TEKNOIOT: Health economics
Showing posts with label Health economics. Show all posts
Showing posts with label Health economics. Show all posts

23 Aug 2020

The Tax-and-Spend Health-Care Solution - Barokong

A Wall Street Journal Oped, From July 29 2018. Now that 30 days have passed, I can post the whole thing.

The Tax-and-Spend Health-Care Solution

Honest subsidies beat cross-subsidies. They’d encourage competition and innovation.

By John H. Cochrane

Why is paying for health care such a mess in America? Why is it so hard to fix? Cross-subsidies are the original sin. The government wants to subsidize health care for poor people, chronically sick people, and people who have money but choose to spend less of it on health care than officials find sufficient. These are worthy goals, easily achieved in a completely free-market system by raising taxes and then subsidizing health care or insurance, at market prices, for people the government wishes to help.

But lawmakers do not want to be seen taxing and spending, so they hide transfers in cross-subsidies. They require emergency rooms to treat everyone who comes along, and then hospitals must overcharge everybody else. Medicare and Medicaid do not pay the full amount their services cost. Hospitals then overcharge private insurance and the few remaining cash customers.

Overcharging paying customers and providing free care in an emergency room is economically equivalent to a tax on emergency-room services that funds subsidies for others. But the effective tax and expenditure of a forced cross-subsidy do not show up on the federal budget.

Over the long term, cross-subsidies are far more inefficient than forthright taxing and spending. If the hospital is going to overcharge private insurance and paying customers to cross-subsidize the poor, the uninsured, Medicare, Medicaid and, increasingly, victims of limited exchange policies, then the hospital must be protected from competition. If competitors can come in and offer services to the paying customers, the scheme unravels.

No competition means no pressure to innovate for better service and lower costs. Soon everybody pays more than they would in a competitive free market. The damage takes time, though. Cross-subsidies are a tempting way to hide tax and spend in the short run, but they are harmful over years and decades.

We have seen this pattern over and over. Until telephone deregulation in the 1970s, the government wanted to provide telephone landlines below cost. It forced a cross-subsidy from overpriced long distance and a telephone monopoly to keep entrants out and prices up. The government wanted to subsidize small-town air service. It forced airlines to cross-subsidize from overpriced big-city services and enforced an oligopoly to keep entrants from undercutting the profitable segments. But protection bred inefficiency. After deregulation, everyone’s phone bills and airfares were lower and service was better and more innovative.

Lack of competition, especially from new entrants, is the screaming problem in health-care delivery today. In no competitive business will they not tell you the cost before providing service. In a competitive business you are bombarded with ads from new companies offering a better deal.

The situation is becoming ridiculous. Emergency rooms are staffed with out-of-network anesthesiologists. Air ambulances take everyone without question, and Medicare, Medicaid and exchange policies underpay. You wake up with immense bills, which you negotiate afterward based on ability to pay. The cash market is dead. Even if you have plenty of money, you will be massively overcharged unless you have health insurance to negotiate a lower rate.

Taxing and spending is not good for the economy. But it’s better than cross-subsidization. Taxing and spending can allow an unfettered competitive free market. Cross-subsidies must stop competition and entry at the cost of efficiency and innovation. Taxing and spending, on budget and appropriated, is also visible and transparent. Voters can see what’s going on. Finally, broad-based taxes, as damaging as they are, are better than massive implied taxes on very few people.

This is why continued tinkering with the U.S. health-care system will not work. The system will be cured only by the competition that brought far better and cheaper telephone and airline services. But there is a reason for the protections that make the system so inefficient: Allowing competition would immediately undermine cross-subsidies. Unless legislators swallow hard and put the subsidies on the budget where they belong, we can never have a competitive, innovative and efficient health-care market.

But take heart—when that market arrives, it will make the subsidies much cheaper. Yes, the government should help those in need. But there is no fundamental reason that your and my health care and insurance must be so screwed up to achieve that goal.

Mr. Cochrane is a senior fellow of the Hoover Institution at Stanford University and an adjunct scholar of the Cato Institute

22 Aug 2020

Supply-side health care - Barokong

The discussion over health policy rages over who will pay -- private insurance, companies, "single payer," Obamacare, VA, Medicare, Medicaid, and so on -- as if once that's decided everything is all right -- as if once we figure out who is paying the check, the provision of health care is as straightforward a service as the provision of restaurant food, tax advice, contracting services, airline travel, car repair, or any other reasonably functional market for complex services.

As anyone who has ever visited a hospital knows, this is nowhere near the case. The health care market in the US is profoundly screwed up. The ridiculous bills you get after the fact are only one sign of evident dysfunction. The dysfunction comes down to a simple core: lack of competition. Airlines would love to charge you the way hospitals do. But if they try, competitors will come in and offer clearer, simpler and better service at a lower price.

Fixing the supply of health care strikes me as the policy win-win. Instead of the standard left-right screaming match, "we're spending too much," "you heartless monster, people will die," a more competitive health care market giving us better service at lower cost, making a cash market possible, makes everyone's goals come closer.

But even health insurance and payment policy is simple compared to the dark web of restrictions that keep health care so uncompetitive. That is deliberate. Complexity serves a purpose -- it protects anti competitive behavior from reform. It's hard for observers like me to understand what's really going on, what the roots of evident pathology are, and what policy steps (or backward steps) might fix them.

Into this breach steps a very nice article in today's WSJ, "Behind Your Rising Health-Care Bills: Secret Hospital Deals That Squelch Competition"  by Anna Wilde Mathews. Excerpts:

Dominant hospital systems use an array of secret contract terms to protect their turf and block efforts to curb health-care costs. As part of these deals, hospitals can demand insurers include them in every plan and discourage use of less-expensive rivals. Other terms allow hospitals to mask prices from consumers, limit audits of claims, add extra fees and block efforts to exclude health-care providers based on quality or cost.
The effect of contracts between hospital systems and insurers can be difficult to see directly because negotiations are secret. The contract details, including pricing, typically aren’t disclosed even to insurers’ clients—the employers and consumers who ultimately bear the cost.
Among the secret restrictions are so-called anti-steering clauses that prevent insurers from steering patients to less-expensive or higher-quality health-care providers. In some cases, they block the insurer from creating plans that cut out the system, or ones that include only some of the system’s hospitals or doctors. They also hinder plans that offer incentives such as lower copays for patients to use less-expensive or higher-quality health-care providers. The restrictive contracts sometimes require that every facility and doctor in the contracting hospital system be placed in the most favorable category, with the lowest out-of-pocket charges for patients—regardless of whether they meet the qualifications.

The restrictions in some hospitals’ contracts mean “you must always include them,” said Chet Burrell, former chief executive of CareFirst BlueCross BlueShield, which offers coverage in Maryland and the D.C. area. “If their costs are 50% higher for the same service, you have to include them. That cost is directly built into premiums…in the end the buyer of the service pays that.”

Hospital systems with restrictive language in their contracts can also protect their position by limiting rivals’ ability to draw patients based on lower prices, insurance executives said.
In some cases, contract clauses prevent patients from seeing a hospital’s prices by allowing a hospital operator to block the information from online shopping tools that insurers offer. Because of such restrictions, some health-insurance enrollees can’t find prices for hospital systems, including BJC HealthCare in St. Louis and NewYork-Presbyterian.
The article is full of these great details, but less clear (understandably) on the fundamental mechanism driving this behavior. One pattern I see is that lack of competition is necessary to buck up government-mandated cross-subsidies. (Previous posts here and here.) The government mandates that hospitals cover indigent care, and medicare and medicaid below cost. The government doesn't want to raise taxes to pay for it. So the government allows hospitals to overcharge insurance (i.e. you and me, eventually). But overcharges can't withstand competition, so the government allows, encourages, and even requires strong limits on competition.

You get a flavor for that here:

... hospitals often receive extra charges, known as “facility fees,” that are supposed to cover the extra costs associated with care given in a hospital setting, including regulatory and safety standards that apply to hospitals. Hospitals can often impose these fees after they acquire an off-site clinic or office.
American Hospital Association executive vice president Thomas Nickels said facility fees, which are also paid by Medicare, are needed to cover the extra costs that hospitals must shoulder, including treating any patient who needs care. “We have far more regulatory requirements, legal requirements, facility and structural requirements” than other providers, he said
Indeed. But in a competitive system, high cost producers are driven out, whether that high cost is real or regulatory.

Medicare and Medicaid abet this cross-subsidy by paying higher rates for the same service offered in a hospital than they do at an outpatient clinic, and more at a clinic than in a doctor's private office.  Hospitals have cleverly reacted to this opportunity:

Hospital systems have also been snapping up other types of providers, including doctor practices, clinics and outpatient surgery centers, and raising these providers’ prices. A study published in April in the Journal of Health Economics found that doctors’ prices increased on average by 14.1% after they became part of hospital systems.
In many cases, insurer-hospital contracts allow hospitals to move these new acquisitions immediately to the hospitals’ reimbursement rates—which are typically far more generous for the same services. That leads to a fast markup in prices.
SourceL WSJ
The nice graph to the left illustrates this phenomenon.

The tone of the article leads naturally to the usual morality play of nefarious behavior and greed. That's the wrong lesson. Hospitals do have to satisfy the government's demand for cross subsidies, and if they must compete they can't do it.

This won't be fixed by more regulation, or the FTC going after hospitals to force them to be more competitive while the rest of the health care system forces them to be less competitive.

I am reminded of two old Soviet Union jokes.

1) The border guard catches an American trying to smuggle in jeans. (Selling jeans in Russia used to be very profitable.) He demands a bribe. The American answers indignantly, "what kind of communist are you, demanding personal bribes?" The Russian answers, "you Americans should be pleased to see entrepreneurship! That's the capitalist system, no?" The American answers, "no, the capitalist system is greed subject to the discipline of competition."

Medicine is missing the discipline of competition.

2) The Soviet citizen goes in to buy his car. The manager says, "your car will be ready in 10 years." The man answers, "is that in the morning or the afternoon?" The manager says, "how can you possibly care, that's 10 years from now?" The man answers, "that's when the plumber is coming too."

I made two minor appointments with the Stanford health care system. I called the first, and the first available appointment was December 12, three months out. I called the second, and the nice lady answering the phone said "Our first appointment is December 12." She didn't understand why I guffawed when I answered, "Is that in the morning or the afternoon?"

I also made an appointment to see a private doctor to get an FAA medical exam. (That's another example of a complete waste of time and money, but that's for another day.) There is no insurance, you pay for these out of pocket, and a lot less than any bill from Stanford hospitals. The lady who answered the phone said, "do you want to come in this afternoon or tomorrow?"

21 Aug 2020

Cross subsidies and monopolization, explained - Barokong

I found a beautiful, clear, detailed, fact-based, and devastating explanation of how forced cross-subsidies, monopolized markets, and lack of competition conspire to strangle the American health care system.

