The faltering doctors’ groups reflect part of a broader decline in health care alongside the nation’s economic downturn. As people put off medical appointments and everything from hip replacements to routine mammograms, health spending dropped an annualized rate of 18 percent in the first three months of the year, according to recent federal data.
This is even more shocking than it seems. The social distancing phenomenon did not even begin in America until well into March. That means spending on health care probably fell by at least 50% in late March.
I’ve long advocated a health care system where people make most purchases out of pocket. For the poor, the government might subsidize the creation of health savings accounts. Money not spent on health care could be used for other purposes. Under this sort of system, health care spending would probably fall at least in half, perhaps much more.
Critics argue that health care is a necessity, not subject to the laws of supply and demand. They mock people who suggest that buying health care is like purchasing a movie ticket or a snowmobile.
There’s no doubt that some types of health care are a necessity, say mending a broken leg or treating a heart attack victim. Presumably that sort of care continued during the lockdown. Based on the data from the first quarter, however, it seems as if much of health care is in fact discretionary spending. There is every reason to believe that paying out of pocket would dramatically reduce health care spending from the current levels of nearly 18% of GDP.
Admittedly, some of this spending is merely postponed. On the other hand, there would be much lower costs in a system where most payments are made out of pocket and the provision of health care is deregulated, as the public would be much more cost conscious.
READER COMMENTS
John Hall
May 13 2020 at 6:12pm
A close family member had an elective procedure cancelled in March and has not been allowed to reschedule.
Healthcare spending would be much higher absent the supply shock.
Peter
May 14 2020 at 1:48pm
Bingo. While of course anecdotal, like you I don’t know a single person, myself included, that cancelled anything. It was all supply side.
I can also tell you some of those medical professionals are going lose to permanent business though probably won’t matter in practice. For example my dentist remained open whereas my wife’s didn’t, she found a new dentist and isn’t going back. Ditto my optician has lost me as a patient.
JFA
May 13 2020 at 8:00pm
“Presumably that sort of care continued during the lockdown”:
https://www.yalemedicine.org/stories/hospitals-covid-fears/
Mark Z
May 13 2020 at 8:29pm
Even if something is necessary in the long run, if it’s discretionary in the short run that may be all that matters. Spending on food is not discretionary in the long run, but unless you’re about to starve, it is discretionary at any moment. If I need an expensive drug to survive within a week, and I know many pharmacies carry it, I’d devote at least a few minutes shopping around rather than buying from the first pharmacy I wander into, but that may just be me.
John
May 13 2020 at 10:29pm
My parents are both doctors and are sitting around with nothing to do because all elective procedures are cancelled.
I don’t think that the fact that some procedures can be deferred means they were all a waste. For example, my mother in law needs a root canal and can’t get one and has to just suffer through the pain.
On some level literally all health care spending is discretionary! One is always free to just suffer and die the old fashioned way. That doesn’t mean it’s desirable.
Matthias Görgens
May 13 2020 at 11:12pm
The food analogy is apt here.
You can defer food, but not indefinitely.
Some food items are essential, like some amino acids and fats, but you can get them in many different packages. Eg as a steak or as something plant based.
There are regulations on food production and distribution. But compared to health care it’s a free market utopia with food.
JFA
May 14 2020 at 5:56am
One of the main talking points of many health economist and health policy analysts is that you can’t shop around for healthcare because you need it right then. There was one estimate from HCCI using a large private claims database that something like only 35% of healthcare was “shoppable”. ERs should probably be a little bit busier than they are right now, but I think the big drop in health spending is showing just how shoppable healthcare could actually be.
Michael Pettengill
May 16 2020 at 6:28am
If you are doing the shopping for health care, auto warranty repairs,…
However, insurers generally do the shopping for you, if they are paying part of the bill. And, the five procedures you need to reach your $5000 deductible generally need to be done at insurer selected providers to be counted toward the deductible, done to increase the business to the providers selected to get a volume discount.
