I received a postcard in yesterday’s mail. The first paragraph reads:

“The City of Tallahassee’s Office of Cross-Connection Control monitors actual or potential backflow via cross connections with non-approved water sources. We are committed to the quality of water delivered to our customers, and your drinking water remains clean and free of contaminants [sic]. Our records indicate that your backflow prevention assembly is due for annual testing. Please have this test performed by a certified backflow prevention assembly tester who will forward copies of the test results to our office. Failure to respond to this notice could result in discontinuance of your water service.”

The remainder of the postcard explains how I can locate a city-approved certified tester, cites sections of the Florida Administrative Code and City of Tallahassee Code Ordinances, and concludes, “Thank you for your cooperation in this important matter for our community.”

I have lived in the same house in Tallahassee for 25 years and have never had my “backflow prevention assembly” tested. I don’t even know whether I have one. Why am I required to have this test now?

I don’t see how this can be a problem. First, the city water lines are under pressure, so the water only flows one way. As long as the pressure is maintained in the city lines, how there can be any backflow? Second, all the water in the lines in my house came from the city line, so even if there was backflow, it would just be water that came from the city mains going back that way. Where is the problem?

If someone knows more about water systems than I do, feel free to explain to me why this testing, which hasn’t been done in the quarter century I’ve lived in this house, is in the public interest now. I know this is a minor issue in the big scheme of things, but I am a blogger here at The Beacon, so I’m using this opportunity to carp about it.

My current plan is to throw the postcard away and do nothing. Do you really think they would cut off my water? My best guess is that nobody even checks to see if I comply. I’ll let you know if anything comes of my passive resistance.

What I call health policy orthodoxy is committed to two propositions: (1) The really important health issue for poor people is access to care, and (2) to ensure access, waiting for care is always better than paying for care. In other words, if you have to ration scarce medical resources somehow, rationing by waiting is always better than rationing by price.

(Let me say parenthetically that the orthodox view is at least plausible. After all, poor people have the same amount of time you and I have, but a lot less money. Also, because their wages are lower than other people’s, the opportunity cost of their time is lower. So if we all have to pay for care with time and not with money, the advantage should go to the poor. This view would be plausible, that is, so long as you ignore tons of data showing that whenever the poor and the non-poor compete for resources in almost any non-price rationing system, the poor always lose out.)

The orthodox view underlies Medicaid’s policy of allowing patients to wait for hours for care in hospital emergency rooms and in community health centers, while denying them the opportunity to obtain less costly care at a walk-in clinic with very little wait at all. The easiest, cheapest way to expand access to care for millions of low-income families is to allow them to do something they cannot now do: add money out of pocket to Medicaid’s fees and pay market prices for care at walk-in clinics, doc-in-the-boxes, surgical centers, and other commercial outlets. Yet, in conventional health policy circles, this idea is considered heresy.

The orthodox view lies behind the obsession with making everyone pay higher premiums so that contraceptive services and a whole long list of screenings and preventive care can be made available with no co-payment or deductible. Yet, this practice will surely encourage overuse and waste and, in the process, likely raise the time prices of these same services.

The orthodox view lies at the core of the hostility toward Health Savings Accounts (HSAs), Health Reimbursement Arrangements (HRAs), and any other kind of account that allows money to be exchanged for medical services. Yet, it is precisely these kinds of accounts that empower low-income families in the medical marketplace, just as food stamps empower them in any grocery store they choose to patronize.

The orthodox view is the reason so many backers of Obamacare think it will expand access to care for millions of people, even though there will be no increase in the supply of doctors. Because they completely ignore the almost certain increase in the time price of care, these enthusiasts have completely missed the possibility that the act may actually decrease access to care for the most vulnerable populations.[1]

The orthodox view is the reason there is so little academic interest in measuring the time price of care and why so much animosity is directed at those who do measure such things. It explains why MIT professor Jonathan Gruber can write a paper on Massachusetts health reform and never once mention that the wait to see a new doctor in Boston is more than two months.[2]

This neglect would matter little if not for one thing: the evidence, as I explain in my book Priceless: Curing the Healthcare Crisis, suggests that the orthodox view is totally wrong.

