While Senate is out to play for recess, the rest of the country waits on their brilliant solutions to surface in the fall. Obama wants health care reform that reduces costs, covers more Americans, and makes doctors accountable to their patients. Sounds like a great plan.
I only find one problem with it: there is no plan.
A few bipartisan congressional committees have been arguing over different ideas for the past few weeks. A couple of proposals have been knocked around, and it looks as though we are in store for some sort of public health insurance plan designed to compete with those evil private companies that drive up prices to exploit the American public. (My brutality is entirely sarcastic.)
Basic, Adam Smith-style, economics show us why a publicly provided insurance plan will not achieve these goals without dire sacrifices. However, taken out of context, it can also show us why they think it will work.
Let’s begin with the latter, the logic behind the public plan: A public insurance policy or series of regional nonprofit cooperatives (the two primary health reform proposals) are designed to compete with private insurance providers. The lower prices of these subsidized entities will attract customers to switch from private providers and attract the uninsured to jump on board. The competition will pressure private providers to reduce prices to try and keep their customers. Such is the beauty of competition.
Now the problems with that logic: In a perfectly competitive world, prices are driven down to the actual costs of doing business. This is because firms undercut each other until profits are minimal. As a result, private insurers naturally have vast incentives to reduce costs and waste, as they are profit maximizing, competitive firms. If their prices were artificially high, competitors would have opportunity to charge less and take customers. This is a basic market system.
However, we do not live in the perfect world. Firms can get around this by conspiring with competitors to charge an agreed-upon, higher price. Even if this was legal, short-run incentives to cheat typically cause these cartels to fail (think OPEC). If the U.S. government thinks that collusion is taking place in the health care insurance industry they should look into anti-trust action, rather than jumping in the with their own firm(s) to stir the pot.
We need to examine the reasons why costs are so high in the private sector before thinking about hijacking the industry with a subsidized public entity. (Not to mention that the government does not have a very good track record with efficient operations: postal service, department of motor vehicles, social security, etc.)
Costs are high for a much less controversial reason: asymmetric information. Meaning, we know more about our health, and likelihood to use the policy, than does the insurance companies. So if you are extremely healthy, and will not cost the insurance company very much, you should not pay very much. And, conversely, if you are unhealthy (or paranoid), you should pay more for your constant doctor visits and prescriptions.
Unfortunately, insurance companies cannot clearly tell how healthy its customers are. To cover these risks they are forced to charge somewhere in the middle. Healthy people are charged more than they are eager to pay (some choose to opt out), while unhealthy people are charged too little. As you can imagine, operating costs in the insurance company are driven up because its customers are primarily unhealthy; prices follow accordingly. Soon enough, premiums and deductibles are so high that it is barely insurance at all, and you are better off paying out of pocket. If it were not for the terrifying risk of being caught sick without a method of payment, the market would crumble altogether.
Hence, the problem is not in private companies exploiting the public for vast profits. The problem is inherent in this type of insurance system. Generally, insurance is supposed to be something you never hope to use, like car insurance. And we purchase it for some peace of mind. Health insurance, on the other hand, has turned into a sort of ambiguous savings account. We all contribute as little as possible to the communal pot and draw down as much as possible.
A public insurance system does not address this problem of asymmetry, and would also be plagued with high operating costs. The only way to reduce the prices is to run at a loss (which government firms can do) relying on subsidies to stay afloat. Money to fund subsidies must come from somewhere—your pocket, pockets of the wealthy, your employer’s, your kid’s…who knows? Congress will figure that out in the fall.
Around 60% of Americans are provided healthcare benefits through their employers. Congress hopes to elect incentives (or mandates) to motivate more companies to provide this benefit. Providing healthcare imposes huge costs on firms, resulting higher prices for their customers, reduced wages for employees, and/or fewer employees altogether. To make the matter worse, firms – not the customers – are choosing the health insurance providers. And as our beautiful and prosperous market system has demonstrated for hundreds of years, the consumer always makes the most efficient choice in spending their money. Your employer has as much business in purchasing your healthcare than it does in purchasing your food and housing.
