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November 04, 2009

Comments

Tom

It's worth noting that the bill is not projected to increase the budget deficit, and in fact is projected to decrease the budget deficit. Most of the bill is paid for by cuts in Medicare, taxes on insurance packages valued over a certain amount, and taxes on high income earners (over $1 million household).

It's also not clear to me how universal health care is a net loss for the country. If health care were made free for me tomorrow, I wouldn't immediately go to the doctor's or a hospital. People need health care when there's something wrong with them, and they don't need health care when there's not something wrong with them. The demand for health care will not suddenly go up upon passage of this bill. Ideally what will happen is that private insurers either go out of business or cut their profit margins considerably. In either case, insurance premiums will decrease for everybody: the very poor will have free insurance, and everybody else will have cheaper insurance (with the very rich subsidizing the very poor through taxes). The only people this bill will hurt are private insurance company employees and investors.

Nathan Smith

"People need health care when there's something wrong with them, and they don't need health care when there's not something wrong with them."

Some do, they're called hypochondriacs. But generally, demand for health care is contingent on events, people don't typically do it just for entertainment. But people do decide to get particular procedures and treatments etc. on the basis of cost. I've had physical therapy for a back problem that I wouldn't have gotten if insurance didn't pay for it. I turned down a dental mold when I found out insurance didn't pay for it. There are lots of expensive tests that people and doctors can do or not do, and cost will certainly be a factor. The demand for health care is downward-sloping. Yes, the demand for health care certainly *will* go up on passage of the bill, though probably over time rather than suddenly, unless this is prevented by rationing.

The claim that the bill is not projected to increase the deficit is propaganda, based on all sorts of budgetary gimmicks. And of course even the pretense of being budget-neutral depends on tax hikes. There are plenty of things wrong with tax hikes, not least that they destroy incentives to work and create wealth, but to the extent that we *can* afford to raise taxes we desperately need any money that can be raised to close the already enormous deficits we have, not to finance massive new spending.

Tom ends with this sentence: "The only people this bill will hurt are private insurance company employees and investors." But we know that's not true since Tom has already said taxes will be raised on high earners and Medicare will be cut.

Tom

I don't think you understand fully the mechanism and benefits of a single-payer system. Yes, taxes will increase, but people will no longer have to purchase private insurance, and ultimately people in general will end up paying less in taxes than they would have paying for insurance. Empirical evidence and reason proves this to be true. The fact that the house bill is budget neutral means that your plea "Dear China, please stop buying our debt" is cynical and defeatist. And why would I want to think like an economist given the field's recent record? Maybe economists should have more humility and less hubris.

Nathan Smith

The "empirical evidence" you refer to is undoubtedly that countries with socialized medicine like France and Canada spend a smaller share of GDP and live (slightly) longer. The second fact is sometimes taken as evidence that the quality of care provided is not inferior, which is complete balderdash: life expectancy depends on many factors, of which health care is far from the most important. It is true that they spend less. But they do so through rationing. They spend a lot less on expensive equipment and tests, they have wait lists, and they use US-developed drugs without paying their fair share of the development costs. You seem to think that a single-payer system magically conjures resources out of thin air. What it does, in Europe, is give less for less; and I doubt that it will do even that, here. We're too used to what Kling calls "premium medicine," we won't give it up.

You say that "reason" also proves that a single-payer system is cheaper, but this is bluster, since you haven't provided any argument. What reason really says is that when you lower the price of something people consume more of it. Sensible people, even if they do believe the purported "empirical evidence" that single-payer systems are more efficient, recognize it as a sort of anomaly, something a bit unexpected; they make roundabout arguments that try to explain it, but they are more or less conscious that these arguments would be unpersuasive if it weren't for what they think are the facts.

Feel free to explain what you think you mean by "the field [of economics'] recent record" that calls for "more humility and less hubris." I am at a loss to guess what you refer to.

One more thing. Let's accept for the sake of argument the bogus claim that the House bill is budget neutral. It still raises taxes. There's a limit to how much revenue you can get by raising taxes. If we raise taxes and *don't reduce* the deficit, that means less resources are available to pay back the undiminished debt. It's as if a mortgage debtor whose solvency was in doubt lost $50K gambling and told the bank not to worry because he paid his gambling debts from a small inheritance he had received and not from his regular income. Just as the bank has good reason to worry about how the debtor spends money he has from any source, China has reason to worry if the US uses up its power to tax its own wealthy citizens and spends it on health care handouts instead of on getting its fiscal affairs in order.

