Economists Display What They Don’t Know About the Health Care Industry

Recently, I resorted to a rare economic argument in a health IT article, pointing out that it’s unfair to put the burden of high health care costs on the patients. Now 101 economists have come out publicly recommending that very injustice. Their analysis shows the deep reluctance of those who are supposed to guide our health care policy to admit how distorted the current system is, and how entrenched are the powerful forces that keep it from reforming.

My argument cited numerous studies and anecdotal reports to show the deplorable record of the US health care industry regarding costs: providers who don’t reveal prices, providers who don’t know what the patient’s out-of-pocket costs will be, wrenching differences in insurance payments for the same procedure, missing quality information that consumers would need to make fair comparisons, and more. Just as icing on the cake, the most recent Consumer Reports (November 2015) offered a five-page article on all the screw-ups that lead to medical “sticker shock.”

Probably I’m foolish to launch an economic argument with the distinguished signers of the brief letter to key members of Congress. The signers’ credentials are impeccable, placing them in an impressive list of universities and think tanks–all of which, I’m sure give generous coverage for any health care these economists need. If any of the signers should be burdened with the Cadillac tax, they could cover it with an extra consulting gig at the World Bank. (What’s the economics behind “nice work if you can get it”?)

But the economists just aren’t facing realities in the health care industry. Let’s expand their telescoped argument, full of assumptions and leaps of faith, to see what they’re saying.

First, they expect that the Cadillac tax will not be quietly absorbed by firms wooing professionals in high demand (such as health IT developers), but will drive those firms to reduce coverage. The burden will explicitly fall on the individual patient. I suspect that many firms facing staff shortages would just compensate key high-performers for the high-cost health coverage, but let’s accept the economists’ assumption and move on.

Next, the economists assume that the patient will make rational choices leading to what they call “cost-effective care.” What could such choices be?

Can the patient tell her doctor that a certain test is unnecessary, or that a certain treatment is unlikely to improve her condition? Does the patient know that the test has too many false positives, or is unlikely to add to the doctor’s knowledge? These questions lie precisely within the expertise of the provider, not the patient.

Can the patient determine whether a high-cost drug will pay for itself in reduced future health care and improved quality of life? This calls for extended longitudinal research.

Can the patient tell her provider or insurer to adopt a rigorous pay-for-value regime? If she goes looking for an ACO, will it actually gather enough data to treat her efficiently, and does it truly get rewarded for doing so? These are nation-wide policy issues outside the patient’s control.

As I pointed out in my earlier article, the patients lack the information needed to compare the costs and quality of procedures from different providers. Patients try to do so, but data is inadequate. Nor will yelling and screaming about it make any difference–we’ve all known about the problem for years and it hasn’t made much difference so far.

I don’t like dumping on economists. After all, they rarely cause the problems of the world, and are all too often tasked with solving them. The perennial occupational hazard of the economist is to be forced to make recommendations on the basis of insufficient knowledge.

But in this case, the average patient has knowledge that these economists lack. The problems are also well known to anyone in the health care industry who has the courage and clarity of vision to acknowledge what’s going on. If we want the system to change, let’s put public pressure on the people who are actually responsible for the problems–not the hapless patient.

About the author

Andy Oram

Andy Oram

Andy Oram writes and edits documents about many aspects of computing, ranging in size from blog postings to full-length books. Topics cover a wide range of computer technologies: data science and machine learning, programming languages, Web performance, Internet of Things, databases, free and open source software, and more. My editorial output at O'Reilly Media included the first books ever published commercially in the United States on Linux, the 2001 title Peer-to-Peer (frequently cited in connection with those technologies), and the 2007 title Beautiful Code. He is a regular correspondent on health IT and health policy for He also contributes to other publications about policy issues related to the Internet and about trends affecting technical innovation and its effects on society. Print publications where his work has appeared include The Economist, Communications of the ACM, Copyright World, the Journal of Information Technology & Politics, Vanguardia Dossier, and Internet Law and Business.

1 Comment

  • I’d like to point readers to a report on the tax from the Congressional Research Service. It includes not even a hint as to how the Cadillac tax could achieve its goal. The CRS report (on pages 18-19) lists hoary old economic nostrums about supply and demand. There is no recognition that health care in the US is not a typical market. And the system will not change in response to “10.2% of single and 6.0% of non-single insurance premiums” (percentages that may or may not rise over time).

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