health care is not made in china

Trade Balance Medical

Trade Balance - Medical Equipment, 2008

Matt Yglesias makes the point that the price of new cars has not increased as fast as inflation over time, nor have High Definition TVs which have seen costs come down.  He wonders why the same hasn’t happened for health care technology:

This gets back to some of the perversities of fee-for-service medicine. The current market creates strong incentives for people to develop “better and more expensive” methods of treatment, but almost no incentive to develop “as good but cheaper” methods of treatment. Both kinds of innovation, however, are extremely valuable. The world’s resources are limited, and the development of cheaper methods of treatment would allow for more overall treatment and thus better outcomes.

In short, I’d say the answer comes down to China, or really its relative absence from the health care market.  As an NPR report from a few days ago illustrated nicely, the reason consumer goods like TVs, toasters, shoes and even cars has come down has a lot to do with the unsustainable trading relationship between the U.S. and China.

Key point: consumer goods are transportable.  But health care is fixed in place.  You get sick where you live.  So while capital is free to scurry the globe in search of cheap labor and factor inputs for consumer goods, health care has to contend with the realities of operating in a high-wage, highly-regulated society.

Trade Balance - TV Parts, 2008

To some degree, this goes for technological innovations in health care as well.  Unlike cars and most consumer electronics, the manufacturing capabilities required for precision medical equipment and small-batch pharmaceuticals is highly specialized and continues, for the most part, to be held relatively close to the vests of the companies that develop the products.  That means, the U.S. and other “advanced industrial” economies continue to manufacture many of these products.  The charts (right) illustrate this: medical instruments have been among the few “bright-spots” in American manufactured goods exports over the last 20 years. (Red indicates the US has a trade surplus with a country in that industrial category.  Green indicates a trade deficit.  Maps come from this handy dandy tool from TradeStats Express).  We export more medical instruments to China than we import.  Not so for car parts or TVs.

Andrew Sullivan builds on Yglesias’s argument contending that the market should be harnessed to fix health care.  To be frank, its not at all clear that so-called “market” approaches solved as many problems as we thought since the 1970s.  A narrative emerged post-1980 that American prosperity was regained after a period of stagflation due to a return to stricter market principles.

Trade Balance - Vehicle Parts, 2008

But as this very cool explanation from the Economist shows, what looked like prosperity was far more closely tied to government spending and the co-dependent relationship between American borrowing and Chinese manufacturing and China’s cheap money policy.

Bottom line: We can’t import our way out of the health care mess.  We need to fix it.  That’s why I continue to believe that the way to address costs must come down to a set of organizational innovations.


Written by seansafford

July 28, 2009 at 7:16 pm

9 Responses

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  1. Despite all of this, it’s not a given that health costs need to rise. LASIK, for instance, has decreased dramatically in price, while other surgeries have increased in cost. That’s because people who pay for LASIK shop around and doctors have incentives to lower price. They do likewise for vet services, and the cost trajectory there is lower than elsewhere.

    And this doesn’t work for the rest of healthcare why? Because China does lots of manufacturing? James Fallows had a great article in the Atlantic a while back on China and currency rates. He found that while currency obviously helps, it wasn’t a big reason why firms went there. Higher rates would just encourage them to relocate elsewhere in the world. Manufacturing as a percentage of US GDP, in any case, has remained near constant for the last thirty years.



    July 28, 2009 at 8:02 pm

  2. Health care may not be made in China, but people can travel there and elsewhere in search of cheaper medical procedures, often the same ones not covered by most insurance plans.



    July 28, 2009 at 9:06 pm

  3. China doesn’t export the mowing of lawns, but we get that done. The usual economist example of a non-tradeable service good is a haircut. Have the prices for those grown faster than inflation?



    July 29, 2009 at 3:07 pm

  4. Thorfinn,

    This is not an attack on you or your position, but I have a few questions concerning your statements above.

    Isn’t LASIK is an elective surgery? And the people who go for it have the luxury of time to “shop” around for the best price and services? Although entrusting ones vision to the lowest bidder sounds daft to me.

    And is there not a cheaper altrenative to LASIK, and they are called, drumroll please… GLASSES?

    I think we are talking apples and oranges again in the circular firing squad that has been called debate on healtcare here in the USA.

    I mean when one’s appendics desides to explode, or you have a heart attack, or you have a car wreck and are critically injured, you do not have the same luxury of time to “shop” around. These stituations demand immediate and intense attention at the closest facility capable of handeling these non-elective surgeries.

    Plus I see no list of fees up on the wall of Doctors offices or hospitals listing the actually prices for services.

    Let’s take a hip replacement surgery for example. That is one procedure where you can take some time to “shop” around. Where are the competing prices to “shop” from the available hospitals offering the same surgery? There aren’t any. And good luck in trying to find an answer to that.