And of course, if we tax the wealthy heavily, they'll have less incentive to make lots of money, which reduces the revenue base. This is another factor that estimates of "budget neutrality" never take into account.

nato

I think the big gain to be made in health care is transparency. It can be extremely difficult for even educated individuals to judge what is and isn't necessary, what is and isn't covered, what is and isn't standard practice. Secrecy and private actuarial data are competitive advantages, and given that the patient has immensely less information than either provider or insurer, the incentives tend to be pretty perverse. The current system (if one can call it that) seems to rely on the compassion and altruism of doctors combined with the threat of political intervention in order to provide market signals. That's not a recipe for efficiency *or* health. I can't say I know what the right answer is, but I'm not sure it would be easy to do much worse.

ms

In my experience, anything with a very large government finger in the pie is not efficient. And it seems to me that the dems, especially the odious Pilosi, are being very dishonest about the cost of this. Anything that creates 111 new agencies, bureaus and the like will not be efficient. And since when do entitlements cost what they were touted to cost at the outset? It just doesn't happen. If this passes, the country's fate will almost certainly mirror California's. I have just been notified that 10% of our income will be confiscated by the state got the next few months--they say to be returned at tax time--the state is that desperate. They say the state is just borrowing the money for awhile. I seriously doubt I will ever see that money--10% of our income with Christmas approaching, and we already pay huge taxes here in CA. It's what's coming. In light of all this, I'm really quite surprised that you libertarians would be behind this big government healthcare move!

ms

FOR the next few months

Tom

The U.S. health care system is driven largely by market forces, which are predicated on the profit motive. The theory behind the U.S. system is that private health insurance companies seeking to maximize profit will compete with each other, thus driving down costs.

How well does this theory work in practice? From 2000-2004, profits for the top 17 U.S. health insurance companies rose 114%; in contrast, the profits of companies in the S&P 500 rose 5% during the same period. Simultaneously, the number of uninsured individuals grew by six million people, and health insurance premiums rose 60%.

This situation suggests that insurance companies have an incentive to price people out of health care to maximize profit. The methods by which private health insurance companies achieve this include denial of insurance to people with pre-existing conditions, heavy utilization review, and “cherry-picking”.

Single payer saves money by reducing administrative costs, and it greatly facilitates cost control because of its centralized administration. Physicians, hospitals, and insurers devote a large amount of money to handling claims and hiring administrative staff to deal with billing. These costs, along with costs like marketing and advertising, are among the administrative costs that would be saved by switching to a single-payer system. When a health care system has a single payer and only one set of rules, cost controls can apply to the entire system.

The status quo is unacceptable. National health spending is expected to reach $2.5 trillion in 2009, accounting for 17.6 percent of the gross domestic product (GDP). By 2018, national health care expenditures are expected to reach $4.4 trillion—more than double 2007 spending. National health expenditures are expected to increase faster than the growth in GDP: between 2008 and 2018, the average increase in national health expenditures is expected to be 6.2 percent per year, while the GDP is expected to increase only 4.1 percent per year. In a word: unsustainable.

According to one of Nathan's recent posts, he thinks the system we have now is fine. Why?

Tom

In response to ms:
The congress has actually been quite pessimistic about the costs of the plan and are most likely overshooting it a bit. Obama's goal is to be as honest and forthright about the costs as possible, and he has reiterated again and again his opposition to any plan that will add to the budget deficit. I trust Obama and am therefore inclined to believe him.

Why do I support a public option, or some variation thereof, even though I'm a Libertarian? Because the insurance market is parasitic in a capitalist system. I don't want an insurance provider that is highly efficient, because that efficiency translates to maximization of profits and denial of service. If there were a public option for auto, home, and health insurance, you betcha I'd sign up for it. Insurance is just about the only thing I'm in favor of nationalizing (that and maybe oil production). For all other industries I'm in favor of private-market capitalism.

Nathan Smith

I don't think Tom can be called a libertarian on this issue. In fact he writes like a Marxist, regarding profits as theft, and refusing to recognize that administration, advertising, and other operations that are not directly and obviously productive have value. So far as that goes his argument could equally justify nationalizing the restaurant sector, the automotive repair sector, agriculture, you name it. It's interesting, and deeply disturbing, that a libertarian can turn into a Marxist so easily. And yet in a way it's unsurprising. Libertarianism has a proud intellectual heritage, star-studded with figures like Locke, Jefferson, Bastiat, Hayek, and Milton Friedman, yet the juvenile, so to speak, "street" libertarianism spawned on college campuses tends to be characterized by limited understanding of these great philosophers; it is crude and paranoid and simplistic, often destitute of a sophisticated understanding of how the free market works even when it uses the free market as a slogan. While this general trait of libertarianism was one of the things that bothered me about Cato, I think it's safe to say that Cato won't be supporting Pelosi's health care bill.