Democrats argue that the proposed reforms, although not ideal, are better than doing nothing. I would have to agree on some levels. However, better options are out there. Rather than making feeble attempts at optimizing a system that clearly doesn’t work, we should focus on real reform by changing the way Americans purchase healthcare.
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um… care to provide any evidence for any of these wild assertions? Like, for instance:
Really? Because you could also could argue that consumers have a much worse chance of predicting whether they, an individual, will fall ill or get hit by a bus, than an insurance company which employs actuaries and has reams of statistical data to determine likely claims in their overall insurance pool — not to mention the extensive medical history checks they often do in order to isolate and exclude the most vulnerable applicants. Do you have any evidence?
Really? Why high operating costs? Isn't a public system at an immediate financial advantage because it doesn't have to seek profit, has no marketing expenditures, and can make investment choices that might be unavailable to private firms because they don't have to balance the budget or please self-interested shareholders? And why are operating costs for Medicare so low, and why do public systems in the rest of the First World uniformly produce dramatically lower costs than private insurance? Do you have any evidence?
Really? Then why do, say, SUVs exist? Or if we don't want to have a frustratingly abstract argument about the effectiveness of markets — what if the most efficient choice in health care has to be chosen collectively (distributing costs) rather than by individuals? And what makes us think health care is at all comparable to other consumer products? Do you have any evidence?
…Look, I think “health insurance” and especially employer-purchased health insurance is a stupid idea too. But you haven't made a persuasive case against the public option as a remedy to that problem.
You also might want to look into the other provisions of the various health reform packages — though they differ on the public option, there's a core set of reforms that they all basically agree on, which arguably might be more important: universal coverage mandates, ending the practice of denying coverage from preexisting conditions, standardizing pricing frameworks, etc. Don't dismiss the House plan(s) out of hand just because of your problems with the public option.
August 5, 2009 at 8:05 amAh Markus… I expected you would have already been here. I actually thought this was a well intentioned, well thought out article. And you come in with your “eh… whatever… you should do it like we do in Canada” comments.
I actually am incentivized to withhold pre-existing condition information from my insurance company and my insurance company has no way of knowing if go to the gym 3 times a week or haven't been since Christmas. So yes… I potentially do know more about my need for insurance than my insurance company. Unless of course you have evidence to the contrary which you always demand but rarely provide.
The “high costs” of public ventures is because they are not incentivized to keep costs low. You liberals like to complain about waste in the DoD budget… why doesn't your model work there?
I would love to see the evidence for “operating costs for Medicare so low.” Preferably from an unbiased source since even I could link to think tanks and other groups with an agenda. Remember, I took Statistics 101 too so I can make the numbers lie just like every other college Freshman
SUV's exist (disclaimer: I drive an Eddie Bauer Expedition and love it) because the consumer has decided the best and most efficient way to allocate his or her resources to match his or her individual indifference curve. Sure they aren't the most efficient with regard to gas mileage but the extra cost in gas keeps me from going to McDonalds every day which will save you money someday when I am on Medicare and my heart doesn't keep failing on me.
Do you have evidence that health care should be treated differently than other products? Say care for my automobile or care for my house? Please Markus, if you are going to deman evidence from these writers, provide some of your own.
I agree that there are pieces and parts of this bill that deserve a good hearing and probably should be implemented, however the clear agenda of the people in charge is to get the public option foot in the door. Forgive those of us who love our free market and are actually happy with our health care choices if we don't want to have the public option shoved down our throats by people who admit that eventually they want it to be the only option.
August 5, 2009 at 10:09 amHello, Newt Gingrich, I knew it was you.
August 5, 2009 at 6:11 pmHealth Bill Hacks Wildly at True Problem, Misses
Thank you, Nikolai Skievaski, for your article. I almost think you might be Scoop 44's token conservative. This is the first header I have seen on its Web site that didn't drip with an arrogant liberal, progressive, or socialist agenda.
It's nice to see someone's character has survived being educated at one of today's universities where debate too often is replaced by mandate. Your respecting my right to know about other unpopular ideas is a benchmark forgotten by too many in your trade. It is one, however, that has been guaranteed by a piece of paper written on by men who feared for their lives, the words they wrote and approved of so important that hundred-of-thousands of Americans since have given theirs to protect its message.
