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Wednesday, July 7, 2010

Ivy League and Economically challenged

Donald Berwick's recess appointment allowed us to avoid some additional pointless Senate drama. From all accounts he is a smart, respected, and well intentioned person. The problem is he is suffers from what Hayek referred to as the "fatal conceit".  From CNSnews:

Berwick argued that purposely provided an inadequate supply of health-care—as Britain’s health-care system does—is superior to allowing the market to provide an excess. “In America, the best predictor of cost is supply; the more we make, the more we use—hospital beds, consultancy services, procedures, diagnostic tests,” Dr. Berwick wrote.  “… Here, you choose a harder path. You plan the supply; you aim a bit low; you prefer slightly too lit tle of a technology or a service to too much; then you search for care bottlenecks and try to relieve them.”  

Yes, you can try to plan the supply but if there is anything we should have learned in the 20th century it is that planned economies simply do not work. The conceit here is the belief that the problems which universally afflicted planned economies in the past (and I do mean universally - no exceptions) can be avoided by those of us in the present who are just that much smarter and insightful. 

The present system is indefensible. It is supply driven and wasteful and will bankrupt us. However, Dr. Berwick is delusional (and he is not alone) if he thinks he plan and can use a command and control system to execute a centrally driven system which will defeat an army of gamers who will exploit the many unanticipated weaknesses which will bedevil his plans. 

It is all about coordination of human efforts and allocation of scarce resources. Berwick's take on this?
Please don’t put your faith in market forces,” he said (italics in original).  “It’s a popular idea: that Adam Smith’s invisible hand would do a better job of designing care than leaders with plans can. I find little evidence that market forces relying on consumers choosing among an array of products, with competitors fighting it out, leads to the healthcare system you want and need. In the US, competition is a major reason for our duplicative, supply driven, fragmented care system.” 
His alternative... central planning by experts. To blame the dysfunctional system in place on market forces is laughable. The prices are all administratively fixed. You can't have free markets when the prices are fixed. It is duplicative and wasteful because the price signals, which are administratively fixed, are sending the signals to be wasteful and duplicative.

The solution to such pricing problems... The independent Payment Advisory Board! What a great idea. Create a board of experts selected via a political process to set prices on what may be an infinite number of items through a political process. What a great idea. Why did I not think of this myself? Perhaps because I have some actual working knowledge of economics and an appreciation of the catastrophic mistakes of history.  This idea is simply even more of the fatal conceit. It is so fundamentally flawed that it is difficult to critique. Do those who propose this idea realize that basically every single price set by the board will be wrong and they will have no idea in any real time which prices are so out of whack that they acutely disrupt service delivery?

The saving grace is that the prices are said to be restricted to Medicare. It is highly likely that they will be used as the framework for private payers. The NEJM of weighs in on this with a piece by Timothy Stoltzfus Jost, J.D.. In this he concludes:
In the long run, Congress may not be able to cap Medicare expenditures without addressing private expenditures as well. If the IPAB opens the door to rate setting for all payers, it may well be the most revolutionary innovation of the ACA.
Disruptive, yes. Innovative, hardly. Administrative prices and state driven price controls are ancient and resurface whenever mankind displays historical amnesia. It is sad this happens all to often. This time is different.  Here we go again.


  1. Chauncey McHargue M.D.July 9, 2010 at 12:48 PM

    So let me see if I understand you. You don't think this whole price control, Payment Advisory Board thing is going to work, because it hasn't ever worked in recorded economic history? I just want to make sure I've got the fundamental idea here, because Berwick is from Harvard so he should know what he is doing.

  2. I really don't see the IPAB surviving for very long. There was a consensus of opposition by virtually every major medical society. I sense that it will eventually be lobbied out of existence or substantially marginalized after Democrats loose control of Congress and/or White House.