Notes:

1. John C. Goodman, “Emergency Room Visits Likely to Increase under ObamaCare,” National Center for Policy Analysis, Brief Analysis No. 709, June 18, 2010, http://www.ncpa.org/pdfs/ba709.pdf.

2. Jonathan Gruber, “The Impacts of the Affordable Care Act: How Reasonable Are the Projections?” National Bureau of Economic Research, NBER Working Paper 17168, June 2011, http://www.nber.org/papers/w17168.pdf.

[Cross-posted at Psychology Today]

I had earlier posted about the SNAFUed boondoggle also known as the Eastern span of the Oakland-San Francisco Bay Bridge (here and here), but the bad news just keeps rolling in.

Yesterday it was revealed that the tower supporting the entire self-anchored suspension bridge rests on bolts that are likely to fail, causing the tower to move. A “veteran seismic engineer” has helpfully pointed out:

That’s something you don’t want.

It seems that Caltrans, the agency building the $6.4+ billion bridge, after guessing that engineers could figure out how to build its arty design safely, then guessed that bolts banned from use in bridges would be OK if they were manufactured under a slightly different process.

Problem is, instructions for the altered manufacturing process failed to get passed along to the Alabaman manufacturer.

Thus the banned bolts arrived, got embedded in concrete on top of pilings in the Bay, and the 525 foot tower was lowered on top of them. Where they can now not be inspected.

Throughout, Caltrans continues to insists its quality control has been “pretty rigorous.”

The California State Senate suggested an investigation by a “truly independent third-party,” such as “a panel of University of California professors or an independent, nonprofit think tank,” but the Feds know better, and now the Federal Highway Administration is going to come in and investigate.

Asked about the prospect of $6.4 billion not being enough to deliver a bridge that can actually be used, Jerry Brown, governor of our most-taxed state (and in his previous post as mayor of Oakland an early proponent of form over function in advocating for the designer bridge), succinctly philosophised: “s— happens.”

Guess our taxes won’t be headed down anytime soon.

Barring legal maneuvers, a fringe party becomes part of a country’s mainstream politics for one of two reasons: because it sheds or conceals its extravagant views or because mainstream politics shifts in such a way as to make it relevant. The UK Independence Party, which won an average of 25 percent of the vote in the seats it contested in the recent local elections in Britain, belongs in the second category.

Prime Minister David Cameron, who once famously described UKIP as “a bunch of fruitcakes, loonies and closet racists”, felt forced, the day after the stunning results, to say, “We need to show respect for people who have taken the choice to support this party.” The move from the early dismissal to the recent recognition of UKIP by the authorities is an ironic illustration of how the organization led by Nigel Farage, a relatively young former commodities broker who serves in the European Parliament, has transited from the margins of British politics to the center. And it has done so without shedding or concealing its ideas, which are essentially three: immigration is a scourge; the United Kingdom must leave the European Union, and the welfare state needs to be rolled back.

What has happened? The traumatic post-bubble scene in Britain and Europe has helped Farage’s cause, of course. So has the blurring of the ideological lines between the three dominant parties, including the Conservatives and the Liberal-Democrats, who used to be at opposite ends of the spectrum but have been, since the 2010 general election, allies in government. More fundamentally, however, what has happened is that UKIP now lies at the intersection of two powerful though mutually exclusive sentiments that have been gathering steam for many years in contemporary Britain: individualism and nationalism.

The first sentiment is a healthy reaction against the growth of government and social engineering, which have gradually interfered with, or even replaced, the old tradition of voluntary association and community that is a hallmark of the country’s democracy. The second sentiment is a fear of the disruptive forces of globalization, a distrust of things foreign and different. Of course, the lines are not always clearly demarcated: there is in part an individualistic ingredient in the xenophobic reaction against outsiders, mostly the disgust with the European bureaucracy in Brussels.

The point here is that UKIP has managed to capture a growing share of the electorate (we will have to wait until the general election of 2015 to see whether this phenomenon has long legs) because the mainstream parties have not been able to address these two sentiments. Even if they had tried, it would not have been an easy task at all because there is a contradiction at heart between wanting to push back the state (both the British and the European states) and rejecting the consequences of the free circulation of goods, services, capital and people.