To argue with Tom's statistics a bit, why does he cite 2000-2004? Part of that period was a recession. It's not surprising that health insurance, a relatively acyclical business, would do well during a recession relative to other businesses whose demand is more cyclical. And did health insurance profits rise fast because they were becoming very high, or because they were previously low, or both? And what is the measure of profits-- absolute dollar profits, or profits as a share of... well, say, of market value? Of course when a business is subject to political risk, as the health insurance industry has been lately, that will tend to suppress its market value and make its profits look higher in those terms. And what happened after 2004? I don't think Tom's statistics allow us to draw any conclusion about whether the level of profits in the health insurance industry is appropriate or not.

Tom keeps harping on denial of care for pre-existing conditions. But to provide insurance that covers a pre-existing condition is like selling fire insurance for a house that's already on fire. You need to have insurance before the condition develops. If you don't, you're liable for the costs of treatment. I think there's room for a good deal of improvement in insurance design so that the NPV of lifetime compensation occurs at the time a malady is revealed; and insurance design would improve if the market weren't distorted by employer-based health care plans. But denials of care for pre-existing conditions isn't some bug of the health insurance system. The solution is to get insurance before the condition develops.

Nato remarks that "I'm not sure it would be easy to do much worse;" I would add that I'm not sure it would be easy to do much better. Partly the worse/better is undefined. I mean, I'd certainly admit that single-payer with tight rationing has some advantages. It might be more egalitarian and cheaper, at the cost of not providing high-quality care to those who can afford it and not fueling medical innovation (which may be the most important factor of all in the long run). I would recommend some changes. Linking health care to employment is stupid; tax employer health care benefits so that goes away. Too much of health care is already nationalized through Medicare and Medicaid; roll that back. It would be nice to deregulate entry into the medical profession. Above all, we should discourage insulation of health care consumers from costs. Catastrophic health insurance is fine but people should pay out of pocket for treatments under a few thousand dollars. But is 16% of GDP too much to pay for health care, if that's what it takes? No. Or is 16% rather than 6% is too much extra to pay for US "premium medicine" over and above what they have in Canada and France? No, not necessarily. The decentralized decision-making of the market, with people taking into account their own needs, is the best judge. It's not perfect, not even close, but it's the best. Not that we have a free-market health care system now, we don't, but if we did it might not look all that different from what we have.

Tom

Equating insurance, which is a hedge against good things, to other industries, which are the good things, is profoundly confused. The ideal scenario for an insurance company is for it to never have to pay an insurance claim, or in other words, to not have to provide a service to a customer. The ideal scenario for a retailer is to sell all of its merchandise to customers. If an insurance claim is not paid, nobody benefits but the insurance company. If a retailer sells merchandise, both the retailer and the customer benefit. Insurance companies design their plans to minimize the amount of money they have to pay out, but what would be ideal for the nation is for insurance companies to pay out every penny that does not go towards administrative costs. Why does Nathan think it's so good for insurance companies to gamble on people who are the least likely to even need the coverage? It's great profit for insurers, but it's not very great for people who actually have health problems.

Walmart made a ton of money by innovating supply chains, warehouses, and the like. Through their superior organization, they were able to offer the best prices for things people needed, and they've pushed their competitors to adopt similar efficiencies. In the insurance market, efficiency means finding creative ways to get people to pay money without having to give anything in return. The insurance industry is so clearly parasitic, it baffles me that Nathan can't understand the difference between it and other services.

Tom

Here's an intuition pump. A small village operates in a free market and they have one doctor. If nobody gets sick or injured, then nobody needs the doctor, and the doctor has to beg on the street for alms. If every body gets deathly sick and injured, then the doctor can charge whatever she wants because she's in such high demand and the people are willing to pay whatever it takes to save their lives. No villager wants to lose everything when they get sick or injured, and the doctor doesn't want to starve in the event nobody needs her, so they all decide to hedge against these scenarios by chipping in equally to pay for the doctor's salary and maybe a little extra if the doctor has to work extra hours. This is how a single-payer system should function on a micro-scale. If instead the villagers decided to pay a private insurance broker who cherry picked the healthiest villagers and denied the unhealthiest, denied the claims of some sick villagers because of their policy, and redacted others because of technicalities, then the villagers would have the US system.

