7106 words

Con­sid­er­a­tions On Cost Dis­ease

Feb­ru­ary 9, 2017

I

Tyler Cowen writes about cost dis­ease. I’d pre­vi­ously heard the term used to refer only to a spe­cific the­ory of why costs are in­creas­ing, in­volv­ing labor be­com­ing more ef­fi­cient in some areas than oth­ers. Cowen seems to use it in­dis­crim­i­nately to refer to in­creas­ing costs in gen­eral – which I guess is fine, good­ness knows we need a word for that.

Cowen as­sumes his read­ers al­ready un­der­stand that cost dis­ease ex­ists. I don’t know if this is true. My im­pres­sion is that most peo­ple still don’t know about cost dis­ease, or don’t re­al­ize the ex­tent of it. So I thought I would make the case for the cost dis­ease in the sec­tors Tyler men­tions – health care and ed­u­ca­tion – plus a cou­ple more.

First let’s look at pri­mary ed­u­ca­tion:

There was some ar­gu­ment about the style of this graph, but as per Poli­ti­fact the basic claim is true. Per stu­dent spend­ing has in­creased about 2.5x in the past forty years even after ad­just­ing for in­fla­tion.

At the same time, test scores have stayed rel­a­tively stag­nant. You can see the full num­bers here, but in short, high school stu­dents’ read­ing scores went from 285 in 1971 to 287 today – a dif­fer­ence of 0.7%.

There is some het­ero­gen­ity across races – white stu­dents’ test scores in­creased 1.4% and mi­nor­ity stu­dents’ scores by about 20%. But it is hard to credit school spend­ing for the mi­nor­ity stu­dents’ im­prove­ment, which oc­curred al­most en­tirely dur­ing the pe­riod from 1975-1985. School spend­ing has been on ex­actly the same tra­jec­tory be­fore and after that time, and in white and mi­nor­ity areas, sug­gest­ing that there was some­thing spe­cific about that decade which im­proved mi­nor­ity (but not white) scores. Most likely this was the gen­eral im­prove­ment in mi­nori­ties’ con­di­tions around that time, giv­ing them bet­ter nu­tri­tion and a more sta­ble fam­ily life. It’s hard to con­struct a nar­ra­tive where it was school spend­ing that did it – and even if it did, note that the ma­jor­ity of the in­crease in school spend­ing hap­pened from 1985 on, and demon­stra­bly helped nei­ther whites nor mi­nori­ties.

I dis­cuss this phe­nom­e­non more here and here, but the sum­mary is: no, it’s not just be­cause of spe­cial ed; no, it’s not just a fac­tor of how you mea­sure test scores; no, there’s not a “ceil­ing ef­fect”. Costs re­ally did more-​or-less dou­ble with­out any con­comi­tant in­crease in mea­sur­able qual­ity.

So, imag­ine you’re a poor per­son. White, mi­nor­ity, what­ever. Which would you pre­fer? Send­ing your child to a 2016 school? Or send­ing your child to a 1975 school, and get­ting a check for $5,000 every year?

I’m propos­ing that choice be­cause as far as I can tell that is the stakes here. 2016 schools have what­ever tiny test score ad­van­tage they have over 1975 schools, and cost $5000/year more, in­fla­tion ad­justed. That $5000 comes out of the pocket of some­body – ei­ther tax­pay­ers, or other peo­ple who could be helped by gov­ern­ment pro­grams.

Sec­ond, col­lege is even worse:


Note this is not ad­justed for in­fla­tion; see link below for ad­justed fig­ures

Inflation-​adjusted cost of a uni­ver­sity ed­u­ca­tion was some­thing like $2000/year in 1980. Now it’s closer to $20,000/year. No, it’s not be­cause of de­creased gov­ern­ment fund­ing, and there are sim­i­lar tra­jec­to­ries for pub­lic and pri­vate schools.

I don’t know if there’s an equiv­a­lent of “test scores” mea­sur­ing how well col­leges per­form, so just use your best judg­ment. Do you think that mod­ern col­leges pro­vide $18,000/year greater value than col­leges did in your par­ents’ day? Would you rather grad­u­ate from a mod­ern col­lege, or grad­u­ate from a col­lege more like the one your par­ents went to, plus get a check for $72,000?

(or, more re­al­is­ti­cally, have $72,000 less in stu­dent loans to pay off)

Was your par­ents’ col­lege even no­tice­ably worse than yours? My par­ents some­times talk about their col­lege ex­pe­ri­ence, and it seems to have had all the rel­e­vant fea­tures of a col­lege ex­pe­ri­ence. Clubs. Classes. Pro­fes­sors. Room­mates. I might have got­ten some­thing extra for my $72,000, but it’s hard to see what it was.

Third, health care. The graph is start­ing to look dis­ap­point­ingly fa­mil­iar:

The cost of health care has about quin­tu­pled since 1970. It’s ac­tu­ally been ris­ing since ear­lier than that, but I can’t find a good graph; it looks like it would have been about $1200 in today’s dol­lars in 1960, for an in­crease of about 800% in those fifty years.

This has had the ex­pected ef­fects. The av­er­age 1960 worker spent ten days’ worth of their yearly pay­check on health in­sur­ance; the av­er­age mod­ern worker spends sixty days’ worth of it, a sixth of their en­tire earn­ings.


Or not.

