June 30, 2012


The Healthcare Myths We Must Confront (Cliff Asness, June 29, 2012, American)

The goals of healthcare reform--covering more Americans, improving outcomes, and doing so more cost effectively--are all laudable, but are all hampered by the continued belief in these myths. Rejecting these misconceptions is crucial to any chance of our eventually emerging with a better system.

Myth #1:  Healthcare prices have soared in the recent past

Everyone knows that healthcare prices have soared, but everyone may well be wrong. The statistics we see are always about the amount we spend on healthcare, not the price of healthcare. Consider a comparison of healthcare in the 1950s versus today. In the 1950s, you had none of the subsequent developments in pharmaceuticals, surgery, diagnosis, etc. How much would you pay for that versus today's healthcare? Not so much, I'm guessing. In fact, if you look around the world, in impoverished countries you can probably find a reasonable facsimile of this 1950s healthcare at a low cost. While this example is intentionally extreme, the measurement problem it illustrates is important. The quality of the best healthcare has soared over time. This measurement problem is not unique to healthcare. Measuring the price inflation in computers is incredibly difficult. If the price of a laptop today is the same as 20 years ago, but the laptop is ridiculously better now, hasn't the price really fallen dramatically?

Consider another hypothetical. Imagine we develop a cure for all cancers that costs a flat $1 million per person and works perfectly. Let's assume this is more than the total cost to treat these cancers otherwise. In this case, the amount we spend on healthcare will likely rise dramatically, because it just got much better and we chose to spend more on it. The cure we are talking about did not exist before now, so it does not make sense to ask whether the price rose. Here's a better question. Are we better off even though we are spending much more on healthcare? Yes, we are, although some will cite the dramatic rise in our healthcare spending and demand that action be taken.

One more, and let's get really simple. In the olden days, our great-grandparents might have had one pair of reading glasses. Now, many of us have one pair at home, one in the car, one at work, etc. Because we are more prosperous we spend more on reading glasses than our forebears, even though the price has not necessarily changed. Again, there is a gigantic difference between what we spend on something and its price. And again, the comparison of old and new prices is particularly vexing in healthcare because most of the healthcare we buy was not even invented when our great-grandparents were ill.

The above is highly relevant to our ongoing debate because the "soaring price of healthcare" is often cited as a reason we desperately need reform, perhaps radical reform. Even if correctly referred to as the "soaring cost of healthcare," this is presented as an unambiguously bad thing, when that is certainly false. It's bad when it's a function of waste or monopoly power gained through cronyism--undoubtedly part of our system and, as usual, with government the main culprit--but not bad when it's the result of improvement, undoubtedly a huge component over time. The price of healthcare over time is hard to accurately measure, but those screaming about the price soaring are probably wrong.

Until consumers have their own skin in the game, there's no reason for them not to waste money in this fashion.  Universal HSAs will force each of us to consider whether we'd rather have six pairs of glasses and all kinds of vanity procedures or rather have the money in our own savings accounts.

Posted by at June 30, 2012 8:39 AM

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