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Crowding Out

March 1, 2010

The much more skilled letter-writer, Don Boudreaux, has a very interesting one today. I’m finding it increasingly annoying that I have tons of trouble embedding audio and video, but you can navigate here to listen to the show. Below are highlights:

KESTENBAUM: Turns out, doctors had been giving out a lot of free care to old people and now they were going to get paid for that, and within limits, whatever they asked for.

Dr. Lucian Leape was a practicing surgeon at the time.

Dr. LUCIAN LEAPE (Surgeon): We found out what the general fee for our service was and charged that or maybe added 10 percent, ’cause of course I’m better than average. And so it was an incentive for doctors to charge what they thought was reasonable for them, and then of course to increase it every year by, say, 5 or 10 percent.

JOFFE-WALT: In 1992, Congress adopted Hsiao’s Relative Value Scale, that enormous spreadsheet. And it worked for a while until just a few years later, it didn’t anymore. [+1 for rational expectations!]

KESTENBAUM: There are different explanations for what happened. Hsiao blames lobbyists. Lobbyists and doctors say, sorry, health care just is expensive, and most of the time, Medicare actually underpays us.

JOFFE-WALT: Congress did try one more thing. It tried to slow growth of doctor pay by saying payments could not grow faster than the overall economy grows. But when the economy slowed, that would mean cutting doctor pay.

KESTENBAUM: When that happened, Congress balked and put off making the cut one year, then the next year and the next. Those delayed cuts added up and now this coming Monday morning, doctors are facing a 21 percent pay cut. Unless, of course, Congress puts it off again.

JOFFE-WALT: So that question about paying doctors, we’re still working on it.

One question that I have is this: it is fairly well understood that wages are sticky downward, and because of the types of contractual agreements (and heuristic biases) that go into setting wages, what part of microeconomic theory from the past…20 or so?…years would lead you to believe that doctors’ wages would be any different?

Lobbying Congress is what you get when the government de facto sets wages, much the same way strikes are what you get when a union agreement sets wages. Doctors aren’t magically immune to money illusion.

It is, of course, no surprise that our political organizations have failed in their efforts to centrally plan in the field of medicine. It is these same political organizations that propose to further centrally plan in the field of medicine. Many leftist-liberals lament how the government (mostly Senate) works, indeed, it is a veritable cottage industry in the blogosphere. Most look toward other political systems with envy saying, “If we only had that!” I share their wishful thinking…but passing health care reform isn’t going to fundamentally change the way the US government works, so all of the pitfalls of the current system are going to be further superimposed upon the field of medicine, to create a rigid structure that is highly resistant to change — in an industry that changes very rapidly.

Does that sound like a rational solution?

Addendum: In the version of the health care “reform” bill that is the most likely to pass (the President’s outlay), the only provision with teeth designed to “bend the cost curve” is (drum roll please): large cuts in Medicare. See the above quotation.

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2 Comments leave one →
  1. ken permalink
    March 3, 2010 5:13 am

    Nick, one of the problems of doctors wages is the same problem as a lot of other wage disparities,Percent spread. For the last ? many years,every time we increase wages,we do it by %. The GP makes X today, The Specialist makes X+1,X+2. When we give both a 10%[or substitute x%] raise,the result is GP=X*10%,SP={X+2}*10%.As anyone can see,over time the wages will grow farther apart,as the difference grows larger.To correct this we need to reverse the process. For example pick a middle point between highest and lowest,call this y. for the next 10 years,instead of a x% raise,everyone takes an x% decrease,plus a y raise. Both top and bottom get a raise of y,but the x% decrease cuts the top more than the bottom,narrowing the spread.

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