This time I can’t say with 100% cer­tainty that all this extra spend­ing has been for noth­ing. Life ex­pectancy has gone way up since 1960:


Extra bonus con­clu­sion: the Span­ish flu was re­ally bad

But a lot of peo­ple think that life ex­pectancy de­pends on other things a lot more than health­care spend­ing. San­i­ta­tion, nu­tri­tion, quit­ting smok­ing, plus ad­vances in health tech­nol­ogy that don’t in­volve spend­ing more money. ACE in­hibitors (in­vented in 1975) are great and prob­a­bly in­creased lifes­pan a lot, but they cost $20 for a year’s sup­ply and re­placed older drugs that cost about the same amount.

In terms of cal­cu­lat­ing how much lifes­pan gain health­care spend­ing has pro­duced, we have a cou­ple of op­tions. Start with by coun­try:

Coun­tries like South Korea and Is­rael have about the same life ex­pectancy as the US but pay about 25% of what we do. Some peo­ple use this to prove the su­pe­ri­or­ity of cen­tral­ized gov­ern­ment health sys­tems, al­though Ran­dom Crit­i­cal Analy­sis has an al­ter­na­tive per­spec­tive. In any case, it seems very pos­si­ble to get the same im­prov­ing life ex­pectan­cies as the US with­out oc­tu­pling health care spend­ing.

The Nether­lands in­creased their health bud­get by a lot around 2000, spark­ing a bunch of stud­ies on whether that in­creased life ex­pectancy or not. There’s a good meta-​analysis here, which lists six stud­ies try­ing to cal­cu­late how much of the change in life ex­pectancy was due to the large in­creases in health spend­ing dur­ing this pe­riod. There’s a broad range of es­ti­mates: 0.3%, 1.8%, 8.0%, 17.2%, 22.1%, 27.5% (I’m tak­ing their num­bers for men; the num­bers for women are pretty sim­i­lar). They also men­tion two stud­ies that they did not of­fi­cially in­clude; one find­ing 0% ef­fect and one find­ing 50% ef­fect (I’m not sure why these stud­ies weren’t in­cluded). They add:

In none of these stud­ies is the issue of re­verse causal­ity ad­dressed; some­times it is not even men­tioned. This im­plies that the ef­fect of health care spend­ing on mor­tal­ity may be over­es­ti­mated.

They say:

Based on our re­view of em­pir­i­cal stud­ies, we con­clude that it is likely that in­creased health care spend­ing has con­tributed to the re­cent in­crease in life ex­pectancy in the Nether­lands. Ap­ply­ing the es­ti­mates form pub­lished stud­ies to the ob­served in­crease in health care spend­ing in the Nether­lands be­tween 2000 and 2010 [of 40%] would imply that 0.3% to al­most 50% of the in­crease in life ex­pectancy may have been caused by in­creas­ing health care spend­ing. An im­por­tant rea­son for the wide range in such es­ti­mates is that they all in­clude method­olog­i­cal prob­lems high­lighted in this paper. How­ever, this wide range in­i­cates that the coun­ter­fac­tual study by Meerd­ing et al, which ar­gued that 50% of the in­crease in life ex­pectancy in the Nether­lands since the 1950s can be at­trib­uted to med­ical care, can prob­a­bly be in­ter­preted as an upper bound.

It’s going to be com­pletely ir­re­spon­si­ble to try to apply this to the in­crease in health spend­ing in the US over the past 50 years, since this is prob­a­bly dif­fer­ent at every mar­gin and the US is not the Nether­lands and the 1950s are not the 2010s. But if we ir­re­spon­si­bly take their me­dian es­ti­mate and apply it to the cur­rent ques­tion, we get that in­creas­ing health spend­ing in the US has been worth about one extra year of life ex­pectancy. This study at­tempts to di­rectly es­ti­mate a GDP cor­re­sponds to an in­crease of 0.05 years life ex­pectancy. That would sug­gest a slightly dif­fer­ent num­ber of 0.65 years life ex­pectancy gained by health­care spend­ing since 1960)

If these num­bers seem ab­surdly low, re­mem­ber all of those con­trolled ex­per­i­ments where giv­ing peo­ple in­sur­ance doesn’t seem to make them much health­ier in any mean­ing­ful way.

Or in­stead of slog­ging through the sta­tis­tics, we can just ask the same ques­tion as be­fore. Do you think the av­er­age poor or middle-​class per­son would rather:

  1. Get mod­ern health care
  2. Get the same amount of health care as their par­ents’ gen­er­a­tion, but with mod­ern tech­nol­ogy like ACE in­hibitors, and also earn $8000 extra a year

Fourth, we see sim­i­lar ef­fects in in­fra­struc­ture. The first New York City sub­way opened around 1900. Var­i­ous sources list lengths from 10 to 20 miles and costs from $30 mil­lion to $60 mil­lion dol­lars – I think my sources are cap­tur­ing it at dif­fer­ent stages of con­struc­tion with dif­fer­ent num­bers of ex­ten­sions. In any case, it sug­gests costs of be­tween $1.5 mil­lion to $6 mil­lion dol­lars/mile = $1-4 mil­lion per kilo­me­ter. That looks like it’s about the inflation-​adjusted equiv­a­lent of $100 mil­lion/kilo­me­ter today, though I’m very un­cer­tain about that es­ti­mate. In con­trast, Vox notes that a new New York sub­way line being opened this year costs about $2.2 bil­lion per kilo­me­ter, sug­gest­ing a cost in­crease of twenty times – al­though I’m very un­cer­tain about this es­ti­mate.

