to choose such behavior.

if only that were true
But "cheat" is a relative term. Trying to get what the market will bear, plus 10% if the item is really crucial, isn't "cheating" in your book. It is in mine. Any "rip-off" is in the eye of the beholder; and the law. If not, than any scam would just be good business.

But to cheat, rip-off, gouge, scam, or otherwise take advantage of a segment of the population is good in the short term (make a quick buck) but disasterous in the long term (lose your business, go to jail, etc.).

Yet the scams, rip-offs and cheating continues; sometime with legitimate businesses, most often with street hustlers, internet scammers and the like.

For me, everytime I raise prices for any reason, I weigh the potential lost business (long-term) against my expenses and the business's needs (long-term) there is never a short-term thinking involved.

Why should there be 50 licensing boards?
I don't disagree with rigorous standards, however, state licensing boards of all types are notorious for restricting business and free markets.

Recent examples are cosomtology license requirements for those who braid hair.

And I support states rights. If states are serious about ensuring quality and quantity of medical personnel, they would agree to standardized licensing requirements.

"If you lived in a corrupt, lawless underdeveloped country"
LEAVE!

When people are forced to live in a corrupt, lawless country and when their neighbors do nothing to help prevent such corruption, then only the corrupt can survive.

If people can escape, then the corrupt will feed upon themselves until they disappear.

It is the self-interest of a few with the force of the state to impose their self interest on the many that allows such destructive self interest to perpetuate.

How long would DPRK survive if their people could escape? East Germany and USSR and to fence their people in.

If the USA opened its borders allowing those escaping corrupt countries to freely enter, work, and start businesses in the USA, how long could those corrupt countries survive?

Anthony is Right.
In game-theory, cheating may be a good strategy, but not in real-life.
People have evolved as very good cheater-detectors with a strong emotions for justice and righteous anger. This isn't to say that people don't try to outsmart others or find a way to skirt retaliation, it's just that on the whole in only a niche strategy, and has very little effect on Healthcare institutions.

Once again, we're off-topic, but I couldn't help but add my agreement to Anthony's point.

Way Off-base. High Prices are not the same thing as Cheating
I think that you and I would agree that a proprietor should get what the market will bear. Based on this statement:
"But "cheat" is a relative term. Trying to get what the market will bear, plus 10% if the item is really crucial, isn't "cheating" in your book. It is in mine."
But, if the item is "really crucial" and you can charge 10% more, then that IS what the market will bear. And, it's not cheating.
Cheating is when someone breaks the law to manipulate the market in some way. If I fraudulently sell a used medical component as a new one in order to get a higher price, I'm a cheater. But, charging higher prices because of greater demand is exactly what I'm supposed to do in order to participate in the economy.
High prices are valuable in the market. They invite competition which increases supply, and they make sure that the people who most need supplies are able to get them.

Good Clarification. Thanks.
I missed it the first time, Arnold. And, I got caught up in the cheating part of your argument. I largely agree with your observation here, because it is consistent with North's points. Thanks for clarifying.

in your mind, a businessman is obligated to keep costs to what you think is fair?
Why should your opinion of what constitutes a "fair" price be binding on anyone?

supply and demand
the AMA determines how many people can become doctors through it's licensing of medical schools.

AMA - supply of doctors
Sounds like the schools would have more effect on the supply of doctors than a body that licenses medical schools. The medical schools have more to say about how many medical students they admit than the AMA.

It shouldn't
and I didn't say that.

Agreed; to a point
Your example is, more or less, what I was talking about. But, let's say, that a relatively short term glitch occurs (say a transportation loss for a week or two) and you decide to take advantage of a short-term captive market and raise your prices. If the item is food, and there is no other dealer for it redily available, the result is "gouging" for a short term profit.

There are a good number of other examples, but I'll stay with that.

Not the point.
Dr. Kling's point is not that institutions (i.e. culturally reinforced behaviors,) are required for ethical behavior. He certainly never suggested that the lack of proper sets of beliefs or institutions excused unethical behavior. He suggests that it is only when the right set of institutions exist that self-interest leads people to engage in behaviors that are beneficial for the economy as a whole.

What Dr. Kling suggested was that culturally reinforced beliefs shape the way people perceive their self-interest. For example: Bob lives in a country where corruption is taken for granted, and that corruption is how you make money. Bob is likely to perceive that getting a civil service job and taking bribes is in his self-interest. Since corruption harms Bob's society as a whole, Bob's self-interest and society's interests are in conflict.

Now imagine that Bob lived in a country whose culture reinforced the belief that education and hard work are the way to succeed. Bob's self-interest, guided by culturally reinforced beliefs, would lead him to go to school, and work hard at a job producing a good or service that people want for a price they are willing to pay. Bob's self-interest and society's interests coincide.

Dr. Kling never attempts to excuse unethical behavior or to suggest that the right institutions are required for ethical behavior. He suggests that the right institutions/culturally reinforced beliefs make sure that the interests of the individual and society coincide.

If I might make a suggestion, Dr. Kling: The term "institutions" sounds as if it involves big, gray buildings filled with bureaucrats. I think that substituting "culturally reinforced beliefs" for the term makes the whole thing much more clear.

Not a question of right and wrong.
Imagine a snake oil salesman. He knows his product is fake. He rides in to some dusty Western town, makes his pitch, he sells a few bottles. Then, he moves along. This sort of thing could happen because he did not have to deal with his customers ever again. Every exchange was a one-time exchange. In a one-time exchange, the short term gain is all that matters to somebody who has no ethics.

When you own a shop, and have a reputation for quality and/or service to protect, then you have an economic motivation to be honest and fair. After all, if you cheat somebody today, they might not be back tomorrow. Thus, long-term gain becomes more important than simply getting all you can from any particular exchange.

Economics is an amoral science. It only cares what WILL happen under a given set of circumstances, not what SHOULD. If there is an incentive to cheat, some people will do so. Saying that this is true does not suggest that it is right, good, or in anybody's long term interest.

How many new medical schools in USA?
Or how many have expanded?

Why must so many go overseas to medical school?

an idea for a nationalised HC system
Here's a radical idea. We could take the best beaurocrats from each of the government agencies, say one from the Post Office, one from DEA, one from FEMA, one from ATF. Now don't forget, these are the best of government employees we're looking for, then we let them run a universal health care system. And we could predict that it will be just as effective as all the other government agencies!

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