No, this was not on some goofy libertarian website. It was in the official Voter Information Guide, for the ultra-progressive state of California, authored by "the legislative analyst." Whether the analyst is a secret libertarian struggling to get the word out, or simply that this is so much the way of doing things in California that nobody notices the scandal of it all, I do not know.

Starting on p. 62, with my emphasis

911 EMERGENCY MEDICAL TRANSPORTATION

Ambulances Provide Emergency Medical Care and Transportation . When a 911 call is made for medical help, an ambulance crew is sent to the location. ... (Ambulances also provide nonemergency rides to hospitals or doctors’ offices when a patient needs treatment or testing.)

Private Companies Operate Most Ambulances.  ...State law requires ambulances to transport all patients, even patients who have no health insurance and cannot pay. ...

Commercial Insurance Pays More for Ambulance Trips Than Government Insurance Pays. The average cost of an ambulance trip in California is about $750. Medicare and Medi-Cal pay ambulance companies a fixed amount for each trip. Medicare pays about $450 per trip and Medi-Cal pays about $100 per trip. As a result, ambulance companies lose money transporting Medicare and Medi-Cal patients. Ambulance companies also lose money when they transport patients with no insurance. This is because these patients typically cannot pay for these trips. To make up for these losses, ambulance companies bill patients with commercial insurance more than the average cost of an ambulance trip. On average, commercial insurers pay $1,800 per trip, more than double the cost of a typical ambulance ride.
Not stated, just why do commercial insurers put up with this? The answer is, that you need government approval to run an insurance company in California, and an insurer who said "we're not paying for that" won't be allowed to do business in California.

Also not stated, just what happens to you if you don't have health insurance but actually are the type who pays your bills? Good luck.

THE EMERGENCY AMBULANCE INDUSTRY

Counties Select Main Ambulance Providers. County agencies divide the county into several zones. The ambulance company that is chosen to serve each zone has the exclusive right to respond to all emergency calls in that area. If you want to know why there is no competition in the 911 ambulance industry, now you know. I don't know about private, non-911 ambulances. Is this all just exploiting the convenience of 911? Can you get a competitively priced ambulance ride if you know who to call?

The company generates revenue by collecting payments from patients’ insurers. In exchange, the ambulance company pays the county for the right to provide ambulance trips in that area. The county typically chooses the ambulance company through a competitive bidding process....
So cash strapped counties are in on the business of fleecing insurance companies, and through them, people and businesses who pay premiums.

19 Aug 2020

Lottery Winners Don't Get Healthier - Barokong

Alex Tabarrok at Marginal Revolution had a great post last week, Lottery Winners Don't get Healthier (also enjoy the url.)

Wealthier people are healthier and live longer. Why? One popular explanation is summarized in the documentary Unnatural Causes: Is Inequality Making us Sick?

The lives of a CEO, a lab supervisor, a janitor, and an unemployed mother illustrate how class shapes opportunities for good health. Those on the top have the most access to power, resources and opportunity – and thus the best health. Those on the bottom are faced with more stressors – unpaid bills, jobs that don’t pay enough, unsafe living conditions, exposure to environmental hazards, lack of control over work and schedule, worries over children – and the fewest resources available to help them cope.
The net effect is a health-wealth gradient, in which every descending rung of the socioeconomic ladder corresponds to worse health.
If this were true, then increasing the wealth of a poor person would increase their health. That does not appear to be the case. In important new research David Cesarini, Erik Lindqvist, Robert Ostling and Bjorn Wallace look at the health of lottery winners in Sweden (75% of winnings within the range of approximately $20,000 to $800,000) and, importantly, on their children. Most effects on adults are reliably close to zero and in no case can wealth explain a large share of the wealth-health gradient:

In adults, we find no evidence that wealth impacts mortality or health care utilization.... Our estimates allow us to rule out effects on 10-year mortality one sixth as large as the crosssectional wealth-mortality gradient.
The authors also look at the health effects on the children of lottery winners. There is more uncertainty in the health estimates on children but most estimates cluster around zero and developmental effects on things like IQ can be rejected (“In all eight subsamples, we can rule out wealth effects on GPA smaller than 0.01 standard deviations”). (My emphasis above)

Alex does not emphasize the most important point, I think, of this study.  The natural inference is,The same things that make you wealthy make you healthy. The correlation between health and wealth across the population reflect two outcomes of the same underlying causes.

We can speculate what those causes are.  (I haven't read the paper, maybe the authors do.) A natural hypothesis is a whole set of circumstances and lifestyle choices have both health and wealth effects. These causes can be either "right" or "left" as far as the evidence before us: "Right:" Thrift, hard work, self discipline and clean living lead to health and wealth. "Left:" good parents, good neighborhood, the right social connections lead to health and wealth.

Either way, simply transferring money will not transfer the things that produce money, and produce health.

Perhaps the documentary was right after all: "class shapes opportunities for good health."  But "class" is about more than a bank account.

Also, Alex can be misread as a bit too critical: "If this were true." It is true that health and wealth are correlated. It is not true that more wealth causes better health.  The problem is  not just "resources available to help them cope."

Why a blog post? This story is a gorgeous example of the one central thing you learn when doing empirical economics: Correlation is not causation. Always look for the reverse possibility, or that the two things correlated are both outcomes of something else, and changing A will not affect B.   We seldom get an example that is so beautifully clear.

Update:  Melissa Kearney writes,

"Bill Evans and Craig Garthwaite have an important study [AER] showing that expansions of EITC benefits led to improvements in self-reported health status among affected mothers.
Their paper provides a nice counterpoint to the Swedish lottery study, one that is arguably more relevant to the policy question of whether more income would causally improve the health of low-income individuals in the U.S.

Thanks Melissa for pointing it out. This is interesting, but I'd rather not get in to a dissection of studies here -- just who takes advantage of EITC benefits, how instruments and differences do and don't answer these problems. The main point of my post is not to answer once and for all the question -- how much does showers of money improve people's heath -- but to point out with this forceful example for non-economists the possibility that widely reported correlations - rich people are healthier -- don't automatically mean that money showers raise health.

16 Aug 2020

Blueprint for America - Barokong

Some of the inspiration for this project came from the remarkable 1980 memo (here) to President-elect Ronald Reagan from his Coordinating Committee on Economic Policy.

Like that memo, this is a book about governance, not politics.  It's not partisan -- copies are being sent to both campaigns. It's not about choosing or spinning policies to attract voters or win elections.

The book is about long-term policies and policy frameworks -- how policy is made, return to rule of law, is as important as what the policy is --  that can fix America's problems. It focuses on what we think are the important issues as well as policies to address those issues -- it does not address every passion of the latest two-week news cycle.

The book comprises the answers we would give to an incoming Administration of any party, or incoming Congress, if they asked us for a policy package that is best for the long-term welfare of the country.

The chapters, to whet your appetite:

INTRODUCTION

CHAPTER 1: The Domestic Landscape by Michael J. Boskin

IN BRIEF: Spending by George P. Shultz

CHAPTER 2: Entitlements and the Budget by John F. Cogan

CHAPTER 3: A Blueprint for Tax Reform by Michael J. Boskin

CHAPTER 4: Transformational Health Care Reform by Scott W. Atlas

CHAPTER 5: Reforming Regulation by Michael J. Boskin

CHAPTER 6: National and International Monetary Reform by John B. Taylor

CHAPTER 7: A Blueprint for Effective Financial Reform by John H. Cochrane

IN BRIEF: National Human Resources by George P. Shultz

CHAPTER 8: Education and the Nation’s Future by Eric A. Hanushek

CHAPTER 9: Trade and Immigration by John H. Cochrane

IN BRIEF: A World Awash in Change

CHAPTER 10: Restoring Our National Security by James O. Ellis Jr., James N. Mattis, and Kori Schake

CHAPTER 11: Redefining Energy Security by James O. Ellis Jr.

CHAPTER 12: Diplomacy in a Time of Transition by James E. Goodby

CLOSING NOTE: The Art and Practice of Governance by George P. Shultz

My chapter on a Blueprint for Effective Financial Reform is a better version of the talk on Equity Financed banking which I posted here. (The talk was based on the paper. Now you have the paper.)

My chapter on Trade and Immigration is new, and an uncompromising red-meat free-market view. I don't think one should compromise centuries old economic understanding just because it's not politically popular at the moment.

If you got this far, you might also be interested in my Economic Growth essay written for a parallel but similar project.

11 Aug 2020

Testimony - Barokong

I was invited to testify at a hearing of the House budget committee on Sept 14. It's nothing novel or revolutionary, but a chance to put my thoughts together on how to get growth going again, and policy approaches that get past the usual partisan squabbling. Here are my oral remarks. (pdf version here.) The written testimony, with lots of explanation and footnotes, is here. (pdf) (Getting footnotes in html is a pain.)

Chairman Price, Ranking Member Van Hollen, and members of the committee: It is an honor to speak to you today.

Sclerotic growth is our country’s most fundamental economic problem. If we could get back to the three and half percent postwar average, we would, in the next 30 years, triple rather than double the size of the economy—and tax revenues, which would do wonders for our debt problem.

Why has growth halved? The most plausible answer is simple and sensible: Our legal and regulatory system is slowly strangling the golden goose of growth.

How do we fix it? Our national political and economic debate just makes the same points again, louder, and going nowhere. Instead, let us look together for novel and effective policies that can appeal to all sides.

Regulation:

Let’s get past “too much” or “too little” regulation, and fix regulation instead.

Regulation is too discretionary – people can’t read the rules and know what to do. Regulatory decisions take forever. Regulation has lost rule-of-law protections. Agencies are cop, prosecutor, judge, jury and executioner all rolled in to one. Most dangerous of all, regulation is becoming more politicized.

Congress can fix this.

Social programs

Let’s get past spending “more” or “less” on social programs, and fix them instead.

Often, if you earn an extra dollar, you lose more than a dollar of benefits. No wonder people get stuck. If we fix these disincentives, we will help people better, encourage growth and opportunity--and in the end we will spend less.

Spend more to spend less.

Spending is a serious problem. But moving spending off the books does not help.

For example, we allow a mortgage interest tax deduction. This is exactly the same as collecting taxes, and sending checks to homeowners – but larger checks for high income people, people who borrow a lot, and people who refinance often.

Suppose we eliminate the mortgage deduction, and put housing subsidies on budget. The resulting homeowner subsidy would surely be a lot smaller, help lower-income people a lot more, and be better targeted at getting people in houses.

The budget would look bigger. But we would really spend less -- and grow more.

Taxes

Tax reform fails because arguments over the level of taxes, subsidies, or redistribution torpedo sensible simplifications. We could achieve tax reform by separating its four confounding issues.

First, determine the structure of taxes, to raise revenue with minimal economic damages, but leave the rates blank. Separately negotiate the rates. Put all tax incentives in a separate subsidy code, preferably as visible on-budget expenditures. Add a separate income-redistribution code. Then necessary big fights over each element need not derail the others.