    The bottom line is you can NEVER have real competition if the consumer has no idea what the prices for things are. And the Medical industry is notorious for keeping fees for services close to the vest.



    July 30, 2009 at 2:01 pm

  5. LASIK is an elective procedure and much cheaper alternative, eyeglasses, is available. LASIK doctors are ‘forced’ to compete.

    Should we have ‘cheaper alternative’ to the current state of health care, to allow the insurers to compete in quality and price?



    July 30, 2009 at 2:13 pm

  6. Vaspa56,

    There are plenty of non-elective, emergency services where price shopping isn’t really an option. However, there are plenty of services for which this is not the case. Plus, many health problems are the direct result of our behavior.

    You’re right that the absence of direct price comparisons between hospitals (between insurance plans too) is a big problem. It’s the reason we lack a real market in healthcare, why hosptials develop organization problems, and why it all costs so much.



    July 30, 2009 at 3:12 pm

  7. Most video games and other software are still programmed in the US and their cost has come down considerably over time – or at least has not increased greatly – while the products have gotten much more powerful. Ford, GM, Honda, and Toyota all make cars in the US – and adjusted for inflation they aren’t much more expensive than they were in the 1970s and 80s while being much more efficient, safer, reliable and comfortable. The “we don’t import it from China” excuse just doesn’t cut it for everything.

    I recently came across a billing schedule for medical procedures from the 1950s – an emergency appendectomy cost $500 back then, approximately $2,000 in today’s dollars. Good luck getting an appendectomy for that these days – the cost would be $10,000 or more (possibly as much as $50,000 or up).

    Why has this specific procedure increased 5 to 10 fold in inflation adjusted prices? They’ve been doing this procedure for the better part of a century, so it’s not a new, innovative procedure. Granted, this is one isolated procedure, so it is not a representative sample.

    Still, why should this procedure, which has been done successfully since almost the dawn of modern medicine, be that much more expensive? It indicates that the health care industry has gotten either 5 – 10 times more profitable or that it’s gotten 5-10 times less efficient at providing a given service at a given price. If someone can get to the bottom of that, they will have found the root cause of our health care cost escalation problem.



    July 30, 2009 at 4:19 pm

  8. I guess one thing we’d want to know, MarkJ, is whether more people survive the procedure today than they did back then. Lets assume, for argument’s sake, that while the procedure itself hasn’t change, the equipment has changed a lot and lets further assume that those equipment changes make the procedure safer or otherwise to improve patients’ outcomes.

    Matt’s original idea was that equipment costs haven’t come down quickly. His argument — as far as I can tell — was that the fee-for-service system gives doctors incentives to use the latest and best gadgetry, regardless of whether the improvement in outcomes is large enough to improve the costs.

    My argument is simply that this plays into the production cycle of new equipment and new pharmaceuticals in ways that make it both possible and desirable to keep production of those goods on US soil. And that contributes to the medical care costs going up faster than would otherwise be the case.


    Sean Safford

    July 30, 2009 at 4:48 pm

  9. I’m sure mortality rates have come down some, but it was hardly a super-risky procedure back in the 50s. Besides, video games and cars have become much better since the 1980s and sell for approximately the same price as the old Atari games do (and don’t even get me started on cars from the 70s and 80s). Couldn’t we expect the same improvements in health care? Better mortality rates for the same price? It’s not like there haven’t been any advances and new capital (i.e. sophisticated equimpent)that facilitate the manufacture of better video games or cars. These industries deal with the same technological and investment issues as health care, but in their case products get better but the price, when adjusted for inflation, stays the same or grows only moderately. Why is health the only sector of the ecomomy that doesn’t offer more for less, or at least more for the same price?

    I think we’d also want to know why medical care rates have not increased as dramatically in many European countries, despite the fact that people seem to get care that is just as good as, if not better than, what people get in the US.

    They face the same “can’t import from China” restrictions we face, and would (since they acheive basically equivalent performance) also face the technological advancement costs we face. Yet the government of France (not to mention Sweden, Italy, England, the Netherlands, etc.) spends the same amount per capita on medical care as the US government – but there they provide health care to every citizen. In the US, the government spending only covers a fraction of the population, and even a large portion of those covered by the government plan (the elderly) often pay for supplemental insurance. So our total per capita spending, when you include all the private sector expenditures, is almost triple theirs, yet they have a higher life expectancy.

    My suspicion is that here there are vast sums of money disappearing into the health care system in the form of supernormal profits. I’m not sure if our patent laws are too generous, or whether the health care industry has managed to use its lobbyists to game the system to such a degree that they can suck up vast sums of money some other way. It seems that what providers and insurance companies charge for health care bares less an less relationship to the actual cost of providing that care i.e. the total resources used (capital, labor of health care workers, and drugs). It’s one of a very few sectors of the economy that seems to get less and less efficient over time, and I don’t think it has anything to do with not importing it from China.



    July 30, 2009 at 6:24 pm

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