Things be­come clearer when you com­pare them country-​by-country. The same Vox ar­ti­cle notes that Paris, Berlin, and Copen­hagen sub­ways cost about $250 mil­lion per kilo­me­ter, al­most 90% less. Yet even those Eu­ro­pean sub­ways are over­priced com­pared to Korea, where a kilo­me­ter of sub­way in Seoul costs $40 mil­lion/km (an­other Ko­rean sub­way project cost $80 mil­lion/km). This is a dif­fer­ence of 50x be­tween Seoul and New York for ap­par­ently com­pa­ra­ble ser­vices. It sug­gests that the 1900s New York es­ti­mate above may have been roughly ac­cu­rate if their ef­fi­ciency was roughly in line with that of mod­ern Eu­rope and Korea.

Fifth, hous­ing (source):

Most of the im­por­tant com­men­tary on this graph has al­ready been said, but I would add that op­ti­mistic takes like this one by the Amer­i­can En­ter­prise In­sti­tute are miss­ing some of the dy­namic. Yes, homes are big­ger than they used to be, but part of that is zon­ing laws which make it eas­ier to get big houses than small houses. There are a lot of peo­ple who would pre­fer to have a smaller house but don’t. When I first moved to Michi­gan, I lived alone in a three bed­room house be­cause there were no good one-​bedroom houses avail­able near my work­place and all of the apart­ments were loud and crime-​y.

Or, once again, just ask your­self: do you think most poor and mid­dle class peo­ple would rather:

  1. Rent a mod­ern house/apart­ment
  2. Rent the sort of house/apart­ment their par­ents had, for half the cost

II

So, to sum­ma­rize: in the past fifty years, ed­u­ca­tion costs have dou­bled, col­lege costs have dec­tu­pled, health in­sur­ance costs have dec­tu­pled, sub­way costs have at least dec­tu­pled, and hous­ing costs have in­creased by about fifty per­cent. US health care costs about four times as much as equiv­a­lent health care in other First World coun­tries; US sub­ways cost about eight times as much as equiv­a­lent sub­ways in other First World coun­tries.

I worry that peo­ple don’t ap­pre­ci­ate how weird this is. I didn’t ap­pre­ci­ate it for a long time. I guess I just fig­ured that Grandpa used to talk about how back in his day movie tick­ets only cost a nickel; that was just the way of the world. But all of the num­bers above are inflation-​adjusted. These things have dec­tu­pled in cost even after you ad­just for movies cost­ing a nickel in Grandpa’s day. They have re­ally, gen­uinely dec­tu­pled in cost, no eco­nomic trick­ery in­volved.

And this is es­pe­cially strange be­cause we ex­pect that im­prov­ing tech­nol­ogy and glob­al­iza­tion ought to cut costs. In 1983, the first mo­bile phone cost $4,000 – about $10,000 in today’s dol­lars. It was also a gi­gan­tic piece of crap. Today you can get a much bet­ter phone for $100. This is the right and proper way of the uni­verse. It’s why we fund sci­en­tists, and pay busi­ness­peo­ple the big bucks.

But things like col­lege and health care have still had their prices dec­tu­ple. Pa­tients can now sched­ule their ap­point­ments on­line; doc­tors can send pre­scrip­tions through the fax, phar­ma­cies can keep track of med­ica­tion his­to­ries on cen­tral­ized com­puter sys­tems that in­ter­face with the cloud, nurses get au­to­matic re­minders when they’re giv­ing two drugs with a po­ten­tial in­ter­ac­tion, in­sur­ance com­pa­nies ac­cept pay­ment through credit cards – and all of this costs ten times as much as it did in the days of punch cards and sec­re­taries who did cal­cu­la­tions by hand.

It’s ac­tu­ally even worse than this, be­cause we take so many op­por­tu­ni­ties to save money that were un­avail­able in past gen­er­a­tions. Un­der­paid for­eign nurses im­mi­grate to Amer­ica and work for a song. Doc­tors’ notes are sent to India overnight where they’re tran­scribed by sweatshop-​style labor for pen­nies an hour. Med­ical equip­ment gets man­u­fac­tured in goodness-​only-knows which ob­scure Third World coun­try. And it still costs ten times as much as when this was all made in the USA – and that back when min­i­mum wages were pro­por­tion­ally higher than today.

And it’s ac­tu­ally even worse than this. A lot of these ser­vices have de­creased in qual­ity, pre­sum­ably as an at­tempt to cut costs even fur­ther. Doc­tors used to make house calls; even when I was young in the ’80s my fa­ther would still go to the houses of dif­fi­cult pa­tients who were too sick to come to his of­fice. This study notes that for women who give birth in the hos­pi­tal, “the stan­dard length of stay was 8 to 14 days in the 1950s but de­clined to less than 2 days in the mid-1990s”. The doc­tors I talk to say this isn’t be­cause mod­ern women are health­ier, it’s be­cause they kick them out as soon as it’s safe to free up beds for the next per­son. His­toric records of hos­pi­tal care gen­er­ally de­scribe leisurely con­va­les­cence pe­ri­ods and mak­ing sure some­body felt ab­solutely well be­fore let­ting them go; this seems bizarre to any­one who has par­tic­i­pated in a mod­ern hos­pi­tal, where the mantra is to kick peo­ple out as soon as they’re “sta­ble” ie not in acute cri­sis.

If we had to pro­vide the same qual­ity of ser­vice as we did in 1960, and with­out the gains from mod­ern tech­nol­ogy and glob­al­iza­tion, who even knows how many times more health care would cost? Fifty times more? A hun­dred times more?

And the same is true for col­leges and houses and sub­ways and so on.