Note, economists created these complicated rules by arguing for negotiating prices to cut costs when insurers/employers paid all the bills, then economists argued patients were getting too many colonoscopies, blood draws, peeing in a cup because they were free, because if it’s free, patients will suffer going without food and time wasting indignity for no reason, so they pay out of pocket, first $10, then hundreds of dollars after $10 didn’t cut costs, then thousands of dollars when hundred dollar deductibles didn’t cut costs.
Why hypochondriacs become economists should be studied, because I have never known anyone who does not put off going to doctors, dentists, ophthalmologists because it’s at best inconvenient, and often uncomfortable and scary.
Aladin
May 13 2020 at 11:58pm
Wouldn’t a decline in routine mammograms and other cancer checkups lead to a increase in cancer rates later on? At a later stage, where it is much harder to do anything about it? You can argue that’s discretionary. But a failure to do it leads to much bigger problems later on … I’m not sure that is an example of spending that would not or should not happen with no lockdown. I believe there was a WSJ piece that addressed this directly.
Justin
May 15 2020 at 12:19pm
Such screenings are discretionary in the sense that you don’t need to have the work performed immediately, which I think is what Scott was getting at.
Having your car checked out mechanically and maintained is not discretionary in the sense that if you don’t do it, your car will eventually breakdown, but you generally have time to shop around and find the right place to take care of your issue.
Market forces are weak for emergency services (if you have a heart attack, it’s probably best to go to the nearest ER even if they have a tendency to overcharge), but most health care isn’t like this. You need to have the test or procedure done, but if it waits a day, a week or a month, you’ll likely be fine.
Phil H
May 14 2020 at 2:56am
Yeah, I don’t buy this either. Commenters above have mentioned, as Scott himself did, that many healthcare purchases can be postponed. Just because something isn’t time-sensitive doesn’t mean it isn’t necessary.
But I think the bigger mistake is to conceptualize healthcare as “that which is necessary for health,” with clearly bounded limits on what is needed (just enough healthcare to get a person “healthy” again). The equivalent in the food industry would be to classify some food as “necessary” and some food as “unnecessary.” That’s not the way we do it for food, and I don’t think it’s helpful to think of healthcare services in that way, either.
(You might think that undermines the healtcare-as-a-right argument, and I think you’d be right. But there’s a whole other strand of anti-market healthcare argument, which is more along the lines of “healthcare is a knowledge service, so by definition the buyer cannot accurately judge the product, so the standard buyer-seller relationship cannot exist”. Personally, I’ve always found this one a bit more compelling than the “healthcare is a right” strand that people on this site love to rail against.)
Trevor W Adcock
May 14 2020 at 4:06am
Have you seen the results of the RAND health insurance study in Washington State, or the Oregon Medicaid study? They showed having health insurance didn’t increase health outcomes to a statistically significant degree.
In the RAND experiment spending was at least 1/3 less, but health outcomes weren’t statistically significantly different.
Phil H
May 14 2020 at 5:55am
That result is exactly what I was saying! I’m saying it’s a mistake to regard healthcare as being *only* those products and services that bring a person back to a state of health. Just as it’s a mistake to regard food as being *only* those products that supply a person with their RDA of nutrition.
Floccina
May 14 2020 at 5:26pm
“But there’s a whole other strand of anti-market healthcare argument, which is more along the lines of “healthcare is a knowledge service, so by definition the buyer cannot accurately judge the product, so the standard buyer-seller relationship cannot exist”.”
Many services are “knowledge services”. I know little about auto-mechanics, wiring, plumbing etc. At least in healthcare:
I have a GP who can help me (if they thought we were paying directly they’d even shop for price).
I know how I feel.
