HC Economist Models

Healthcare Economist Manifesto

Last week, I officially graduated from the University of California-San Diego with a Ph.D. in Economics. After 5 years of advanced education, how would I reform the current health care system?  What principles are essential to a well-functioning health care system?  I answer these question below in the “Healthcare Economist Manifesto.”


Healthcare Economist Manifesto

General Comments

  1. Government-run health insurance.  I am neither for nor against government run health insurance.  There are compelling arguments on both sides.
    • For: Creates a more “equal” society; easiest way to decrease the number of uninsured; can solve the problem of adverse selection; lower administrative costs; benefits small business who otherwise would pay high load factors; experts can conduct cost-benefit analysis to see which medical treatments are truly necessary, taxes may not be distortionary if taxes for public health insurance are the same as the premiums people would have paid for private health insurance.
    • Against: May stifle innovation if new technologies depend on government approval; administrative costs savings may not be as high as anticipated; benefit generosity will grow over time as special interests lobby for inclusion in benefits; stifles innovation of new health insurance products; more generous benefits can increase the moral hazard problem; experts may be corrupted and cost-benefit agencies have lost credibility in Congress (see AHCPR history); in times of economic crisis, health benefits will need to be cut; will put a strain on the budget (see Medicare unfunded liabilities); will necessarily lead to higher taxes.
  2. Physician Payment.  How should physicians be paid?  Fee-for-service?  Salary?  Capitation?  There is no clear cut answer.
    • Fee-for-service payment gives doctors incentives to perform too much care.  Capitation gives an incentives for doctors to do too little.  My research finds that when specialists are paid through a fee-for-system scheme rather than on a capitation basis, surgery rates increase 78%.  Further, paying primary care doctors capitation (without a gatekeeper) will increase referrals to specialist and drive up costs.
    • It is easier to pay fee-for-service for procedures.  However, the ideal payment structure may depend on what we want doctors to do.
    • Do we want to pay doctors as guardian professionals or commercial innovators?
    • The Mayo Clinic pays a salary and provides excellent healthcare, but it may be difficult to replicate the Mayo culture throughout the country.
  3. Too little care or too much?
  4. Rationing.  In most places in the U.S., if say the ‘R’ word you’ll be called a socialist.  However, any economist knows that all scare goods are rationed.  In a completely free-market system, prices ration goods–only those willing to pay the selling price are able to acquire the good.  Currently, private health plans ration care by what is included in their list of benefits.  Pay a higher price and you’ll get more generous benefit coverage.  Private health plan administrators are the final arbitrators (read: ‘rationers’) in deciding whether a treatment will be paid for.  If the government took over the supply of health care, bureaucrats and not prices would determine what would be covered.  Whatever system we choose, it is naive to believe that rationing will not occur.  Whether this rationing will take place through prices, private health plan administrators, or government bureaucrats will depend on the system we choose.
  5. Reducing Supplier-induced-demand is the key to reducing costs.  When you take your care to the repair shop and your mechanic says you need a new timing belt or catalytic converter, how do you know you really need it?  Unless you’re an auto expert, you likely will either have to take their advice, or seek a second opinion.  Car repair, like medical care, is typically an experience good. When physicians prescribe a treatment, the patient will almost always accede to the doctor’s recommendation.  This is even more so the case since most patients have insurance, and thus will be largely insulated for the cost of providing the service.  Getting physicians to be more cost conscious is the key to reducing health care costs in America.

What should we do?

Any health reform that I would support should have the following components:

  1. Private health insurance:  But I thought you said you were ambivalent about government-run health insurance?  That is true.  Whether or not there exists a government-run health insurance system, individuals must have the choice to use private insurance.  
    • Private health insurance provides some market discipline even if there is a public health insurance system.  The public health care system can learn from innovations from private health plans and vice versa.  If waiting times or quality ever worsen significantly, individuals should always have the right to purchase their own private health coverage.
    • Private health insurance could also be a testing ground for new innovations.  With a single payer system, a treatment is either adopted or it is not.  If the treatment begins to make patients worse off, this will affect a great many people.  On the other hand, it would be less risky if the treatment was first covered by private insurance and only later–after it was proven successful–would the government health  plan include it in its list of benefits.
  2. Out-of-pocket payments.  When something is free, people do not value the good nearly as much as when they pay for it.  Thus, to limit overuse of the healthcare system, copayments, coinsurance and deductibles need to be implemented.  These payment can–and should–be lower for the poor but they should not be zero.  
    • Even Nobel Laureate Muhammed Yunus said: “I think it’s very important to have the patients, the people who are asking for health services, to pay. How that payment will be made…it can be in a variety of ways. But the important thing is they must pay. They must feel that this is a service they are buying so that they feel equal, so they don’t feel small.”
    • Copayment and coinsurance rates must be sensibly designed.  While basic catastrophic health insurance (i.e., coverage for serious illnesses, but not basic primary care) may sound reasonable from an economic theory point of view, it gives patients an incentive to go the emergency room for basic medical needs and preventive care.  Going to the emergency room for simple issue is not cost effective.  Copayment and coinsurance rates should help to direct patients to the most cost efficient alternative.  
  3. Reduce patent length.  I have mulled over supporting the elimination of patents all-together, but as of now I’ll at least strongly support the reduction in the length of patents.  Patents give producers a monopoly over certain goods produced for a given amount of time.  This creates short-run inefficiencies, which may be outweighed in the long-run if companies increase innovation.  So why should we shorten patent length?  Boldrin and Levine provide some compelling arguments.
    • Patents do not increase innovation: Before Italian patent protection 1961-1980: Italy discovered 9.3% of the world’s new active chemical compounds.  After Italian patent protection: 1980-1983, Italy discovered only 7.5% of the world’s new chemical compounds.  India also has limited patent protection, but is generating many of major pharmaceutical advances.  Another study shows that strong copyright protections also do not increase innovation.
    • Innovation Chains:  Patents prevent innovation by disallowing other firms from building on the work of others
    • Rent Seeking: Patents give companies an incentive to higher lawyers (to extend patent length and increase the scope of the patent) rather than researchers (who invent and innovate).
  4. Public Health.  Public health must continue to be an important part of the health care system.  As the swine flu outbreak shows, there is no greater threat to civilization than the spread of a deadly contagious disease.  Vaccinations have helped stop some of these diseases in their tracks, but their is a constant threat of a new outbreak.  Further, public health initiatives such as clean water and basic sanitation can do much more to improve health than medical care after one becomes sick (see posts on El Salvador).  However, public health should not focus on telling people what to do when it only affects their own health.  For instance, we need to reduce spending on campaigns against smoking, drinking and obesity.  People generally know what’s healthy and what’s not and should be able to decide what to do for themselves.
  5. Electronic Medical Records (EMR).  We need them.  Having the government do it would provide a single platform for all providers and would easily allow patients to transfer records between doctors.  However, the government is a dinosaur and new EMR innovations would take a while to be implemented under the government system.  Further, the U.S. already has some high quality EMR systems in place (see the VA and Kaiser Permanente).  Regardless of whether the government or private health insurance creates EMR, privacy concerns are paramount.  Further, EMR are not a cure all.  While they will almost certainly improve care–especially coordination of care–Margalit et al. (2006)finds that in Israel, “physicians spent close to one-quarter of visit time gazing at the computer screen.”
  6. More money for primary care.  Less for specialists. This is not an absolute statement.  In some countries, specialists may be rare and underpaid, but in the U.S., it is primary care physicians who are underpaid.  The focus in the U.S. health care system now is on procedures and tests where we should focus on the more cost effective primary care.  Nurse practitioners and physicians assistants can supply care focused on more time with the patients.  Innovative forms of delivering primary care–such as retail clinics at pharmacies–should be encouraged.
  7. Certification, not licensure.  Doctors are expensive.  Why?  For three reasons: 1) they provide high value services, 2) going to medical school is costly, 3) they participate in a cartel known as the AMA. It has been shown by many studies that the AMA cares more about physician profits than patient health. Because physicians need a license to practice, they limit supply and drive up prices.  Costs would drop if only certifications were required.  (See my series of posts on licensure).  In many instances, the certification/licensure debate would not produce any real change because physician training for both licensure and certification would be nearly identical.  On the other hand, patients could pay more to see doctors with better/more certifications while still being able to save money by going to a provider with worse/less education.  Certifications would also allow talented physicians to perform cross-discipline procedures.  For instance, ophthalmologists have frequently prevented optometrists from conducting certain treatments through license requirements.
  8. Don’t reinvent the wheel.  Medical care in America is not optimal, but that does not mean that we need to throw out the baby with the bath water.  There are many examples in the U.S. of where superior health care is provided at a reasonable price.  These include the Mayo Clinic, Kaiser Permanente, Hill Physicians Medical Group, and the Marshfield Clinic.  Even the UK’s National Health Service was born out of existing institutions.