III

The ex­ist­ing lit­er­a­ture on cost dis­ease fo­cuses on the Bau­mol ef­fect. Sup­pose in some un­der­de­vel­oped econ­omy, peo­ple can choose ei­ther to work in a fac­tory or join an or­ches­tra, and the salaries of fac­tory work­ers and or­ches­tra mu­si­cians re­flect rel­a­tive sup­ply and de­mand and profit in those in­dus­tries. Then the econ­omy un­der­goes a tech­no­log­i­cal rev­o­lu­tion, and fac­to­ries can pro­duce ten times as many goods. Some of the in­creased pro­duc­tiv­ity trick­les down to fac­tory work­ers, and they earn more money. Would-​be mu­si­cians leave the or­ches­tras be­hind to go work in the higher-​paying fac­to­ries, and the or­ches­tras have to raise their prices if they want to be as­sured enough mu­si­cians. So tech im­prove­ments in the fac­tory sec­tory raise prices in the or­ches­tra sec­tor.

We could tell a story like this to ex­plain ris­ing costs in ed­u­ca­tion, health care, etc. If tech­nol­ogy in­creases pro­duc­tiv­ity for skilled la­bor­ers in other in­dus­tries, then less sus­cep­ti­ble in­dus­tries might end up foot­ing the bill since they have to pay their work­ers more.

There’s only one prob­lem: health care and ed­u­ca­tion aren’t pay­ing their work­ers more; in fact, quite the op­po­site.

Here are teacher salaries over time ( source):

Teacher salaries are rel­a­tively flat ad­just­ing for in­fla­tion. But salaries for other jobs are in­creas­ing mod­estly rel­a­tive to in­fla­tion. So teacher salaries rel­a­tive to other oc­cu­pa­tions’ salaries are ac­tu­ally de­clin­ing.

Here’s a sim­i­lar graph for pro­fes­sors ( source):

Pro­fes­sor salaries are going up a lit­tle, but again, they’re prob­a­bly los­ing po­si­tion rel­a­tive to the av­er­age oc­cu­pa­tion. Also, note that al­though the av­er­age salary of each type of fac­ulty is sta­ble or in­creas­ing, the av­er­age salary of all fac­ulty is going down. No mys­tery here – col­leges are doing every­thing they can to switch from tenured pro­fes­sors to ad­juncts, who com­plain of being over­worked and abused while mak­ing about the same amount as a Star­bucks barista.

This seems to me a lot like the case of the hos­pi­tals cut­ting care for new moth­ers. The price of the ser­vice dec­tu­ples, yet at the same time the ser­vice has to sac­ri­fice qual­ity in order to con­trol costs.

And speak­ing of hos­pi­tals, here’s the graph for nurses ( source):

Fe­male nurses’ salaries went from about $55,000 in 1988 to $63,000 in 2013. This is prob­a­bly around the av­er­age wage in­crease dur­ing that time. Also, some of this re­flects changes in ed­u­ca­tion: in the 1980s only 40% of nurses had a de­gree; by 2010, about 80% did.

And for doc­tors (source)

Sta­ble again! Ex­cept that a lot of doc­tors’ salaries now go to pay­ing off their med­ical school debt, which has been bal­loon­ing like every­thing eles.

I don’t have a sim­i­lar graph for sub­way work­ers, but come on. The over­all pic­tures is that health care and ed­u­ca­tion costs have man­aged to in­crease by ten times with­out a sin­gle cent of the gains going to teach­ers, doc­tors, or nurses. In­deed these pro­fes­sions seem to have lost ground salary-​wise rel­a­tive to oth­ers.

I also want to add some anec­dote to these hard facts. My fa­ther is a doc­tor and my mother is a teacher, so I got to hear a lot about how these pro­fes­sions have changed over the past gen­er­a­tion. It seems at least a lit­tle like the ad­junct story, al­though with­out the clearly de­fined “pro­fes­sor vs. ad­junct” di­chotomy that makes it so easy to talk about. Doc­tors are re­ally, re­ally, re­ally un­happy. When I went to med­ical school, some of my pro­fes­sors would tell me out­right that they couldn’t be­lieve any­one would still go into med­i­cine with all of the new stresses and de­mands placed on doc­tors. This doesn’t seem to be lim­ited to one med­ical school. Wall Street Jour­nal: Why Doc­tors Are Sick Of Their Pro­fes­sion – “Amer­i­can physi­cians are in­creas­ingly un­happy with their once-​vaunted pro­fes­sion, and that malaise is bad for their pa­tients”. The Daily Beast: How Being A Doc­tor Be­came The Most Mis­er­able Pro­fes­sion – “Being a doc­tor has be­come a mis­er­able and hu­mil­i­at­ing un­der­tak­ing. In­deed, many doc­tors feel that Amer­ica has de­clared war on physi­cians”. Forbes: Why Are Doc­tors So Un­happy? – “Doc­tors have be­come like every­one else: in­se­cure, dis­con­tent and scared about the fu­ture.” Vox: Only Six Per­cent Of Doc­tors Are Happy With Their Jobs. Al Jazeera Amer­ica: Here’s Why Nine Out Of Ten Doc­tors Wouldn’t Rec­om­mend Med­i­cine As A Pro­fes­sion. Read these ar­ti­cles and they all say the same thing that all the doc­tors I know say – med­i­cine used to be a well-​respected, en­joy­able pro­fes­sion where you could give pa­tients good care and feel self-​actualized. Now it kind of sucks.

