Input Market Substitutes

The Wall Street Journal has an interesting article on input market substitutes for health care patient sedation:  using a machine to sedate patients instead of a anesthesiologist.  Economically we can address which is more cost efficient if we take a look at the marginal product of each per dollar spent on each input and choose the one that has a higher marginal product per dollar in cost.

In the article we see that anesthesiologist's cost between $600 to $2000 per procedure and the machine would cost $150.  If the marginal product is similar, then the machines are substantially more cost-efficient.

Increased Labor Demand and Higher Wages

The New York Times reports that increased demand for laborers in China is resulting in increased wages, which is exactly what the competitive labor market model predicts. The article also states that as reductions in the number of young laborers in the future due to government birth policies will have even fewer laborers in the future.

So will Chinese economic growth be hindered by this reduction in the supply of labor and even higher labor costs?

Rising Input (Wage) Costs Result in Higher Output Prices

In an interesting article from the NY Times, we see that increases in wages (and thus the firms costs) are likely to result in higher output prices.

How Should Physicians be Paid?

Most physicians currently are paid a fee for the services they perform, which in most economic contexts makes a great deal of economic sense. Some physicians are paid a salary, meaning they earn a set income over a given time period. Many people in today's economy are salaried, including yours truly. The question is, should physicians be compensated using a fee for service or salary model?

As I mentioned above, usually a fee for service makes a great deal of sense, especially when the services that are being provided are being paid by the person providing them. In health care this is not exactly the case, as third-party payers pay the bulk of health care services for those with health care, and for those without health care, the prices they would have to pay leads many to go without health care services or under-ultilize the amount of services they need.

Additionally, many physicians are compensated using a reimbursement schedule called a resource based relative value scale (RBRVS) set up by Medicare. This RBRVS then is calculated based on relative value units (RVU's) which are the cost of an average service, and is based on three areas. The first is the amount of physician work - which is the part of the compensation based on the physicians labor - and no adjustment is made based on the physician is board certified or of higher or lower quality than others, just on the average amount of effort that each different health care service on average requires. The second is based on medical practice expenses - typically family practice and none family practice, and the third is based on malpractice expenses. Each of these three components are then adjusted by a conversion factor which basically accounts for different levels of prices in differing geographic regions.

As I mention in some of my economics classes, the big problem with this, is that physicians are compensated on their implicit and explicit costs, and not on the added value of the services they provide.

In today's New York Times, an interesting article looks at the incentives that exist for physicians compensation based on the pre-dominant fee for service versus a salaried model. The AMA and many physicians oppose a salary compensation model, since they fear that their incomes will be declining. This may be because by ordering extra services, the physician can increase their compensation, and if that is true, some point to this as an example of why health care costs are increasing.

Personally, I am in favor of a physician salary model. Market forces will work, just like they do in an economically similar market (firms directly sell the individuals labor) of academics. Not all academics (even in the same field, same department and same university) have the same salary. Rather salaries are determined by the relative productivity for those individuals and the value that the university places on those individuals. Thus all physicians would not make the same salary, just like not all physician make the same amount of compensation in the fee for service arena.

What do you think?