Pricing Everything and Value of ???

An undergraduate student, Jaime Rosenthal, spent her summer working for some University of Iowa professors and published her summer research in JAMA.  She called 102 hospitals, usually multiple times, to request pricing information about hip surgery for her uninsured grandmother (ficticious).  Only about half could come up with any price at all and the prices varied hugely. 

“Among both top-ranked and non-top-ranked hospitals, total price estimates ranged from $10,000 to well over $100,000; for reference, available data suggest that Medicare and other large payers frequently pay between $10,000 and $25,000 for primary joint replacement surgery.”

Sara Kliff notes that medical prices are usually nontransparent and vary widely:

Rosenthal’s findings are not exactly an anomaly in medical research: A study published in the Archives of Internal Medicine in the spring found even greater variation in prices for an appendectomy. Depending on where it was performed, the very simple procedure could cost anywhere from as little as $1,529 to as much as $182,955.

Moneybox notes that the health care industry is similar to other industries with price discrimination like hotels (which a hospital resembles) and airlines:

[The health care industry lacks price transparency and has wide variance in prices.] I often hear this discussed by health care wonks as driven by unique attributes of the health care industry... But nontransparent pricing is a fairly common feature of economic life outside the realm of standardized commodities traded in highly competitive markets. Look at the range of different prices residents of any given city are paying for identical cable television packages at any given time. Or look at airline pricing, where all kinds of crazy stuff happens. Connecting flights are sometimes cheaper than direct ones despite higher costs, how many days you stay is often a factor, one-way and round-trip price differentials are wacky, nobody understands the alchemy behind when you can redeem frequent flier miles, etc.

Or perhaps the most directly relevant comparison would be hotels, since hospitals and hotels feature the same basic dynamic that an empty room is pure waste. Hotel revenue management is a very complicated issue that you can study at Cornell or hire consultants for and is undertaken with the assistance of complicated computer models. A small, charming B&B may have a pricing scheme that's as simple as a two-by-two grid assessing whether it's a weekend or a weekday and whether it's peak or off-peak season. But a sophisticated hospitality firm is going to have a pricing formula that's extremely hard to summarize, and there's no reason to expect hospitals to be any different from hotels in this regard.

Will Obamacare Cause Mass Unemployment?

It turns out that there was a CBO study that concluded that about 800,000 Americans are only working because being on a group plan is the only way for them to afford health insurance. When Obamacare  makes it feasible for them to get insurance on the individual market, they are going to retire.  That is a huge change.  Rep. Michele Bachmann said that Obamacare "will kill" the jobs, but by this measure, Social Security and Medicare are the biggest job killing programs in US history for enabling mass retirements.

These retirements won’t increase unemployment because the definition of unemployed are people who are looking for work and these people do not want to work.  It should decrease unemployment because the unemployed will be able to fill these jobs.  It will swap some employed people who don’t want to work for unemployed people who do want to work. This is not falling into the lump-of-labor fallacy because people who want to retire have a lot more savings than unemployed people and so the spending of the newly retired will decrease less than the spending of the newly employed will increase and that will boost aggregate demand.

A Medicare-for-all plan really would kill jobs because it would dramatically reduce administrative costs.  It would eliminate private insurance company jobs and many jobs of people who work in billing departments.  This is what increased efficiency usually does.  Look what happened to farmer employment as they got more efficient.  If farmers could still only feed a little more than their family, then we would still all be farmers. 

Too bad the CBO didn't also estimate how many entrepreneurs are only working a corporate job for the health insurance and will start small businesses once they can afford an individual plan.

