Then I took a Kenneth Arrow to the knee

Blog host CBD asks us is healthcare demand really elastic? The answer is a complicated mess of “yes, sometimes, but not always” that’s worth exploring.

If you ask a liberal to discuss the inelasticity of healthcare cost my experience is they will ramble on for chapters incoherently about Kenneth Arrow and market failures. You can actually read Arrow’s paper on uncertainty and the healthcare market for yourself and draw your own conclusions.

What’s always interesting to me about Arrow’s paper is how liberals ends to stretch it far past it’s actual thesis into an argument for a complete government takeover of medicine. After all since these decisions are complicated you shouldn’t be allowed to make them (H/T to rdbrewer for that video).

As I read the paper Arrow lays out his claim about knowledge gaps in the healthcare setting then makes some suggestions, many of which aren’t even all that objectionable (state licensing of physicians is pretty tame) others of which are a bit more in line with the progressive mindset (government setting up insurance in failed markets, although this is vague enough it might not be super progressive).

All of this is still leading up to the original question: is healthcare demand elastic? Which returns to our original answer “yes, sometimes, but not always.”

What I mean by this is that there are lots of cases of healthcare demand that are entirely inelastic. If I get hit by a car on my way out today, I need healthcare, and don’t really have much of a choice about where I get it or how much I get. But this represents only one facet of the healthcare continuum. And arguably not the one we spend the most one.

Another more complicated aspect is prescription drugs. Here you deal with a range of issues including whether or not the drug is needed, name brand vs. generic, etc.  Take my own case. I’m on crestor due to a high cholesterol problem largely caused by genetics. Considering between generic Lipitor and Crestor there was very little price difference to me (although significant cost to my insurance.) This incentive structure is further manipulated by drug companies paying a part of a copay to keep you on the name brand drug. (When Lipitor went generic, they gave out cards that covered the copay difference if you stayed on the name brand. Many people did so, at significant cost to insurers.) Arrow starts in on this in his paper noting that given the model of insurance at the time (which largely continues today) there was little incentive for the consumer to compare prices. Which is true.

Not that you could compare many prices if you even want to. I don’t have it handy, but there was a paper a while back where a group called numerous hospitals and found a fairly low number could even give you a price for a procedure (I think it was a knee replacement) and even many of those that could gave prices more or less off the so called “Chargemaster” which might as well be made up numbers.*  Lastly there’s insurance complexities: the insurance negotiated price is usually well below the chargemaster price, but you’ll hardly ever be able to figure out what it is until after you get your bill. So if you have, lets say, a $1000 deducible, and you’re going to get an MRI, you might call a few places, get quotes that range anywhere from $600 to $3000 (that later being the “chargemaster” price.) The $600 place may have a contract for $550 with your insurer, but maybe the $3000 place’s contract stipulates it’s $450.

Worse yet is when you have to deal with out of network care. The devil there is less the price itself and more the “balance billing” (where you’re responsible for the difference between the plan limit paid and what the provider charges.) I have 70% out of network coverage compared to 90% in network, which sounds great, maybe I should just got to whatever doc I want! Except the plan limits are so low I’m better paying double at an in network provider.

Things get even stranger when you drill down. The book Tracking Medicine is the best summary of the Dartmouth Atlas project I’ve seen, John Wennberg’s attempt to understand “unwarranted variations” in the practice of medicine. His evidence suggests that rather than varying according to illness severity, medical demand tends to rise with supply (rather than the more traditional reverse). That is to say the more providers there are the higher utilization gets, but outcomes don’t seem to get any better.

And there’s still the thorny thicket of the big grouping of “end of life issues” that you can’t talk about without people screaming “death panels!” (Although I’m sympathetic, there’s a thin line here between euthanasia and market forces, especially since government distorts the market so much!) But it’s also something we have to think about. [I omitted a part here about some late stage cancer drugs because it confused the issue, maybe I’ll work on that for another post].

So once again, returning to the question: “Is healthcare demand elastic?” Yes, sometimes, but not always.  Which could be put different by saying “there’s a fair amount of elasticity in demand, but also huge areas of inelasticity.” But I don’t think we should simply discard the former because the latter exist. Food is a mixture of elastic and inelastic conditions too, but we’ve managed to get things fairly functional in that market. Large deductibles are a way at trying to leverage what elasticity there is in the market, but they’re insufficient (or perhaps even wrong) given other problems (such as lack of price transparency) that exist (many of which are created by government meddling.) This is the age of information, and I really think we could make headway towards many of the problems Arrow describes in his paper and actually fix some areas of market failure, but we’re moving in the exact opposite direction (Thanks Obamacare!)


*Oh those chargemasters, they’re also the bane of the uninsured since your average bill is generated off those. I lost my shit once at a bunch of hospital execs saying more or less that as “Catholic Health Providers” (heh) we had a moral duty to transparent billing, and that by sending uninsured people chargemaster based bills we were more or less extorting them. (Never mind that chargemaster numbers are often used to define “charity care” and “Bad debt” levels, which is tantamount to lying.) Heck 20% of the stuff on a chargemaster bill isn’t even paid for by most insurers. It’s things like “gloves, gauze, pill cups” which are “modalities” they roll into their contract rate (Which is still lower than the procedure rate listed on the bloated chargemaster.) Despite this, those things still appear on every uninsured patient’s bill, which of course they can call and “negotiate” down (but they’ll still probably pay more than even a patient with a massive deductible.)

4 comments on “Then I took a Kenneth Arrow to the knee
  1. Or, as Devo said,

    “I’m your doctor and here’s the bill
    (He’s your doctor and here’s the bill)
    Doctor Steel and here’s the bill
    (He likes to steal so here’s your bill)!”

  2. You repeat my main point….that some health care demand is inelastic, and some isn’t.

    But in reality, the health care market is so distorted that conventional economic terms are insufficient to describe how and why people spend their money.

    When I am able to shop and compare prices and services the way I do when I buy a car or a TV or a painter, then perhaps we will be on our way to a rational health care market…..

    • Do you need regular checkups on your heart? You don’t know! Trust us, we’ll do the checkups. And we’ll even let you know if you need another checkup in 6 months. (hint: you need another checkup to make sure you’re not suffering from some horrible disease that afflicts nearly 1 out of 400 men between the ages of 50 and 95)

    • I’d like to say I “added to” or “took your point in a slightly different direction.”
      I admit in a haze of writing the day after Oktoberfest I lost my point a bit. But generally I think we overfocus waaaayyy to much on the inelastic part of healthcare, ignoring the large swaths of the elastic market.

      Granted car buying isn’t to far from healthcare, talk about an opaque market.

      What’s interesting to me is that when you say “market failure for healthcare” to a liberal they jump all up and down about Arrow and how right he was and blah blah blah, but don’t even seem to note that a lot of his concerns were actually sorta subsumed in the information age. The failures now are almost entirely of a different sort.

      Edited (I HAVE THE POWER!) to add: And I think where we disagree is, in part, how much the elasticity matters.
      Yes, it tends to be the least expensive on an individual case, but in aggregate it’s a pretty large chunk of the market. How much is up for grabs, but if we look at things from the “Tracking Medicine” perspective (that is taking into account the unwarranted variations) it’d be enough to radically shift the market.

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