A massive simplification of the tax code is, I think, more important than the rates – and easier for us to agree on.

Debt and deficits

Each year the CBO correctly declares our long-term debt unsustainable. Yelling louder won’t work.

First, let’s face the big problem: a debt crisis, when the U.S. suddenly needs to borrow a lot and roll over debts, and markets refuse. This, not a slow predictable rise in interest rates and crowding out, strikes me as the biggest problem.  Crises are always sudden and unexpected, like earthquakes and wars. Even Greece could borrow at remarkably low rates. Until, one day, it couldn’t.

The answers are straightforward. Sensible reforms to Social Security and Medicare are on the table. Address underfunded pensions, widespread credit and bailout guarantees.

Buy some insurance. Like every homeowner shopping for a mortgage, the US chooses between a floating rate, lower initially, and a fixed rate, higher initially, but forever insulating the budget from interest rate risks, which are the essential ingredient of a debt crisis. Direct the Treasury and Fed to buy the fixed rate.

Above all, undertake this simple, pro-growth economic policy, and grow out of debt.

Concluding comments

You may object that fundamental reform is not “politically feasible.” Well, what’s “politically feasible” changes fast these days.

Winston Churchill once said that Americans can be trusted to do the right thing, after we’ve tried everything else. Well, we’ve tried everything else. It’s time to do the right thing.

10 Aug 2020

EconTalk - Barokong

As in other recent projects (growth essay,testimony) I'm trying to synthesize, and also to find policies and ways to talk about them that avoid the stale left-right debate, where people just shout base-pleasing spin ever louder. "You're a tax and spend socialist" "You just want tax cuts for your rich buddies" is getting about as far as "You always leave your socks on the floor" "Well, you spend the whole day on the phone to your mother."

We did this as an interview before a live audience, at a Chicago Booth alumni event held at Hoover, so it's a bit lighter than the usual EconTalk. This kind of thought helps the synthesis process a lot for me.  Russ' pointed questions make me think, as did the audience in follow up Q&A (not recorded). Plus, it was fun.

I always leave any interview full of regrets about things I could have said better or differently. The top of the regret pile here was leaving a short joke in response to Russ' question about what the government should spend more on. Russ was kindly teeing up the section of thegrowth essay "there is good spending" and perhaps "spend more to spend less" ideas in several other recent writings. It would have been a good idea to go there and spend a lot more time on the question.

From the growth essay, I think the government could profitably spend a lot more money on the justice system. That so many of our fellow citizens rot in jail awaiting trials, that the vast majority never receive a trial anyway but a hasty plea-bargain, that their legal representation is so thin, is a disgrace -- and causing huge problems. If a wrongly accused young man spends two years in jail before charges are dropped, the consequences for him and his family are awful. Business relies on a speedy and efficient justice system to adjudicate commercial disputes, and that seems to be falling apart too, partly for lack of resources.  The cost here is peanuts compared to, say, peanut subsidies.

Our public infrastructure doesn't just consist of steel and asphalt. The public software needs investment as well, or more.

Public health is one of the most essential public goods. Of all the civilization-ending scenarios you can think of, nuclear war and a pandemics top my list. Many past pandemics followed a surge in globalization -- the plague of the 1350s, that wiped out half or more of the population; the smallpox that wiped out native America in the 1500s, the 1918 flu. (Larry Summers has a good article on this point.) We are ripe for antibiotics to stop working and new diseases to spread catastrophically, if not among humans among the plants and animals on which we depend. Don't count on the UN and the WHO.

The government can profitably fund basic research. "Yes, 95% of funded research is silly. Yes, the government allocates money inefficiently. Yes, research should also attract private donations. But the 5% that is not silly is often vital, and can produce big breakthroughs." (Basic research is not the same thing as subsidies for commercializing research.)

Yes, Martha, I should have said, there are public goods here and there.

Of course, more spending on things like these does not imply more spending overall. They're all remarkably cheap, and could easily be funded by spending a little less on some of the colossal waste. (Example: We spend $6 billion on the FBI and $13 billion on border control.) Of course, one must also spend wisely and use the results wisely. And one could add a lot to the list. But repeating a fun joke about spending is not the right answer.

4 Aug 2020

Growth full oped - Barokong

Source: Wall Street Journal

On November 7 I wrote "Don't believe the economic pessimists," an oped about growth in the Wall Street Journal. Now that 30 days have passed, I can post the whole thing here. pdf here (my webpage).

Don't Believe the Economic Pessimists

No matter who wins Tuesday’s presidential election, now ought to be the time that policy makers in Washington come together to tackle America’s greatest economic problem: sclerotic growth. The recession ended more than seven years ago. Unemployment has returned to normal levels. Yet gross domestic product is rising at half its postwar average rate. Achieving better growth is possible, but it will require deep structural reforms.

The policy worthies have said for eight years: stimulus today, structural reform tomorrow. Now it’s tomorrow, but novel excuses for stimulus keep coming. “Secular stagnation” or “hysteresis” account for slow growth. Prosperity demands more borrowing and spending—even on bridges to nowhere—or deliberate inflation or negative interest rates. Others advocate surrender. More growth is impossible. Accept and manage mediocrity.

But for those willing to recognize the simple lessons of history, slow growth is not hard to diagnose or to cure. The U.S. economy suffers from complex, arbitrary and politicized regulation. The ridiculous tax system and badly structured social programs discourage work and investment. Even internet giants are now running to Washington for regulatory favors.

If you think robust growth is impossible, consider a serious growth-oriented policy program—one that could even satisfy many of the left’s desires.

• Taxes. The ideal tax system raises revenue for the government while distorting economic decisions as little as possible. A pure tax on consumption, with no corporate, income, estate, or other taxes is pretty close to that ideal.

The U.S. tax system is the opposite: By exempting lots of income, the government raises relatively little money. Yet an extra dollar is heavily taxed, greatly lowering incentives and encouraging people to find or create exemptions. This massive complexity and obscurity undermine faith in the system.

Progressives, ponder this: With a sales tax of only 25%, the government would likely have gotten a lot more money from Donald Trump—who has employed complex but legal tax-avoidance schemes—than it did by purporting to tax income at high rates.

• Regulation. U.S. regulation is arbitrary, slow, discretionary and politicized. Speak out on the wrong side of the party in power and some federal agency will be after you.

Imagine a deep rule-of-law regulatory reform, along the lines proposed by House Speaker Paul Ryan’s “Better Way” plan. Congress must review and approve major regulations. People and businesses have a right to see evidence and appeal. Regulators face a shot clock—no more years and years of delays on decisions. Agencies must conduct serious, transparent and retrospective cost-benefit analysis.

Imagine a similar deep reform of state and local restrictions including zoning laws and occupational-licensing regulations.

• Social programs. When many people earn an extra dollar, they lose more than a dollar of benefits. If we fixed these disincentives, more Americans would work—and fewer would need benefits.

• Health. Replace ObamaCare with a simple health-insurance voucher. Deregulate insurance and entry into health care dramatically.

• Finance. Replace strangling regulation of financial companies with a simple rule: If you issue enough equity that stockholders bear the risks, you can do what you want. Rep. Jeb Hensarling has proposed such legislation. Hearty competition is the best consumer protection.

• Labor. The best worker protection is a worker’s ability to swiftly change jobs. This is more likely if employers do not face a mountain of red tape, complex rules and legal liability.

• Immigration and trade. The politically incorrect truth: Allowing Americans to buy from the best supplier and permitting people who want to work and start businesses to immigrate is good for the economy. Trying to impoverish China will not revive America.

• Education. Let lower-income Americans get a decent education from charter schools and vouchers.

• Energy. Trade all the crony subsidies and credits and regulations for a simple uniform revenue-neutral carbon tax. The country will have more growth and less carbon.

It would take an entrenched obtuseness to claim such a program cannot substantially improve economic output and incomes. If you claim such good policy cannot help, then it follows that bad policies do not hurt. Nativism, trade barriers, overregulation, legal capture, high taxes, controlled markets and people excluded from work won’t hurt our slow but positive growth. Don’t give populists cover to try it again.

If you object that such good policy is politically infeasible, then you at least grant that robust growth is economically possible. And small steps help. Current bipartisan proposals to reform taxes, Social Security, immigration, the regulatory state and trade agreements would go a long way to reviving growth. Have a bit more faith in democracy.

On the other hand, the major party presidential candidates’ signature plans—child-care tax credits, college subsidies, higher taxes on people who don’t hire good enough lawyers; threatening a trade war and deporting millions of unauthorized immigrants—cannot revive substantial growth.

So why is there so little talk of serious growth-oriented policy? Regulated and protected industries and unions, and the politicians who extract support from them in return for favors, will lose enormously. The global policy elite, steeped in Keynesian demand management for the economy as a whole, and microregulation of individual businesses, are intellectually unprepared for the hard project of “structural reform”—fixing the entire economy by cleaning up the thousands of little messes. Even economists fight to protect outdated skills.

Mr. Cochrane is a senior fellow of the Hoover Institution and an adjunct scholar of the Cato Institute.

30 Jul 2020

Healthcare repair on "The Hill" - Barokong

On repeal and replace, a healthcare oped on "The Hill", here.

Republicans replacing Obamacare, beware. It has a certain logic. Much of it patches up unintended consequences of previous regulations. If we just roll back and patch once again, we will end up right back where we started.

It’s wiser to start with a vision of the destination. In an ideal America, health insurance is individual, portable, and guaranteed renewable — it includes the right to continue coverage, with no increase in cost. It even includes the right to transfer to a comparable plan at any other insurer. Insurance companies pay each other for these transfers, and then compete for sick as well as healthy patients. The right to continue coverage is separate from the coverage itself. You can get the right to buy gold coverage with a silver plan.

Most Americans sign up as they graduate from high school, get a drivers’ license, register to vote, or start a first job. Young healthy people might choose bare-bones catastrophic coverage, but the right to step up to a more generous plan later. Nobody’s premiums subsidize others, so such insurance is cheap.

People keep their individual plans as they go to school, get and change jobs or move around.  Employers may contribute to these individual plans. If employers offer group coverage, people keep the right to individual plans later.

Health insurance then follows people  from job to job, state to state, in and out of marriage, just like car, home and life insurance, and 401(k) savings.

But health insurance is not a payment plan for small expenses, as home insurance does not “pay for” lightbulbs. Insurance protects your wallet against large, unexpected expenses. People pay for most regular care the same way they pay for cars, homes, and TVs — though likewise helped to do so with health savings and health credit accounts to smooth large expenses over time. Doctors don’t spend half their time filling out forms, and there are no longer two and a half claims processors for every doctor.

Big cost control comes from the only reliable source — rigorous supply competition. The minute someone tries to charge too much, new doctors, clinics, hospitals, and models of care spring up competing for the customer’s dollar. “Access” to health care comes like anything else, from your checkbook and intensely competitive businesses jockeying for it.

