Tuesday, July 21, 2009

Faith in Committees

Ezra Klein criticized Gregg Mankiw for doubting the new health care program will cut costs. Ezra's objections are based on his faith in the following:

  • A "comparative effectiveness review", which will look at differences in costs between regions, and supposedly rationally reduce wasteful expenditures
  • An "Independent Medicare Advisory Council", which will identify "best practices"
  • Monopsony power, where a large single buyer (the government) will force suppliers to cut costs
  • As risk' becomes infeasible to ddiscriminate, health care providers will focus on costs of suppling services instead

This is classic difference between a conservative and a liberal on questions of commerce. A liberal thinks that governments can be more efficient if we set up top-down councils that issue wise edicts; a conservative thinks such committees will not issue any wise edicts [note, on social policies this is reversed, and here I side with the liberals]. I would admit most such councils are filled with people of good faith, but their task is futile, because they don't have the information to make such decisions, nor the incentives to make trade-offs implicit in any wise decisions.

This all reminds me of when I worked in large corporations, and we would form big committees on the 54th floor to get rid of waste. Unless there's a specific plan, which inevitably has winners and losers, such a committee is merely a refuge for grandstanding and a waste of bagels. All large government agencies (the Post Office, the Department of Defense, Education Boards) have 'best practices' committees, 'effectiveness councils', with various other names. They all come to naught because the bottom line incentives are not conducive to cost cutting. They are fundamentally spending other people's money on other people, without any direct, strong incentive to do so efficiently. The incentive to cut costs gets lost in the context of fairness, justice, and coalition building.

Is there an example of a government committee, like the 'comparative effictiveness review', that has ever cut costs? A wise government council that has identified best practices more efficiently than a market? Government purchasers actually finding lower cost providers? Is there insufficient incentive to 'cut costs' currently, compared to the new system?

The only way to cut costs is to force those demanding services to economize by decentralize decision making, in the process exposing health care demand to the costs of more of their decisions. Currently, about 10% of health care expenditures are out-of-pocket, and when someone else pays, people ask for too much, suppliers inflate costs, and here we are. But current legislation is all about benefits and almost painless cost cuts that involve no inconvenience to the rabble. This is why free marketers like myself and Mankiw are pessimistic.

You might as well put your faith in input-output matrices, dynamic programming, or mandatory readings from "Who Moved My Cheese?" There are two ways to cut health care costs. Have government decide to spend at most $X on health care, and have their wise committees figure out how to deal with this lower budget, or increase the out-of-pocket expenditures of people so they internalize their costs and economize on health care purchases.


J said...

Waste of bagels?

No bagel is ever wasted in a good committee meeting.

Health care should be free till age 50. Over 50 everyone is on its own. The community has no interest in expensively prolonging the lives of the people. Incurable diseases should not be cured at the other people's expense.

Mick Jagger said...

To reduce the "end of life" costs, we should repeal sin taxes on alcohol and cigarettes, repeal helmet and seat belt laws (and remove seatbelts while installing a railroad spike in the steering wheel's center of cars owned by convicted drunk drivers), repeal drug laws, and generally encourage people to have a good time in a way that shortens lifespans.

Anonymous said...

Good point about faith or lack of faith in the wisdom of crowds. There is another way of thinking about your opposing camps of thought: those who believe in "Darwinian" solutions that call for wild cross-sectional dispersion of resources and those who want to eliminate cross-sectional dispersion (give everyone the same resources). The Darwinian approach is fundamentally "unfair" because it means it means that your ability to survive has nothing to do with your own accomplishments: you get a reward for wisely choosing your grandparents or making sure that you are a human capital freak of nature a la Michael Jordan or Bill Gates..The committee approach/Administration approach is an attempt to squeeze out corss-sectional dispersion. My sense is that any attempt to eliminate social volatility/cross sectional dispersion is futile...like a water filled balloon...squeeze it in one place and it bulges elsehwere....The nice thing about Sweden is that you pay a lot in taxes ( as will probably be the case here ) but in Sweden you get about 2000 days of vacation a year and you are expected to take the vacation days....