Having a father who served on Okinawa in WWII, and a son who served in Afghanistan loving that country's freedom fighters, my family is just one of millions of other Americans who understand freedom is anything but free, and that our right to know is the only thing that stands between us and chaos.
Please take a few seconds to read about a true hero you may not have known about, who had lived in Afghanistan. His goal was to simply educate girls with the newfound freedom America had given to him, his losing his life protecting it. I pass his name onto you, so it may not be forgotten, too many in our elite media stepping all over his original story. Maybe you will have the passion to contact his family and see how they are doing.
<http://www.freedomisknowledge.com/otw/harrybela...>
Thank you again for your telling the truth about this health care bill that will effect us all for decades to come.
August 5, 2009 at 8:29 pmDarn.. I was trying to channel Adam Smith. “Newt” is a let-down.
Believe it or not I am not a right-winger by any stretch of the imagination. I am an unabashed fiscal and economic conservative though.
August 5, 2009 at 9:43 pmClassical capitalism as depicted by Adam Smith had three central characteristics, none of which pertain today, nor would any of today's (nor yesterday's) “captains of industry” want them to.
Can you imagine the caterwaling fits that pharmaceutical companies or medical insurance companies would throw if our government mandated, for example, that the public be fully informed — the first of Smith's sin quo non prerequisites for capitalism.
Capitalism is as far from the economic system we have in this country as communism was from what Lenin imposed in the USSR.
August 6, 2009 at 10:08 amWell, I am fairly well acquainted with Adam Smith's writings but thanks for the tutorial anyway!
If you read carefully you will note that I did not (nor would I) argue that our health care system is an example of perfect capitalism. Nor do I argue that our economy is an example of perfect capitalism. I am simply arguing that I would rather move towards that goal than away from it.
August 6, 2009 at 10:21 amI love free markets. If you have an inkling of understanding of economics you wouldn't equate what I said with loving the situation described in the video. Our health care system is not a free market by any stretch of the imagination. You are typical of the liberals who are promoting this problem… tugging at heart strings is more important than dealing in reality or facts.
The truth is, I could come up with equally compelling and heartbreaking situations in Canada where the average wait time for cancer patients to begin treatment is considerably higher than it is here in America. Do you love people dying simply because the government can't get wait times down far enough for them to begin treatment in the critical few days after diagnosis?
You can engage in calling names if you wish, but I prefer this debate to be about ideas and facts, not name calling and blatantly biased anecdotal evidence.
August 6, 2009 at 12:29 pmHow many kinds are there?
Colorado Matt is probably one of each.
August 6, 2009 at 12:33 pm“I could come up with equally compelling and heartbreaking situations in Canada where the average wait time for cancer patients to begin treatment is considerably higher than it is here in America.”
So can Newt, Rush, Bill O, and all the other liars who shill for mega-buck health care pirates.
Shades of Joe McCarthy [holding an old shopping list]: “I hold here in my hand a list of umpteen communists is the State Department.”
August 6, 2009 at 12:47 pmActually *you* could come up with this same evidence if you were to simply take the time to research both sides of the issue. I can give you plenty of statistics on infant mortality rates and life expectancy that would support your side of the story. I also understand the underlying problems behind these statistics as well as the wait time issue for surgery and cancer treatment in both the UK and Canada.
Just because someone doesn't agree with you doesn't mean they are a liar or stupid. It might very well be that the talking heads that you listen to (Olbermann? Maddow? HuffPo? DailyKos?) are lying to you and you just don't know because you don't take the time to do your own research.
Or maybe I am just an idiot…
Probably not though!
August 6, 2009 at 2:16 pmOr maybe I am the loving father of four children working a white collar job to help them get into and through college like I have done… twice.
Or maybe you are right, I am probably just a creep and most likely stupid as well.
