Arnold Kling writes today at Tech Central Station about “market-oriented reforms for health care.” Some key points:

…On the demand side, I propose event reimbursement in health insurance instead of procedure reimbursement. On the supply side, I propose reputation systems instead of credential-based regulation.

Event reimbursement insurance would give you a lump sum if you become injured or seriously ill. The lump sums might be in multiples of $5000. You might get $5000 for a broken wrist that requires surgery, $25,000 if you are diagnosed with stage one breast cancer, etc. The insurance contract would spell out which events result in which dollar amounts….

One advantage of event reimbursement compared with procedure reimbursement is that it gives patients and providers the incentive to control costs. It also gets insurance companies out of the business of setting fees for services. Providers set fees, and consumers decide either to accept those fees or go somewhere else for service. Relative to current practice, this is a radical concept, and it would take some learning on the part of both consumers and health care providers to adapt. We seem to be able to handle this aspect of markets in other goods and services, so I am optimistic that this would work.

However, the primary advantage of event reimbursement insurance is that it is true insurance. As I pointed out in “You Call This Health Insurance,” the traditional “health insurance” that we have today is really something quite different. The current system cannot deal with someone who develops a disease that puts him or her at risk for expensive procedures going forward. The competitive market breaks down at that point….

…Leaving aside medical insurance, for the medical field as a whole I believe that reputation systems would work better than our current system of credential-based regulation.

A friend who is an optometrist puts a lot of time into lobbying the state legislature. That is because the boundaries between what he can do relative to an optician or an ophthalmologist are determined by state laws. One group is constantly trying to use the legislative process to take territory away from the others.

These sorts of regulatory boundaries impose tremendous costs on consumers, without our realizing it. Like fish unaware that they are swimming in water, most of us go through life without ever thinking about the pervasive, murky regulatory swamp through which we swim when we seek medical care.

In most industries, government does not get involved in defining work rules. If a company decides to have a financial analyst do computer programming or a computer programmer do financial analysis, that is none of the government’s business. In the medical industry, however, the government does dictate such work rules. This creates all sorts of supply bottlenecks. For example, if there is an increase in the number of patients needing help with starting exercise programs to recover from orthopedic injuries, the result is a shortage of “physical therapists.” Any other market would adapt by coming up with a close substitute. In medicine, that is not allowed.

Another example is the rule that only a physician may write prescriptions. This protects the income of physicians, but by the same token it prevents lower-cost alternative health delivery systems from emerging….

Although medical work rules serve primarily to carve out economic rents for health care providers, they are not sold that way to the public. Instead, these regulations ride in under the banner of “consumer protection.”

The free market principle is that as consumers we should protect ourselves. The key to protecting ourselves in a deregulated environment for medical care would be reputation systems. As Howard Rheingold discusses in his book Smart Mobs, the concept of reputation systems receives increasing attention in our information-rich, networked society.

There are reputation systems all around us. Consumer Reports ratings are a reputation system. eBay uses a reputation system to keep buyers and sellers honest. Mortgage lenders and other suppliers of consumer credit rely on a reputation system known as credit scoring.

In medicine, we already use reputation systems. The diploma on the doctor’s wall is one. The referral that is made by friends or other doctors is another. All sorts of private systems are springing up to evaluate data on hospitals, doctors, and so on.

Reputation systems could provide us with an alternative to the strict, credential-driven structure that we have today. Someone could earn a reputation as capable of training you to do certain exercises without earning a license as a physical therapist. Someone could earn a reputation as a reliable prescriber for certain types of medications in certain types of situations without getting a full-fledged MD. In fact, the drug industry could be deregulated, with reputation systems for medicines replacing “FDA approval.”

If you took away the centrally-planned regulatory system for medical care, my conjecture is that reputation systems would emerge as a more efficient Hayekian market response. In some cases, such as medicines, I would want to see a gradual deregulatory process, rather than lose consumer protection completely and suddenly.

Some of the expense of operating reputations systems could be offset by lower costs elsewhere. If bad doctors (and incompetent technicians as well) were dealt with by reputation systems, malpractice lawsuits would be needed much less, if at all.

If we took away the regulatory swamp, the changes would be dramatic. You could have your gall bladder surgery done by a dental assistant. That would not be a good idea, but it would be your responsibility as a consumer to make that decision. Your protection against making bad decisions would be common sense, information, and effective reputation systems.

My guess is that a lot of business process re-engineering would take place spontaneously if the regulatory swamp were replaced by consumer choice and reputation systems. I think that this is the best hope for allowing medical care to become as efficient as possible by taking advantage of the best technologies and practices our economy has to offer….

For more about the deregulation of healthcare, among other things, see my series “Fear of the Free Market” (here, here, and here).

Wizbang‘s Kevin Aylward laments the distribution of income from CD sales:

This breakdown of the cost of a typical major-label release by the independent market-research firm Almighty Institute of Music Retail shows where the money goes for a new album with a list price of $15.99.