This contradiction is tearing apart the mainstream parties themselves. As is well known, the Tories have been deeply divided over Europe for a long while. So much so that at least one hundred Conservative MPs in Westminster, about one third of Cameron’s party, are much closer in ideological terms to UKIP than to the government they support. Because he knows this, Cameron has promised a referendum on whether the UK will stay in the European Union after the next general election if he wins.

Numerous voices in Britain are dismissing the recent elections as a typical case of mid-term discontent rather than a sea change in British politics. Nobody knows for sure. But the connection that Farage has established with the two potent sentiments that have taken grip of a large chunk of the electorate suggests the traditional parties need to do a lot more than hope this is a passing fad.

Despite the fact that prices in healthcare do not play the same role as they do in other markets, there is a tendency on both the political right and the political left to ignore this fact.

The right, for example, issues frequent calls to make prices transparent. A number of proposals would even require doctors and hospitals to post their prices. Doctors find these proposals perplexing because they know that there are no prices at a typical physician’s office. There are only different payment­ rates. What possibly could be gained by posting these rates on the wall? If you are a BlueCross patient, how does knowing what an Aetna patient is paying help you in any way?

On the left, a common view is that health costs are too high because health-care prices are too high. They believe that the way to control costs is to push prices down. This idea is actually written into the Affordable Care Act. All kinds of efficiency ideas are included in the new law, but when all else fails—and most knowledgeable people believe that all else will fail—ACA will try to solve the problem of rising Medicare costs by squeezing the providers. Medicare’s chief actuary predicts that by the end of the decade, Medicare fees for doctors and hospitals will be lower than Medicaid’s.[1] And it may not end there. At least one organization advocates imposing Medicare-type price controls on the entire healthcare system.[2]

The problem with this way of thinking is that prices in healthcare are symptoms of problems, not causes of problems, in the same way that a high body temperature is a symptom of a fever. Just as it would make no sense to try to treat a fever by lowering the body’s temperature, it makes no sense to try to control prices while ignoring why they are what they are. Plus, when we treat symptoms rather than their causes, there are inevitably unanticipated negative consequences. For example, if we tried to impose low fees on every provider for all patients, we would begin to drive the most capable doctors out of the system—into alternative pay-cash-for-care services and perhaps even out of healthcare altogether.

But there is an even more fundamental problem with trying to solve the problem of cost by suppressing prices. The suppression of provider payments is an attempt to shift costs from patients and taxpayers to providers. Even if we get away with it, shifting­ costs is not the same thing as controlling­ costs. Doctors are just as much a part of society as patients. Shifting cost from one group to the other makes one group better off and the other worse off. It does not lower the cost of healthcare for society as a whole, however.

Finally, both the right and the left—but especially the left—too often assume that the ideal price of care for low-income patients is zero. After all, if price is a deterrent to care, doesn’t it follow that you maximize access by making healthcare free at the point of consumption? Not necessarily. I will explain why in my next blog post. Until then, please see my Independent Institute book, Priceless: Curing the Healthcare Crisis.

Notes:

1. John D. Shatto and M. Kent Clemens, “Projected Medicare Expenditures under an Illustrative Scenario with Alternative Payment Updates to Medicare Providers,” Centers for Medicare & Medicaid Services, US Department Of Health & Human Services, August 5, 2010, https://www.cms.gov/ReportsTrustFunds/downloads/2010TRAlternativeScenario.pdf#page=7.

2. Michael Ettlinger, Michael Linden, and Seth Hanlon, “Budgeting for Growth and Prosperity: A Long-Term Plan to Balance the Budget, Grow the Economy and Strengthen the Middle Class,” in The ­Solutions ­Initiative, Peter G. Peterson Foundation, Washington, DC, May 2011, 40–47, http://www.pgpf.org/Issues/Fiscal-Outlook/2011/01/20/~/media/4595173EB72C47EF9E8E85DE680A22B0.ashx.

[Cross-posted at Psychology Today]

If you ask a hospital in your neighborhood to give you a package price on a standard surgical procedure, you will probably be turned down. After the suppression of normal market forces for the better part of a century, hospitals are rarely interested in competing on price for patients they are likely to get as customers anyway.

