Flaks and Health Care: Lessons on the Economies of Scale
Last week, WC wrote an analysis of an opinion essay by Department of Administration Commissioner Becky Hultberg. Well, more likely by some assistant. The issue was whether Alaska’s employees and retired employees should be shipped stateside for medical treatment. WC was not kind; the Commissioner’s essay was a textbook example of logical fallacies. AKM at The Mudflats was kind enough to post the essay as well, giving WC a lot of additional readers. Among those additional readers, apparently, was someone in Commissioner Hultberg’s office.
Because a modified version of the same essay appeared in the Fairbanks Daily News-Miner on Sunday, August 4.
The new version removed the ad hominem fallacies but left in the non sequitur fallacy. The new version also recasts the Commissioner’s trial balloon as a wholly voluntary program. Whatever that means.
But the Commissioner’s revised essay still demonstrates an apparent ignorance of economics, including economies of scale. The laws of economics apply to health care, after all. The Commissioner says,
We have documented many examples of medical procedures performed in Alaska that are charged at several times the rates of those performed in the Pacific Northwest. While we recognize that costs will be higher in Alaska, they cannot be double or triple the costs in the regional market.
Let’s try a hypothetical and see if the Commissioner is right.
Assume there is an expensive piece of diagnostic equipment. Assume it’s very useful, even life-saving, in emergency diagnoses. It has the potential to save a dozen or more lives a year in interior Alaska. Assume the machine is only useful in the few hours after an accident or injury, to diagnose what is wrong. For convenience, we’ll call this hypothetical gadget a Hultberg Machine.
Assume the Hultberg Machine costs $500,000. Assume it has a maintenance cost of $100,000 a year. And assume it will be obsolete and have to be replaced in five years. So the total cost of the Hultberg Machine, over it’s useful life, is $1 million. That total cost has to be repaid in patient fees over the useful life of the machine.
In Seattle, the Hultberg Machine might get used twenty times a day. In Interior Alaska, it might get used twice a week. Ignoring operating costs and indirect costs, how do the charges for the use of the Hultburg Machine pencil out in Seattle and in Fairbanks?
In Seattle, the $1 million dollar lifetime cost of the Hultberg Machine gets amortized across 36,500 patients, for a cost of $27.40 per patient.
In Fairbanks, with a much lower usage rate, the Hultberg Machine gets amortized across 520 patients, for a cost of $1,923.08 per patient.
So on WC’s little hypothetical example, the unit cost of using the Hultberg Machine in Fairbanks is about seventy times higher than in Seattle. Not “several times higher,” it’s seventy times higher. Ordinarily, another economic law, the law of supply and demand, would dictate that increased competition would lower the price, but increased competition – two Hultberg Machines in Fairbanks – would simply increase the price, not lower it, because the constraint is demand, not supply. Note also the risk of artificially increased demand, where the Hultberg Machine is used inappropriately simply because it is available.
Shipping patients to the Lower 48 isn’t workable; this is an emergency diagnostic tool, after all. Do we sacrifice the dozen lives that might be saved and not have a Hultberg Machine in Fairbanks? Do we make the conscious decision to let patients die who might be saved? Do we create the kind of de facto “death panels” that former Governor Palin fantasized might exist?
WC’s point is that many of the profoundly difficult questions in U.S. health care policy involve the hard laws of economics. While the Commissioner’s revised essay removes the personal attack on Shannyn Moore, the complaints about higher costs in Alaska betray a very worrying ignorance of economics and avoid the real issues and challenges in health care. What health care can we afford to provide? Who decides?
And health care economics affect all non-trivial aspects of Alaska’s health care. WC is old enough to recall when health care services weren’t available in Alaska. WC, for example, had to go to Seattle in 1968 to have impacted wisdom teeth extracted; the procedure wasn’t available in Fairbanks. If Commissioner Hultberg ships patients to Seattle for removal of wisdom teeth because the cost is 30% lower, the law of supply and demand will inexorably drive up the cost in Alaska.
The health care mess is big, complex and filled with ethical and economic pitfalls. It’s not a place for someone who claims – twice now – that health care costs “cannot be double or triple the costs in the regional market.” The claim betrays a profound ignorance of the underlying issues. And a serious unawareness of the Law of Unintended Consequences.