Mean­while, I also see ar­ti­cles like this piece from NPR say­ing teach­ers are ex­pe­ri­enc­ing his­toric stress lev­els and up to 50% say their job “isn’t worth it”. Teacher job sat­is­fac­tion is at his­toric lows. And the vet­eran teach­ers I know say the same thing as the vet­eran doc­tors I know – their jobs used to be en­joy­able and make them feel like they were mak­ing a dif­fer­ence; now they feel over­worked, un­ap­pre­ci­ated, and trapped in moun­tains of pa­per­work.

It might make sense for these fields to be­come more ex­pen­sive if their em­ploy­ees’ salaries were in­creas­ing. And it might make sense for salaries to stay the same if em­ploy­ees in­stead ben­e­fit­ted from lower work­loads and bet­ter work­ing con­di­tions. But nei­ther of these are hap­pen­ing.

IV

So what’s going on? Why are costs in­creas­ing so dra­mat­i­cally? Some pos­si­ble an­swers:

First, can we dis­miss all of this as an il­lu­sion? Maybe ad­just­ing for in­fla­tion is harder than I think. In­fla­tion is an av­er­age, so some things have to have higher-​than-average in­fla­tion; maybe it’s ed­u­ca­tion, health care, etc. Or maybe my sources have the wrong sta­tis­tics.

But I don’t think this is true. The last time I talked about this prob­lem, some­one men­tioned they’re run­ning a pri­vate school which does just as well as pub­lic schools but costs only $3000/stu­dent/year, a fourth of the usual rate. Mar­ginal Rev­o­lu­tion notes that India has a pri­vate health sys­tem that de­liv­ers the same qual­ity of care as its pub­lic sys­tem for a quar­ter of the cost. When­ever the same drug is pro­vided by the of­fi­cial US health sys­tem and some kind of grey mar­ket sup­ple­ment sort of thing, the grey mar­ket sup­ple­ment costs be­tween a fifth and a tenth as much; for ex­am­ple, Google’s first hit for Deplin®, of­fi­cial pre­scrip­tion L-​methylfolate, costs $175 for a month’s sup­ply ; un­reg­u­lated L-​methylfolate sup­ple­ment de­liv­ers the same dose for about $30. And this isn’t even men­tion­ing things like the $1 bag of saline that costs $700 at hos­pi­tals. Since it seems like it’s not too hard to do things for a frac­tion of what we cur­rently do things for, prob­a­bly we should be less re­luc­tant to be­lieve that the cost of every­thing is re­ally in­flated.

Sec­ond, might mar­kets just not work? I know this is kind of an ex­treme ques­tion to ask in a post on eco­nom­ics, but maybe no­body knows what they’re doing in a lot of these fields and peo­ple can just in­crease costs and not suf­fer any de­creased de­mand be­cause of it. Sup­pose that peo­ple proved be­yond a shadow of a doubt that Khan Acad­emy could teach you just as much as a nor­mal col­lege ed­u­ca­tion, but for free. Peo­ple would still ask ques­tions like – will em­ploy­ers ac­cept my Khan Acad­emy de­gree? Will it look good on a re­sume? Will peo­ple make fun of me for it? The same is true of com­mu­nity col­leges, second-​tier col­leges, for-​profit col­leges, et cetera. I got of­fered a free schol­ar­ship to a mediocre state col­lege, and I turned it down on the grounds that I knew noth­ing about any­thing and maybe years from now I would be locked out of some sort of Ex­cit­ing Op­por­tu­nity be­cause my col­lege wasn’t pres­ti­gious enough. As­sum­ing every­one thinks like this, can col­leges just charge what­ever they want?

Like­wise, my work­place of­fered me three dif­fer­ent health in­sur­ance plans, and I chose the middle-​expensiveness one, on the grounds that I had no idea how health in­sur­ance worked but maybe if I bought the cheap one I’d get sick and re­gret my choice, and maybe if I bought the ex­pen­sive one I wouldn’t be sick and re­gret my choice. I am a doc­tor, my em­ployer is a hos­pi­tal, and the health in­sur­ance was for treat­ment in my own health sys­tem. The moral of the story is that I am an idiot. The sec­ond moral of the story is that peo­ple prob­a­bly are not super-​informed health care con­sumers.

This can’t be pure price-​gouging, since cor­po­rate prof­its haven’t in­creased nearly enough to be where all the money is going. But a while ago a com­menter linked me to the Delta Cost Project, which scru­ti­nizes the exact causes of in­creas­ing col­lege tu­ition. Some of it is the ad­min­is­tra­tive bloat that you would ex­pect. But a lot of it is fun “stu­dent life” types of ac­tiv­i­ties like clubs, fes­ti­vals, and pay­ing Milo Yiannopou­los to speak and then clean­ing up after the en­su­ing riots. These sorts of things im­prove the stu­dent ex­pe­ri­ence, but I’m not sure that the av­er­age stu­dent would rather go to an ex­pen­sive col­lege with clubs/fes­ti­vals/Milo than a cheap col­lege with­out them. More im­por­tant, it doesn’t re­ally seem like the av­er­age stu­dent is of­fered this choice.

This kind of sug­gests a pic­ture where col­leges ex­pect peo­ple will pay what­ever price they set, so they set a very high price and then use the money for cool things and in­creas­ing their own pres­tige. Or maybe clubs/fes­ti­vals/Milo be­come such a sig­nal of pres­tige that stu­dents avoid col­leges that don’t com­ply since they worry their de­grees won’t be re­spected? Some peo­ple have pointed out that hos­pi­tals have switched from many-​people-all-in-a-big-ward to pri­vate rooms. Once again, no­body seems to have been of­fered the choice be­tween ex­pen­sive hos­pi­tals with pri­vate rooms ver­sus cheap hos­pi­tals with room­mates. It’s al­most as if in­dus­tries have their own rea­sons for switch­ing to more-​bells-and-whistles ser­vices that peo­ple don’t nec­es­sar­ily want, and con­sumers just go along with it be­cause for some rea­son they’re not ex­er­cis­ing choice the same as they would in other mar­kets.