What about those who can’t afford even this much?  Nobody dies in the street. There is also a robust system of government and charity care for the poor, indigent, those who have fallen between the cracks, and victims of rare expensive diseases. For most, this simply means a voucher or tax credit to buy private insurance.

But — a central principle — the government no longer massively screws up the health insurance and health care arrangements of the majority of Americans, who can afford houses, cars, and smartphones, and therefore health care, in order to help the unfortunate. We help people forthrightly, with taxes and on-budget spending.

Why do we not have this world? Because it was regulated out of existence, and now is simply illegal.

The original sin of American health insurance is the tax deduction for employer-provided group plans — but not, to this day, for employer contributions to portable individual insurance.  “Insurance” then became a payment plan, to maximize the tax deduction, and then horrendously inefficient as people were no longer spending their own money.

Worse, nobody who hopes to get a job with benefits then buys long-term individual insurance. This provision alone pretty much created the preexisting conditions problem.

Patch, patch. To address preexisting conditions, the government mandated that insurers must sell insurance to everyone at the same price. Insurance companies will then try to avoid sick people, so coverage must be highly regulated.  Healthy people won’t buy it, so it must be nearly impossible for people to just pay out of pocket. Obamacare added the individual mandate.

Cross-subsidies are a second original sin. Our government doesn’t like taxing and spending on budget where we can see it. So it forces others to pay: It forces employers to provide health insurance. It forces hospitals to provide free care. It low-balls Medicare and Medicaid reimbursement.

The big problem: These patches and cross-subsidies cannot stand competition. Yet without supply competition, costs increase, the number of people needing subsidized care rises, and around we go.

The Republican plans now circulating make progress. Rep. Tom Price’s plan ties protection from preexisting conditions to continuous coverage. His and Speaker Paul Ryan’s “Better Way” plan move toward premium support for private insurance, and greater portability.

So far, though, the announced plans do not really overturn the original sins. But those plans were crafted in a different political landscape. We can now  go big, and really fix the government-induced health care mess in a durable way.

I visited my dermatologist last month. I spent 20 minutes with a resident, and 5 minutes with the dermatologist. The bill was $1335. An “insurance adjustment”  knocked off  $779. Insurance paid $438. I paid $118.  The game goes on. We start with a fake sticker price to negotiate with the uninsured and to declare uncompensated care. But you cannot just walk in and pay as you can for anything else. Even $438 includes a huge cross-subsidy.

We’ll know we’ve fixed health care when we don’t get bills like this.

Mr. Cochrane is a Senior Fellow of the Hoover Institution at Stanford University and an Adjunct Scholar of the Cato Institute.

Miserable 21st Century - Barokong

Nicholas Eberstadt in Commentary, (HT Marginal Revolution) offers a revealing look at what's wrong with "middle" America's stagnation. Read the whole thing, but the following snapshot jumped out at me.

He starts with a review, probably familiar to readers of this blog, of the sharp decline in work rates, even among prime-age men and women.

As of late 2016, the adult work rate in America was still at its lowest level in more than 30 years. To put things another way: If our nation’s work rate today were back up to its start-of-the-century highs, well over 10 million more Americans would currently have paying jobs.
Why are so many not working, not studying for work, and not even looking for work? What is going on in their lives? One answer:

The opioid epidemic of pain pills and heroin that has been ravaging and shortening lives from coast to coast is a new plague for our new century...
According to [Alan Krueger's] work, nearly half of all prime working-age male labor-force dropouts—an army now totaling roughly 7 million men—currently take pain medication on a daily basis.
I think Krueger had a different idea in mind: that they are in pain, indicated by medication, so can't be expected to work. How the explosion in disability jibes with a much safer workplace is an interesting puzzle to that view. Eberstadt has a different interpretation, and the lovely thing about facts is they are facts, not interpretations.

We already knew from other sources (such as BLS “time use” surveys) that the overwhelming majority of the prime-age men in this un-working army generally don’t “do civil society” (charitable work, religious activities, volunteering), or for that matter much in the way of child care or help for others in the home either, despite the abundance of time on their hands. Their routine, instead, typically centers on watching—watching TV, DVDs, Internet, hand-held devices, etc.—and indeed watching for an average of 2,000 hours a year, as if it were a full-time job. But Krueger’s study adds a poignant and immensely sad detail to this portrait of daily life in 21st-century America: In our mind’s eye we can now picture many millions of un-working men in the prime of life, out of work and not looking for jobs, sitting in front of screens—stoned.
(Mark Aguiar, Mark Bils, and Kewin Charles and Erik Hurst have a new paper coming soon, which I just saw presented, "Leisure Luxuries and the Labor Supply of Young Men", with some more facts about time-allocation of non-working young men. They emphasize cheaper and better video games and leave out drugs.)

But how did so many millions of un-working men, whose incomes are limited, manage en masse to afford a constant supply of pain medication? Oxycontin is not cheap. As Dreamland carefully explains, one main mechanism today has been the welfare state: more specifically, Medicaid, Uncle Sam’s means-tested health-benefits program. Here is how it works (we are with Quinones in Portsmouth, Ohio):
"[The Medicaid card] pays for medicine—whatever pills a doctor deems that the insured patient needs. Among those who receive Medicaid cards are people on state welfare or on a federal disability program known as SSI. . . . If you could get a prescription from a willing doctor—and Portsmouth had plenty of them—Medicaid health-insurance cards paid for that prescription every month. For a three-dollar Medicaid co-pay, therefore, addicts got pills priced at thousands of dollars, with the difference paid for by U.S. and state taxpayers. A user could turn around and sell those pills, obtained for that three-dollar co-pay, for as much as ten thousand dollars on the street."
You may now wish to ask: What share of prime-working-age men these days are enrolled in Medicaid? According to the Census Bureau’s SIPP survey (Survey of Income and Program Participation), as of 2013, over one-fifth (21 percent) of all civilian men between 25 and 55 years of age were Medicaid beneficiaries. For prime-age people not in the labor force, the share was over half (53 percent). And for un-working Anglos (non-Hispanic white men not in the labor force) of prime working age, the share enrolled in Medicaid was 48 percent.
By the way: Of the entire un-working prime-age male Anglo population in 2013, nearly three-fifths (57 percent) were reportedly collecting disability benefits from one or more government disability program in 2013. Disability checks and means-tested benefits cannot support a lavish lifestyle. But they can offer a permanent alternative to paid employment, and for growing numbers of American men, they do. The rise of these programs has coincided with the death of work for larger and larger numbers of American men not yet of retirement age. We cannot say that these programs caused the death of work for millions upon millions of younger men: What is incontrovertible, however, is that they have financed it—just as Medicaid inadvertently helped finance America’s immense and increasing appetite for opioids in our new century.
The VA has also been a part of getting veterans addicted to pain killers.

If you dozed off, the main point: Half of non-working prime age men take daily pain medication. Half of non-working prime-age people are in Medicaid, which pays for re-sellable opiates. Three-fifths of non-working prime age Anglos receive disability payments. The latter benefits disappear if you take a job, or if you move, a steep disincentive that Nick does not mention.

I knew the story, but was not really clear on the magnitude. Half.

An advantage of government-subsidized drugs Nick points out: crime is down. However, our criminal justice system offers another barrier to employment and advancement:

...rough arithmetic suggests that about 17 million men in our general population have a felony conviction somewhere in their CV. That works out to one of every eight adult males in America today.
In the understatement of the year,

we might guess that their odds in the real America are not all that favorable.
The bottom line

And when we consider some of the other trends we have already mentioned—employment, health, addiction, welfare dependence—we can see the emergence of a malign new nationwide undertow, pulling downward against social mobility.
Actually looking at people's lives in this way is devastating to the nostrum that "inequality" is mysteriously increasing and just needs more transfers, or its just a lack of "jobs" which can be brought back by left-wing "demand" or right-wing trade restrictions.

people inside the bubble are forever talking about “economic inequality,” that wonderful seminar construct, and forever virtue-signaling about how personally opposed they are to it. By contrast, “economic insecurity” is akin to a phrase from an unknown language.
This is I think an inartful choice of language. I hear "insecurity" a lot from the left, for example just how it is that obese people have trouble paying for food. And, Orwellian language or not, they do have a point. "Insecurity" is not the core of the problem. "Barriers to Advancement" sounds too old fashioned. "Caught in the web of awful disincentives" is more accurate but does not sing.

The abstraction of “inequality” doesn’t matter a lot to ordinary Americans. ...The Great American Escalator is broken—and it badly needs to be fixed.
With the election of 2016, Americans within the bubble finally learned that the 21st century has gotten off to a very bad start in America.
Reading the Weekend New York Times, especially the Review, I think this is actually false. Americans within the bubble are still foaming at the mouth with Trump Derangement Syndrome. But when they get a grip,

Welcome to the reality. We have a lot of work to do together to turn this around.

26 Jul 2020

The Obamacare Unraveling - Barokong

I usually leave Brad DeLong and Paul Krugman alone. If you haven't figured them out by now, you are beyond my help.

In particular, Brad a few years ago made fun of me for "predicting" in 2013 that Obamacare exchanges would unravel due to adverse selection. I have so far  resisted the temptation to needle Brad about that as, well... the Obamacare exchanges unraveled due to adverse selection!

But, unbelievably, Brad is doubling down. While recommending again a snarky 2015 Krugman piece, in which even Krugman was not naming his snarks, DeLong writes:

Who is he talking about? John Cochrane, among others:

John Cochrane (December 2013): What To do When Obamacare Unravels: “The unraveling of the Affordable Care Act presents a historic opportunity for change….

…Next spring [2014] the individual mandate is likely to unravel when we see how sick the people are who signed up on exchanges, and if our government really is going to penalize voters for not buying health insurance. The employer mandate and ‘accountable care organizations’ will take their turns in the news. There will be scandals. There will be fraud. This will go on for years…

As you may have noted, there was no adverse-selection meltdown of the ObamaCare exchanges in the spring of 2014...
OK. Mea Culpa. I got "2014" wrong. Though not "this will go on for years." It took three years longer than I said. (And I will admit, I did not think hard about how long it would take before writing "2014")

The insurers pulling out of exchanges, the swaths of the country with only one insurer left, the policies that are nice cards in your pocket but don't actually pay for much, the skyrocketing premiums... it all took three more years.

But of all this, Brad seems completely unaware. What, Obamacare is going just swimmingly? People (other than those getting subsidies and medicaid) are just delighted with their nice low premiums and great coverage? Insurance companies are all swarming to provide exchange policies? Just what rock did Brad crawl out from under? He continues

And what has been Cochrane’s reaction to the failure of his confident prediction? The closest to an acknowledgement of error I can find is:

John Cochrane (July 2014): Ideas for Renewing American Prosperity: “ObamaCare and Dodd-Frank are monstrous messes…

…Long laws and vague regulations amount to arbitrary power. The administration uses this power to buy off allies and to silence opponents. Big businesses, public-employee unions and the well-connected get subsidies and protection, in return for political support. And silence: No insurance company will speak out against ObamaCare or the Department of Health and Human Services… Shorter John Cochrane: Never mind that all my predictions were false. ObamaCare is a disaster. And insurance companies are not happy with it–they have just been intimidated by fear that Obama will somehow come after them if they speak ou about what a disaster ObamaCare is for them.

