Tuesday, July 14, 2009

Vet care vs. health care

I've long been making the case on this blog that in order to get health care costs under control we need to move away from a reliance on insurance to pay for most health care services. My theory is that insurance reduces competition among health care providers and the incentive for consumers to shop around for the best deal, with costs further raised by the bureaucracy and paperwork inherent in insurance. If we simply paid cash for most procedures -- catastrophic and emergency care excepted -- prices should go down and quality should go up.

Yesterday Megan McArdle threw a major monkeywrench into this theory with her introduction of this graph, provided by the American Enterprise Institute of all people:

As McArdle comments:
Veterinary spending is rising just about in line with human medical spending. Kudoes to AEI for publishing a graph that seriously undercuts one of the major conservative arguments about health care: that the main problem is consumers who don't bear their own costs. Veterinary spending is subject to few of the perversities that either left or right suppose to be the main problems afflicting health care spending. Consumers pay full frieght most of the time. They are price sensitive, and will let the patient die if keeping him alive costs too much. There is no adverse selection. There is no free riding on mandatory care. Government regulation is minimal. Malpractice suits are minimal, and have low payouts. So why is vet spending rising along with human spending?
I really struggled with this one, because it simply doesn't make any sense and flies in the face of my understanding of economics. Well, one reason I read McArdle's blog is for the comments, and this commenter seems to have found an explanation:

(click to enlarge)

In other words, in the free market veterinary care model costs have only risen 12 percent versus 38 percent in the regulated and distorted health care sector. Rather than being a shot to the heart of the free market theory, it seems to actually be another arrow in the quiver in favor of market-based reforms.

So why are we looking to extend the broken insurance model rather than go with what appears to work both in theory and practice?

Update: Yet more on the pet vs. human controversy here. Look for my response in the comments section.

Update: More thoughts here.


Josh said...

Why shouldn't healthcare get more expensive? A lot of medical spending is on luxury services. As heartless as this is to say, spending hundreds of thousands of dollars to save a patient with a 10% survival rate is a luxury. And I'm being generous and assuming that elective surgeries are left out of the calculations of growth in medical costs. I'm not sure they are and that would add even more luxury cost to the total bill.

Why should we be surprised that as the nation became more affluent (and got to keep more of their paycheck), expenditures on luxury items increased. Over the last 20 years Americans have spent much more money on the non-essentials: larger houses, leasing expensive cars, etc.

The concern shouldn't be overall spending. What we should worry about is: spending for basic care and burden on the taxpayer. If individuals, or their companies are paying for gold-plated care why should we care. We don't care about nice cars, trips, clothes, etc. In fact these things stimulate our economy.

The current problem is the government is paying, either through Medicare or tax breaks for employers. Basic care is a right, expensive all-covered care is not. If there is an insurance firm that wants to cover the latest and greatest as part of your plan . . . so be it. Just don't provide tax incentives that drive employers to these plans.

Paradigm Shifter said...

That's a major screw-up on the part of the AEI. I know the thinking that went into that graph's layout as I run into it with work-related data all the time, they just remedied it in the wrong manner.

If they had plotted the data on the same axis and used the absolute numbers they showed, it would have made comparisons very different given that human medical expenditures are several orders of magnitude different in size. The graph would have been illegible. Thus, they thought it would be better to plot on two different axes. The only time that makes sense is when one data set is showing periodic data while the other shows cumulative, or perhaps two data sets that are related but completely separated in magnitude and units (like engine torque and horsepower - a product of torque and speed - vs. engine speed on the x-axis).

What AEI should have done is taken a common starting point, and normalized each data set by using that starting point as the baseline and all subsequent years as a percentage of that starting point. Because that's really what they are trying to show - the relative increase in costs from one year to the next.

These are the "deep thoughts" that I have from spending way too much time in data as a Six Sigma black belt.

Finally, while I agree with much of Josh's logic, I disagree with his semantics on health care. Basic health care is NOT a right - I challenge him to show me where in the Constitution it is defined as such. I only make this quibble because as Mary Ann Glendon points out in the book Rights Talk, even mis-phrasing things as rights has a skewing effect in discussing contentious issues with serious effects. If basic health care is a right, what is basic health care and how can someone deny another one of such care as that person sees fit if it is a right?

Colin said...

Great thoughts, appreciated.