(this ar­ti­cle on the Ok­la­homa City Surgery Cen­ter might be about a par­tial cor­rec­tive for this kind of thing)

Third, can we at­tribute this to the in­ef­fi­ciency of gov­ern­ment rel­a­tive to pri­vate in­dus­try? I don’t think so. The gov­ern­ment han­dles most pri­mary ed­u­ca­tion and sub­ways, and has its hand in health care. But we know that for-​profit hos­pi­tals aren’t much cheaper than gov­ern­ment hos­pi­tals, and that pri­vate schools usu­ally aren’t much cheaper (and are some­times more ex­pen­sive) than gov­ern­ment schools. And pri­vate col­leges cost more than government-​funded ones.

Fourth, can we at­tribute it to in­di­rect gov­ern­ment in­ter­ven­tion through reg­u­la­tion, which pub­lic and pri­vate com­pa­nies alike must deal with? This seems to be at least part of the story in health care, given how much money you can save by grey-​market prac­tices that avoid the FDA. It’s harder to apply it to col­leges, though some peo­ple have pointed out reg­u­la­tions like Title IX that af­fect the ed­u­ca­tional sec­tor.

One fac­tor that seems to speak out against this is that start­ing with Rea­gan in 1980, and pick­ing up steam with Gin­grich in 1994, we got an in­creas­ing pres­ence of Re­pub­li­cans in gov­ern­ment who de­clared war on over­reg­u­la­tion – but the cost dis­ease pro­ceeded un­abated. This is sus­pi­cious, but in fair­ness to the Re­pub­li­cans, they did sort of fail mis­er­ably at dereg­u­lat­ing things. “The lit­eral num­ber of pages in the reg­u­la­tory code” is kind of a blunt in­stru­ment, but it doesn’t ex­actly in­spire con­fi­dence in the Re­pub­li­cans’ dereg­u­la­tion ef­forts:

Here’s a more in­ter­est­ing (and more fun) ar­gu­ment against reg­u­la­tions being to blame: what about pet health care? Vet­eri­nary care is much less reg­u­lated than human health care, yet its cost is ris­ing as fast (or faster) than that of the human med­ical sys­tem ( pop­u­lar ar­ti­cle, study). I’m not sure what to make of this.

Fifth, might the in­creased reg­u­la­tory com­plex­ity hap­pen not through lit­eral reg­u­la­tions, but through fear of law­suits? That is, might in­sti­tu­tions add extra lay­ers of ad­min­is­tra­tion and ex­pense not be­cause they’re forced to, but be­cause they fear being sued if they don’t and then some­thing goes wrong?

I see this all the time in med­i­cine. A pa­tient goes to the hos­pi­tal with a heart at­tack. While he’s re­cov­er­ing, he tells his doc­tor that he’s re­ally upset about all of this. Any nor­mal per­son would say “You had a heart at­tack, of course you’re upset, get over it.” But if his doc­tor says this, and then a year later he com­mits sui­cide for some un­re­lated rea­son, his fam­ily can sue the doc­tor for “not pick­ing up the warn­ing signs” and win sev­eral mil­lion dol­lars. So now the doc­tor con­sults a psy­chi­a­trist, who does an hour-​long eval­u­a­tion, charges the in­sur­ance com­pany $500, and de­ter­mines using her im­mense clin­i­cal ex­per­tise that the pa­tient is upset be­cause he just had a heart at­tack.

Those out­side the field have no idea how much of med­i­cine is built on this prin­ci­ple. Peo­ple often say that the im­por­tance of law­suits to med­ical cost in­creases is over­rated be­cause mal­prac­tice in­sur­ance doesn’t cost that much, but the sit­u­a­tion above would never look lawsuit-​related; the whole thing only works be­cause every­one in­volved doc­u­ments it as well-​justified psy­chi­atric con­sult to in­ves­ti­gate de­pres­sion. Ap­par­ently some stud­ies sug­gest this isn’t hap­pen­ing, but all they do is sur­vey doc­tors, and with all due re­spect all the doc­tors I know say the op­po­site.

This has noth­ing to do with gov­ern­ment reg­u­la­tions (ex­cept in­so­far as these make law­suits eas­ier or harder), but it sure can drive cost in­creases, and it might apply to fields out­side med­i­cine as well.

Sixth, might we have changed our level of risk tol­er­ance? That is, might in­creased cau­tion be due not purely to law­suit­pho­bia, but to re­ally car­ing more about whether or not peo­ple are pro­tected? I read stuff every so often about how play­grounds are be­com­ing ob­so­lete be­cause no­body wants to let kids run around un­su­per­vised on some­thing with sharp edges. Sup­pose that one in 10,000 kids get a hor­ri­ble playground-​related in­jury. Is it worth mak­ing play­grounds cost twice as much and be half as fun in order to de­crease that num­ber to one in 100,000? This isn’t a rhetor­i­cal ques­tion; I think dif­fer­ent peo­ple can have le­git­i­mately dif­fer­ent opin­ions here (though there are prob­a­bly some util­i­tar­ian things we can do to im­prove them).