Nathan Smith

Tom writes:

"Equating insurance, which is a hedge against good things, to other industries, which are the good things, is profoundly confused. The ideal scenario for an insurance company is for it to never have to pay an insurance claim, or in other words, to not have to provide a service to a customer. The ideal scenario for a retailer is to sell all of its merchandise to customers."

Let me explain why I think Tom is making a mistake here. A transaction consists of two sides: A does something for B, B does something for A. Typically one side is a good or service, the other side is a money payment. A and B will typically regard one side of the transaction as a benefit and the other as a cost. They agree to the transaction because they think the benefit outweighs the cost.

Of course, people would always prefer to get the benefit of the transaction *without* paying the cost. A retailer may regard it as ideal to sell all its merchandise, but it would be even more ideal for the retailer if they could receive all the customers' payments without providing the merchandise. Giving customers merchandise is a cost that the retailer must incur in order to get access to consumers' payments for it. In exactly the same way, the insurance company gets a benefit, customers' premiums, while incurring a cost, an obligation to pay claims. Exactly like the retailer, they would prefer to receive the premiums and not pay any claims. But contracts are written that make it illegal for them to do so.

But what is to prevent insurance companies from cheating by accepting premiums but not paying claims? This problem, too, is not in any way unique to the insurance industry; all kinds of market transactions have problems with defining and enforcing contracts. Can the supermarket sell you rotting produce, or is that a contract violation which entitles you to a reimbursement? What remedies are available to you if Amazon takes your credit card payment but doesn't send you its product? Is it false advertising if a restaurant advertises as "healthy choice" a menu item that is high in saturated fats and has a lot of calories? Does your lease require you to keep the lawns mowed and the gutters clear of leaves? Possibly these contractual issues are especially difficult to negotiate and litigate in health care, although I suspect this argument is exaggerated. But it's at most a matter of degree, not of kind.

re: "If an insurance claim is not paid, nobody benefits but the insurance company."

Not true. First, "the insurance company" includes its shareholders and/or managers and/or workers, so that's already a broader set of people. But second, *other customers* of the insurance company benefit. If the insurance company turns out not to be liable for a particular claim, it can afford to offer lower premiums to its customers. It will do so to gain market share, or to retain market share vis-a-vis other insurance companies that are also able to avoid a particular claim.

"Insurance companies design their plans to minimize the amount of money they have to pay out..."

Presumably not. After all, they could minimize the amount of money they have to pay out by not going into the insurance business in the first place, then they'd pay out zero. A profit-maximizing insurance company presumably tries to maximize the *difference* between the premiums they take in and the claims they pay out plus any litigation fees they are compelled to pay. Denying claims which they have contractually committed to pay is not costless: it can lead to costly legal action against them, and/or it can damage their reputations, causing a loss of customers, and therefore of premiums.

"what would be ideal for the nation is for insurance companies to pay out every penny that does not go towards administrative costs."

I don't know what is meant by "the nation" here: for shareholders in insurance companies, of course, it would not be ideal for profits to be zero. But it wouldn't be ideal for anyone else either. When investors hazard their capital, they need to get a return, otherwise they won't do it. If health insurance profits were zero, no one would invest in health insurance, so there wouldn't be any health insurance, which would be bad, since health insurance provides a valuable service. Tom's argument sounds a bit like the Marxist fallacy that the world would be better if capitalists didn't make any profits.

"Why does Nathan think it's so good for insurance companies to gamble on people who are the least likely to even need the coverage? It's great profit for insurers, but it's not very great for people who actually have health problems."

Of course people who are unlikely to need the coverage are good customers for insurance companies, but they're also unlikely to be willing to pay as much, both because they're running smaller risks and maybe could better afford to pay out of pocket, and because, thanks to competition, people like this are likely to have offers of cheap health care from other insurance companies. High-risk, unhealthy people are more expensive to insure, so they will have to pay more, which is perfectly natural and appropriate. Provided that they can charge higher premiums to high-risk, unhealthy people, insurance companies will be glad to take them on.

"In the insurance market, efficiency means finding creative ways to get people to pay money without having to give anything in return."

In any industry, not just health care, it's good for profits if you can find a way to get people to pay money without having to give anything in return. But since people have to consent to give you their money, that's usually not easy to do. A retailer could try to make a business model out of conning people into paying top dollar for trash, rather than creating real value. No doubt some have. Health insurance companies could do the same. Or they could focus on helping customers make informed health care choices, making transactions transparent and user-friendly, and designing coverage policies that gave people peace of mind without encouraging waste.

"The insurance industry is so clearly parasitic, it baffles me that Nathan can't understand the difference between it and other services."