A foreign patient is a different matter. This is a customer the hospital is not going to get if it doesn’t compete. That’s why a growing number of US hospitals are willing to give transparent package prices to foreigners, and these prices often are close to the marginal cost of the care they deliver.

North American Surgery (an enterprise that facilitates medical tourism) has negotiated deep discounts with about two dozen surgery centers, hospitals, and clinics across the United States, mainly for Canadians who are unable to get timely care in their own country. The company’s cash price for a knee replacement in the United States is $16,000 to $19,000, depending on the facility a patient chooses.[1]

Now here is what is interesting: The same economic principles that apply to the foreign patient who is willing to travel to the United States for surgery also apply to any ­patient who is willing to travel. That includes US citizens. In other words, you don’t have to be a Canadian to take advantage of North American Surgery’s ability to obtain low-cost package prices. Everyone­ can­ do ­it.

US patients willing to travel and able to pay cash may get an even better deal by taking advantage of the online service, MediBid. People register and request bids or estimates for specific procedures on MediBid’s website for the services of, say, a physician, surgeon, dermatologist, chiropractor, dentist, or numerous other medical specialists. MediBid-affiliated physicians and other medical providers respond to patient requests and submit competitive bids for the business of patients seeking care. MediBid facilitates the transaction, but the agreement is between doctor and patient, both of whom must come to an agreement on the price and service.

The company facilitated more than fifty knee replacements in 2012. Each request got an average of five bids, with some getting as many as twenty-two. Most prices were between $10,000 and $12,000, and the average was about $12,000.[2]

The implications of all this are staggering. Many US hospitals are able to offer traveling patients package prices that are competitive with the prices charged by top-rated medical tourist facilities around the world. (You don’t have to travel to Thailand, after all.) However, I would insert this note of caution: Although a hospital with excess capacity gains by charging the marginal ­customer the marginal cost of care, it may not cover the full costs it needed to stay in business if it charges every ­customer that price. So the prices we are looking at may not be long-run equilibrium prices.

The final question is: Why are US employers and insurers overpaying by so much, and why does the amount they overpay vary so much?

In part, because in the entire medical marketplace, there is no natural evolution to uniform, market-clearing prices, the way markets work in other sectors of the economy. Even MRI scans vary by over 650 percent in a single town. Furthermore, most providers don’t even know how to price their services because they don’t know what their costs are.[3]

Market prices plays a critical role in coordinating economic activity, but not so much in the healthcare system. The reason is that their effectiveness has been hampered by a variety of government interventions, including those that have fostered the third-party payment system. As I explain in my book Priceless: Curing the Healthcare Crisis, unless we liberate prices and allow them to do their job, reforms that are supposed to significantly improve healthcare will fall far short of that goal.

Notes:

1. Devon Herrick, “Medical Tourism: Have Insurance Card, Will Travel,” National Center for Policy Analysis, Brief Analysis, No. 724, September 22, 2010, http://www.ncpa.org/pdfs/ba724.pdf.

2. MediBid.com website, correspondence, and discussions with Ralph Weber, president and CEO of MediBid.

3. Kelly Kennedy, “Healthcare costs vary widely, study shows,” USA­ Today, June 30, 2011, http://www.usatoday.com/money/industries/health/2011-06-30-health-costs-wide-differences-locally_n.htm.

[Cross-posted at Psychology Today]

This bridge took 5 years and $936 million to build

I have written before about the amazing saga of the new span for the Oakland-San Francisco Bay Bridge, now 24 years and $6.4 billion in the making...with no end in sight. A full account of its background can be found here.

The “signature design” never before built and of dubious seismic stability in one of the Continental U.S.’s most earthquake-prone areas, now faces a new round of problems: 2,300 bolts holding it together are likely to fail.

Bolts that the agency building the bridge had itself banned from use on bridges.

This bridge has been 24 years and $6.4 billion in the making

But rules—when you’re the government and they’re your rules—are made to be broken. As explained by the Director of the California Department of Transportation (Caltrans):

Generic specifications are for a run-of-the-mill bridge, and this bridge is not run-of-the-mill.

Indeed it’s not. It’s “art,” and pesky notions like safety and engineering principles must simply understand.