Economies of Scale vs. Monopoly Power

The Wall Street Journal (behind subscription paywall) says that hospitals are rapidly buying up small physician's practices because hospitals can negotiate a higher price from insurers for exactly the same services that the the doctors had been doing.  The title of the story is Same Doctor Visit, Double the Cost, and it tells about David Hubbard who, "underwent a routine echocardiogram at his cardiologist's office last year, [and] was surprised to learn that the heart scan cost his insurer $1,605. That was more than four times the $373 it paid when the 61-year-old optometrist from Reno, Nev., had the same procedure at the same office just six months earlier."  The reason was that his doctor's practice had been acquired by a hospital that was better at negotiating a higher price from insurers because of its economies of scale in bargaining clout! David was upset that he had to pay the extra thousand dollars himself because of his high-deductible health plan.  And it isn't just private insurance.  Big hospitals are also able to negotiate higher payment from Medicare too.  
This is kind of like an economy of scale.  Walmart has been able to lower its average costs as it has grown bigger simply because a larger buyer has more leverage to squeeze down supplier prices through monopsony power.  Monopsony power is not the textbooks example of an economy of scale because it is a market failure and economists usually think of economies of scale as being efficient, but monopsony power does meet the textbook definition.   In the above case, doctors offices are able to increase their seller power (monopoly power) by getting larger.  This has the same effect as an economy of scale: It increases the size of organizations because smaller organizations cannot compete. 

Value of a Life

A Life’s Value

As U.S. Agencies Put More Value on a Life, Businesses Fret

As the players here remake the nation’s vast regulatory system, they have been grappling with a subject that is more the province of poets and philosophers than bureaucrats: what is the value of a human life? The answer determines how much spending the government should require to prevent a single death.

To protests from business and praise from unions, environmentalists and consumer groups, one agency after another has ratcheted up the price of life, justifying tougher — and more costly — standards.
The Environmental Protection Agency set the value of a life at $9.1 million last year in proposing tighter restrictions on air pollution. The agency used numbers as low as $6.8 million during the George W. Bush administration. The Food and Drug Administration declared that life was worth $7.9 million last year, up from $5 million in 2008, in proposing warning labels on cigarette packages featuring images of cancer victims.
The Transportation Department has used values of around $6 million to justify recent decisions to impose regulations that the Bush administration had rejected as too expensive, like requiring stronger roofs on cars.

And the numbers may keep climbing. In December, the E.P.A. said it might set the value of preventing cancer deaths 50 percent higher than other deaths, because cancer kills slowly. A report last year financed by the Department of Homeland Security suggested that the value of preventing deaths from terrorism might be 100 percent higher than other deaths.

...“Agencies have been using numbers that I thought were just too low,” said W. Kip Viscusi, a professor of economics at Vanderbilt University whose research is cited by most of the federal agencies as the basis for their calculations.

...some industry representatives said assigning a value to life was inherently subjective, and that the recent changes were driven by the administration’s pursuit of its regulatory agenda rather than scientific considerations.

“It looks like they just cooked the books — they just doubled the numbers,” said Todd Spencer, executive vice president of the Owner-Operator Independent Drivers Association, a trade group for the trucking industry, which faces higher costs under some of the Transportation Department’s new rules.

...The current rise in the value of life is based on the work of Professor Viscusi, who wrote his first paper on cost-benefit analysis as a Harvard undergraduate in the early 1970s. ...

The idea he and others have since developed in a long string of studies is that differences in wages show the value that workers place on avoiding the risk of death. Say that companies must pay lumberjacks an additional $1,000 a year to perform work that generally kills one in 1,000 workers. It follows that most Americans would forgo $1,000 a year to avoid that risk — and that 1,000 Americans will collectively forgo $1 million to avoid the same risk entirely. That number is said to be the “statistical value of life.”
Professor Viscusi’s work pegs it at around $8.7 million in current dollars.  Before the current administration, only the E.P.A. had fully embraced this methodology. Other agencies relied instead on the results of surveys asking Americans how much they would spend to avoid a given risk. This technique tends to produce significantly lower results. An even older technique, which yields even lower numbers, is to sum the wages lost when a worker dies.

