Healthcare spending and innovation

Greg Mankiw quotes a post he wrote a couple of years ago. The normative analysis is pretty much what I wrote about in a post a couple of days ago:

The reason that we spend more [on healthcare] than our grandparents did is not waste, fraud and abuse, but advances in medical technology and growth in incomes. Science has consistently found new ways to extend and improve our lives. Wonderful as they are, they do not come cheap. Fortunately, our incomes are growing, and it makes sense to spend this growing prosperity on better health.

Ezra Klein talks about innovation and healthcare spending today, but comes down on the opposite side of Mankiw in terms of his positive analysis:

Like Kevin Drum, there's one objection to a national health-care system that I find kind of interesting. As the argument goes, the United States overspends on health-care insurance. But that overspending has a point. It supercharges innovation. The rest of the world, in fact, free rides off of the high prices we pay for new drugs and ingenious technologies. That's not a great deal for us, but it's better than the grim future that awaits us in a world where the United States is not massively overpaying, and innovation thus grinds to a global halt.

The problem with that objection is that it's all theory. I've never seen empirical evidence quantifying the benefits of domestic overpayment, nor the cost to innovation of, say, a government health-care system that cut spending by 15 percent. Similarly, you'd also want to consider whether further drug innovation was the most productive use of those dollars. Out of every $100 we spend paying more for drugs and devices than other countries, would those last $8 do more good contributing to "innovation" (along with profits, advertising, me-too drugs, etc) or funding early childhood education? Or cutting taxes?

Nor do proponents of this theory seem to take it particularly seriously. They'll use it as a cudgel against single-payer, but never as an argument to increase domestic spending. But why not? If the benefits to innovation are really so grand, why shouldn't we double our spending? Or increase it by 20 percent? It seems unlikely that fortune has delivered us to the optimal point on the curve. If the need to better fund global medical innovation were truly so persuasive, you'd imagine that it would cease being a convenient objection to universal health care and be built into an affirmative policy proposal in its own right.

I'm more with Klein on this point, but don't agree fully with what he says. Like I said a couple of days ago, some reduction in costs is necessary to make sure the federal deficit doesn't explode to ridiculous levels, as well as to ensure all people have access to the care they deserve. However, that reduction comes a price that manifests itself in may forms, most notably, reduced innovation. Some of the slack will (hopefully) be picked up by other researchers (ie universities), but innovative, if very expensive, life-saving technologies will not come to market as quickly, if at all. I don't think the ever increasing healthcare costs are the most efficient use of money (especially when an alternative use of money is covering people in the lowest income bracket), but cost inflation reduction is not a free lunch.

Veterinary Spending Part 2

I liked to a graph a couple of days ago showing pet and human healthcare spending and their remarkably similar growth rates. I found the graph pretty interesting but ultimately useless since I didn't know the growth rate of pets. Well, Zubin Jelveh over at The Stash ran the numbers and came up with a very rough graph of per-capital vet and human healthcare spending:

[O]ne source (to get the needed data) is the American Veterinary Medical Association (AVMA), which puts out a survey roughly every five years on the pet population in the U.S. going back to 1983. (And possibly earlier, but I couldn't recover earlier surveys.) Using figures from those surveys on the population of cats, dogs, birds, and horses -- which grew from 125 million to 172 million between 1983 and 2007 -- and Biggs' veterinary services spending, I calculated per-capita expenditures for pet care between 1984 and 2006. I did the same for humans and rebased everything to $1 in 1984:

As you can see, pet care grows at a much slower than humans. My original caveats about per-capita spending are still applicable and given the models limitations (ie he lumped many different types of animals together) I still think this is has limited relevancy. Ideally, it would weigh the various animals given how much they contribute to the overall spending, but even that wouldn't solve everything.

Heath Care: Europe vs. the US

Megan McArdle and Kevin Drum have a little debate about which system is better.

Megan first:

Since private systems have so far found it virtually impossible to deny many treatments for long, this will mean that millions of budget constrained people will find themselves with less available treatment than before.

(I say this assuming arguendo that we think a public plan can and will control costs by limiting treatment--a thesis of which I am actually pretty skeptical.)

This is not a crazy worry. What America is best at is delivering a lot of complicated care in extremis, and "quality of life" treatments. What European countries are best at is delivering a lot of ordinary care for the sorts of things that afflict people from 0-50, which is why most of the Europhile journalists writing about Europe genuinely have very good experiences to report. I'd rather be here to have a hip replacement, but I might rather be in the Netherlands to have a baby. Doing something moderately ordinary here is a hassle. Doing something extraordinary there is often not possible for the overwhelming majority of citizens, though that depends on what, and in what system.

Kevin responds:

Boy, I'd sure like to see some backup for that. If by "extraordinary" Megan means the most extreme 0.001% of procedures, then maybe she's right. Maybe....