Does a template for U.S. health reform exist?

There are two countries that have a model that may work for the U.S.: the Netherlands and Switzerland.  Both use private health insurance to cover patients, but have nearly universal health insurance coverage.  [Universal coverage may be easier to achieve in these smaller, more homogeneous countries than in the U.S., however.]  The Dutch system allow individuals to still get coverage through their employers if they so choose, but employers need not offer health insurance.  Individuals pay their own health insurance premiums, but these premiums are subsidized depending on household income.

Neither of these countries models is a perfect fit for the U.S., but they do have attractive elements.  Like any policy discussion, the devil is in the details.  In order to have true health care reform, we must incentivize patients and providers to maximize health care quality for the lowest cost.


  1. Jason,

    I have already emailed, twittered, bookmarked and in any other possible way shared this with the majority of people I know. The effort you put into this is obvious and yet it flows as a single thought process really well.

    From rationing to supply-induced demand to patent policy, you’ve covered an a LOT of ground.

    The best part is how open-ended you leave it. There is no single solution but a lot of interrelated options for pursuing reform. We can learn from other systems and utilize the current political environment to hopefully make those small key changes that won’t hurt the SIGs too much, but will help everyone as potential future patients.

    This made me laugh out loud: “they participate in a cartel known as the AMA.” Totally caught me off guard.

    Congratulations on graduating and I hope you achieve a lot of what’s written here. Looking forward to more great stuff.


  2. Jason

    In general Holland is the best model for the US. We wont get there of course….and user fees are a zombie (see Bob Evans)

    One minor remark. You think you opt out of the NHS in the UK? You can purchase private health insurance and even use it for certain things (usually elective surgery). But almost every Brit has a local GP (paid by the state) and no Brit can opt out of paying for the NHS, unless they want to go to jail….it’s called the Inland Revenue Service, and they will come to your house and take you to jail if you decide to opt-out of paying 🙂


  3. Reducing cost for programs for smoking, drinking, and obesity? There is some fairly strong evidence that such programs are effective and further working studies on the way that support this.

    As a just finished Ph.D. student you should know that mechanisms to help people with self-control problems can sometimes be useful!

    I love the post in general, it provides some good insight into what people should be focusing on.


  4. I agree that programs to reduce smoking, drinking and obesity are very important. This can help individuals significantly improve their quality of life as well as improve longevity. However, people who claim that we can significantly reduce health care costs just by reducing smoking, drinking and obesity are incorrect. It is possible that instituting counseling for smoking, drinking and obesity can increase cost as people live longer. I am not saying that this will not be money well spent, only that it will not significantly reduce medical costs in the U.S.

  5. Lots of good information processed here. I think the private health insurance companies in the European system are not allowed to make a profit unlike in the U.S. That is why it works over there.

  6. You make this comment:

    Doctors are expensive. Why? For three reasons: 1) they provide high value services, 2) going to medical school is costly, 3) they participate in a cartel known as the AMA.

    The AMA is not a cartel. It exercises no cartel powers. A cartel “is a formal (explicit) agreement among firms. It is a formal organization of producers that agree to coordinate prices and production.” (Wiki). The AMA has no formal agreement amongst doctors to provide service at set fees, nor are its members coordinating fees and services provided. OPEC may be a cartel, but the AMA is not.

    Further, fewer than 40% of licensed physicians are members of the AMA, and the proportion of physicians who belong has been declining. Because of that, the AMA could not exert cartel power even if so inclined.

    I am a physician but do not and have never belonged to the AMA.

  7. Thanks for writing this pretty level-headed article. I think it’s best to keep all these options always open to everyone. There has to be some competition in all these areas. Closing off avenues in the area of healthcare is just a bad idea and we should look to other countries before diving in to a Universal system. France has a sort of hybrid between the USA and Europe’s socialized medicine and it seems to be working “okay.” But every government that tries it can easily bankrupt themselves, because we all will die, and we’ll all have a lot of expenses in those last few days. Let’s be careful. Yoda said, “Once you start down the dark path, forever will it dominate your destiny.” This could be a dark path, and there’s no turning back. Once people start getting something for “free”….

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