Mark Z
May 14 2020 at 10:29pm
I’m sure anti-market people would challenge this view, certainly for healthcare, possibly for everything else as well. There was a paper a few years ago finding that, in rating physicians or hospitals (I forget which), patients took into account superficial qualities like how nice they were over more substantial things like mortality rate. I find this believable but doubt it is very significant. Within a typical developed country I doubt which hospital or doctor one goes to within one’s range of choices often has a significant effect on mortality. Usually one hospital is probably about as good as another. One with a meaner staff might prolong one’s life a couple weeks, but the margin is probably too small for a typical patient to even notice, so they defer to more salient but superficial differences. If a charismatic car salesman could talk people into paying the same price for a car that lasted 12 years that a less charismatic salesman charges for a car that lasts 13 years, it may meet the definition of irrationality (or rather ignorance, possibly rational ignorance, of small differences), but not sufficiently robust irrationality to justify abolishing the automobile market.
Interestingly though another study found that hospitals in politically contentious districts in the UK tended to have better quality care – even controlling for funding – than other districts, suggesting people were responsive to variation in quality, and politicians and health bureaucrats reacted accordingly.
Phil H
May 15 2020 at 7:30am
Hi, Floccina. That’s right, and that’s exactly why rip-offs are so common in those industries. In Britain, we call substandard builders “cowboys”. Car mechanics are/were legendary for using fake parts to fix cars.
There are solutions to these problems: courts, industry standards, third-party certification, direct government regulation. None of them are simple or perfect.
And unfortunately, while “I know how I feel” is true, it’s also what enables quacks and crystal healers to flourish. It’s not quite enough to make for fair transactions.
mayank
May 14 2020 at 6:54am
Another interesting trend will be the lack of a catch up effect. I believe most doctors run at very high levels of utilization for elective surgeries, typically requiring scheduling weeks in advance.
Since doctor supply is relatively in elastic to demand over a few year horizon (med schools take time to produce new docs), to go back to their normal volume + catching up people who have missed out might take more than a year.
in that case, it will be interesting to see what happens to the all cause mortality of those who have been randomly forced to delay their elective procedures. As the commenters above say, there are other reasons than death to do a procedure, but certainly if deaths go up then we’ll know there was a material cost to the delay.
Alan Goldhammer
May 14 2020 at 7:47am
I am on the board of a moderate size non-profit that provides health insurance to 6000 individuals and serve on both the investment and health insurance sub-committees. We had our quarterly meeting to go over filed claims yesterday and it was striking to see the large drop in in-person visits and the large up tick in tele-medicine consults. Many of the consults were for mental health issues which is not surprising.
I do take issue with Scott’s point about moving health care to an out of pocket model. We know from behavioral economics how this will turn out. It’s the similar to how employees approach 401(k) investments. Thaler and Sunstein showed that most won’t contribute the necessary funding to even get the employer match. Deciding not to go in for periodic healthcare exams (a likely outcome) will lead to problems such as diagnosed high blood pressure or cholesterol, increased skin cancers, diabetes, and so on for a vast number of Americans.
robc
May 14 2020 at 8:18am
To make the analogy correct, you have to see what 401k investment looks like AFTER you get rid of the SS portion of FICA. Add 11.676% percent onto everyone’s gross check (12.4/106.2) and we will see how many more people are at least getting the match.
Two results:
People who arent adding much into their 401k because they are struggling on what they currently make would suddenly have more “excess” money for retirement.
People who treat SS as a retirement plan and thus don’t need the 401k will have to change their plans.
And of course, some people will just spend more and not add a dime to their 401k. But if I assume people are rational actors (even though it isn’t true, it is disrespectful to not assume so) then they are making the right choice.
robc
May 14 2020 at 9:00am
12.4% onto gross, 11.7 is the real effective SS FICA rate.
robc
May 14 2020 at 9:01am
And net, not gross. Ugh, I am struggling this morning.
Pretend you know what I meant.
Mark Z
May 14 2020 at 10:28am
With the insurance-based system, we’re in the opposite boat: it’s common for people to get tests done that would not remotely pass a cost-benefit test and sometimes even biopsies or procedures that increase the risk of death by more even than the disease they were supposed to prevent (e.g., the PSA test for prostate cancer; there’s some evidence that Americans get mastectomies at a higher rate than warranted, etc.).