Here is a comedian's take on the reductions in the value of a life that the government uses for regulations: Colbert Report. Time magazine reported that several foreign governments had been using yet another value per year:

In theory, a year of human life is priceless. In reality, it's worth $50,000. That's the international standard most private and government-run health insurance plans worldwide use to determine whether to cover a new medical procedure. More simply, insurance companies calculate that to make a treatment worth its cost, it must guarantee one year of 'quality life' for $50,000 or less. New research, however, would argue that that figure is far too low. Stanford economists have demonstrated that the average value of a year of quality human life is actually closer to about $129,000.

These Stanford economists used cost effectiveness analysis for determining that $129,000 is the best value of a year of life, but their . They basically looked at how costly kidney dialysis is and simply declared that to the the benchmark value of a life.  But nobody put much thought into the cost effectivness of kidney dialysis.  It is just a longstanding US tradition to pay for that.  

The Value of a Human Life for government agencies -  Mother Jones:

Though calculating the "value of a statistical life" (VSL) may sound callous or morbid, it can lead to stronger safety and environmental regulations. For example, auto safety rules that would cost $100 million to implement but might protect $500 million worth of lives (say, 100 people at $5 million a pop) are seen as a good deal, cost-benefit-wise. VSLs can vary widely, depending on the agency crunching the numbers and the administration in office. As this chart shows, the feds currently think each of us is worth somewhere between $5 million and $9.1 million.

Competitive Bidding and Lower Costs?

Kevin Drum says, "There's good evidence that competitive bidding is a useful part of the healthcare discussion and can indeed help control medical costs. But how much?" There are two studies I have seen on this, but that I do not understand and they both say that competitive bidding could reduce costs by about 8%.  However, two real-world caveats:
1. Medicare Advantage was supposed to do this and it has ended up costing taxpayers more than regular Medicare.  That is a pretty big strike against competitive bidding.  In theory it could work, but the only example of it in practice is a complete failure. 
2. One of the reasons that competition works poorly with Seniors is that a significant fraction of Seniors have some form of dementia or low literacy or depression, or some other difficulty shopping for something as complex as health insurance which is hard enough for an Economics PhD to sort out. 
3. Outsourced to Kevin:

...just focus on private insurance. When a corporation provides health insurance for its employees, what does it do? Answer: it sets some minimum requirements and then solicits competitive bids from insurance companies. After it gets the bids, it chooses one of the low bidders. This is competitive bidding in its purest form.

So how has that done at holding down healthcare costs? In case you need a hint, the charts on the right tell the story. Since 1999, according to the Kaiser Family Foundation, group insurance premiums have gone up 168%. And CBPP reportsthat private insurance costs have risen faster than Medicare costs consistently over the past four decades.

Private corporations all rely on competitive bidding, and it just hasn't done much to hold down costs. That's because the real source of America's high medical costs is the fact that we simply pay more than other countries for everything we get: more for doctors, more for procedures, more for hospital stays, more for drugs, and — yes — more for insurance.

The mechanism for competitive bidding is a voucher program or "premium support".  The major way that Paul Ryan's plan cuts the government's costs is by just capping government expenditures and letting more of the burden of paying increasing health costs fall upon senior citizens as health costs rise.  Ironically, this plan would eventually turn Medicare into something similar to Obamacare, but Ryan opposes Obamacare. 

5% lower quality for 50% lower price?