$0.17 Musicians’ unions

$0.80 Packaging/manufacturing

$0.82 Publishing royalties

$0.80 Retail profit

$0.90 Distribution

$1.60 Artists’ royalties

$1.70 Label profit

$2.40 Marketing/promotion

$2.91 Label overhead

$3.89 Retail overhead

That’s a pretty remarkable breakdown. Label[s] get $7.01per CD and retailers get $4.69 for a combined percentage of 73% of the price of each CD. Royalties, artists, and manufacturing costs combined total only $4.29.

Is someone forcing the artists to record at gunpoint? Why don’t we just take half of everyone else’s share and give it to the artists? Mmmm…I wonder what would happen to the marketing and sales of CDs then.

Here’s a better way to look at it, Kevin. The artists’ royalties from each CD are split among a small number of people. All the other entities in the production-distribution chain are corporations who have to cover the cost of wages, benefits, rent, utilities, supplies, lawyers, etc., etc. It’s fair to say that artists, per capita, do better than everyone else in the chain. But, as I asked above, is someone forcing the artists to record at gunpoint? If not, what they make is no one else’s business.

I’m surprised that a blogger who seems otherwise to have a firm grasp of conservative-libertarian principles would presume to second-guess the outcome of free-market transactions.

EconoPundit points to a piece that appeared in the Boston Fed’s Regional Review (Q4 2002). The authors, Katharine Bradbury and Jane Katz, try to argue that income inequality is growing and that we should do something about it. Exhibit A is this graph, which shows real income by quintile for 1967-2000:

Looks bad, doesn’t it? If you didn’t know anything about the underlying dynamics, you’d think that the poorest American households made almost no progress in more than 30 years. Bradbury and Katz then try to convince their readers that it really is bad because the patterns of mobility between quintiles have changed little in recent decades:

What those “stable” patterns really mean is something quite different than Bradbury and Katz would have us believe. If you do the math correctly, you find that in a stable population only about 25 percent of the households that were in the poorest quintile in the late 1960s were still there a generation (about 30 years) later. Similarly, only about 25 percent of the households that were in the richest quintile in the late 1960s were still there a generation later. A small fraction of households stay in the same quintile; a smaller fraction move out of that quintile and then come back to it; most leave, never to return.

Actually, the percentage of households that remained in the poorest quintile in the last one-third of the 20th century must have been far less than 25 percent. The number of households wasn’t stable during that period (nor will it remain stable). According to the Census Bureau, the number of households increased from about 63 million in 1970 to about 103 million in 2000 (and will continue to grow by more than 1 million a year). What income quintile do you suppose is occupied by most new households, which consist mainly of young couples and immigrants*? The bottom quintile, of course.

So, let’s take population growth into account. The bottom quintile consisted of about 13 million households in 1970 (one-fifth of the total of 63 million). Of those 13 million, only about 3 million (25 percent) remained there in 2000. But by 2000, the bottom quintile consisted of about 21 million households (one-fifth of the total of 103 million). Therefore, at the end of the 20th century, only about 15 percent of the households (3 million of 21 million) then in the bottom quintile had been there for a generation.

The first graph really should look something like this:

I’ve kept it simple by omitting most of the inter-quintile movement, but you get the idea. The way I’ve drawn it is the way it really happens, according to the numbers kindly provided by Bradbury and Katz.

All Bradbury and Katz have shown us is that new households are generally poorer than more established households. What they haven’t shown us — because it’s untrue — is that households that start at the bottom stay at the bottom. Nor do households that start at the top stay at the top.
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* See Robert J. Samuelson’s column, “The Changing Face of Poverty,” in this week’s Newsweek. Here are the key points about immigrants and poverty:

…For 2003, the Census Bureau estimated that 35.9 million Americans had incomes below the poverty line; that was about $12,000 for a two-person household and $19,000 for a four-person household. Since 2000, poverty has risen among most racial and ethnic groups. Again, that’s the recession and its after-math. But over longer periods, Hispanics account for most of the increase in poverty. Compared with 1990, there were actually 700,000 fewer non-Hispanic whites in poverty last year. Among blacks, the drop since 1990 is between 700,000 and 1 million, and the poverty rate—though still appallingly high—has declined from 32 percent to 24 percent. (The poverty rate measures the percentage of a group that is in poverty.) Meanwhile, the number of poor Hispanics is up by 3 million since 1990. The health-insurance story is similar. Last year 13 million Hispanics lacked insurance. They’re 60 percent of the rise since 1990.

To state the obvious: not all Hispanics are immigrants, and not all immigrants are Hispanic. Still, there’s no mystery here. If more poor and unskilled people enter the country—and have children—there will be more poverty. (The Census figures cover both legal and illegal immigrants; estimates of illegals range upward from 7 million.) About 33 percent of all immigrants (not just Hispanics) lack a high-school education. The rate among native-born Americans is about 13 percent. Now, this poverty may or may not be temporary. Some immigrants succeed quickly; others do not….