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Health Care Mythology

Health Care Mythology



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Published by Scott Orn

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Published by: Scott Orn on Jul 26, 2009
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Health Care Mythology
REVISED DRAFT7/22/2009Clifford S. Asness, Ph.D.Managing and Founding PrincipalAQR Capital Management, LLCComments welcome:comments@stumblingontruth.comRelated essays at:www.stumblingontruth.com
What We Know That Ain’t So
Will Rogers
famously said, “It isn't what we don't know that gives us trouble, it's what we knowthat ain't so.” So it is with the health care debate in this country. Quite a few “facts” offered tothe public as truth are simply wrong and often intentionally misleading. It seems clear that notruly productive solution will emerge when these false facts represent our common starting point.So, this essay takes on the modest task of simply disabusing its readers of some untrue notionsabout health care.I do not take on the harder task of prescribing how we should (and if we should) reform healthcare, though I offer a few thoughts. Important work must be done here by those who understand,far better than I, the details of health care provision. However, no details are necessary for thisessay, and no animals (though perhaps some egos) were harmed in its creation. The fallacies Ipresent are basic and it takes only a rational economic framework to expose themThere are large groups of people in this country who want socialized medicine and they sensethat the stars are aligning, and now is their time to succeed. They rarely call it socializedmedicine, but instead “single payer health care” or “universal coverage” or something that theirpublic relations people have told them sounds better. Whatever they call it, they believe (orpretend to believe) a lot of wrong-headed things, and they must be stopped. Step one isunderstanding how and why they are wrong. Step two is kicking their asses back to Cuba wherethey can get in line with Michael Moore for their free gastric bypasses.Finally, please read my standard disclosure (though it’s more designed for somethingthat mightbe construed as financial advice, it can’t hurt) and my admission of non-originality.
Myth #1 Health Care Costs are Soaring
No, they are not. The amount we spend on health care has indeed risen, in absolute terms, afterinflation, and as a percentage of our incomes and GDP. That does not mean costs are soaring.You cannot judge the “cost” of something by simply what you spend. You must also judge what
you get. I’m reasonably certain the cost of 1950’s level health care has dropped in real termsover the last 60 years (and you can probably have a barber from the year 1500 bleed you foralmost nothing nowadays). Of course, with 1950’s health care, lots of things will kill you that2009 health care would prevent. Also, your quality of life, in many instances, would be farworse, but you will have a little bit more change in your pocket as the price will be lower. Wantto take the deal? In fact, nobody in the US really wants 1950’s health care (or even 1990’shealth care). They just want to pay 1950 prices for 2009 health care. They want the latest pills,techniques, therapies, general genius discoveries, and highly skilled labor that would maketoday’s health care seem like science fiction a few years ago. But alas, successful science fictionis expensive.
A few commentators on my earlier drafts have pointed out that this quote is attributable to several different people,and it’s far from clear it’s really, or only, by Will Rogers. Interestingly these particular commentators went on tosay that nothing I say has value because of this possible “oversight” of mine (while admitting that many others alsoattribute the quote to Rogers). The only possible response a gentle author like myself can have is that they can biteme.
In the case of health care, the fact that we spend so much more on it now is largely a positive.The negative part is if some, or a lot, of that spending is wasteful. Of course, that is mostly thegovernment’s fault and is not what advocates of government control want you to focus upon.We spend so much more on health care, even relative to other advances, mostly because it isworth so much more to us. Similarly, we spend so much more on computers, compact discs,HDTV, and those wonderful one shot espresso makers that make it like having a barista in yourown home. Interestingly, we also spend a ton more on these other items now than we did in1950 because none of these existed in 1950 (well, you could have hired a skilled Italian man tolive with you and make you coffee twice a day, so I guess that existed and the price has in factcome down; my bad, analogy shot). OK, you get the point. Health care today is a combinationof stuff that has existed for a while and a set of entirely new things that look like (and really are)miracles from the lens of even a few years ago. We spend more on health care because it’sbetter. Say it with me again, slowly – this is a good thing, not a bad thing.By the way, I do not mean that the amount we spend on health care in this country isn’t higherthan it needs to be. Myth #4 covers that.In summary, if one more person cites soaring health care costs as an indictment of the freemarket, when it is in fact a staggering achievement of the free market, I’m going to rupture theirappendix and send them to a queue in the UK to get it fixed. Last we’ll see of them.
Myth #2 The Canadian Drug Story
Ah … one of the holy myths of the “US health care sucks” crowd. This should be fun.The general story is how you can buy many drugs in Canada cheaper than you can buy them inthe US. This story is often, without specifically tying the logic together, taken as an obviousindictment of the US’s (relatively) free market system. This is grossly misguided.Here’s what happens. We have a partially free market in the US where drug companies spend aton to develop new wonder drugs, much of which is spent to satisfy regulatory requirements.The cost of this development is called a “fixed cost.” Once it’s developed it does not cost thatmuch to make each pill. That’s called a “variable cost.” If people only paid the variable cost (oreven a bit more) for each pill, the whole thing would not work. The drug company would neverget back the massive fixed cost of creating the drug in the first place, and so no company wouldtry to develop one. Thus, manufacturers have to, and do, charge more than the variable cost of making each pill.
Some look at this system and say to the drug companies “gee, it doesn’t costyou much to make one more pill, so it’s unfair that you charge much more than your cost.” Theyare completely wrong and not looking at all the costs.So, let’s bring this back to our good natured friends to the North (good natured barring hockeywhen they’ll kill you as soon as look at you
). They have socialized medicine and they bargainas the only Canadian buyer for drugs, paying well below normal costs. Drug companies that
Some say health care advances are really an achievement of the government as the government funds universityresearch. Wow. What a clear case of the government muscling in, taking over, and then pointing to their takingover of Poland as a success. We Poles feel differently.
By the way, that companies try to maximize profit is not something they or I should apologize for, it is beautifuland fair and the reason why great things are created.
FYI, your author is a hockey nut.

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Paula Tropiano added this note
Very "sobering" article. I have not seen anything so well explained piece by piece. Yes, the writing is on the wall. Often we "feel" matters like this health care issue as things that don't "feel right' but there is often the lack of the words to describe such issues or information to validate why things feel off or something is missing . Your breakdown explains "why?"
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