Healthcare is an area in which Americans are overly obsessed with getting the highest possible quality.  Many technological revolutions have produced new products that were initially at least of lower quality than the good that they replaced, but of much cheaper price.  For example, recorded music is still generally worse than live music, but it is much cheaper.  Mass-produced clothing is worse than custom tailored clothing, but much cheaper.  Many of our plastic consumer goods are a bit less durable, but much cheaper than what our parents used. 
Healthcare innovations are almost never this kind of advancement and that is one reason why technological change produces cost increases in healthcare whereas technological change often reduces costs in other industries. But there are many ways we could use existing technologies and institutions to reduce costs right now.  For example:
1. medical licensing is too strict and we need to expand the supply of doctors, particularly for primary care.
2. Expand the ability of nurse practitioners and physician's assistants to practice medicine independently.  They are much cheaper than doctors, but they charge the same amount because they can only work under the supervision of a doctor who gets the profits from their lower salaries. 
3. Increase telephone and online consultations.  There is telephone and online support for nearly every other industry, so why not in medicine?  It could replace a lot of office visits if doctors would answer questions more readily via telephone. People with low ability to pay for American doctors could even be allowed to use foreign doctors too. 
4.  Use more generic drugs.  We have already done a lot with this. 
5. Allow pharmacists to dispense more drugs without a prescription.  There could be an intermediary step between OTC and prescription in which pharmacists are required to do some basic education and patient screening before despensing medication.  Birth control pills are an excellent candidate for this and they are already available over the counter in most countries in the world. 

AMA: Good or Bad?

The American Medical Association is like a union for doctors.  The AMA is typically given the kind of respect that the public gives to doctors, but it is a lobbying organization that has always profited from selling its influence.  Its entire history, the AMA has behaved more like a greedy, for-profit corporation than like a public-interest group and it has promoted drugs and even tobacco in exchange for corporate cash. 

[T]he AMA eventually decided to sell advertising space for its medical journal JAMA to drug companies. Expanding on this business model, AMA President George Simmons decided to create the “AMA seal-of-approval” for favored drugs in 1899, resulting in a five-fold increase in advertising revenue by 1909. Simmons, it turned out, had no credible medical credentials and the AMA did no drug testing for the products given the seal-of-approval.
...Simmons’ focus on molding public opinion also became one of the greatest weapons of the AMA – his “Propaganda Department” would soon expand to communicate the AMA’s views through a column syndicated published in over 200 newspapers, a weekly radio program, and various books about how homeopathic practices and non-AMA approved drugs were “quackery.”
Through the 1930s to 1950s ...the tobacco industry leaned on the AMA to substantiate its dubious health claims. Beginning in 1933, JAMA published tobacco advertisements, stating that it had done so only “after careful consideration of the extent to which cigarettes were used by physicians in practice.” The tobacco industry became the AMA’s largest advertiser, and its implicit endorsement of tobacco products allowed companies like Camel to proclaim slogans such as, “More doctors smoke Camels than any other cigarette.”

...[Today the] AMA derives at least a fifth of its budget from drug companies through an arrangement known as “licensure.” The program consists of AMA selling drug companies its “Masterfile” of doctor profiles, spanning everything from detailed biographic information to an individual doctor’s prescription-writing history. The program is extremely controversial since drug companies in turn use the information to aggressively market their products to doctors. Controversial drugs Vioxx and Avandia, which have subsequently been found to pose significant risks to patients, have been marketed to doctors, in some cases, using information obtained from the AMA.
After an uproar in 2007, the AMA, through a policy of self-regulation, claimed to have stopped selling doctor prescription-writing information. But that pledge must be viewed with skepticism given the AMA’s track record.
During a Senate investigation of abuses of the licensure practice in 1990, the Boston Globe reported that AMA and PhRMA lobbyists came to Capitol Hill to promise Sen. Ted Kennedy (D-MA) that the program was not part of any effort to convince doctors to prescribe PhRMA drugs. This promise to self-regulate was never kept. In 2001 the New York Times reported that the AMA generated $20 million dollars a year from licensure sales to drug companies in a complex scheme to market drugs like Baycol to doctors. In 2006, that number climbed to $40 million, and in 2007 it was reported to be $45 million.
So while the AMA projects an image of representing doctors ...it is actually financially tethered to the drug industry. Unless there are major structural changes to the AMA and its sources of revenue, it is difficult to view the group as an honest broker in the reform dialogue.

And when the AMA isn't promoting drugs for pay, it has been acting like a union that tries to raise the incomes of doctors at the expense of the rest of society. It also has its good side, but that is usually all the public thinks about it.