Perhaps in a decade, there will be a column by Cochrane pretending that he always knew that on net ObamaCare was profitable for insurance companies—which would rather be in the business of making money by efficiently processing claims than by exploiting adverse selection. One date is "all my predictions?" What insurance companies dare speak out against Obamacare or HHS? What insurance companies are finding exchanges profitable? What insurance company "efficiently processes claims?" And where do I sign up?

A strange affair. I don't mind at all it being pointed out when I'm wrong, especially about "predictions." Economics is not that good at unconditional predictions ("what will happen?" vs. "how will a policy change things?")   It's strange to be ridiculed when, for once, I was right! At least in the direction, if not the speed of events.

Update: My views on what should replace Obamacare are here, see especially "After the ACA" and "health status insurance."

25 Jul 2020

Consumption vs. GDP - Barokong

Random Critical Analysis has a really interesting blog post from a while ago, on the difference between consumption and income as measures of well being.  The level of data analysis and detail on that blog is really impressive.

The narrow question is whether the US spends "too much" on healthcare. A counterargument has always been, what else should we spend money on? As a society gets wealthier, it's natural to spend more on health care, just as we spend more on art, travel, and so forth.

(The counterargument to that is, whether we spend more or less is beside the point. The point is a dysfunctional regulated oligopoly is charging way too much for what we get. It's not so bad to spend this much, it's bad to get such a bad deal.)

So, the question is not whether the US spends more on health care, the question is whether we spend more on health care relative to a measure of our standard of wealth.  Using GDP as a rough proxy, we spend a lot more on health care relative to GDP than other countries.

But, the larger point of the blog post, on which I'll focus -- consumption is not GDP (income). Americans are far better off relative to other countries than we think we are. See the graph:

Source: Random Critical Analysis
The actual standard of living -- consumption -- is higher in the US than in any of these other countries. Many of them have higher GDP. What's going on? Well, Ireland, for example, hosts a lot of international companies. These chalk up a lot of GDP in Ireland -- a lot seems to be "produced" in Ireland -- but much of it does not go to Irish people. Similarly Switzerland and Luxembourg.

Much of the difference shouldn't last forever of course. How does the US consume more than we produce (GDP)? We borrow from abroad, and run trade deficits. Eventually that lending must be paid back. (Or at least those lending it to us hope so. We'll see.)  Norway is the opposite. They produce a lot of oil, but use the results to save abroad in their sovereign wealth fund, which eventually they can draw on to finance consumption. (Or so they hope, also.)

In the meantime, though, the difference between income and consumption is quite large.

This difference is even more important in the cross-section. Income variation is often transitory -- you might have a bad year -- and consumption lasts longer.  People in bad years draw down savings, borrow, or get help from relatives. Most of all, super-rich people save a lot. So inequality of consumption -- of actual standard of living -- is much smaller than inequality of one-year income or wealth.

RCA anticipates your first objection

this consumption measure includes government transfers, subsidies, etc, notably including the vast majority of healthcare and education spending, as Actual Individual Consumption (AIC) does.
Since some people earlier seemed to miss to this point, I’ll repeat: the only form of consumption excluded from AIC is that which cannot be attributed directly to individuals or households, i.e, collective expenditures by government like military procurement and the like.
I.e. the one thing that is also much larger in the US. And RCA adds nice confirmation. The average US person lives in twice as much space as the average european. And

To the narrow question, US healthcare expenses look out of line compared to GDP

but not at all relative to consumption. (Note the cool dynamic graph)

The post has lots more beautiful graphs on consumption and health care expenditures. But the main point -- consumption, not income (and especially not one year's income) is a much better measure of living standards -- is larger, and my point, so I'll stop here.

Oh, and I still think we're getting a massively raw deal from our inefficient health care system. As is much of europe.

24 Jul 2020

The second original sin of healthcare regulation - Barokong

Whenever I advance one or another view of how a relatively free health care and insurance market could work a lot better than the mess we have now, the obvious question comes up: Well, what about the homeless person with a heart attack? You won't let him die in the gutter will you?

No. Of course not. We are a compassionate society. We will provide for poor people, very sick people, those with diminished mental capacity, the unfortunate, the incompetent, or the merely improvident. People don't die in the gutter.  Any half-reasonable health care reform proposal, including mine, provides some system of charity care; whether via medicaid, government run hospitals (VA for everyone, county hospitals), premium subsidies or vouchers, support for charity hospitals, and so forth; and in our society the government will have a big part in this; I do not appeal to private charity alone.  Such systems will also always be a thorn in our public side; as the tension between cost, effectiveness, quality, moral hazard will not magically disappear no matter how nice the promises of their architects, and the fraud, inefficiency, and bureaucracy of anything run by governments will not disappear as well.

But the great puzzle of health care policy: Just why is it, to accommodate this worthy goal, must your and my health care and insurance be so deeply regulated and so thoroughly dysfunctional? As one small example, why does a 20 minute skin check with the resident of my dermatologist generate a phoney baloney bill for over $1000, meaning a cash and carry market for such a simple, elastically demanded, and perfectly predictable service is impossible?

Why, in order to provide for the unfortunate, do we not simply levy taxes, and pay for charity care, and leave the rest of us alone?

Regular Americans  have jobs, buy houses, buy TVs, cars, and smartphones, negotiate the complexities of 401(k) and IRA plans, cell phone contracts, frequent flyer programs; hire the complex professional services of contractors, car mechanics, lawyers and accountants, and deal with the insane complexity of our tax system.

Why do we not leave such Americans (you and me) to a largely free market (as much as anything is a free market anymore) in dealing with their health care and health insurance? Dealing with a free-market health insurance, offered by companies competing hard for your dollar,  is surely no more complex than dealing with Obamacare exchanges with their constantly shifting plans and networks, and the impossibility of finding out actually what doctor takes what.

I think the answer is relatively simple. Our political system is allergic to the word "tax." Instead of straightforwardly raising taxes in a non-distortionary way (a VAT, say), and providing charity care or subsidies -- on budget, please, where we can see it -- our political system prefers to fund things by forcing cross subsidies.

Medicare and medicaid don't pay what the service costs, because we don't want to admit just how expensive that service is. So, large hospitals make up the difference by overcharging you and me instead. The poster child (though not really a cost driver) is emergency room care. The government passed a law saying hospitals must provide emergency room care for free. But money does not grow on trees, so again you and me (via private insurance) must get overcharged to cross-subsidize. The ACA tried to force young healthy wealthy (not getting subsidies) to vastly overpay for insurance, to cross subsidize the poorer and sicker.

This might seem like a wash. OK, if instead of paying taxes, it makes you feel good to pay business class prices for health insurance, what the heck. Economically, a cross-subsidy works the same as a tax. In fact, we do have Europe-size taxes and subsidies, we just hide them.

But it's not a wash. Cross-subsidies are dramatically less efficient than taxes. Choosing cross-subsidies over taxes is indeed the second original sin of health care and insurance regulation. Cross-subsidies cannot stand competition.

If as now you and I are grossly overpaying for health care and insurance, to cross-subsidize others, a competitive market would come along and peel us off. A local skin-check clinic could offer that service for $50.

Low prices, efficiency, and innovation in the provision of services like health care come centrally from competition, and especially disruptive competition.  With no competition -- especially no entry by new doctors, hospitals, clinics, insurance companies -- costs spiral up. As  costs spiral up, the cost of the charity care spirals up. As that spirals up, the size of the cross-subsidies spirals up. As that spirals up, the need to restrict competition spirals up.

In a sensible world, government assistance lives beside a free market, where innovation and price discovery happen. That keeps the cost of government assistance somewhat in check. But when we choose assistance by cross-subsidy, then kill off competition and force us all in the regulated system, that check disappears.

We do not force you and me into government housing in order to cross-subsidize housing assistance for the poor. (Well, "affordable housing" mandates are going that direction, with predictable results.) We don't force you and me into buses to cross-subsidize public transit for the poor. (Well,... And I don't want to defend the rather atrocious public housing and public transit systems.) We don't force you and me into government-regulated grocery stores and restaurants to provide food stamps and other nutrition assistance. And housing, transportation, and food remain functional markets.

Bottom line: Much of the pathology of health care and health insurance comes from this second original sin, choosing cross-subsidies rather than straightforward taxes. Cross-subsidies require the government to stop competition, so an initially clever way of hiding taxes eventually builds into a monstrously inefficient system.  (That's a key point. Initially, it is about the same. But the cross subsidy system gets more and more inefficient over time.)

We would be far better off to admit this; raise explicit taxes enough to provide the charity end of our care, and let health insurers and care givers compete for the rest of us, as airlines, computer makers, and everyone else does. The politician's job is to explain to people that what they pay more in taxes they will more than make up in lower health care and insurance costs.

The principle goes more deeply. For example, the government wants to provide free birth control. I think that's a great idea -- given the personal and social costs of unwanted pregnancy, and the political turmoil over abortion, sure, every pharmacy should stock free birth control. It would take a very small tax to cover it, and I would gladly pay. But no, the ACA decreed that insurers must "pay" for it, from a cross-subsidy, that people opposed to birth control objected to. Are annual checkups good for public health? If you think so, tax and spend (on budget!) and send people vouchers. And so forth.

What happens in a free market to people who fail to buy health insurance? Don't we need a mandate? On economic grounds, a mandate for extremely high deductible catastrophic coverage makes some sense. People who don't buy health insurance and get some rare cancer cost a lot of money. However, such people are not really the heart of health care costs (or the government's health care costs). There is no real case for forcing such people to buy insurance with lots of first-dollar services, if they choose to pay for those out of pockets. We mandate car insurance, but not that it covers oil changes (to cross-subsidize oil changes for poor people.)

In a free but compassionate market, people who fail to buy health insurance and get sick suffer the same fate as people to fail to buy home insurance and their house burns down, or people who bet on the stock market and lose. The demands of a compassionate society are to make sure everyone gets reasonable health care. But it is not to protect the wealth of relatively well off people who choose to take risks. So, the average person with a job, house, etc. who fails to buy health insurance and then gets sick receives health care -- but also personal bankruptcy. With that stick in front of us, I'm not persuaded that a mandate is going to be necessary for average Americans like you and me. Any more than a mandate is necessary to get us to buy home insurance.

(This isn't really a new thought; it's in After the ACA, for example. But a bunch of correspondence following my last health post makes it worth punching up,.)

