Faith in Committees

Ezra Klein criticized Gregg Mankiw for doubting the new health care program will cut costs. Ezra's objections are based on his faith in the following:

• A "comparative effectiveness review", which will look at differences in costs between regions, and supposedly rationally reduce wasteful expenditures
• An "Independent Medicare Advisory Council", which will identify "best practices"
• Monopsony power, where a large single buyer (the government) will force suppliers to cut costs
• As risk' becomes infeasible to ddiscriminate, health care providers will focus on costs of suppling services instead

This is classic difference between a conservative and a liberal on questions of commerce. A liberal thinks that governments can be more efficient if we set up top-down councils that issue wise edicts; a conservative thinks such committees will not issue any wise edicts [note, on social policies this is reversed, and here I side with the liberals]. I would admit most such councils are filled with people of good faith, but their task is futile, because they don't have the information to make such decisions, nor the incentives to make trade-offs implicit in any wise decisions.

This all reminds me of when I worked in large corporations, and we would form big committees on the 54th floor to get rid of waste. Unless there's a specific plan, which inevitably has winners and losers, such a committee is merely a refuge for grandstanding and a waste of bagels. All large government agencies (the Post Office, the Department of Defense, Education Boards) have 'best practices' committees, 'effectiveness councils', with various other names. They all come to naught because the bottom line incentives are not conducive to cost cutting. They are fundamentally spending other people's money on other people, without any direct, strong incentive to do so efficiently. The incentive to cut costs gets lost in the context of fairness, justice, and coalition building.

Is there an example of a government committee, like the 'comparative effictiveness review', that has ever cut costs? A wise government council that has identified best practices more efficiently than a market? Government purchasers actually finding lower cost providers? Is there insufficient incentive to 'cut costs' currently, compared to the new system?

The only way to cut costs is to force those demanding services to economize by decentralize decision making, in the process exposing health care demand to the costs of more of their decisions. Currently, about 10% of health care expenditures are out-of-pocket, and when someone else pays, people ask for too much, suppliers inflate costs, and here we are. But current legislation is all about benefits and almost painless cost cuts that involve no inconvenience to the rabble. This is why free marketers like myself and Mankiw are pessimistic.

You might as well put your faith in input-output matrices, dynamic programming, or mandatory readings from "Who Moved My Cheese?" There are two ways to cut health care costs. Have government decide to spend at most $X on health care, and have their wise committees figure out how to deal with this lower budget, or increase the out-of-pocket expenditures of people so they internalize their costs and economize on health care purchases.