Thaler and Sunstein’s conclusions may make some sense starting from a position where we are assuming people are undersaving for retirement. I don’t think one can reasonably argue people are underspending on healthcare. If switching to out-of-pocket led to less consumption, I think that would probably be indicative of rationality rather than irrationality. Now, it’s possible they might overcorrect. But suppose we found that in a more out-of-pocket system, fewer people got the necessary tests done with adequate frequency to get early diagnosis for some kind of cancer, and avg. survival time for said cancer went up slightly. Is that proof that people are irrationally ‘short-termist’ in the hypothetical out-of-pocket world? Not at all. Obviously it isn’t rational to be expend any cost necessary to increase likelihood of early detection. I’m not sure what the optimal tradeoff is between expense and heathcare consumption conducive to early detection, but I don’t think we can just assume that whatever people would do if they paid out of pocket will constitute irrational underconsumption, especially since, in the status quo, most people would agree we more have the opposite problem.
Scott Sumner
May 14 2020 at 12:43pm
I was contemplating mandatory HSAs.
robc
May 14 2020 at 1:36pm
I oppose it on general deontological libertarian grounds (ditto for mandatory retirement), but 5% into a M-IRA (M for Mandatory) and 5% into an HSA, both matched by employer, instead of FICA would be a win in my book, even with 10% being greater than 7.65% (and no income limit).
Those are the minimum levels, you could add more (without match) to either pre-tax. I am sure there would be some maximum too, of course (but only on the voluntary part). And like with the Rand Paul HSA proposal, allow premiums to be paid from the HSA.
Z
May 14 2020 at 5:32pm
Absolutely. Singapore has MediSave and it is extremely effective (8-10% of income to mandatory savings account) . The employer also contributes.
Jens
May 14 2020 at 8:24am
For European brains, articles about public health care and health insurance from the US are usually not comprehensible at multiple levels. But if I had to design a public health care system on the whiteboard, i would find an approach like in South Korea quite attractive, in which a national health plan pays a certain, quite high, share of the costs and the rest has to be paid out of pocket or from private insurance. That doesn’t solve all the problems, but it does solve a lot of them.
Scott Sumner
May 14 2020 at 12:47pm
Everyone, It’s theoretically possible that reduced health care spending will lead to worse outcomes. But I have yet to see any persuasive evidence for that claim, at least in the range of 5% of GDP (Singapore) to 18% of GDP (as in the USA). If you go below 5% of GDP then perhaps health outcomes would worsen, but above that level where is the evidence that more spending improves health?
Of course health care spending is more than just about health. Robin Hanson suggests it’s also about “showing that we care”.
Many poor people would rather have bare bones care plus cash, rather than extremely expensive care (under Medicaid).
Alan Goldhammer
May 14 2020 at 3:33pm
A good portion of the high costs in the healthcare system are related to hospitalizations. They are either end of life or beginning of life. The latter are related to premature births that can end up being very expensive. The small plan that I have experience with had 3 premature births in a 12 month period. This group self-insures and took an over $2 million hit over an 18 month period of time (births don’t obey the insurance plan calendar year). It would have been worse except for the stop loss plan.
There are some expensive drugs that are used by some in the plan as well. It’s a complicated issue and even if you have an HSA system with a high deductible, it’s not cost free to the plan administrators. Unfortunately, I cannot go into more detail about my experience other than to note it is complicated.
Jens
May 15 2020 at 3:19am
Many good insights from A. Goldhammer here. That coincides with my knowledge. In order to implement public health care in a morally acceptable and economically efficient manner, one needs forms of collective decisions and responsibility. Systems that work entirely on a individual contract basis will fail at some dimension. You need people who invest a lot of time to convince others, or at least reassure them, if they cannot get something or have to give something, that they do not think or understand is necessary. And you have to invest a lot of effort in communication, intellectually and emotionally, to create a basis of coherence. Without forms of social coherence, you get into a hamster wheel that you can’t get out of. Conservative forms work in a way (https://slatestarcodex.com/2020/04/20/the-amish-health-care-system/), but they simply lost their right to sole representation. (And that won’t change, either, because this loss is ultimately the meaning of being conservative).
