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December 25 2013


Arnold Kling on the Economics of Health Care and the Crisis of Abundance

First an aside and then a longer post on an issue touched on in the podcast. The aside: Arnold Kling stated that health care costs appear to be excessive compared to health outcomes given that longevity in the United States is the same as in other countries that spend less. Longevity is not the only measure of health outcomes. Many other goods are purchased as well (e.g., time/convenience and the ability to remain active). Now the main point. I have always thought that auto mechanics are a good analogy to doctors when thinking of solutions to one of the possible sources of market failure in health care: the suppliers of the goods (the doctors and auto mechanics) effectively demand the goods (by instructing the patients/car owners as to which tests and treatments should be provided). I was glad to hear the podcast discuss this issue, but don't think it went far enough (although Russ Roberts almost came back to it at the end with a discussion of car insurance for oil changes). Russ Roberts indicated that the way he solves this problem is to find a car mechanic he really trusts. The transaction costs to that solution are fairly high, and the market has found another (and I think better) solution. The car makers have internalized the cost of repairs, and the consumer pays for that cost in the price of the car. My experience is that vehicle warranties (on both new cars and used "certified" cars and used cars purchased through the national vendors) have become much more comprehensive and extended warranties are much cheaper and more comprehensive (I used to never purchase them, but have with my last two cars). At least one car maker I know of (BMW) has even internalized the routine maintenance (oil changes) given that the failure to obtain that maintenance may cause more costly warranty claims. Perhaps the pervasiveness of third party payment systems is due to the high transaction costs of educating medical consumers or finding trustworthy doctors and providers. The internet may reduce some of those costs, but my guess is that most consumers only do the research after obtaining a diagnosis (and not research on whether or when to obtain tests and care in the absence of a diagnosis). Ultimately this analogy would suggest that HMOs (providers who both provide care and take on the insurance risk) as being the best solution to the transaction costs of finding trustworthy providers. And yet, my experience (I am an attorney who works with employers on their benefit plans, including medical plans) is that HMOs have dramatically declined in popularity (to the point that many employers do not offer them as an option). What's going on here? Is the analogy wrong? Interested in the thoughts of others on this point. http://www.econtalk.org/archives/2007/11/arnold_kling_on.html
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