Wednesday, January 24, 2007

How Long Does It Take for the Long Run To Arrive?

Some of the discussion from the last two posts has carried over to Mark Thoma's blog. Krugman responded to Mark as follows:

Aha - I was wondering if anyone would raise that. I was taking it as true to a pretty good approximation that the long-run supply curve for medical services is horizontal. Unless you think that there's permanently limited supply of medical education, or something, why should we think otherwise?

And I would guess that very few people would read Bush's statement to mean that it's bad if other people have extensive insurance, because it drives up doctors' paychecks.
So in a comment, I noted:

Based on Krugman's response (must be nice to have him on speed dial), we're now in the much more comfortable environment in which this is a few economists talking about the magnitude of various key parameters.

One could point out that if he was "wondering whether anyone would raise this point," then he seems to realize that he was going a bit overboard in claiming that "no economic analysis I'm aware of says that when Peter chooses a good health plan, he raises Paul’s premiums."

On the substantive point, one could assert that almost any market has a long-run supply curve that is flat. Exceptions would be made for markets like diamonds--there is a finite quantity available to be mined. At this juncture, it becomes quite relevant how long we think it will be before we are in the long run.

As evidence against this happening any time soon, I don't think the AMA is going to give up its near-monopoly on certifying medical practitioners. Licensed practitioners will be in short supply for a long time even if wholesale medical prices rise. In order to get more services when prices change over this long run, we have to build a lot of buildings--medical schools and hospitals--and fill them with really expensive equipment. I'm guessing that long run will take a while to get here.

A commenter on Mark's blog noted that we could allow more immigration of medical personnel, a policy to which I don't object. Chiming in, Brad DeLong posts his views:

It's not clear to me that Paul Krugman is wrong. It is also not clear to me that Paul Krugman is right. One of the things patients are buying with more expensive health-care plans is the freedom to choose their own doctors, and that gives the doctors they choose some monopoly power in their bargaining over reimbursement rates with the insurance companies.

I don't have a handle on how big this effect might be, however.

I think that makes four of us. I also think that Krugman's larger point about the key market failure being adverse selection rather than moral hazard is right, and I would like to stop having policy makers focus on the tax code to try to improve the health care market. As for constructive solutions, I hope to have more in future posts.


Anonymous said...

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ona sabbatical said...

I think there's more to the story than just the price per unit of health care, which has been the focus of this discussion. The tax subsidy for gold-plated health insurance probably stimulated a faster rate of innovation in health care than would otherwise have been the case. (For example, see the discussion and references in Martin Feldstein's 1973 JPE paper, and the evidence in Amy Finkelstein's April 2006 paper on the aggregate effects on health spending of the introduction of Medicare.) As a result, the "standard" for health care probably involves more sophisticated treatment than would otherwise have been the case. Because it is difficult (and maybe adverse-selection-inducing) to write health insurance contracts to exclude certain treatments, the standard health insurance policy is probably considerably more expensive than would otherwise be the case. Thus, Peter's picking a better health plan does indeed raise Paul's (future) premiums. This channel is complementary to the upward-sloping supply curve debated during the past few days.