August 6, 2009 at 2:18 pmwoah… This discussion got a little intense in the last couple days. Anyway, just to quickly respond to a couple of your points (didn't mean to leave this hanging, just been really busy at work):
–On asymmetric information, I think you misread me: my point is that it's much more difficult for an individual to predict his own particular odds of falling ill (or getting hit by a bus) than it is for an insurance company to determine the statistical likelihood that a certain proportion of their pool of insured will fall ill. Whether or not people withhold information in questionnaires — and we can conclude that many people don't considering that, per Kaiser, 21% of individual health insurance purchasers are denied coverage or charged a higher price for preexisting conditions — it's still true that an insurance company can predict with reasonable certainty what their expenditures will be in relation to their income from premiums, while the consumer doesn't know for sure whether their premium in a given year will ultimately be worth $50,000 or $0.
–As for a lack of incentive to keep costs low in the public sphere: this might be true in cases where the state is purchasing things for itself, like DoD, and has the political clout to defend its decisions to Congress. But a public insurer does not improve its own comfort and efficiency as an agency by paying more than the minimum possible for its insureds' health care, while in the event of a cost overrun it does face the discomfort of asking a skeptical Congress for more operating funds and/or cutting its own administrative costs. So the incentive structure is different.
Not to mention, the base cost for a public insurer is much lower than a private insurer's anyway. The existing example we have, Medicare, is a good one: according to the CBO, when compared with the private Medicare Advantage (the only really valid direct comparison, since Medicare treats a highly sick and vulnerable population), provides care at a cost between 3% and 11% lower. Administrative costs and profit are one dramatic source of this difference: from the same report, Medicare Advantage spends 11% of expenditures on administrative costs, Medicare less than 2%. Tack on the 5-7% Medicare Advantage pulls in in profit and you have a pretty dramatic difference. As the CBO puts it:
In other words, the private program has to screw sick people and/or doctors in order to provide the same standard of care that Medicare does. That sounds kind of generalizable to the incentives of today's private insurance, no?
–On SUVs: I don't know if you're being facetious or not, but you have made a non-argument. Your response reads like this:
Do you see the problem here?
Anyway, health care can't be treated like an ordinary consumer product both because of extreme asymmetric information — which I think we all agree exists, even if we think it goes in opposite directions — and because consumer choice is, when they're actually getting care, extremely limited. If you're being rushed to hospital in an ambulance, you're not making a decision based on an indifference curve, you're making a decision based on the immediate desire not to die. If you're conscious at all, you will choose the nearest hospital and whatever procedures the man in the white coat suggests. Even in non-emergency situations, the choice between one doctor or another isn't meaningful: they all have the same certifications, roughly the same costs, and will make nearly identical diagnoses and treatments in most cases. The only significant choice available to the consumer is which HMO/PPO to buy, if they even have that choice, and the relationship between that choice and the kind of care you get is basically zero. I don't see how a free market could possibly treat this “product” effectively.
–All of that is why, to go back to Nikolai's argument, the public option is not so much of an economic misfire as he thinks. And I think he, and you, would have seen that if he had investigated the actual evidence behind his contentions a little more thoroughly.
As for your loving your free-market health care: that's fine, but surely the shared moral imperative to insure the entire population and keep costs from swallowing our economy exceeds your individual comfort with your own care, presuming that the public plan will both accomplish those goals (which I think it would if done right) and maintain the standard of care that everyone deserves (which I think it obviously will). Our argument should be about whether that presumption is correct, not what system either of us likes ideologically and personally.
August 7, 2009 at 8:06 amMarkus,
Thanks to you I have actually been researching the supposed Medicare efficiency! I read the CBO report that you quoted but I also read numerous (both biased and a-political) rebuttals that point out serious flaws in your assertions.
A few quick points. 1) The people choosing Medicare rather than Medicare Advantage are more likely to need the benefits. Therefore the payout / participant is going to be higher for Medicare which skews the efficiency numbers. 2) Medicare “hides” some administrative costs in the payout itself by including a % for the doctors for the purpose of administrative costs. Medicare Advantage apparently accounts for this separately.
As far as the efficiency argument I think you missed my point. You are talking about fuel efficiency but when you are talking about allocation of resources you need to be talking about economic efficiency. You are mixing your metaphorical apples and oranges!
With regard to assymetric information I don't think you understand indifference curves. “Don't want to die” is simply a point on my indifference curve. Just like “I dont' want to sit in Rawlings, WY for 3 days” was a point on my indifference curve years ago when my fuel pump went out on a road trip. I didn't make the same choice for repairs that I would have had it not been an emergency, but it was certainly a free market choice nonetheless.
