Monday, June 13, 2011

Paul Krugman: government eliminates opportunity cost

Ever since the Progressive Era, Americans have been bombarded with the notion that all goods really are collective in nature. Thus, we hear about "our food supply" and "our oil," and "our healthcare."

If goods truly are collective, then it ultimately is up to that most collective entity, government, to "distribute" them. Pay no attention to the real problems that arise out of the notion of collective things, which is nothing but socialism using different terms. And even Paul Krugman cannot "solve" the central problem of socialism: economic calculation.

In his column on Medicare, Krugman manages to wrap a falsehood around a central kernel of truth, that being that on paper, Medicare costs less than private insurance. He writes:’s what you need to know: Medicare actually saves money — a lot of money — compared with relying on private insurance companies. And this in turn means that pushing people out of Medicare, in addition to depriving many Americans of needed care, would almost surely end up increasing total health care costs.

The idea of Medicare as a money-saving program may seem hard to grasp. After all, hasn’t Medicare spending risen dramatically over time? Yes, it has: adjusting for overall inflation, Medicare spending per beneficiary rose more than 400 percent from 1969 to 2009.

But inflation-adjusted premiums on private health insurance rose more than 700 percent over the same period. So while it’s true that Medicare has done an inadequate job of controlling costs, the private sector has done much worse. And if we deny Medicare to 65- and 66-year-olds, we’ll be forcing them to get private insurance — if they can — that will cost much more than it would have cost to provide the same coverage through Medicare.
And what causes this problem? Private enterprise, of course:
And then there’s the international evidence. The United States has the most privatized health care system in the advanced world; it also has, by far, the most expensive care, without gaining any clear advantage in quality for all that spending. Health is one area in which the public sector consistently does a better job than the private sector at controlling costs.
I will give Krugman his argument as far as it goes, but I think that a few points just might be in order, points that Krugman conveniently ignores.

The first is that Medicare is NOT subject to state mandates, and that is a huge factor, as mandates drive up the cost of insurance. (I won't ask why Krugman ignores this point except to say that it does not fit with his narrative that socialism is morally and economically superior to private enterprise.)

Second, Medicare sets the payment schedule and doctors that treat Medicare patients have no other choice. Patients can sue insurance companies and the media generally will side with patients and doctors in having the courts order insurers to spend lots of extra money. However, that does not happen (to my knowledge) with Medicare.

Third, there is no way that the advent of third-party payments will NOT result in higher costs, as decisions for care are made by people who do not have a direct interest in the outcomes. Keep in mind that if we had third-party payments for buying other things, like food, then food prices would be higher than they are now.

Fourth, Krugman falls for the silly doctrine that medical care is "different" and not really subject to the laws of economics. Now, keep in mind that when we say that something is subject to economic laws, what we are saying is that it is a scarce good. If economic laws don't apply, then the good cannot be scarce.

I cannot believe for a second that Krugman would claim that medical care is a non scarce item, yet, he writes about medical care as though it is not scarce. For example, take his long-held view that medical capital drives up costs. If that were true, then it would be the first time in economic history that the presence of capital (at least developed in a free market) forced real costs to be higher than they would be in the absence of capital.

Would Krugman ever write that the development of the assembly line made automobile costs higher? If that were true, then the story of how Henry Ford was able to bring down the price of a new car from about $1,000 to less than $300 simply would be non-existent.

If, indeed, capital were to be responsible for higher real medical costs, then one would have to look at other factors to see why this would be so, for it makes no economic sense by itself. Unfortunately, Krugman is not willing to go outside the narrative that medical care is "different."

Moreover, if government by taking over payments can eliminate opportunity cost (or make it substantially lower), then why does not government involve itself in everything else and lower costs? For that matter, if government by simple fiat can create such miracles, then why has socialism failed in places like Cuba, North Korea and the U.S.S.R.?


Anonymous said...

Mr. Anderson has become so lose with the facts lately that it's borderline depressing. It use to be entertaining, now its just scary that he actually has a say in educating at least a small % of our youth. Here's two of many distortions (lies) Mr. Anderson is trying to push on us:

"Medicare is NOT subject to state and federal mandates"

It's a single payer system that all of us pay into. That is the very definition of a mandate

"Medicare sets the payment schedule and doctors that treat Medicare patients have no other choice"

This is false. They have a choice. Don't see Medicare patients.

"Would Krugman ever write that the development of the assembly line made automobile costs higher?"

This is childish

AP Lerner

Bob Roddis said...

AP Lerner refuses to understand what is meant by "economic calculation". This is truly getting pathetic.

Read his hero Abba Ptachya Lerner who explains how government can and must calculate and distribute the optimal division of goods and income in “the controlled economy“:

William L. Anderson said...