(And the first original sin? The tax deduction for employer provided group insurance, but not for employer contributions to individual, portable, guaranteed renewable, individual insurance. That caused the preexisting conditions problem pretty much by itself.)

21 Jul 2020

A Healthy Reform? - Barokong

Holman Jenkins and Cliff Asness have worthy commentaries on the health insurance reform effort.

Jenkins has quite a few fresh thoughts. He also gets the incurable optimist award for viewing the bill as the "inklings of a salvation" for America’s health-care system. It's possible. Whether it is likely depends on your views of the political process.

Individual insurance:

Jenkins' freshest thought comes last:

We’ll say it again, now for the Senate’s benefit: Apply a few GOP-style fixes and ObamaCare, or something like it, becomes a solution to America’s health-care muddle. You could phase out every other federal program, including Medicare, Medicaid and the giant tax handout to employers, and roll their beneficiaries into ObamaCare.
This wisdom is exactly the opposite of most current commentary, and, here in grumpy-land, where it seems the political process may be heading.

Yes, if any memory of markets remains, the goal should be to get everyone on individual insurance -- functional, portable, individual, lifetime, guaranteed-renewable, competitive health insurance, married to mercilessly competitive innovative and disruptive health care supply. People who need help -- sick and poor -- get it by subsidies to buy that insurance. Period. (Newcomers, some of my many writings on this topic are here.)

I fear we are going in the opposite direction. I fear that the non-subsidized individual market is going to shrink more and more, to become more and more an insignificant, government run, dysfunctional waystation for a handful of unlucky self-employed and young people, on their way to employer care, a government program (medicare, medicaid, VA, etc.) or now to a miserly high-risk pool.

Most of the Obamacare expansion of coverage was into medicare, or by people getting premium subsidies on the exchanges, and by pressure for expanded employer-basded coverage. The market of people paying actual premiums for individual insurance remains tiny.  Commenters point out the apparent pathology that Congress is wasting so much time on a tiny sliver of the population, how most of us have "just fine" coverage through employers, medicare, medicaid, VA, government employee plans, retiree plans, and so on. As if this is the right way to run things.

Parts of the Republican bill do seem helpful towards reviving the individual market. The vision that we should all be there, as we are all in the individual home, auto, and life insurance market; as well as the vision that the central problem is a supply system made dysfunctional by cross-subsidies and resultant anti-competitive limitations, I don't see yet in the legislative proposals and surrounding commentary.  That is a bad sign for the politics of Jenkins' (and my) vision. It is not ignorance. My impression is that most people involved understand the promised land perfectly well, they just don't think it can get two votes in the senate, let alone 51 or 61.

Mandate

Jenkins offers equally fresh thinking on the mandate

...In a world where individual insurance is fairly priced, a mandate would be less burdensome. As candidate Obama said in 2008, with a smidgen of hyperbole, if health insurance is a good deal, nobody would need to be forced to buy it.
...The philosophical premises of the Republican and Democratic individual mandates could not be further apart. The original Republican mandate, hatched by the Heritage Foundation in 1989, was aimed at making sure would-be free riders paid their fair share, no longer transferring their financial risk to the taxpayer or other health-care consumers.
ObamaCare turned the mandate into a tax—a way to overcharge the young, healthy and (let’s face it) male to generate funds to subsidize voter blocs Democrats wanted to subsidize.
The economic argument for a mandate of the Heritage type is pretty strong, as we have mandates for auto insurance. Given that we are not going to allow people to die in the gutter, then a mandate protects the finances of such government-provided charity care (or government mandated cross subsidies) to require that everyone has at least bare-bones catastrophic coverage, to cover... well, whatever it is that we are not willing to say "no" to when they show up on the hospital doorstep. Which is a lot.

Even that argument for a mandate is quite limited. We don't let people die, or suffer untreated illness. But there is much less case that we should not be willing to bankrupt the improvident. Even Sweden and Denmark do that. If you don't buy health insurance and get a heart attack, the government and hospitals should happily burn through your bank account.  And then you get the care you need. The economic mandate really is really only needed for people with few resources, or who can't get around to filling out forms (a lot of us).

And, yes, the economics of insurance is ex-post transfers. Those who turn out to be healthier than expected, ex-post transfer resources to those who turn out to be sicker than expected.

But, Jenkins' great insight is, look how these valid economic arguments utterly perverted in the political system.

Neither the economic mandate, nor insurance itself, is the basis for massive, completely predictable transfers from one group to another. Under Obamacare, individual mandates, insurance mandates, and "community" rating turned in to a massive transfer from (as he put it) "the young, healthy and (let’s face it) male to generate funds to subsidize voter blocs Democrats wanted to subsidize." That is clearer in this weekend's other commentary. See Ross Douthat in the Times review section, for example), focusing on "tax cuts for the rich;" and commentary focusing on how it will "hurt old people" -- both taxes and handout to old people, only enacted with Obamacare, now apparently baked in stone. All this unitentionally makes Jenkins' point. This isn't about health insurance anymore. It's just redistribution.

Also, the trope of how millions will now be "denied access to health care" (once again confusing insurance and care). Actually, 10 million of the CBO scoring that the Republican plan would lead to millions losing coverage came down to the mandate. 5 million of that are  people eligible for Medicaid who, the CBO thinks, will simply not bother to sign up evenfor free insurance without the mandate.

ObamaCare went out of its way to be a bad deal for the young and healthy, who didn’t sign up. The GOP fix [5:1 premiums, much less mandated coverage], if adopted in the Senate, would go a long way toward letting individual premiums be fairly and attractively priced to these people.
It would. Sadly, coverage of what's going on in the Senate, covered say in the same WSJ issue "Senators tackle heath bill rewrite" will undo modest progress:

Among the provisions senators are tackling is one that allows insurers to charge older Americans five times as much as younger people and lets states obtain waivers that could make that disparity even larger.
That old people are more expensive to care for than young people is not an insurable risk. Old people per se are not necessarily deserving of cross-subsidies. Old, poor people are, but because they're poor not because they're old. Most non-poorold people own a house, which they have paid off, and substantial assets.  Most wealth in the economy is owned by old people. Old people have lower expenses.  Limiting the ratio of young to old in mandated insurance is just one huge cross-generational transfer of wealth. (On top of, I might add, social security, which is an enormous transfer from the current young to the current old. The current young are not going to get such generosity when they get old.) The supreme court had it half right -- the mandate is a tax. The big tax is the "community rated" overpriced insurance.

Jenkins again: If we had universal individual insurance, and helped people by subsidizing its purchase,

Congress could start making rational judgments about whom to subsidize and whom not to subsidize. Do all seniors need a handout, or only the poor ones? [Or only the sick ones?] And surely no Congress would re-up to the current employer tax benefit, which gives its biggest handout to the highest earners while producing all the pathologies the employer-centric payment system is heir to.
Is that a typo? Surely no Congress should reup, or perhaps could, but I see no signs that no Congresswould.  The tax deduction for employer provided health payment plans seems as rooted as the equally silly and damaging tax deduction for mortgage interest.  (And kudos to WSJ for coming out against that onein the lead editorial.) The proposal to also exempt individual insurance payments from taxes at least undoes some damage by putting both on the same footing.

Why cross subsidize wealthy seniors so much? Well, they vote. And they vote Republican. Given that, it's amazing that the house even tried to put in 5:1 in favor of Bernie-Sanders voting youth.

In case you missed it, the tax deduction for employer provided group coverage, but not for employer or employee contributions to an individual portable plan, really is the original sin, or the fly that the little old lady swallowed on her way to death from horse. Preexisting conditions follow entirely from that -- who will pay for lifelong guaranteed renewable insurance if they plan to get a job and throw it away? People who get sick and leave their jobs are stuck. Well, solve that with community rating, guaranteed issue, forced cross-subsdies, limits to competition.. and here we are.

Preexisting conditions.

In principle, this should be a transitional problem in a world where everyone has access to attractive, fairly priced health insurance. By giving new options to the states, the House bill would make subsidizing pre-existing conditions a general obligation of the taxpayer as it always should have been.
So far so good. To amplify, in a portable, individual, universal, guaranteed-renewable competitive market, there is no preexisting conditions problem. But to get there, especially after Obamacare wiped out the existing guaranteed-renewable individual insurance, people currently sick are going to need an on-ramp. In Jenkins' optimistic view, the state high risk pools are such a transitory device. Jenkins is absolutely right that we need some transitory device.  By forcing cross-subsidies to give the illusion we are not taxing and spending, we achieve less at much greater cost.

I would prefer (as he might) a vibrant unconstrained competitive insurance market; that market would have guaranteed issue, but because insurers are allowed to charge any price so they will happily serve and compete for any customer without coercion. Then high risk pools subsidize the high premiums that people already sick have to pay, until we realistically can expect everyone to have bought guaranteed-renewable insurance before they got sick.

A good principle is that transitory devices need not be perfect. Another good principle is that imperfect transitory devices should be transitory.

However, with the portable, individual, universal, guaranteed-renewable competitive market nowhere in sight, I fear that this "transitional" problem is going to be semi-permanent.

What happened to portability, the long promise that you can buy insurance across state lines?

State-based high risk pools are going to make it even harder for people to move from state to state. State-based insurance already does this to some extent. Under Obamacare the conceit was, with guaranteed issue and community rating, anyone could move, and just get insurance in the new state. That was never easy in practice. (Actually trying to buy individual insurance that covers anything, as we did for a daughter over 26, is a salutary exercise.)

In sum, I worry as advertised at the outset, that we are headed to a permanent state that the government runs ever expanding mediare, medicaid, VA, and so forth; employer-based group coverage is forever ensrhined, and the market for individual insurance of people actually paying premiums becomes completely dysfunctional, now really providing only catastrophic coverage for a tiny group of people who are essentially uninsured until they become sick, at which point they are transferred to a government provided high risk pool. The transitory has a way of becoming permanent.

Here I think Jenkins makes one tiny mis-step:

Republicans...wussed out with a semi-mandate, in which anybody who lets coverage lapse and then tries to re-enter the system will pay a penalty.
No, that is not a semi-mandate! That was one good step on the way to guaranteed renewable coverage. You buy health insurance not so that "someone else" will pay for your predictable expenses, and not so much for the chance that you might have a catastrophe this year. You buy health insurance so that if you get sick, you can still buy health insurance next year!  You should face a healthy incentive to stay insured. The imperfection of the Republican plan is that it limited the penalty (insurers would charge larger penalties for those who lapsed coverage, and could not charge more than 5:1) not that it imposed a penalty.

However, sometimes half step may not work half as well as a whole step. In a true GR system, if you drop out, and fail even to purchase the option to buy insurance later, then you get sick, you will be charged the full newly rated price. That's the only way to have insurers voluntarily cover you, without cross-subsidizing from someone else, and thus without banning competition. In that case you always have an incentive to sign up, quick, before you get even sicker. With a fixed and capped penalty for signing up again, now you have no incentive to hurry. You're going to pay the same penalty no matter how sick you get or how long you wait. So critics are right that a new group of people waiting to get really sick before they sign up again and pay the penalty will crop up.