Scott Sumner
May 15 2020 at 12:17pm
What are your thoughts on the system in Singapore? They spend about 5% of GDP.
Ben Carter
May 14 2020 at 1:32pm
It seems that an HDHP combined with an HSA meets part of the goal you are after with better cost transparency being the other part of the goal, which would be quite a noble cause. That still doesn’t account for the fact that you have a large segment of the population without the sophistication needed to effectively shop for healthcare, but that would just muddy the model.
I don’t see how forced deferral of medical services is proving any points unless it is deferred to the point that a large number of scheduled medical procedures are outright canceled, which may eventually become the case and then you would have some useful data.
Floccina
May 14 2020 at 2:53pm
It at least means people could probably shop for and travel for a significant amount of care.
The Amish go to Mexico for care and some have proposed medical ships with good MD’s from Indian. Dean Baker has proposed allowing MD’s from other developed countries having sort of medical embassies.
Not all care is emergency care. So why don’t we have any of this? Robin Hanson thinks it is because medical purchasing is bond up with showing that we care. It’s the only half way reasonable explanation I’ve heard.
David
May 14 2020 at 3:21pm
Most health care debates assume that sickness is an exogenous variable. However, if the amount of sickness is dependent upon behavior, then we have another lever to pull to reduce healthcare expenditures. The best government policy would be to create a matrix of biomarkers (bodyfat percentage, age, blood pressure, etc.) that are highly correlated with levels of sickness.
Miniminize expenditures for sickness = F (x(1)…….x(n))
Then the government would pay out “rewards” to people who voluntarily submit to the testing required to measure F(X(1…n)). So a 50-year old male with 12% body fat and a 95/55 blood pressure, and non-smoker could receive a $2,500 payout while a 40-year old female with 45% body fat, 160/100 blood pressure and a smoker would get $0. Then you’ll be amazed how low healthcare expenditures would fall once people understand how endogenous healthcare costs truly are!
Anon
May 15 2020 at 1:46am
Isn’t that the whole point of underwriting & community rating already in force: you buy a plan where your premiums (periodic) and out-of-pocket for services (actual events and their treatment) are tied to your biomarkers, capped at can’t be beyond a community as a whole?
And every your your premiums/oop are adjusted if you keep healthy and focus on staying health (premiums go down or oop are cut down or don’t increase).
Thomas Hutcheson
May 14 2020 at 10:21pm
Doctors ought to have a fiduciary responsibility for their client’s health-care spending.
Health savings accounts are OK but they should not be funded with tax deductions, but with partial tax credits.
Thaomas
May 15 2020 at 7:52am
#4. Who knows? Data on delays of surgery provide no evidence. That doctors are know to make recommendations without regard to cost-benefit considerations was already well know.
Thomas Hutcheson
May 15 2020 at 9:30am
I know it’s not intentional, but my email seems to have gotten blocked again on “The Money Illusion.” 🙂
Scott Sumner
May 15 2020 at 12:20pm
Try again, I can’t find it.
SaveyourSelf
May 15 2020 at 10:49am
Yes. You are unequivocally correct.
There hasn’t been much COVID where I work but I’m affected by the regulation for COVID none the less. Since schools were closed, businesses closed, and visitor restrictions applied to the local hospital, Emergency Room visits are down about 60%–by my estimate. I think this change is multi factor. First many ER visits are typically for work notes and school notes. With work and school illegal, those notes are unnecessary. This isn’t a bad change. The laws that drive parents and workers to their doctor for notes are wasteful and expensive. The wasteful costs are not born by the decision makers who require doctor’s notes to excuse work absences, which is why they persist. Family’s and employees bear that burden and it is a LARGE burden. Second viruses are common and highly contagious. Eliminating people congregating slows the spread of viruses. This is a well known phenomenon. In a typical year where I work, ER visits drop 30-50% (again, my estimate over 10 years of observation in a small community hospital) during summer when school is out. It picks back up again the exact same week school restarts. That’s causal! And the reductions in ER visits I described happened without even considering the “elective” aspects of medicine like procedures and plastic surgery and what not. So not all of the reductions you are seeing in healthcare utilization are due to postponing elective medicine choices.