Once again, you are doing what many are doing and arguing that the “human” element brings an emotional aspect to the decision table that cannot be effectively handled by the marketplace. If that is the case then how is it possible that funeral homes can run in a free market? That is one market that no one thinks about until they need it and then it is certainly an emotional choice and one which few people know anything about.
Thanks for the reasonable discussion… your insightful comments always point me in a direction for further research and analysis.
Oh… one last thing. The DoD doesn't purchase anything for itself. They purchase stuff for me. I actually wrote to my Congresswoman regarding the recent F22 situation because those are my planes they are talking about.
Maybe the problem is that I have a completely different view of my role in government than you do. You think the government should buy you health care. I don't think I want to buy my health care through the government.
August 7, 2009 at 8:42 amhi dude! I'm really enjoying these debates too — you're a good sparring partner.
I think I saw the same objections to the CBO report that you did — Heritage Foundation seems to be the source of them, but they're reasonable enough that an objective source could quote them. Except that, if you read the CBO report carefully, you'll notice that they actually weighted their data to adjust for the difference in health levels between Medicare and MA insureds (which is small but significant — the poll I saw, and I'll dig up the source if you're interested, said something like 10% of Medicare patients described themselves as “in poor health” vs. 6% of MA, and other demographic differences). And as for physician's fees, Heritage's own data says that that amounts to an additional 1%-4% administrative costs for Medicare on top of the <2% CBO quoted — which still pales behind the 11% administrative + 6% profit that MA spends — and only then when you include administrative costs distributed among other government agencies, which CBO rightly points out could just as easily be assigned to MA (which uses some public infrastructure). So I don't see those objections as persuasive.
Efficiency — I actually wasn't talking just about fuel efficiency. In general SUVs seem like an enormous waste of money: what do they do that a minivan and/or a pickup wouldn't do more effectively and cheaply? Other than make their owners feel good about driving such a big, tough, expensive vehicle, which I think we can agree is not a valuable market outcome. You might be one of the few SUV drivers who legitimately use it for carrying equipment or handling tough roads, I don't want to make this personal. But your average commuter driving his empty Suburban through the suburbs is just pouring money down a hole.
On indifference curves and free market choices — emergency auto repairs are a small fraction of auto maintenance costs, and people expect to be gouged. In most cases you can comparison-shop your mechanic and/or learn how to perform simple maintenance yourself. Health care, though, just cannot be comparison-shopped in nearly all cases, and consumer information on the difference between practictioners — who most of us interact with multiple times yearly, paying whatever they ask — is zero.
(Funeral homes, meanwhile, don't seem to have any check on their prices (have you ever tried to finance a funeral?), and if it weren't such a rare expenditure I think it'd be a problem we'd have to address.)
I don't think it's a matter of emotion. I think it's a matter of lack of information and meaningful choice.
And the DoD: they do, though, have an internal culture that is happier and functions better when it has good equipment. Medicare, and a hypothetical public insurer, is not affected by doctors' happiness.
August 7, 2009 at 9:08 amPoint taken on the Medicare efficiency debate. I am skeptical of the claims that it is super efficient but in my opinion, the jury is still out and I am still researching!
I actually have 4 kids (2 of them in high school) and am sitting here looking out my office window at the Rocky Mountains where we like to play on weekends. So yeah, I probably use my SUV more efficiently than most! A few weeks ago we had it in 4Low and we still weren't sure we were getting off that mountain… but I digress!
Not to be morbid but funerals aren't a “rare” expenditure in that close to 100% of us will have need of one.
And in my experience most people have less information about handling a funeral than they do the medical condition leading up to the funeral.
I am not sure why you continue to insist that there is zero or almost no information available for comparing doctors. Less than a month ago a lady I work with asked me about my experience with my doctor because she is choosing another one. I have sought out information on everything from chiropractic to cardiac care and there is plenty of information out there. And I don't pay “whatever they ask” in either case… I choose very carefully.