Let me try to explain why the health insurance is not "clearly parasitic." Sometimes in life people are subject to certain kinds of risks, uncertain and perhaps unlikely events which, however, if they happen, will be somewhere in the range from bad to catastrophic. Economists sometimes call this a "risky prospect." An expected loss can be calculated, equal to the probability of the bad event times the loss incurred if the bad event is realized. But a person might be willing to pay a good deal more than the expected loss *ex ante* so that if, *ex post*, the bad outcome occurs, the cost can be mitigated by a third party. Now, in a large population, the number of bad events that will occur is typically much less uncertain than for individuals. So, an insurance company can undertake to cover individuals' losses when major bad events occur, in return for premiums that are greater than the expected loss, but less than what individuals would be willing to pay to eliminate the small chance of being ruined. The insurance company can turn a profit, while at the same time benefiting its customers by giving them greater security. That's the concept of insurance.

Tom

Since insurance for emergency health care seems like a great idea to Nathan, presumably he would be in favor of crime insurance as well. Let's say we don't pay police officers with public money, and instead pay through crime insurance claims, and crime insurance is only provided by the private market. In areas of high crime, insurance premiums would also be high given the risk to the company, and they would selectively decide which people they're willing to cover based on the risks involved. Not everyone would be covered, and thus if the police prevent or solve a crime for someone without insurance, the cost would be passed on through to the insurance claims of others. Now, maybe someone gets burgled and they have crime insurance, so they call the police, give them their insurance information, and the police catch the criminals. The police bill the insurance company $20,000 for man-hours, gas, maybe bullets, and personal risk. The insurance company looks into your file and notices that you failed to mention that you live next to a registered sex-offender, a fact unrelated to the risk of burglary, but because it was an undeclared risk, they redact your contract and deny your claim. This scenario happens a lot with private health insurance. You can find testimony of health insurance executives on YouTube who detail the terrible things their companies do to maximize profit. Nathan may call me a Marxist for noting that this kind of system is broken, and that it would make more sense for the public to pay the police with taxes, but I don't think he's a good judge of basically anything, to be honest.

Nathan Smith

I'm not calling Tom a Marxist. I am saying that much of his reasoning is vitiated by characteristic Marxist fallacies. And the fact that Tom commits Marxist fallacies in his reasoning is separable from his view that the "system is broken." It's quite possible to argue that the system is broken without committing Marxist fallacies.

Crime insurance does exist, in a way. Renter's insurance, I believe, will reimburse you in the event of a robbery. And if you left your doors unlocked or told lies about the kind of neighborhood you live in, that might be grounds for denying your claim, and rightly so. Locks themselves are an example of a private crime prevention initiative.

But of course, the market requires a basic enforcement of contracts and property rights to function, so crime prevention can't be left wholly to the private sector. The difference is that criminals take your belongings without your consent. Doctors and insurance companies don't.

nato

"Possibly these contractual issues are especially difficult to negotiate and litigate in health care, although I suspect this argument is exaggerated."

Nathan suspects this is exaggerated. Well, he's free to do so, but it is essentially the crux of the main argument against the current system. Health care consumers are in a worse position for negotiation, litigation*, and generally sending market signals through informed choice than in any other market, which has serious consequences.

The incentives are perverse. Nathan says "to provide insurance that covers a pre-existing condition is like selling fire insurance for a house that's already on fire." Actually, it's usually a lot more like selling fire insurance for a house with faulty wiring. This means the individual has a strong incentive not to call the electrician to inspect their wiring until after they've caused a fire, because if the electrician finds a wiring problem they'll never be able to get fire insurance again. I can name, off the top of my head, at least six instances in my own life where people I've known have chosen not to take proper care of medical conditions because to see a doctor about them would have imperiled their insurance.

There's tremendous money to be made from "wellness", because managing potential illness is massively more efficient than responding to crises, yet there's no market mechanism** for the best company at promoting wellness for the least money to profit from that. So, that's not what happens. Instead we have a system that is fabulous at providing the very best extreme care in the world. This isn't efficient in the aggregate, but it does demonstrate that the market is very good at maximizing the provision of what can be monetized. Perhaps we could move to some public/private hybrid system where health management care is insured and ensured by the government and health crises are left to private insurance, though I haven't thought of a way to do this that doesn't lead to most of the same problems.

Profit isn't theft by any means, but profit divorced from utility occupies the same place in the economic firmament as rent-seeking. It's reprehensible even from a libertarian perspective, because you're supposed to make profits off of providing utility, not *not* providing utility. But that's pretty much how it works now. It might have made sense in the past when workers tended to stay at the same firm for a lifetime, thereby rationalizing incentives for both consumer and insurer, but it's insane today.