No system is better at everything than any other system. There are always tradeoffs. But the overall evidence is crystal clear: European state healthcare systems, taken as a whole, provide better care than America's hodgepodege system at about half the price.

Maybe? You have to be kidding me. The question as to what system is better is up for debate, however, at the extreme, to quote Mr. Drum, the overall evidence is crystal clear: the US is far better. There is a reason we have the best doctors in the world many of which are immigrants.

Take as a whole, it is not at all clear the European state healthcare is better. More on that below.

Megan responds:

[C]ontrary to what Mr. Drum has apparently read--cancer survival rates in Europe lag those in the US. (Although this is complicated: we catch cancer earlier, because we're screening-test-mad, and some cancers just hang out for decades without killing you). At the highest macro level, life expectancy, Europe generally outperforms us. But it's not clear how much of that is health care, and how much things like our murder rate, and our famously sedentary lifestyles. When you drill down into many diseases, we outperform them. And many argue that we outperform them on hard-to-measure "lifestyle" issues: how fast your torn ACL gets repaired, how quickly (or whether) you get a hip replacement, etc. Such quality of life issues are nearly impossible to measure, though this hasn't stopped many people from trying. But I don't really trust the figures they generate.

Europe gets a great deal out of all of this. We figure out what works, then they adopt it. But we get a great deal too--we get earlier access to controversial treatments, and our future generations get all the treatments we've discovered so far.

Europe has cheaper healthcare that may or may not be better overall. They have access to largely American life-saving innovations later than we do thanks to their system. Also, due to price restrictions and other factors, the innovation paid for by US healthcare consumers is available to Europe at a reduced price. If we were to somehow switch to a system comparable to theirs, overall life expectancy on both sides of the Atlantic would stop increasing as fast. Treatment used in Europe is paid for by us because of our high costs. Big Pharma and biotech companies are able to pay for their life saving research because they know if the produce something worthwhile, they can market in the US. It then gets exported to Europe because these firms are profit maximizing and realize that even if they get fractions on the dollar on what they do in America, it costs almost nothing to produce something like a pill once the research has been done. But if they can't sell it for high prices in the US it reduces the incentive to innovate, and less useful medication and other technologies are invented. While this may be a worthy trade off, it means Europe can pay less for world class treatment than we do even if they get it later than Americans do.

As Americans, we like the absolute best treatment almost regardless of what it costs. If treatment A is 10 times as expensive as treatment B, and is 5% more effective, most of us, based largely on the recommendation of our doctors, choose treatment A. Often, we aren't even informed of treatment B because treatment A is "far superior" to all other options and only some irrational individual would choose B. Also, if coverage is provided by an employer or the government, there's not much reason to go with B. This is not necessarily a bad thing, a marginal improvement in care could mean the difference between life and death. Additionally, if the government is in the business of supply the poor with coverage, many people would be repulsed at the idea of providing them with inferior care to save a few dollars. This thinking dives innovation, as well as rapidly increasing healthcare costs that will potentially explode our national debt.

Healthcare cost inflation is a very difficult issue that is inseparable from innovation and treatment. While "treating the person not the disease", reducing the gold-plated treatment for very minor issues, improving healthcare IT, rooting out inefficiencies in administrative costs, preventive care etc. may make a dent in costs, they are not going to solve the problem. We, as a society, have to recognize the desire for the best treatments avaliable, innovation, and other prefrefences of ours cost a lot money. If we move to a system more like Europe (again, not necessarily a bad thing) the rate of innovation will decrease and some of the population will not have access to the absolute best medical technologies. Maybe more importantly, the next big medical invention might not get invented or get significantly delayed.

Some reduction in costs is obviously necessary, but it comes at a price, and we need to be honest about and aware that price.

Veterinary Spending

Megan McArdle has an interesting post:

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?

Two reasons, presumably: technological change and rising income. As we get wealthier, we spend more of our income on former luxuries, like keeping our pets healthy--nineteenth century veterinary care for sick cats consisted of a sack and some stones to weight it down with. And improvements in health care technology are giving us more things to spend that money on. With the help of my family, I bought my dog five extra years of life with an MRI that diagnosed his slipped disk; without it, we'd have had to put him to sleep when he was three. Worth it? I think so. But in 1950, I couldn't have afforded it, even if it had been available.

Interesting for sure, but I'm not sure how much the correlation between the veterinary spending and healthcare spending means. In addition of the total amount spent on veterinary care, I would like see numbers on pet ownership. It's possible that most (but probably not all) is explained by an increase in pet ownership. However, that too may be misleading because if life expectancy of say dogs is increasing that would increase pet ownship becuase people who might not replace a pet would keep one for a long time and some might get a younger one to compensate for an old dog that just sits around.

The AEI post Megan links to is here. And below is the graph she references.


Update: Veterinary Spending Part 2 can be found here.