Asness

If all of this is depressing you and you want a good old romp through free market heath care and reform, read Cliff Asness

Myth #2:  The pre-ObamaCare system was ‘insurance’
It was not a system of insurance. Insurance, as practiced everywhere else but healthcare, is about catastrophes. What we had was a government-subsidized payment plan funneled through insurance companies.
... Due primarily to the tax subsidy given to employer-provided healthcare (a bipartisan, so-far-untouchable disaster), catastrophic health insurance is not Americans’ norm. Rather, employers provide essentially all healthcare from basic health maintenance and symptom relief to the most expensive life-saving procedures, and they do it because the government massively subsidizes this approach.
This is odd. You don’t go to your car insurer to fill your car with gas or to your homeowner’s insurance company to change a light bulb. Why do you go to your health insurance company for everyday medical services? That is not insurance, it is tax-subsidized provision of all your healthcare needs, and it causes two of our system’s biggest problems. 1) Health coverage is not portable, as it’s employer-provided, and 2) consumers are insulated from the cost of basic healthcare because they don’t pay directly for services. Educated consumers spending their own money would be far better shoppers for healthcare. ...Paying $5 for a prostate exam is demeaning to both parties.
Myth #3: Stopping insurance companies from charging based on pre-existing conditions is the one good part of ObamaCare
Even many Republicans fall for this one, perhaps because it polls well. In these days of horrible discord, partisanship, and uncivil discourse (actually very much like the other 200+ years of the Republic) it is nice to know we can all still get together to rally around a really dumb idea....
It goes on like this. Go read the original.

Final political thoughts

You will notice that I'm not really getting in to the weeds on the Republican plan, and you may be disappointed by a lack of close analysis.  I've writtenhere at length about how health insurance and health care (for the last time, not the same thing!) should be fixed. There is no point in repeating that.  The plan has lots of steps in the right direction.  But to score it by economic purists' standards is unfair and unproductive.  The Republican plans are clearly crafted by what the leaders think they can get through politically. Score them as such -- and from my limited knowledge of politics, they strike me as bloody brilliant given the current situation of a narrow majority in the Senate, "resistance" close to "rebellion" from the other side, and nobody really in fear of the President or party discipline. This really isn't an economic issue at this point. If they can get a few steps in the right direction, show they can govern, and set the stage for more comprehensive reform later, there is hope.

Jenkins adds

P.S. Don’t kid yourself that Democrats have a plan other than blindly defending more and more subsidies for more and more health-care consumers. Single-payer is not a plan. It’s an invitation for the health-care industry—doctors, hospitals, the research establishment—simply to turn their full attention to serving the self-paying rich.
As so much of America, the veneer of government concern for common people leads instead to private schools, gated communities, private jets, and soon concierge doctors and hospitals for the 1%, those with connections, and the Washington elite. And lousy public schools, public transport, and coming soon lousy health care for the rest.

20 Jul 2020

Wild health care proposal - Barokong

I found a lovely post on health care full of wild ideas at market-ticker.org. You may not agree with all the proposals -- wild even by my standards.  But it is full of interesting detail on what's wrong with the microeconomics of health care delivery, as opposed to the usual focus on health insurance, and who pays, ignoring the vast dysfunction of the underlying market.

A few choice quotes to whet your appetite

All providers must post, in their offices and on a public web site without any requirement to sign in or otherwise identify oneself to access it, a full and complete price list which shall apply to every person....
All customers must be billed for actual charges at the same price on a direct basis at the time the service or product is rendered to them.  This immediately and permanently decouples "insurance" from the provision of care.  The current system of an "explanation of benefits" that often features a "negotiated discount" of some 90% is nothing other than an extortion racket and is arguably felonious...  All medical records are the property of, and shall be delivered to, the customer at the time of service in human readable form (a PDF provided on common consumer computer media such as a "flash stick" shall comply with this requirement.)  Any coding or other symbols on said chart must include a key to same in English delivered at the same time....
All surgical providers of any sort must publish de-identified procedure counts and account for all complications and outcomes, updated no less often than monthly. Consumers must be able to shop not only on price, but also on outcome...
Auxiliary services (e.g. medical or dental Xrays, lab testing, etc) may not be required to be purchased at the point of use.  If you wish to buy your tests from the lab down the street (which also must post a price) that's up to you....
Any test or diagnostic that carries no exposure to drugs or radiation, nor is invasive beyond a blood draw, may be purchased without doctor order or prescription...
No government funded program or government billed invoice will be paid for medical treatment where a lifestyle change will provide a substantially equivalent or superior benefit that the customer refuses to implement.  The poster child for this is Type II diabetes, where cessation of eating carbohydrates and PUFA oils, with the exception of moderate amounts of whole green vegetables (such as broccoli) will immediately, in nearly all sufferers, return their blood sugar to near normal or normal levels.  The government currently spends about 25% of Medicare and Medicaid dollars on this one condition alone and virtually all of it is spent on people who can make this lifestyle change with that outcome but refuse...
Health insurance companies must sell true insurance to sell any health-related policy at all.  A true insurance policy is defined as one that (1) does not cover any condition you have received treatment for over the last 24 months...
And so on. For my tastes it suffers from the usual vagueness about the subject of all these sentences. Is transparent pricing, for example, a new set of regulations? Why don't hospitals already post prices, unlike airlines which do so voluntarily? Which regulations are stopping hospitals from competing on price, and maybe we should get rid of those rather than pass new regulations? But apart from the question whether this is new rules or just a vision of how things should be, it's an interesting and refreshing and totally out of the box view.

18 Jul 2020

NoahLogic - Barokong

My little foray here into the blogosphere sometimes leaves me in slack-jawed amazement at the leaps of illogic in the commentariat.

Such was the case last week, whenNoah Smith writing at Bloomberg.com, took on arecent post of mine about food stamps.

My post was about food stamps, and about the language that people use to hide agendas in the policy debate. Scott Simon at NPR thought he had a big gotcha by repeatedly asking Congressman Adrian Smith "Is every American entitled to eat?" because the budget proposal reduces food stamp payments. The title was "single payer food," as it seemed Scott's view of food was like many people's view of health care.

This sent Noah on a tear about "free market purists" who disdain "single-payer" health care:

In a recent blog post, Hoover Institute senior fellow John Cochrane likens single-payer health care to single-payer food:

...

by drawing an equivalence between health care and food, Cochrane is ignoring the long history of economic research showing that the health-care market is very different from others.   Here I am left scratching my head. I did not, in fact, "liken single payer-heath care to single-payer food." I didn't mention health care at all. How can a post about food stamps "ignore" research on health economics? And if you spend 10 seconds googling you will find I have addressed all these arguments in other writing that is actually on this topic. You might not agree with my answers, but I don't "ignore" them.

A bit of advice to Noah: OK, you can't be bothered to do any real research before mounting a personal attack on  Bloomberg.com. But try to make it all the way through ablog postbefore writing a takedown.

(Or, back in the old days, before writing that "Cochrane is ignoring" something, basic journalistic ethics would demand that you contact Cochrane for comment, at which point Cochrane could point out that no, he is quite aware of Ken Arrow's work and has responded to it in detail, especially when actually writing about health care, not food. Or an editor or fact checker would require that. Some news media still practice this kind of basic journalistic ethics. Bloomberg, we see, does not.)

***

However completely unrelated to the subject at hand, though, Noah does bring up some interesting issues regarding health care. I'm grateful for the opportunity to rebut, because, as a matter of fact, I have written about health care,  and the attack gives me an opportunity to recycle some great old prose to prove that point.

The issue at hand: Can markets work for health care and health insurance? Noah:

There are so many problems with the health-insurance and health-care markets that it’s little wonder that they operate differently from the markets for food or cell phones.
That's a misleading comparison. Health care is a complex personal service. The right comparison is lawyers, accountants, tax preparers, contractors, car repair shops, architects, gardeners, interior designers, bankers, brokers. These are all cases in which people deliver a complex service, and they know a lot more than we do. We hire their expertise as much as a product.

Health insurance is insurance. The right comparison is car insurance, home insurance, personal liability insurance, life insurance, disability insurance, and more complex insurance associated with businesses, such as director liability insurance, product liability insurance, freight insurance, and so forth.

All of these we generally leave to somewhat free markets. Nobody thinks there needs to be a single-payer contractor. (Well, maybe Noah does. I can't wait to see what kinds of bathroom tiles ContractorCare will pay for.) Just what is it about health care and insurance that have an essential market failure, and these do not?

Noah summarizes a1963 Ken Arrow essay about health care, which Noah cites as research showing that markets cannot possibly work. The objections:

.. the importance of moral norms.  People have all kinds of moral considerations associated with health care. They expect doctors to act honestly and selflessly, and not just seek profit
Any time economists start telling you to pass complex regulations to enforce morality, run in the opposite direction. The Obama administration had something with the idea of "science-based" policy. At least let's get the cause and effect science right before we start making moral claims.

Let's read economists about economics:

...incomplete markets. Can people really know all of the possible health conditions they might get, including how much they would pay to cure or treat each one? ... The answer is certainly no.
...uncertainty -- in health care, people don’t know what they’re buying until it’s already too late to make a different choice. Unlike food, which you buy over and over, open-heart surgery tends to only happen once.
...adverse selection. People with health problems are more likely to try to buy health insurance; and since insurance companies know this, they have to charge everyone more.
....moral hazard. After you’ve paid for insurance, the insurance company has every incentive to deny as many claims as it can get away with denying
These are all the standard objections to markets. They are all theoretical possibilities, echoed in every econ 101 textbook. But are they true of health care and insurance? And so much so that the evident pathologies of a government run system is better? (Remember, the free market case is not that markets are perfect. It is the long and sorry experience that governments are worse.) And are they so much more true than they are of all the above listed complex personal services, that the latter can be left to markets but a vast government bureaucracy must not only provide for all but outlaw the private option?

As it turns out, I have written about these things, in "After the ACA" easily available on my website and rather relentlessly promoted on this blog, especially p. 184ff,

B. The Straw Man
...Critics adduce a hypothetical situation in which one person might be ill served by a straw- man completely unregulated market, with no charity or other care (which we have had for over eight hundred years, long before any government involvement at all), which nobody is advocating. They conclude that the hypothetical justifies the thousands of pages of the ACA, tens of thousands of pages of subsidiary regulation, and the mass of additional federal, state, and local regulation applying to every single person in the country.