To bring back the law­suit point, some of this prob­a­bly re­lates to a dif­fer­ence be­tween per­sonal ver­sus in­sti­tu­tional risk tol­er­ance. Every so often, an el­derly per­son get­ting up to walk to the bath­room will fall and break their hip. This is a fact of life, and el­derly peo­ple deal with it every day. Most el­derly peo­ple I know don’t spend thou­sands of dol­lars fall-​proofing the route from their bed to their bath­room, or hir­ing peo­ple to watch them at every mo­ment to make sure they don’t fall, or buy a bed­side com­mode to make bathroom-​related falls im­pos­si­ble. This sug­gests a re­vealed pref­er­ence that el­derly peo­ple are will­ing to tol­er­ate a cer­tain fall prob­a­bil­ity in order to save money and con­ve­nience. Hos­pi­tals, which face huge law­suits if any el­derly per­son falls on the premises, are not will­ing to tol­er­ate that prob­a­bil­ity. They put rails on el­derly peo­ple’s beds, place alarms on them that will go off if the el­derly per­son tries to leave the bed with­out per­mis­sion, and hire pa­tient care as­sis­tants who among other things go around care­fully hold­ing el­derly peo­ple up­right as they walk to the bath­room (I as­sume this job will soon re­quire at least a mas­ter’s de­gree). As more things be­come in­sti­tu­tion­al­ized and the level of ac­cept­able in­sti­tu­tional risk tol­er­ance be­comes lower, this could shift the cost-​risk trade­off even if there isn’t a population-​level trend to­wards more risk-​aversion.

Sev­enth, might things cost more for the peo­ple who pay be­cause so many peo­ple don’t pay? This is some­what true of col­leges, where an in­creas­ing num­ber of peo­ple are get­ting in on schol­ar­ships funded by the tu­ition of non-​scholarship stu­dents. I haven’t been able to find great sta­tis­tics on this, but one ar­gu­ment against: couldn’t a col­lege just not fund schol­ar­ships, and offer much lower prices to its pay­ing stu­dents? I get that schol­ar­ships are good and al­tru­is­tic, but it would be sur­pris­ing if every sin­gle col­lege thought of its role as an al­tru­is­tic in­sti­tu­tion, and cared about it more than they cared about pro­vid­ing the same ser­vice at a bet­ter price. I guess this is re­lated to my con­fu­sion about why more peo­ple don’t open up col­leges. Maybe this is the “smart peo­ple are rightly too scared and con­fused to go to for-​profit col­leges, and there’s not enough abil­ity to dis­crim­i­nate be­tween the good and the bad ones to make it worth­while to found a good one” thing again.

This also ap­plies in health care. Our hos­pi­tal (and every other hos­pi­tal in the coun­try) has some “fre­quent flier” pa­tients who over­dose on meth at least once a week. They comes in, get treated for their meth over­dose (we can’t legally turn away emer­gency cases), get ad­vised to get help for their meth ad­dic­tion (with­out the slight­est ex­pec­ta­tion that they will take our ad­vice) and then get dis­charged. Most of them are poor and have no in­sur­ance, but each ad­mis­sion costs a cou­ple of thou­sand dol­lars. The cost gets paid by a com­bi­na­tion of tax­pay­ers and other hos­pi­tal pa­tients with good in­sur­ance who get big markups on their own bills.

Eighth, might total com­pen­sa­tion be in­creas­ing even though wages aren’t? There def­i­nitely seems to be a pen­sions cri­sis, es­pe­cially in a lot of gov­ern­ment work, and it’s pos­si­ble that some of this is going to pay the pen­sions of teach­ers, etc. My un­der­stand­ing is that in gen­eral pen­sions aren’t re­ally in­creas­ing much faster than wages, but this might not be true in those spe­cific in­dus­tries. Also, this might pass the buck to the ques­tion of why we need to spend more on pen­sions now than in the past. I don’t think in­creas­ing life ex­pectancy ex­plains all of this, but I might be wrong.

IV

I men­tioned pol­i­tics briefly above, but they prob­a­bly de­serve more space here. Libertarian-​minded peo­ple keep talk­ing about how there’s too much red tape and the econ­omy is being throt­tled. And less libertarian-​minded peo­ple keep in­ter­pret­ing it as not car­ing about the poor, or not un­der­stand­ing that gov­ern­ment has an im­por­tant role in a civ­i­lized so­ci­ety, or as a “dog whis­tle” for racism, or what­ever. I don’t know why more peo­ple don’t just come out and say “LOOK, RE­ALLY OUR MAIN PROB­LEM IS THAT ALL THE MOST IM­POR­TANT THINGS COST TEN TIMES AS MUCH AS THEY USED TO FOR NO REA­SON, PLUS THEY SEEM TO BE GOING DOWN IN QUAL­ITY, AND NO­BODY KNOWS WHY, AND WE’RE MOSTLY JUST DES­PER­ATELY FLAIL­ING AROUND LOOK­ING FOR SO­LU­TIONS HERE.” State that clearly, and a lot of po­lit­i­cal de­bates take on a dif­fer­ent light.

For ex­am­ple: some peo­ple pro­mote free uni­ver­sal col­lege ed­u­ca­tion, re­mem­ber­ing a time when it was easy for mid­dle class peo­ple to af­ford col­lege if they wanted it. Other peo­ple op­pose the pol­icy, re­mem­ber­ing a time when peo­ple didn’t de­pend on gov­ern­ment hand­outs. Both are true! My uncle paid for his tu­ition at a re­ally good col­lege just by work­ing a pretty easy sum­mer job – not so hard when col­lege cost a tenth of what it did now. The mod­ern con­flict be­tween op­po­nents and pro­po­nents of free col­lege ed­u­ca­tion is over how to dis­trib­ute our losses. In the old days, we could com­bine low taxes with widely avail­able ed­u­ca­tion. Now we can’t, and we have to argue about which value to sac­ri­fice.

