Friday, April 22, 2011

Today's Krugman. How Health Care Is Not a Loaf of Bread.

Well, Krugman doesn't say that. I do. But what Krugman says does relate to that loaf of bread:
Earlier this week, The Times reported on Congressional backlash against the Independent Payment Advisory Board, a key part of efforts to rein in health care costs. This backlash was predictable; it is also profoundly irresponsible, as I’ll explain in a minute.
But something else struck me as I looked at Republican arguments against the board, which hinge on the notion that what we really need to do, as the House budget proposal put it, is to “make government health care programs more responsive to consumer choice.”


Medical care, after all, is an area in which crucial decisions — life and death decisions — must be made. Yet making such decisions intelligently requires a vast amount of specialized knowledge. Furthermore, those decisions often must be made under conditions in which the patient is incapacitated, under severe stress, or needs action immediately, with no time for discussion, let alone comparison shopping.
Imagine this: You walk into a bakery, wondering if you are hungry and if some kind of bread might take care of that. Instead of feeling hunger, you need to have an expert examine you to verify what that gnawing in your belly means.

That same expert then recommends the kind of bread that best fits your symptoms and in most cases it is bread sold at that same bakery. Which means that the expert's sales and profits will depend on what she or he recommends to you.

You buy the bread and eat it. It may or may not turn out to be the right kind of bread for your particular type of hunger, in which case you need to go back to that bakery or perhaps to another one to get a second opinion.

All that sounds crazy. But it's the way we consume health care when ill. The differences between the consumption of bread and the consumption of say, blood pressure medications, are enormous: We usually cannot self-diagnose blood pressure problems and we cannot buy the necessary medications without a middleman/woman.

The need for bread is predictable and the quality of the product is fairly easy to judge. The need for many health care products is unpredictable and their quality very difficult to evaluate even after testing them for a while. And the sellers of the bread don't have the same double incentives as the sellers of health care would do in the absence of professional and ethical constraints, because bakers don't tell us if we need bread but sellers of health care do tell us if we need their services.

The examples I give may sound silly but they should be taken very seriously. Health care is not the same as a loaf of bread and it cannot be traded in exactly the same manner to gain imagined market benefits. Concepts such as "consumer choice" are not totally without benefit in the medical markets but their impact is tiny. The reason for that is simple: Consumers lack the necessary information not only about the complicated treatments in the medical marketplace but even about what they ultimately might need.

Providers play a double-role as both sellers of products and services and as the consumers' agents. That double-role means that the people who have the best information in the markets are also the people whose incentives are not necessarily towards less consumption or lower costs. Higher health care costs usually mean that someone gets paid more, after all.

Combine that with the low price-elasticity of medical care (i.e., the fact that seriously ill people are willing to pay almost any price for relief and survival) and the still wide availability of insurance coverage, and you might see why markets are unlikely to offer price competition and efficiency. In any case, competition in price may be meaningless if consumers cannot evaluate the quality of the package they buy.

Krugman might scold at me for using the term "consumers" here but I agree with his basic point. It's one thing to argue that consumer choice by healthy people among competing insurance policies is doable. It's quite another thing to send the sick or high-risk elderly out to the private health insurance markets with a voucher with shrinking real value. Yet this is what the conservatives recommend.