What Paul Krugman Doesn’t Understand About Health Economics

by | Jul 28, 2017 | John Goodman

By John C. Goodman

Originally posted at Forbes, July 2017 

Paul Krugman is an editorial writer for the New York Times and a winner of the Nobel prize in economics. Yet more than any other economist in the country, he routinely discredits the very profession that has honored him.

Krugman says that Obamacare actually works. He also thinks the entire health care system would work better if government paid all our medical bills. In making these claims, he writes the way a non-economist would. Wherever there are people who think health policy problems can be solved without any knowledge of economics, Krugman is there to give them aid and comfort – week after week, month after month.

Here is a reader alert for some of Krugman’s most egregious errors.

Monopoly. When it comes to health care, monopoly is better than competition and public is better than private, according to Krugman. In last Friday’s column, he wrote, “The simplest way to ensure that people have access to essential health care is for the government to pay their bills directly.”

Really? Would that work for the other professional services? Lawyers? Accountants? Architects? Engineers? Try to imagine what socialized accounting would look like. While you are doing that ask yourself whether Krugman’s view would apply equally well to other essential services. Would our need for food, clothing and shelter be better met if government paid all the bills?

When Adam Smith, the father of economics, wrote the Wealth of Nations he explained that private sector competition is superior to public sector monopoly. At that time, there were only a few small-scale experiments in socialized production and distribution to analyze. The Jamestown Colony, for example. But in the 20th Century, we had socialistic experiments on a grand scale — in the Soviet Union, in China and in other countries. North Korea is a continuing example. They were all monumental failures.

Is It possible that medicine is different? Apparently not. Socialized medicine in Russia didn’t appear to work any better that socialized grocery stores.

Institutions. As any decent introductory economics textbook should explain, institutions matter. There is a reason why Federal Express is different from the US Postal Service and why, in an effort to survive, the latter is trying to become more like the former. In arguing for a government monopoly in the provision of medical care, Krugman used to point to the VA system as the ideal. These days he is following in Bernie Sanders footsteps, pushing Medicare for all. At other times, he seems to imply that Medicaid for all would do just as well. Apparently, he hasn’t discovered the Indian Health Service yet.

Here’s what Krugman doesn’t seem to know. Medicare is not actually run by the government. It is run by Blue Cross and other private insurers. Why? Medicare contracts with private insurers for administrative services because they have more knowledge and expertise than government bureaucrats. Moreover, one third of all seniors have chosen to enroll in private Medicare Advantage plans. These plans look just like insurance for younger people, and they are cheaper and better than traditional Medicare! Medicaid is also privately administered in most places, and two-thirds of the beneficiaries nationwide are in private plans.

So, in both Medicare and Medicaid, government is not paying all the bills. And no one who is knowledgeable about these programs is recommending that government do so.

Opportunity cost. “Obamacare … has worked,” writes Krugman. Why is that? “Because it brought about a dramatic reduction in the number of Americans without health insurance.” This is a mistake that is frequently made in health policy. But you don’t expect a well-trained economist to make it.

More of something isn’t necessarily good unless you compare it to what must be sacrificed in order to achieve it. The first thing students learn in their first economics course is that there is no such thing as a free lunch. Everything has an opportunity cost. The guns/butter tradeoff is an oft used example. More guns means less butter and vice versa.

Who is sacrificing so that roughly 17 million people can have health insurance? The victims surely include the 10 million people with non-group insurance who are getting no subsidy from the federal government, but who now face doubled premiums, soaring deductibles and an ever-narrowing network of providers. “[P]eople who are out there busting it, sometimes 60 hours a week, wind up with their premiums doubled and their coverage cut in half,” said Bill Clinton, during last year’s presidential campaign. I can‘t say it any better.

Add to that another 8 million people who are paying an annual fine because they find health insurance not worth the cost – even when it’s subsidized.

Marginal costs and marginal benefits. Monday’s New York Times carried another Krugman column, defending Obamacare against those who would reform it. Yet the same paper on the same day carried a full-page story on free health care – recently made available on a county fairground over three days in rural Appalachia. More than 2,000 people lined up, many camping out overnight to be ready at the 5 a.m. opening. These are people for whom Obamacare premiums are unaffordable or for whom Obamacare deductibles and copayments put basic care out of reach.

Economists are trained to evaluate changes by comparing marginal gains against marginal costs. The kind of health insurance Obamacare forces people to buy is great for hospitals. It will pay the cost of a million-dollar premature baby, should that misfortune arise. But a $6,000 deductible in rural Virginia doesn’t help much with basic health care needs.

What about people who are newly enrolled in Medicaid? A carefully-designed experiment in Oregon (like the controlled trials the FDA requires of new drugs) sheds light on that question. Medicaid enrollment appears to have no effect on physical health, although Medicaid enrollees suffer less depression. We’re paying a lot for reduced depression. If Obamacare’s Medicaid expansion were subjected to the same rigor we insist on for new drugs, it wouldn’t be allowed on the market.

Externalities. One of the most important insights of modern economics is the understanding that if markets aren’t working properly, people can impose “external” costs on each other when they pursue their own self-interest. Under Obamacare this is happening in spades, yet I can’t recall a single occasion when Krugman has even mentioned it.

Health plans can dump their most costly enrollees on other plans, say, by limiting the access of cancer patients to the best specialists and best facilities or by requiring high, out-of-pocket payments for the best cancer drugs. Employers can end their post-retirement health care programs and dump those costs on the nongroup market, where the (older) enrollees will pay premiums that are held artificially lower than the expected cost of their care. Individuals can dump costs on others by remaining uninsured while healthy and buying coverage only after they get sick.

These perverse incentives are the most important reasons why Obamacare is undergoing a race to the bottom on quality and a death spiral on price. But you won’t learn about any of this reading the editorial pages of the New York Times.

This article was originally posted at Forbes on July 25, 2017.