We should just be glad that, by and large, health care providers are such good people. If they weren't, dentists would encourage kids to eat candy and doctors would be happy with smoking and obesity. Instead we get a largely free ride there in that market signals are mostly unnecessary to guide providers toward best practices. But insurance companies? Not so much.

*As are providers, of course. The only relatively safe party is the insurance company.
**Yet! Perhaps as effective one can be devised.

Nathan Smith

I would be interested to know what the evidence is that "wellness" is so much better than crisis response. The blogs I read tend to link to evidence that preventive care is overrated. Perhaps they're biased. But who is doing the studies that support "wellness?" Of course, I can readily believe that if people got regularly advice about how to stay healthy *and took it* they would be healthier. But advice about how to stay healthy is often at odds with what people like to do. Now, I can easily imagine a non-economist conducting a "study" that basically says, "Hey, it would only cost $10M to tell people not to eat so much saturated fats, and you'd save $500M worth of surgeries and early deaths! Yay, 'wellness.'" Well, maybe, but something is omitted from this analysis: People *like* to eat fatty foods, and the main cost of getting them to change their lifestyles is not the cost of explaining to them that fatty foods are unhealthy, but the pleasure they lose by giving them up. So is the research on the economics of 'wellness' care undertaken by economists, who would probably do it competently, or non-economists, who probably wouldn't?

This is clever: "We should just be glad that, by and large, health care providers are such good people. If they weren't, dentists would encourage kids to eat candy and doctors would be happy with smoking and obesity." But erroneous. I don't doubt that doctors and dentists really do care about their patients' health, rather than being purely profit-seeking. And I think that matters. But it wouldn't really be in a dentist's interest to encourage kids to eat candy, because (a) markets are sufficiently fluid that the extra business for the dental profession thus created would likely go to someone else, and (b) kids and parents know less than dentists but they know enough to be suspicious of such advice, and a dentist who loses patients' trust is sure to lose their business, too. A lot of "market failure" arguments turn out to be fallacious on closer examination.

Nato writes: "Health care consumers are in a worse position for negotiation, litigation*, and generally sending market signals through informed choice than in any other market..." Could some kind of empirical test of this claim be proposed? Nato is making the closest tenable argument to Tom's untenable ones. He's not saying that health care is some industry from Mars in which none of the laws of economics apply, but simply that problems present in many industries are present in health care to a unique degree. I doubt that even that is true, however. What really makes health care different is that people view it as an entitlement, and that distorts everything. That's what makes cost insulation seem normal. That's what makes us compel hospital ERs to treat the uninsured. That's what makes us regulate entry to the medical profession so rigorously (it's a great pretext for AMA rent-seeking). And these abnormal policies, motivated by the widespread view of health care as an entitlement, give rise to perverse pricing and regulation and thus to market failures that aren't really a function of the market. If the view of health care as an entitlement were completely expunged from attitudes and policies, I think markets and the common law could ultimately handle the other issues with a pretty high degree of efficiency, no worse than the automotive repair sector or other insurance industries. But that's a conjecture; I won't claim to be able to offer much empirical support. I don't see the empirical support for Nato's position, either.

nato

Treating diabetes is very inexpensive (a couple dollars a day). Treating a diabetic crisis is incredibly expensive (tens of thousands of dollars, sometimes over and over again). Treating certain kinds of back injuries with physical therapy and cortisone injections costs up to several thousand dollars in a year, but the surgical alternative after nerve irritation can gotten to a critical point costs tens of thousands of dollars in surgery, then thousands of dollars worth of physical therapy. Treating cancer early might cost ten or twenty thousand dollars, and treating cancer late might cost a hundred thousand dollars and kill the patient anyway. High quality post natal care for premature baby might cost a hundred thousand dollars but prevents complications that might cost a million over the course of a lifetime. And so on

These figures are all taken directly from personal experience. I could definitely cite examples of folks who are obese or smoke or whatever, but not nearly as many as people who either didn't want to or couldn't get proper health care at one time and someone had to pay for it later*. That's huge inefficiency that is essentially unavoidable because of the perverse incentives of the industry. I don't think that the government has to be the solution. I tend to suspect a more intelligent system of laws and industry standards could bring the power of the market to bear in a productive way, but so far as I know there aren't any examples of this. Instead, we have horribly inefficient government systems around the world that nevertheless appear at least competitive if not better than our own. We'd be safest to copy their example, though we could try to innovate our own.