Almost from the get-go, safety and engineering have taken a backseat as politicians hijacked the bridge-replacement process. Under their guidance, designers came up with an asymmetrical self-anchored suspension bridge with unique cabling features—a design that has never been built, but nevertheless carried the politicized vote of approval.

An architect serving on the panel offered this explanation for the final vote:

“The novelty factor kicked in, especially with the engineers. And everyone was getting a bit tired by then.”

Fast-forward 15 years: the resulting bridge is supposed to be opened for traffic this September, with a final price tag somewhere north of $6.4 billion—nearly five times that projected. The general perception is that if it doesn’t open on schedule it will be a black eye for somebody—though I’m not sure for whom, since none of the original political gamesmen seems to be standing up—and one wonders if safety will now, finally, be allowed to trump politics.

An earlier safety whistle blown was quickly silenced. The Sacramento Bee conducted an exhaustive investigation, reviewing 50,000 technical files, and consulting with the world’s leading experts in bridge construction, to reveal significant questions regarding the safety of the bridge’s concrete foundations.

Questions that have never been answered.

Contrast this with the Tsing Ma Bridge in Hong Kong, for example, built in 5 years, at a cost of $936 million. Similarly a suspension bridge, it is longer than the Bay Bridge’s new span and has two decks: one for cars, one for rail and emergency access, and was built to withstand typhoons.

Though it may not meet Bay Area bureaucrats’ standards as a “signature design,” according to the China Attractions website, this “spectacular bridge ... has become a favorite scenic spot as well as a landmark.”

Whenever the ribbon is cut on the new Bay Bridge’s span, one wonders who is going to be first across the seismically unsafe bridge with questionable foundations and held together with banned bolts. Not my family.

In the aftermath of the 9/11 attacks, the Bush administration crafted a legal theory and detention policy to handle accused terrorists. Nowhere was the policy more conspicuously problematic than at Guantánamo, where a total of 779 detainees were held and where today 166 remain after over ten years. The Bush administration referred to these people as the most dangerous terrorists, as “the worst of the worst,” but that was simply a lie. Of the total captured, only a little over half were even determined by the U.S. government to have committed any belligerent acts against the United States or its allies. And of course, most of those people were just soldiers, many conscripted in the Taliban, fighting against an invading army. Captured enemy soldiers are traditionally treated as prisoners of war, not vicious criminals. Only about 8 percent were labeled al Qaeda fighters. What’s more, only five percent were even captured by U.S. forces—the bulk came from Northern Alliance and Pakistani warlords who rounded up as many people as they could to hand them over for a cash reward. In short, a huge number of these people were totally innocent—on pilgrimage to conduct business or charity work. Some were children.

By 2008, almost everyone who was the least bit reasonable realized this whole thing was a great stain upon the American character and wanted it ended. The Supreme Court ruled in Boumediene v. Bush that constitutional guarantees of common law habeas corpus extended to the prison. Bush’s Defense Secretary Robert Gates and Secretary of State Condoleezza Rice were among the voices calling for closure. Seven Guantánamo prosecutors had resigned, most citing the total mockery of justice. Obama won the presidency promising to close the prison camp.

Yet he didn’t simply vow to close it, release the many who should be released, and try the few whom the government had any evidence to try on terrorism charges. He instead proposed to create a Guantánamo-like prison camp within the United States. In May 2009, standing in front of the National Archives, Obama announced a policy of “prolonged detention” to continue indefinitely holding people without traditional just cause on the basis that nothing else easy could be done.

Under Bush and in the early Obama era, the executive and then the judiciary released prisoners. The administration put a freeze on these releases. Congress also obstructed releases by passing a law barring the release of prisoners to designated enemy states, but it also passed legislation allowing Obama to make individual exceptions of prisoners in the name of national security. He has not done so. What’s more, as commander in chief, he can easily move these prisoners around and order their release as Bush set the system up in the first place. As the head of the executive branch, he also can pardon people in the criminal justice system. Are we really to believe he’s powerless here? Even PBS recognizes that much is in his control.

The last three prisoners to leave Guantánamo have left dead. The last one, Adnan Latif, committed suicide after being told he was cleared for release. He had been stuck in the dungeon for ten years, another totally innocent victim of being in the wrong place at the wrong time. Even though the Supreme Court declared that habeas extended to Guantánamo, and a lower federal court ordered his release, the administration appealed, was backed up by a higher court, and the Supreme Court refused to come to his rescue.