Medicare is not subject to the same kinds of legislative mandates saying what it must cover. You know exactly what I mean here.

If doctors choose to see Medicare patients, then they have to abide by the Medicare payment rules. In fact, a lot of doctors now no longer see Medicare patients because the payments don't cover their costs.

Krugman claims that medical capital is different than any other kind of capital. I think that since he claims a "special case," I would like to see why the laws of economics don't apply here. I don't think that is childish.

Jordan said...

Here is a study by CAHI of the specific health care mandates:

Dennis said...

Excellent commentary, Bill.

I live in Canada where all my medical bills are paid for out of my taxes. Since my doctor retired some months ago, I have been unable to find a replacement. The clinic were he partnered has been unable to find anyone willing to work as a GP for the kind of rates that the government mandates. When they do find someone, the only way to make ends meet is to jam as many patients through the doors as is possible in the course of a day. Naturally, the quality of care suffers immeasurably.

My provincial government is now spending nearly 50% of its budget on health care. They spent a fraction of that when Medicare was introduced in the 60's. Over time, the single-payer system is bound to implode as it crowds out all other types of spending.

Alan Chapman said...

I buy roadside assistance insurance through AAA. I pay around $75 annually which is affordable for virtually anyone. If government compelled AAA to pay for new tires, oil changes, spark plugs, headlamps, break lamps, timing belts, wiper blades, batteries, and filters, then the cost of the insurance would be many times higher. This is precisely what has happened to health insurance.

Anonymous said...

I work in the IT department of a private health care company.

There are many, many regulations that we must follow for Medicare and its patients that do not apply to a non-government insurance business, and, so, can simply be ignored.

Why would you say there are "no mandates" when, from my perspective at least, there are far more rules.

Anonymous said...

Clearly, the dummies who chose to spend 300% more for private health insurance than they needed to over the past 40 years deserve refunds.

William L. Anderson said...

When I mean "mandates," I mean that the insurance is legally required to pay for certain kinds of care as set out by the legislature. As for Medicare, no state legislature can mandate that Medicare cover politically-favored procedures.

American Patriot said...

I am talking as someone whose wife is in healthcare. Her clinic will not see any Medicare or Medicaid patients because of the red tape, slowness of payments, how little they get paid as opposed to private insurance, and other arcane rules they must watch for as Physical Therapists.

This is why state run (single payer or even Obamacare type involvement) systems suck if you care about level of care (see NHS and NICE on the UK) and not waiting till eternity to be seen by a doctor (see Canada - try Province of Quebec's or Ontario's site and search for waiting times for routine procedures....your eyes will pop out!).

Where Krugman is completely dishonest is the whole notion of costs as well as service.

First, Medicare has higher refusal rate than even the worst private insurance co.

Second, level of care cannot be compared. Unless you have a Medicare Advantage policy with a private company, you are in for all sorts of rationing. My wife's old clinic used to see Medicare patients. She couldn't count the number of patients they had to cut loose because they had a certain dollar limit for PT (I believe it was $1500 per year)

Medicare on the surface seems cheap - that is until you look at the unfunded liability created by it. Like Obamacare, all the revenues were front loaded and expenses came later as baby boomers retired (now). That is why it is insolvent as its own actuary says!

One last thing: yes, we do spend more on healthcare than any other advanced country, BUT WE HAVE THE BEST DAMN CARE AS WELL!!!

There are studies galore that for same critical illnesses like different types of cancers and cardiac problems, we have much longer survival periods. That is because we have access to the best technology (facilities) and doctors. I do not see anyone going to Canada or the U.K. for any critical surgery. Do you?

Excellent care costs money and we should not expect to have lower costs than Europe unless we want inferior care than now.
That said, we can lower our costs by 25-30% or more if we undertook litigation reform and opened insurance to competition across state lines. There are other cost reducing incentives like MSAs that would also help.

Anonymous said...

If ANYONE bothered to read the study they'd see that in-vitro fertilization is mandated in California. WHAT?!? Could that be the reason for expensive premiums??

Will said...

American Patriot- cancer mortality and incident rates are the same in the US and Canada. See, for instance and this information from the Canadian Cancer Society

Depending on what cancer you have, sometimes the US is better, sometimes Canada is better. ON THE WHOLE, THE US HAS WORSE HEALTHCARE OUTCOMES THAN OTHER FIRST WORLD NATIONS. When the WHO used to rank healthcare systems, the US was NEVER number 1. I say this as a practicing physician who has done international work and seen other systems first hand.

Also, your wife's clinic must be in a luxurious area to be able to afford not seeing medicare or medicaid patients. In my work in underserved areas, we spend a great deal of time and effort trying to convince eligible people to sign up for medicaid because its the only way we get paid.