"What really makes health care different is that people view it as an entitlement, and that distorts everything" is true, but what is the solution? Is Nathan really suggesting that those without proof of insurance/self-insurance be barred from ERs? That might save money, but I'm pretty sure it's a political non-starter if nothing else. Also, are we to expect healthcare consumers to moderate their desire for health when faced with a crisis?

We should accept those problems as given and then work from there, not say "if only people didn't X" and then essentially throw up our hands. Given the oddities of the healthcare market, an odd, semi-market solution seems indicated. The best available actions for which we have a lot of data would seem to be government offerings in the insurance market.

*And the converse, where successful preventative treatment avoided extremely expensive outcomes

Nathan Smith

I actually didn't say whether I agreed with health care being treated as an entitlement or not, though generally I don't understand the moral case for *any* welfare-type entitlement on a national level unless/until it's feasible to implement it on a worldwide scale. If we merit it by virtue of being human, all humans merit it! But I was just addressing the economic question, what is it that's special about health care? I don't think it's the especially severe market failures. I think it's the belief that health care is an entitlement that distorts things.

To Nato's examples in the first paragraph. Diabetes *is* treated on a 'wellness' basis, already, no? You always hear about diabetics taking their insulin. The market agrees with Nato and is doing it already! For all the other examples, Nato leaves out the crucial variables. (a) What's the *ex ante* probability, at the time that a preventative treatment could be undertaken, that the malady will develop into a crisis? (b) What are the costs of testing? Even if the cost of testing is only a fraction of the difference between the costs of pre-treatment and crisis treatment, if we have to test hundreds to find and nip in the bud one positive case, it might be a losing proposition. Similarly, if out of five whom we pre-treat only one would have reached a crisis, and the pre-treatment is four times as expensive as the crisis treatment, it's cheaper just to treat the crisis cases (though it might save pain and suffering to do prevention). We'd need a different set of facts to form an educated guess about whether Nato's hypothesis is right.

Also, doesn't the US already engage in more of this kind of preventative medicine than other countries? MRIs and colonoscopies and the like are, I think, one of the big reasons US health spending is so much higher.

Nato writes: "Instead, we have horribly inefficient government systems around the world that nevertheless appear at least competitive if not better than our own. We'd be safest to copy their example, though we could try to innovate our own." This is a non-sequitur. If it's worth going to the trouble and risk of attempting to copy foreign institutions, there's got to be a demonstrably big payoff. Nato is wisely reluctant to assert positively that foreign government-run systems are better, let alone better by a wide margin. He says they "appear at least competitive." That appraisal is probably fair, but it argues, if anything, for the status quo, or, better yet, for "trying to innovate our own," which might "bring the power of the market to bear in a productive way" and yield a system that is not "horribly inefficient."

Bear in mind, too, that other systems are parasitic on ours, since the US is where most medical innovation takes place, since it's the only large-country medical system that is capitalistic enough to create strong incentives for it. In the long run, that may be more important than today's high insurance premiums or the uninsured. Even at present, though, I believe polls show that most people are fairly satisfied with their health care.

nato

"Diabetes *is* treated on a 'wellness' basis, already, no?"

A perfect example. Insurance companies have a large incentive to reduce losses by covering diabetes treatments. If you have health insurance, your insurance company is likely to offer its very best coverage rates for ongoing diabetes treatment because it's absolutely in their best interests that you get the very best care.

Of course, there are even greater liability reductions to be had through just not offering insurance. Diabetes is usually considered an "uninsurable" condition, and additionally will drive up the cost of even non-diabetes-related coverage. Consumers, then, have a financial incentive to not get diabetes diagnosed or treated in order to retain the ability to get insurance.

Of course, the law mandates that company-sponsored health insurance cannot exclude preexisting conditions or the insured, so diabetics are usually okay as long as they don't become unemployed for any real length of time.

"Nato is wisely reluctant to assert positively that foreign government-run systems are better"

Well, there is a wide spectrum of national health systems, and some in the developed world don't appear clearly better than our own. Others do. I believe the statistics that show people living longer and more healthily in most other countries, and those countries spending a significantly smaller percentage of their GDP on health care. I really think it would be tough for us to do worse. I say that as a person who has fantastic health insurance, to the point that my corporate health care plans could conceivably fall under the excise tax on "cadillac" health plans.

On the other hand, it would be nice to think that if I left my current job for an entrepreneurial opportunity while a parent or whatever that I would not be in dire straits if the new venture struggled at first or even failed. Certainly many business managers surveyed give other developed countries high marks on business climate regarding health care because the assurance makes workers more willing to take a chance.

