Author: David

People worry about the cost of healthcare, which takes up a fair amount of the national pocketbook. This is particularly true in the United States, where we feel we are paying more than we should, based on the cost of healthcare in other civilized nations.

My question is, to what extent can inflation explain rising healthcare costs?

Note, inflation does not result from rising prices. Inflation is one cause, among several, that can cause some prices to increase.

Here, we are using a narrow definition of “inflation.” Specifically, an increase in the money supply. An increase in the supply of money doesn’t always cause an increase in prices. But, all other things being equal, it should.

Came across this article, a thoughtful and balanced argument in favor of “Personalized Medicine,” in other words treatment customized to the individual. The author emphasizes the role of genetic testing, which is an established practice for cancer chemotherapy, and an emerging discipline elsewhere. But there are other aspects to personalization, among them (as the author notes) the particular range of symptoms a patient might express, a combination that is unique to each individual. Herbalists might add intangibles like temperament. Someone with an economic viewpoint like myself might add assessment of risk tolerance, which is different for different people.

I’ve had the pleasure of working with medical and nursing students lately, and I can assure you, they believe in the personalized approach. Unfortunately, they are entering a field that is increasingly becoming depersonalized. This depersonalization is being driven by a combination of technology and policy.

In Part 1, we discussed price theory in general. In Part 2, we defined the market-clearing price, and discussed how this affects price-fixing schemes like Medicare uses.

In some respects, “price” and “cost” are two sides of the same coin.  If I am able to sell an bottle of vitamins at a price of ten bucks, the guy who buys that is going to say it “cost” $10.  By that he is specifically referring to something called “opportunity cost.”  Meaning, he had to give up the opportunity to spend $10 on something else, or to just hang on to his money.

Likewise, the producer is looking at opportunity costs also. If it costs him $8 to produce something, he is giving up the opportunity to spend eight bucks producing something else, or else just spending the eight bucks on himself.

While price and cost are related, believe it or not, they are not always the same number.  In health care, they are almost never the same number.  Because there is an intermediary between the producer and the consumer.  This intermediary — an insurance company, or the government — pays one price to the producer, and charges a different price to the consumer.  

Price theory is going to be a central basis of most of what I write on healthcare economics — and is a key source of error on the part of policymakers and voters alike — so I’ll take a few moments to discuss how we arrive at prices in general.

First, a quiz. Let’s say I’m planning to buy transportation in the near future. These are the vehicles I’m thinking about buying, in order of preference:

1. A Porsche.
2. A Prius.
3. A Harley-Davidson motorcycle.
4. A Vespa scooter.
5. A bicycle.

Assume the price of a Porsche is $80,000. How much should I pay for the Harley-Davidson?

1. a. $48,000
2. b. $79,998
3. c. $14,606.25
4. d. It’s none of your business

Put Doctors at the Center of Health Care Tech. By Daniel Marchalik. Harvard Business Review.

Interesting article from Harvard Business Review looking at the current state of computer technology in healthcare. The COVID epidemic has highlighted the promise of healthcare tech. For example, utilization of telehealth services has skyrocketed. Yet healthcare technology rates an “F” on facility of use by doctors, contributing to burnout. “Put patient care first,” advises Marchalik.

Comment

In healthcare, maximizing shareholder value boils down to a throughput problem. Sick people go in at one end of the assembly line, and well people come out the other. Healthcare is highly labor-intensive, so productivity is the name of the game.

In every other business in the world, computer technology has improved productivity. But not in healthcare. Quite the opposite, in fact.