Or: some peo­ple get upset about teach­ers’ unions, say­ing they must be suck­ing the “dy­namism” out of ed­u­ca­tion be­cause of in­creas­ing costs. Oth­ers peo­ple fiercely de­fend them, say­ing teach­ers are un­der­paid and over­worked. Once again, in the con­text of cost dis­ease, both are ob­vi­ously true. The tax­pay­ers are just try­ing to pro­tect their right to get ed­u­ca­tion as cheaply as they used to. The teach­ers are try­ing to pro­tect their right to make as much money as they used to. The con­flict be­tween the tax­pay­ers and the teach­ers’ unions is about how to dis­trib­ute losses; some­body is going to have to be worse off than they were a gen­er­a­tion ago, so who should it be?

And the same is true to greater or lesser de­grees in the var­i­ous de­bates over health care, pub­lic hous­ing, et cetera.

Imag­ine if to­mor­row, the price of water dec­tu­pled. Sud­denly peo­ple have to choose be­tween drink­ing and wash­ing dishes. Ac­tivists argue that tak­ing a shower is a basic human right, and grumpy talk show hosts point out that in their day, par­ents taught their chil­dren not to waste water. A coali­tion pro­motes laws en­sur­ing government-​subsidized free water for poor fam­i­lies; a Fox News in­ves­tiga­tive re­port shows that some peo­ple re­ceiv­ing water on the gov­ern­ment dime are tak­ing long lux­u­ri­ous show­ers. Every­one gets re­ally angry and there’s lots of talk about basic com­pas­sion and per­sonal re­spon­si­bil­ity and what­ever but all of this is sec­ondary to why does water costs ten times what it used to? I think this is the basic in­tu­ition be­hind so many peo­ple, even those who gen­uinely want to help the poor, are afraid of “tax and spend” poli­cies. In the con­text of cost dis­ease, these look like in­dus­tries con­stantly dou­bling, tripling, or dec­tu­pling their price, and the gov­ern­ment say­ing “Okay, fine,” and in­creas­ing taxes how­ever much it costs to pay for what­ever they’re de­mand­ing now.

If we give every­one free col­lege ed­u­ca­tion, that solves a big so­cial prob­lem. It also locks in a price which is ten times too high for no rea­son. This isn’t fair to the gov­ern­ment, which has to pay ten times more than it should. It’s not fair to the poor peo­ple, who have to face the stigma of ac­cept­ing hand­outs for some­thing they could eas­ily have af­forded them­selves if it was at its proper price. And it’s not fair to fu­ture gen­er­a­tions if col­leges take this op­por­tu­nity to in­crease the cost by twenty times, and then our chil­dren have to sub­si­dize that.

I’m not sure how many peo­ple cur­rently op­posed to pay­ing for free health care, or free col­lege, or what­ever, would be happy to pay for health care that cost less, that was less waste­ful and more ef­fi­cient, and whose price we ex­pected to go down rather than up with every pass­ing year. I ex­pect it would be a lot.

And if it isn’t, who cares? The peo­ple who want to help the poor have enough po­lit­i­cal cap­i­tal to spend eg $500 bil­lion on Med­ic­aid; if that were to go ten times fur­ther, then every­one could get the health care they need with­out any more po­lit­i­cal ac­tion needed. If some gov­ern­ment pro­gram found a way to give poor peo­ple good health in­sur­ance for a few hun­dred dol­lars a year, col­lege tu­ition for about a thou­sand, and hous­ing for only two-​thirds what it costs now, that would be the great­est anti-​poverty ad­vance in his­tory. That pro­gram is called “hav­ing things be as ef­fi­cient as they were a few decades ago”.

V

In 1930, econ­o­mist John May­nard Keynes pre­dicted that his grand­chil­drens’ gen­er­a­tion would have a 15 hour work week. At the time, it made sense. GDP was ris­ing so quickly that any­one who could draw a line on a graph could tell that our gen­er­a­tion would be four or five times richer than his. And the av­er­age middle-​class per­son in his gen­er­a­tion felt like they were doing pretty well and had most of what they needed. Why wouldn’t they de­cide to take some time off and set­tle for a lifestyle merely twice as lux­u­ri­ous as Keynes’ own?

Keynes was sort of right. GDP per capita is 4-5x greater today than in his time. Yet we still work forty hour weeks, and some large-​but-inconsistently-reported per­cent of Amer­i­cans ( 76 ? 55? 47?) still live pay­check to pay­check.

And yes, part of this is be­cause in­equal­ity is in­creas­ing and most of the gains are going to the rich. But this alone wouldn’t be a dis­as­ter; we’d get to Keynes’ utopia a lit­tle slower than we might oth­er­wise, but even­tu­ally we’d get there. Most gains going to the rich means at least some gains are going to the poor. And at least there’s a lot of main­stream aware­ness of the prob­lem.

I’m more wor­ried about the part where the cost of basic human needs goes up faster than wages do. Even if you’re mak­ing twice as much money, if your health care and ed­u­ca­tion and so on cost ten times as much, you’re going to start falling be­hind. Right now the stan­dard of liv­ing isn’t just stag­nant, it’s at risk of de­clin­ing, and a lot of that is stu­dent loans and health in­sur­ance costs and so on.

What’s hap­pen­ing? I don’t know and I find it re­ally scary.

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