Latif was on a hunger strike, and was force-fed, in violation of international standards of basic human decency. Now a majority of Guantánamo’s inmates are on hunger strike, the administration has responded with force-feeding and by cutting off their water, and Obama again reiterates his supposed goal to close down the prison.

Obama’s partisans attribute his waffling to political pressure and the Republicans, but congressional Democrats were the ones to first refuse to fund the prison closure in 2009. What’s more, Obama could have won points for standing firm on this, for standing up for justice for a change, and teaching the country the importance of human rights and constitutional law. Instead, he chose to spend his political capital on his domestic economic policy.

Here’s what I think the administration should do: simply release these people. If it thinks a few of them can be prosecuted, then it should be bound by all the basic rules of civil procedure. If it thinks that the case against some of them is tainted due to torture, then it should release those people. That is a risk that comes in torturing people, and a civilized society shouldn’t tolerate holding people because they’ve been abused. It should dispense with this “terrorist nation” designation and free these people. The Bush administration detained tens of thousands in Iraq, and let them go. Whatever risk comes in letting them go cannot justify holding onto them a second longer. If the Obama administration really has trouble finding a place for them, I’d recommend buying each of them a house on Pennsylvania Avenue. The money can come from liquidated government assets or from forcing Bush and Obama administration officials to pay restitution.

America’s post-9/11 detention policy will always be remembered as one of the greatest injustices in American history. The very least that must happen now is for the injustice to end. If any of America’s enemies were torturing over a hundred people in a dungeon for a decade and concocted a shameless legal theory to justify it as the Obama administration has, it would be cited as a major human rights abuse and some would call for military intervention to depose such a tyrannical regime. It’s time for all Americans to stop tolerating these profound, unspeakable atrocities carried out in our names. Free the prisoners. Close Guantánamo. And end the nonsensical Alice-in-Wonderland legal principles and military policies that have so thoroughly twisted the American system into a wannabe impersonator of communist dictatorships.

Why is the price of a knee replacement for a dog—involving the same technology and the same medical skills that are needed for humans—less than one-sixth the price a typical health insurance company pays for human operations? Why is it less than one-third of what hospitals tell Medicare their cost of doing the procedure is?

When you recover from your knee replacement surgery, let’s say you spend two nights in a hospital room. If you are like some patients, you may be enjoying all the comforts of a luxury hotel. Fido recovers in a cage, which presumably costs much less. But even with meals, two nights in a hotel should come in under $1,000. The price difference we are trying to explain is many times that amount.

Then, there is the difference in surgeons’ skills. Presumably, the surgeons who operate on humans are more talented and therefore more valuable. But an orthopedic surgeon in Dallas typically gets paid an amount equal to about 10 percent of the $32,500 an insurer pays to the hospital.

I suppose you (as a patient) would get more attention than Fido from nurses and support staff for the one or two days of recovery. Guess how much a nurse gets paid in Dallas? It’s about $30 per hour. That is nowhere near the explanation we are searching for.

Let’s take the actual cost hospitals tell Medicare they incur for this procedure. It’s about $15,000, not including surgeon’s fees. But if veterinarians can do it for a third of that amount, it’s hard to see why the human hospital cost isn’t at least half of what it actually is.

The only explanations I can come up with for why human knees cost so much more are (1) government regulations, (2) malpractice liability, and (3) the inefficiencies created by the third-party payment system. It looks like these three factors are doubling the cost of US healthcare.

Let’s take regulations first. In terms of rules, restrictions, and bureaucratic reporting requirements, the healthcare sector is one of the most regulated industries in our economy. Regulatory requirements intrude in a highly visible way on the activities of the hospital medical staff and affect virtually every aspect of medical practice. In Patient ­Power, Gerry Musgrave and I described the burdens faced by Scripps Memorial Hospital, a medium-sized (250-bed) acute care facility in San Diego, CA. Scripps had to answer to thirty-nine governmental bodies and seven nongovernmental bodies. It periodically filed sixty-five different reports, about one report for every four beds. In most cases, the reports were not simple forms that could be completed by a clerk. Often, they were lengthy and complicated, requiring the daily recording of information by highly trained hospital personnel.