And finally- to Professor Anderson- you've clearly never read (or really understood) Kenneth Arrow's seminal work on the economics of health care, which is surprising to me, as it created a whole field of inquiry, and Arrow was a nobel winner in your field.

As a Doctor, I can tell you that innovation DOES drive up costs. New drugs cost substantially more than generics. Consider CML- before 2001 CML was a death sentence. Now, you can take gleevec at a cost of $3500 a month FOR THE REST OF YOUR LIFE. For someone diagnosed in their mid 20s, that could be 60 years of 42k a year. Even intuitively, everyone says cutting edge treatment costs more. The cutting edge is the innovation.

Also, one thing any doctor will tell you- patients are terrible judges of treatments. They usually don't make rational decisions, instead using price as a proxy for quality. I'm coauthoring a study that suggests that increase patient choice since the 1980s has been a driving factor in increased cost.

ekeyra said...


"Now, you can take gleevec at a cost of $3500 a month..."

Whenever you start talking about the cost of perscription drugs you have to keep two facts in mind:

1. FDA testing and approval is somewhere in the ballpark of a decade.

2. Patents arbitrarily restricting the production capacity of medications.

Those two factors drive up the development costs and eventual retail costs for any and all perscriptions to astronomical numbers.

"patients are terrible judges of treatments."

As far as their judgements concerning prices, how can they be expected to extract actual information from prices when they are so distorted by government interference?

Maurizio said...

"the most expensive care, without gaining any clear advantage in quality for all that spending"

I am laughing reading this. Krugman obviously has never experience the queues that happen under socialized medicine. Here in Italy, you can have to wait months to do an MRI, unless you know a doctor who puts you in front of the queue. And it is not even an entirely socialized system: you can go to private hospitals, and even in public hospitals you have to pay a small fee for exams (50 dollars or so for an MRI). In Italy, every family knows that there must be a doctor in every family, otherwise you are screwed.

Lord Keynes said...

"Here in Italy, you can have to wait months to do an MRI, unless you know a doctor who puts you in front of the queue."

And is that for non-life treatening, elective problems?

Or emergencies?

American Patriot said...


Overall, U.S. has better outcomes:

Another thing you cannot deny is that the world comes to (at great cost) us for medical care - not vice versa. How do you explain that?

The short, undeniable answer is that we have the no. 1 care in the world for anything outside of the routine.
My point is that there is a cost associated with that and we should expect to pay more as such.

Drugs and services would be cheaper if government let the free markets work in healthcare. Unfortunately, healtcare is one of the most heavily regulated sectors in this country.

By the way, are you associated with Doctors Without Borders?

Anonymous said...

Why would anyone ever believe the private sector would do a better job at controlling health care costs than the public sector?

Private = Profit! This means a large majority of your health care dollars are not going to pay for your doctors/hospitals/medicines - they are going to shareholder profits, CEO salaries, marketing budgets etc. Every year that health care expenses go up, private insurance premiums have to go up even more to retain those profit margins.

It's plain silly to think that private insurance would ever do a better job of providing health care than a public system...


Anonymous said...

One more thing...For those who are under that American illusion that we have "far superior" health care outcomes, please read this peer-reviewed scientific article. This is based on facts and not wishful thinking...

From Annals of Surgery

Fact and Fiction: Debunking Myths in the US Healthcare System

Umut Sarpel, MD; Bruce C. Vladeck, PhD; Celia M. Divino, MD; Paul E. Klotman, MD

Authors and Disclosures

Posted: 06/06/2008; Annals of Surgery. 2008;247(4):563-569. © 2008 Lippincott Williams & Wilkins


burkll13 said...

first of all, the idea that we have a free market in healthcare now is silly. its socialized, just organised differently. so all these comparisons between USAs healthcare vs the worlds is all just hot air. it doesnt mean anything. this is a simple supply/demand problem. the supply of doctors arent growing proportionate to population, making their time scarcer and scarcer. prices for services go up. the poor get their care rationed. all a single payer system does, is ration it based on some other criteria. RATIONING IS THE PROBLEM!

Bob Roddis said...

Statist programs impair economic calculation.

Statists refuse to understand what "economic calculation" even is.

Debating them is futile.

American Patriot said...


We do not and never had free markets. Have you heard of competition and how it works??

Health insurance is a very low profit margin business. Last year they were ranked 86th among industries.
Apparently you do not keep up with financial news.

Not a surprise to me!

Anonymous said...

How come nobody ever talks about how the supply of Doctors has been restricted by the medical establishment. This would certainly cause prices to rise.

Maurizio said...

@lord keynes

I am not sure how the doctors set the priorities for life threatening cases (I have no direct experience). what I can say is that, for non-life threatening cases, your position in the list is determined by your level of friendhsip with some doctor.

Also, for life-threatening cases, many people decide to be treated at private clinics, to avoid the queues, and to avoid the well known lack of attention that doctors pay to people in public hospitals.