To Scott’s point about private spending for healthcare and HSA. HSA is a beautiful thing. But it’s not exactly easy right now to use prices to ration healthcare. My wife, for example, has a diagnosis called MS for which her doctors recommended various medications. The medicine that made the most sense based on the limited studies available costs–get this–$16,000 USD per month and it’s the kind of medication she would take, once started, for the rest of her life! Had I insurance I wouldn’t care about the cost, true. I probably wouldn’t even be aware of it. As it is, though, I have HSA. So I asked and now I know and so that information is part of our medical decision making process. But I have to wonder, who in the entire world could afford to pay so much for anything? Even selling the house and the car, working every day of every week in the USA and eating nothing but ramen noodles from China that price would still be obscenely difficult to meet. And the other alternatives in the market for MS medications are all priced at precisely the same price point, almost as if they were in a cartel or as if there were so few of them that it was logical for the sellers to behave as if they were a cartel. In any case, the number I quoted for her medicine is not really a price—not in the sense that prices are typically designed to attract customers to purchase a product. No one could afford that. So, as it is, she’s not getting any MS medicine. Critics may argue (and they have) that my position is foolish. That health care plans cannot discriminate because Obamacare made it illegal to deny coverage based on health history and thus the insurance companies would be obligated both to accept her and then to pay for her medication regardless of cost. Those critics, I suspect, think health insurance plans, especially government run plans, have infinite resources. To which I would point out that Medicare will go broke in the somewhat near future and Medicaid is already under water. Also in the same vein, prior to Obamacare there were 5 insurance companies selling individual plans in my area. Since Obamacare, every year, one after another insurance company has withdrawn until now there is only a single company selling insurance in the “marketplace”. And it is, shocker, the Medicaid provider. (On a side note, I suspect Obamacare was designed to lead the US to a single payer health system. And, to that end, it has been extremely effective. What it has not been effective at doing, however, is lowering healthcare costs or improving health.) So for Scott’s HSA idea to work, significant changes in the healthcare market would have to occur. At a minimum, providers and companies would have to produce and publish menus with prices listed in advance of visits. [For fun, trying going to your local ER and asking for a menu of prices and services. See what that gets you.]
One final note. Mandatory HSA undermines the whole point of “paying out of pocket”. In order to arrive at meaningful prices, people must be free to consider alternatives. Make HSA mandatory, Scott, and you insulate those HSA dollars from competition with other industries. Part of your complaint, as I understand it, is that healthcare expenditures in the US are already excessively high relative to other alternatives. Making healthcare saving mandatory is one very effective way of making absolutely certain that that bloated percentage remains higher than it would be otherwise. Also, reducing competition for those dollars from non-healthcare alternatives predictably behaves just like a reduction in supply of healthcare and leads to higher prices. And, if that isn’t enough, inviting even one government coercive legislative intervention on HSA sets the precedent to institute more. At the end of that very predictable legislative landslide you’d up right back where you started—centrally rationed healthcare that makes no sense and costs a fortune. Please don’t go there. Please.
Charley Hooper
May 15 2020 at 1:27pm
In the area where I live, 911 calls are down dramatically. I’m on the board of the local fire department and total calls to this fire department were down about 50% in April.
People were evidently being more careful, deciding they could handle their “emergency” themselves, or deciding the devil they knew was better than the devil they didn’t know waiting for them at the hospital.
911 calls are clearly demand-side.
Comments are closed.