Then there is the malpractice system. Estimates place the burden of the system at between 2 percent and 10 percent of the cost of US healthcare. But it’s hard to separate out the effects of malpractice from the effects of regulation. Remember, both institutions are trying to do the same thing: reduce the incidence of adverse medical events (no matter how imperfectly). If a hospital fails to follow a regulation and that failure leads to a patient death, the failure would undoubtedly be the basis for a malpractice lawsuit. So the existence of the malpractice system helps encourage compliance with regulations—making them more costly.

Finally, there are the inefficiencies produced by the third-party payment system. When providers do not compete for patients based on price, they typically do not compete on quality either. In the hospital sector, they tend to compete on amenities instead. The way you compete on amenities is to spend more on amenities. This adds to costs.

It’s amazing how often people cannot see the forest for the trees. Think how many volumes have been written trying (and failing) to explain why our healthcare costs are so high. Sometimes the answers to complex questions are more easily found by asking the simplest of questions. I will ask and answer more of such questions in my next blog post. Until then, please see my Independent Institute book, Priceless: Curing the Healthcare Crisis.

[Cross-posted at Psychology Today]

Complex systems, by definition, are systems that are too complex for any single individual (or group of individuals) to grasp and understand. What difference does that make? It makes a huge difference.

Most of us wouldn’t walk into a chemistry lab and start pouring solutions from one beaker into another—at least if we don’t know anything about chemistry. Similarly, we wouldn’t walk into a biology lab and start moving substances from one petri dish to another if we’re not trained biologists. And if we don’t know anything about nuclear power plants, most of us wouldn’t walk into one and start pushing buttons.

We wouldn’t do any of these things because most of us have common sense. We know intuitively that if we don’t know what we are doing in a complex environment, odds are great that anything we do will mess things up.

Not everyone has this common sense-based humility, however. The late Nobel laureate economist, Friedrich Hayek, called the hubris of people who want to tinker with systems they do not understand the “fatal conceit.” The term is apt. Just about everything that has gone wrong in health policy can be directly attributed to this very error.

For more than 200 years, economists have been studying the complex system we call the economy. How do they do it? They don’t try to understand the economy in all its complex detail. Instead, economists use highly simplified models to predict some general effects of parameter changes in ordinary markets. For example, we can say with some certainty that rent controls will cause housing shortages and price supports in agriculture will cause crop surpluses.

Unfortunately, there is no model of the healthcare system that allows us to make anything like these kinds of predictions. The Affordable Care Act will insure 32 million more people. In addition, most of the rest of us will have to convert to health plans that have more generous coverage than we now have. We know that when people have more insurance coverage they try to consume more care. But what happens when there is a system-wide increase in demand and no change in supply?

Will the excess demand drive thousands of people to hospital emergency rooms? Will clinics run by nurses start springing up to meet the demand that doctors cannot meet? If service is rationed by increasing the waiting time, will everyone who can afford it turn to concierge doctors, who will be paid extra fees for prompt service? As more doctors become concierge doctors, how will the system manage the even greater rationing problem faced by all those left behind? Will patients start going out of the country—seeking care in the international medical marketplace?

Unfortunately, there is no model that allows us to answer these questions with any confidence.

Why can’t we apply ordinary economic models to healthcare markets? As I explain in my book Priceless: Curing the Healthcare Crisis, one reason is that price doesn’t play the same role in healthcare as it does elsewhere in the economy. Although many would like to think that our system is very different from the national health insurance schemes of other countries, the truth is that Americans mainly pay for care the same way people all over the developed world pay for care at the time they receive it—with time, not money.

On the average, every time we spend a dollar at a physician’s office, only 10 cents comes out of our own pockets. As a result, for most people, the price of care in terms of the time (getting to and from the doctor’s office, waiting in the reception area, waiting in the exam room, etc.) tends to be greater—and probably much greater—than the money price of care.

In general, we have no reliable model to tell us who gets care and who doesn’t when the time price of care rises for everyone, as we expect to happen once the Affordable Care Act gets fully implemented.

[Cross-posted at Psychology Today]