How is it that we accept this deeply illogical argument, or that anyone making it expects it to be taken seriously? Will not one person fall through the cracks or be ill served by the highly regulated system? If I find one Canadian grandma denied a hip replacement or one elderly person who cannot get a doctor to take her as a Medicare patient, why do I not get to conclude that all regulation is hopeless and that only an absolutely free market can function? Both straw men are ludicrous, but somehow smart people make the first one, in print, and everyone nods wisely

C. Adverse Selection

We all took that economics course in which the professor shows how asymmetric information makes insurance markets impossible due to adverse selection. Sick people sign up in greater numbers, so premiums rise and the healthy go without. George Akerlof’s justly famous “The Market for Lemons” proved that used cars cannot be sold because sellers know more than buyers.

Yet CarMax thrives. Life, property, and auto insurance markets at least exist, and function reasonably well despite the similar theoretical possibility of asymmetric information. Life insurance is also “guaranteed renewable,” meaning you are not dropped if you get sick.

Is the story even true? Do most people, with knowledge of aches and pains, really know so much more about likely cost than an insurance company armed with a full set of computerized health records, actuaries, health economists, and whatever battery of tests it wants to run? Or is asymmetric information market failure in health insurance just a myth passed from generation to generation, despite functioning markets in front of our eyes?

Now the real world does see a big “adverse selection” phenomenon. Sick people are more likely to buy insurance, and healthy people forego it. But the insurance company does not charge people the same rate because it can’t tell who is sick or likely to cost more— the fundamental, technological, and intractable information asymmetry posited in your economics class. The insurance company charges the same rate because law and regulation force it to do so. The insurance company is barred from using all the information it has.

Regulation seems to feel that we have the opposite information problem; insurers know too much. The centerpiece of the ACA, after all, is banning the use of information, that is, preexisting conditions, not a great regret that insurers cannot tell who has preexisting conditions in order to charge them more.  [Like many others Noah took both sides of this. People know more than doctors so the is adverse selection. Doctors know more than people so there are incomplete markets, and people can't shop.]

This source of adverse selection is the legal and regulatory problem, not the information problem of economic theory, and easily solved. If insurance were freely rated, nobody would be denied. Sick people would pay more, but “health status” insurance or guaranteed renewability solve that problem and eliminate the preexisting conditions problem.

Adverse selection due to fundamental information asymmetry in an unregulated market is, as far as I can tell, a cocktail-party market failure. It is a nice story, but does not quantitatively account for the real world. Furthermore, the ACA is not a minimally crafted regulation to solve the problem that people know more than their insurance companies can know about their health. Once again we are subject to the logical fallacy of accepting the entire regulatory structure because of one alleged failure

of a hypothetical free market.

D. Shopping Paternalism

Defenders of regulation reiterate the view that markets can’t possibly work for health decisions:

“A guy on his way to the hospital with a heart attack is in no position to negotiate the bill.”

“One point I cannot agree with is that competition can work in healthcare, at least as it does in other markets. I cannot fathom how people faced with serious illness will ever make cost- based decisions.”

“What about those who currently don’t have the background and/or the economic circumstances to consume healthcare, (e.g. take anti-hypertensive medicine instead of [buying] an iPhone)?”

Ezra Klein trying to understand why healthcare prices are so high and so obscure, writes:

"Health care is an unusual product in that it is difficult, and sometimes impossible, for the customer to say “no.” In certain cases, the customer is passed out, or otherwise incapable of making decisions about her care, and the decisions are made by providers whose mandate is, correctly, to save lives rather than money. In other cases, there is more time for loved ones to consider costs, but little emotional space to do so— no one wants to think there was something more they could have done to save their parent or child. It is not like buying a television, where you can easily comparison shop and walk out of the store, and even forgo the purchase if it’s too expensive. And imagine what you would pay for a television if the salesmen at Best Buy knew that you couldn’t leave without making a purchase."
[Noah is also not being particularly original!]

New York Times columnist Bill Keller put it clearly, in “Five Obamacare Myths:”

"[Myth:] The unfettered marketplace is a better solution. To the extent there is a profound difference of principle anywhere in this debate, it lies here. Conservatives contend that if you give consumers a voucher or a tax credit and set them loose in the marketplace they will do a better job than government at finding the services—schools, retirement portfolios, or in this case health insurance policies— that fit their needs.
I’m a pretty devout capitalist, and I see that in some cases individual responsibility helps contain wasteful spending on health care. If you have to share the cost of that extra M.R.I. or elective surgery, you’ll think hard about whether you really need it. But I’m deeply suspicious of the claim that a health care system dominated by powerful vested interests and mystifying in its complexity can be tamed by consumers who are strapped for time, often poor, sometimes uneducated, confused and afraid."

“Ten percent of the population accounts for 60 percent of the health outlays,” said Davis [Karen Davis, president of the Commonwealth Fund]. “They are the very sick, and they are not really in a position to make cost- conscious choices.”

Now, “dominated by powerful vested interests and mystifying in its complexity” is a good point, which I also just made. But why is it so? Answer: because law and regulation have created that complexity and protected powerful interests from competition. And is the ACA really creating a simple clear system that will not be “dominated by powerful vested interests?” Or is it creating an absurdly complex system that will be, completely and intentionally, dominated by powerful vested interests?

But the core issue is these consumers who are “passed out, or otherwise incapable of making decisions about [their] care,” “strapped for time, often poor, sometimes uneducated, confused and afraid,” and “not really in a position to make cost-conscious choices.”

Yes, a guy in the ambulance on his way to the hospital with a heart attack is not in a good position to negotiate. But what fraction of healthcare and its expense is caused by people with sudden, unexpected, debilitating conditions requiring immediate treatment? How many patients are literally passed out?

Answer: next to none. What does this story mean about treatment for, say, an obese person with diabetes and multiple complications, needing decades of treatment? For a cancer patient, facing years of choices over multiple experimental treatments? For a family, choosing long- term care options for a grandmother with dementia?

Most of the expense and problem in our healthcare system involves treatment of chronic conditions or (what turns out to be) end-of-life care, and involve many difficult decisions involving course of treatment, extent of treatment, method of delivery, and so on. These people can shop. Our healthcare system actually does a pretty decent job with heart attacks.

And even then . . . have they no families? If I’m on the way to the hospital, I call my wife. She is a heck of a negotiator. Moreover, healthcare is not a spot market, which people think about once, at fifty-five, when they get a heart attack. It is a long-term relationship. When your car breaks down at the side of the road, you’re in a poor position to negotiate with the tow-truck driver. That is why you join AAA. If you, by virtue of being human, might someday need treatment for a heart attack, might you not purchase health insurance, or at least shop ahead of time for a long-term relationship to your doctor, who will help to arrange hospital care?

And what choices really need to be made here? Why are we even talking about “negotiation?” Look at any functional, competitive business. As a matter of fact, roadside car repair and gas stations on interstates are remarkably honest, even though most of their customers meet them once. In a competitive, transparent market, a hospital that routinely overcharged cash customers with heart attacks would be creamed by Yelp.com reviews, to say nothing of lawsuits from angry patients. Life is not a one-shot game. Competition leads to clear posted prices, and businesses anxious to give a reputation for honest and efficient service.

So this is not even a realistic situation. To be sure, some conditions really are unexpected and incapacitating. Not everyone has a family. There will be people who are so obtuse they would not get around to thinking about these things even if we were a society that let people die in the gutter, which we are not, and maybe some hospital somewhere would pad someone’s bill a bit. (As if they do not now!) But now we are back to the straw man fallacy. Once again, the idea that ACA is a thoughtful, minimally designed intervention to solve the remaining problem of poor negotiating ability by people with sudden unexpected and debilitating health crises is ludicrous. As is the argument that we should accept the entire ACA because of this issue.

Take a closer look at Keller and Davis’s statement: “strapped for time, often poor, sometimes uneducated, confused and afraid,” and “not really in a position to make cost- conscious choices.” We are talking about average Joe and Jane here, sorting through the forms on the insurance offerings to see which one offers better treatment for their multiple sclerosis or diabetes-related complications. If Joe and Jane cannot be trusted to sort through this, how in the world can they be trusted to figure out whether they want a fixed or variable mortgage? Which cell phone or cable plan to buy? To deal with auto mechanics, contractors, lawyers, and financial planners? How can they be trusted to

sign marriage or divorce documents, drive, or . . . vote?

We have a name for this state of mind: legal incompetence. Keller, Davis, and company are saying that the majority of Americans, together with their families, are legally incompetent to manage the purchase of health insurance or healthcare. And, by implication, much of anything else.

Yes, there are some people who are legally incompetent. But—straw man again—Keller and Davis are not advocating social services for the incompetent. They are defending the ACA, which applies to all of us. So they must think the vast majority of us are incompetent.

If not blatant illogic, this is a breathtaking aristocratic paternalism. Noblesse oblige. The poor little peasants cannot possibly be trusted to take care of themselves. We, the bien-pensants who administer the state, must make these decisions for them.

Let me ask any of you who still agree, does this mean you? When you are faced with cancer, do you really want to place your trust in the government health panel, because they will make better decisions than you, with your doctor and family? Or is this just for the benighted lower classes, and you and I, of course, know how to find a good doctor and work the system?

Choice is always between alternatives. Sure, some people make awful decisions. The question is, can the ACA bureaucracy and insurance companies really do better? Yet you would not trust them to buy your shirts? And once again does the entire gargantuan bureaucratic apparatus of the ACA follow, not from the proposition that there is some fundamental economic market failure, but because . . Americans are no good at shopping?

No. Health is not too important to be left to the market. Health is so important—and so varied, so personal, and so subjective— that it must be left to the market. If you do not trust the vast majority of people to make the most important decisions of their lives, and a government bureaucracy can make better decisions on their behalf, you are a devout patrician, not a devout capitalist. Well, that was fun, wasn't it? You may or may not agree. You may think I go on too long. But you can't possibly write that I "ignore" Noah's arguments.

By the way, if we're going to get huffy about "ignoring" classic writings of Nobel Prize winners on health care, Noah really shouldn't ignore this classic by Milton Friedman

Noah also starts with a logical whopper:

Americans, in general, support government-provided universal health care. A Pew Research Center survey taken in January found that 60 percent say that it’s the responsibility of the federal government to make sure that all Americans have health coverage.
This should be on the SAT reading comprehension test. "Does the evidence support the proposition?" No. "responsibility... to make sure that all Americans have health coverage" is not "support government-provided universal health care." I support the former, and  not the latter. There are lots of ways, including involving extensive deregulation combined with robust charity care, to deliver "health coverage" without "government-provided universal health care."

So this ends up, really, being another post about language and rhetoric. What is going on with Noah, and with Bloomberg, and their fellow travelers, that such gaping holes of basic logic pass muster? That you can write a personal attack without making it through a blog post, let alone doing 10 seconds of googling to find if your allegations have any basis at all? I'll leave it to you to fill out the names and analogies for the rhetorical strategy. I guess if they think so little of American's shopping competence, they think equally little of their critical reading capacity.

Update: Thanks to a correspondent who pointed it out, we can now add Brad DeLong to the list of people who can't even be bothered to link to an article they want to "smackdown," let alone show any sign of reading it. This is, however, not news.

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