I broke my hand two months ago, and the doctor did not even look at me, he only glanced at the xrays which were badly taken and unreadable, and said everything was ok, and told a nurse to put me the chalk, and told me I had to remove the chalk after 25 days. Later I saw a hand surgeon who told me the chalk was in the wrong position, and that the time should have been 60 days. But what is more striking is that doctors don't pay attention to you, react annoyed if you ask questions, and try to cover and justify each other's errors.

Tel said...

If you think Government runs a better medical system because it is well regulated, higher quality, fully supervised, etc. you need only look at the case of Jayant Patel. He was trained in India, went to work in New York and was reprimanded for sloppy work. Then he worked in Oregon, and was also reprimanded. Then he moved to Queensland, Australia and worked for several more years.

The health administrators in Queensland who hired Patel did very little background checking, and absolutely no followup checking.

During his time in Queensland, several nurses tried to raise the alarm (for years) but they discovered that no one would listen. The administration liked Patel because he achieved good stats (self-reported stats, and mostly falsified). Other junior doctors even went along with it because they were unwilling to take the risk of speaking up.

Will said...

American Patriot- The pieces you link to are mistaken at best and misleading at worst. The various cancer societies and hospitals are much better providers of medical information than think tanks. The first link makes the direct opposite conclusions of the actual sources cited. Did you even look at the links from the Canadian/US cancer societies I posted?

"Another thing you cannot deny is that the world comes to (at great cost) us for medical care - not vice versa. How do you explain that?"

Few people come to the US for treatment- in another thread on this blog I posted the definitive study of Canadians coming to the US for healthcare. Its only a few hundred people each year. Medical tourism as a whole is only 50k-80k patients a year. More than half of those are US residents going elsewhere.This is according to the McKinsey study on medical tourism, which I only have in printed form.

Also, American Patriot have you ever lived or worked somewhere where medicine IS actually unregulated? Cost might be lower, but you are at the mercy of the charlatan selling snake oil. Spend a few weeks of your time trying to convince desperate people that modern anti-retrovirals are a better treatment than concoctions of roots and bark and you'll have some appreciation of this problem.

Regulations have their purpose. As much as people criticize the FDA, we didn't have the thalidomide problem that Europe did- because of more stringent regulations.

And I am not affiliated with Médecins Sans Frontières, though I have worked in clinics they contributed to in a few countries.

Tel said...

American Patriot have you ever lived or worked somewhere where medicine IS actually unregulated? Cost might be lower, but you are at the mercy of the charlatan selling snake oil.

Please, follow the link above and read about Jayant Patel, this happened in a first world, highly regulated, government run medical system, and the results were horrifying. There was systematic active supression of whistle blowers who found themselves unable to even report what was going on.

Finally (and it took years) it got to parliament and even then there was pressure on the MP who brought the matter up to apologise to the doctor in question. Even when it got to parliament they were trying to silence the messenger.

Government regulation is absolutely no guarantee of protection.

American Patriot said...


you say you are a doctor. Are you even aware that there are heck of a lot more Canadian babies born in hospitals in Buffalo, NY than American ones? That is a simple procedure that is not delivered efficiently in Canada.

Waht few patients are you talking about? Johns Hopkins (where I visit every 6 months for medical issues with my son) alone treats thousands of foreigners every year. Their retina division at Wilmer Institute alone had more than 100 foreign patients last year. And that is just one department in one hospital! Same thing is replicated in all major centers from Dana Faber Institute to Mass General to Georgetown to all other famous hospitals.

Straw man arguments like having no regulations at all are below you as a doctor. No one is against useful regulations.

Will said...

American Patriot- your claim is false. There are not more Canadian babies born in Buffalo than American ones.

Again, according to the McKinsey study on medical tourism (I would link to the study, but I only have a print copy) only 50k-80k patients a year travel for medical care. SLIGHTLY MORE THAN HALF of the medical tourism was American's leaving the US for care. Some of this is probably seeking lower cost, some of this is probably to seek treatments not available in the US. I had a patient travel to India for a surgery several doctors in the US advised her not to get (for instance).

So, taking the central range of numbers, we are looking at 28k patients a year entering the US for treatment, which might seem like a lot, but the system treats millions of US patients each year. Its a negligible percentage.

At the same time, 30k patients a year LEAVE the US for treatment. They probably don't go to any one country (a large chunk just jump across the border to Canadian emergency rooms)- which makes the US the biggest single receiver of medical tourism.

As to regulation, I wasn't making a straw man, I was pointing out that the FDA is there for a reason. You demonized regulation indiscriminately. What we need is to keep good regulation and kill bad regulation- but how do you decide? If you ask experts, you are dangerously close to being a statist.