Daily Archives: 05/27/2011

Why does cost effective care spread so slowly

Healthcare Economist

via Why does cost effective care spread so slowly.

According to Fuchs and Millstein, here’s why:

  • Insurers hesitation to standardize coverage.  Standardization of coverage would force insurance companies to compete primarily on the basis of price, which would put pressure on their profits.
  • Employers bear too much of the marginal cost from employees choosing expensive health plans.  Because companies wish to avoid alienating employees, only 20% of large employers require workers who choose more expensive plans to pay the marginal difference in cost.
  • The public does not understand why cost effectiveness is good for them.  The general public does not typically realize that higher health insurance cost are not paid by employers, but by the employees themselves through lower wages in the long run.
  • Legislators need money.  Legislators seek campaign contributions from health industry stakeholders who benefit from the current inefficient arrangements.
  • Hospitals fear cost-effectiveness means lower reimbursements.  Hospital administrators often resist efforts to reduce hospital occupancy for fear that decreases in revenue will jeopardize their ability to cover large fixed costs.
  • Physicians fear pay cuts and loss of professional autonomy.
  • Drug and device manufacturers will lose profits.  Although manufacturer with unique products can sell their goods for a high price, there are alternatives to most medical products.  In these cases, firms attempt to create the perception that their products are unique to justify high prices.  Marketing and lobbying are vital parts of these efforts.

More on macroeconomic policy arguments during the Great Recession

 

The Great Recession has become a fertile ground for considerable analysis of the prevailing conventional wisdom macroeconomic policies. The relative merits of contractionary and expansionary monetary and fiscal policies are at the heart of all ideological battles.
Conservatives fret at the inflationary effects of expansionary conventional (zero-bound interest rates) and unconventional (quantitative easing) monetary policies and call for tightening monetary policy or atleast oppose any further monetary expansion. They also point to the unsustainable public debt and fiscal deficit and argue any fiscal expansion. Some even argue that all this is crowding out private spending, despite the overwhelming evidence of massive idling resources and capacity in the US economy. Their general belief is that hard money and sound government finances are necessary for a robust recovery to take hold.
However, those advocating expansionary policy, David Beckworth, .
Paul Krugman has been the strongest proponent of the view that when faced with a liquidity trap, increases in the monetary base (which includes bank reserves as well as currency) doesn’t cause inflation, or even a rise in broader definitions of the money supply. Faced with a recession and the zero-bound, businesses postpone investments and consumers their spending, thereby forcing banks to hold on to their reserves. This propensity to hold on to reserves is amplified by the fact that under such conditions, cash and T-Bills become near perfect substitutes, and the Fed cannot therefore expand M2.
Krugman points to the evidence from old and recent history to highlight this. At the onset of the Great Depression, though the Fed expanded the monetary base considerably (admittedly this may have been smaller than was required), it did not result in the expected increase in money supply and inflation remained muted.

Much the same happened in Japan. Despite a dramatic expansion in the monetary base by the Bank of Japan, prices kept falling.

Since the beginning of the Great Recession, the US Federal Reserve has been quick in dramatically expanding its balance sheet and increasing the monetary base. The result – M2 money supply and consumer prices have hardly budged.

However, even among those who favor monetary expansion, there is one group who argue that the Federal Reserve could have done more to avert a deep recession in 2008 and 2009 if it had indulged in much more aggressive monetary expansion. Scott Sumner, David Beckworth and others argue that the central bank using monetary policy tools can do more, even when faced with a zero-bound in interest rates, to stimulate aggregate demand and expand the economy.
They advocate setting an explicit nominal GDP target (or nominal GDP growth path) to shape future market expectations about current and future nominal spending and thereby boost economic growth or prevent aggregate demand crashes. This, they argue, can be done by purchasing assets other than Treasury Bills, like longer-term securities, to lower long-term rates and thereby incentivize investment and consumption spending so as to reach the nominal GDP target. David Beckworth writes,

"Set an explicit nominal GDP level target so that expectations are appropriately shaped. If such a rule were adopted expectations of current and future nominal spending would be anchored around the level target… Even if a spending crash did occur the catch-up growth needed to return nominal spending to its level target would most likely imply an expected path of short-term real interest rates consistent with restoring full employment…
if the monetary base and t-bills became perfect substitutes because the 0% bound is reached the Fed should buy longer-term treasuries or foreign exchange… The 0% bond for us really is not a big deal, but simply an artifact of monetary policy using a short-term interest rate as the targeted instrument."

As David Beckworth acknowledges, this understanding is not that different operationally than a New Keynesian invoking a higher inflation target to lower the expected path of real interest rates or the portfolio channel to drive down the term premium on long-term bonds.
Paul Krugman points to evidence from Japan to question the quasi monetarist position on the utility of monetary policy during such liquidity trap crises. In this context, he also draws attention to the views of the late Milton Friedman who had advocated that the central banks push more reserves into the banking system through monetary expansion. In fact, Friedman had famously blamed the Fed’s unwillingness to indulge in sufficient monetary expansion as the major contributor towards the Great Depression.
However, unlike the Fed in the 1930s, the Bank of Japan indluged in massive monetary expansion. However, this did not result in the expected rapid growth in the money supply or monetary base.

Paul Krugman concludes that "in the face of a really big shock, which pushes the economy into a liquidity trap, the central bank can’t prevent a depression". In the circumstances, the only option left is fiscal policy. Here Krugman points to the critical role that the government borrowing and spending played in making up for the steep decline in private consumption.

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More on macroeconomic policy arguments during the Great Recession
gulzar.natarajan@gmail.com (gulzar)
Wed, 25 May 2011 00:31:00 GMT