Maybe most people aren't as careful about their health care as I am… but that's a moral hazard problem. As such it is a market failure, but again, not because it can't work, simply because we have structured it wrong. Perhaps thats why when you say “…[a] public insurer is not affected by doctors' happiness” it worries me! I *want* my doctor to be happy to treat me. The last thing I want is someone just “putting in the numbers” when it comes time to tell me what to do about my bad ticker.
August 7, 2009 at 10:20 amThanks Markus Kolic and ColoradoMatt. After more than a year (yeah, I know it goes back to Truman, but this most recent round) of health care reform “debates” of gut-wrenching stupidly and hysteria, it is a real pleasure to read two adults engaging in reasoned discourse.
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August 14, 2009 at 6:55 amGreat article…just wanted to encourage you to cover why the Insurance Industry is in favor of co-ops and opposed to a public option. Stocks for the Insurance Industry soared at the idea the White House might be willing to substitute co-ops.
Co-ops do not affect Insurance Industry pricing (GAO study done March 2000). Co-ops that succeed (e.g. blue cross/blue shield) are bought up and run by the Insurance Industry to keep prices steady. They remain non-profit but do not affect % of GDP or price to the consumer.
Nothing prevents the Insurance Industry from buying up, buying out, or even starting co-ops to prevent real competition. Without real competition the Insurance Industry will not lower prices. This will increase the % of GDP we spend on healthcare already unsustainable.
The top 10 rated countries have universal coverage, require non-profit health care whether it’s public or private sector, and have sustainable % of GDP.
Because we have a for-profit Insurance Industry we pay approx. $4-6000 more per person than any other industrialized country, yet we don’t have universal coverage and we are rated 37th as a nation for our Health Care (just above Costa Rica).
We are paying Billions for insurance industry advertising, exorbitant salaries, and billions more for the insurance industry to lobby against us to increase their profits and remove competition. Without a non-profit public option, the Insurance Industry will not lower costs.
The Blue Dogs are deceiving themselves and the public. Co-ops are absolutely not a viable competition to bring down costs. This is being done at the expense of our citizens health, financial stability and our nations solvency.
August 22, 2009 at 4:40 pmI agree with you entirely: Co-ops will not work. The current competitive market place does not work. US health care as we know it does not work. However, the point of my analysis is to also point out that a non-profit public option will not work either. It's just more of the same. It goes back to the notion of trying to optimize a bad system rather than replacing the system all together. My proposal is for real reform in the form of a new way to pay for healthcare. Asymmetric information prevents insurance from working efficiently in this industry. So why does the government want to get into the insurance game? They are trying to combat the side-effects rather than the root of the cause.
September 9, 2009 at 10:30 pmIt has nothing to do with Asymetric Information. That's the most ridiculous complex convoluted argument and has nothing to do with our system. It is very simple. We have a “for-profit” system. That is the problem. They are financial giants and we cannot “overhaul” the entire system at once.T
The only option is to force them, through competition, to stop colluding with their own non-profits to bring down cost. In this case you cannot prove collusion. Non-Profits just write off exorbitant salaries, advertising, campaign contributions and spend more to lobby against us to increase profits and remove comptetition.
Even if they brought down costs it is fundamentally wrong, unethical and a conflict of interest to pit profits against patients. Government run health care, as in Medicare, only has a 4% overhead. The reason it's going bankrupt because it is used to hold money paid in over decades, then at 65 when seniors need the most expensive care, we pay the bills. A government run public option is absolutely nothing like this. The services would be the same, but it is exactly like a non-profit private insurance without the advertising, exorbitant salaries, and billions to lobby congress.
Without a viable Public Option. United Health Group and others will run successful non-profits, writing off billions in advertising, exorbitant salaries and lobbyists. They will not lower costs because that affects the profit margin for the entire industry.
There will be no viable competitor. Costs will not be lowered. We will have “Romney Care” where there is plenty of competition between private insurance: “Bay State health insurance premiums highest in country.” ( Kay Lazar's article in the Globe)
We will be forced (”mandated”) to buy into, and subsidize, the massive increase of profits for the Insurance Inustry. This is unacceptable!
I wish we could overhaul the whole system and have stricly single-payer – but that's not going to happen
September 11, 2009 at 1:31 amHave something to add?