Nathan Smith

re: "I believe the statistics that show people living longer and more healthily in most other countries, and those countries spending a significantly smaller percentage of their GDP on health care."

Right, but you understand that this fact really proves next to nothing about the relative quality of health care systems, don't you? Health outcomes depend on many factors other than health care, including diet, exercise, stress, and other lifestyle factors, as well as genetic traits. It's as if you were to say that heating systems in Arizona must be more efficient than heating systems in Michigan because Arizonans spend much less per month on heat. Good empirical analysis would have to control for other factors, e.g., by looking at how particular maladies are handled.

Question: Would you really have an incentive not to get diabetes diagnosed or treated? I mean, you might save money, but that sounds pretty life-threatening. I would certainly say that the demand for health care is downward-sloping in general, but insulin for a diabetic seems like the strongest case of this not being the case.

Ideally, insurance contracts would be designed so that when a chronic condition becomes evident, a patient's current insurer would be obliged to create a fund that would cover the costs of that condition permanently. The patient could then switch insurers without the chronic condition coverage being affected. Insurance might evolve in such sophisticated ways if the market weren't hobbled by the prevalence of employed-based health coverage. On the other hand, a chronic condition which can be treated cheaply doesn't really seem to be what insurance is for. In the paradigm case, insurance is against one-off, catastrophic risks, not small ongoing expenses. It might not be worthwhile to insure against the chance of developing diabetes, since developing diabetes would tend to take the form not of a sudden financial hit that you couldn't cover, but of a limited reduction in lifetime disposable income. Of course, if people are insured against catastrophes but not against chronic conditions, that could create a bias towards waiting for catastrophes, which in turn might give insurance companies an incentive to cross-subsidize insurance against developing chronic conditions, in order to avoid later liability for catastrophic health expenses. All this might entail some inefficiency. Except that, again, I find it hard to believe that someone would consciously avoid diagnosis for diabetes and wait for a crisis to occur simply to keep their insurance premiums down, since they would be taking a life-threatening risk. OK, maybe *someone* would, but is this a serious problem?

Nathan Smith

Not for the first time, I've been inordinately angry and condescending in the course of this discussion, and I want to apologize, especially to Tom. Tom's remark that "I don't think he's a good judge of basically anything, to be honest," is touchingly mild compared to the way I've treated him. I'm sorry.

Nato

"Of course, if people are insured against catastrophes but not against chronic conditions, that could create a bias towards waiting for catastrophes, which in turn might give insurance companies an incentive to cross-subsidize insurance against developing chronic conditions, in order to avoid later liability for catastrophic health expenses."

And thus Nathan comes around to mentioning exactly why the incentives are so perverse. Certainly the idea of one's current insurance being on the hook for chronic conditions permanently has some potential. The big efficiency payoffs to be made in health provision is somehow moving the treatment from reaction to catastrophic events toward maintenance of good/stable heath, and the market incentives are at best weak now. The point of competition in health insurance appears to be in reducing avoiding liability through 1)avoiding covering those with elevated risk and 2)denying claims of those covered. Providers have a strong incentive to charge as much as they can when presented with catastrophic cases, since customers in those circumstances aren't in any position to do comparison shopping. We can feel a further sympathy for sky-high rates because we know that those providers are also stuck providing critical care to many people for free or nearly so. We can feel further sympathy for those getting free care because in a large proportion of cases they couldn't really afford health insurance in the first place.

"Would you really have an incentive not to get diabetes diagnosed or treated? I mean, you might save money, but that sounds pretty life-threatening."

I thought perhaps I should clarify this point but I ended up passing over it. The economic incentives are largely against dealing with the health care problem properly. One ignores it and hopes it goes away, or tries to treat it oneself, or whatever else to keep it off the books, so to speak. Of course, a sober analysis would tell one that it's not worth it and one had better flirt with bankruptcy now than bankruptcy and death later, but the overall point is that even though *all* incentives do not militate against proper treatment, a number of perverse market incentives do.

Nathan Smith

But what I'm saying is that I'm not convinced that this is a *major* cause of efficiency, certainly not that it is a cause of efficiency so large as to account for the difference between 16% of GDP and 6% of GDP or whatever the difference is. The diabetes example is illustrative but ultimately weak, since it's hard to imagine that many people would really ignore diabetes to keep their insurance down. The other examples of 'wellness'/preventive care Nato mentioned aren't obviously persuasive, since the preventive solutions he proposes (a) involve lifestyle sacrifices and/or (b) are subject to the probabilistic problem that a treatment today may be for a problem that has a high probability of not occurring anyway, so that simply comparing the cost of the crisis treatment and the cost of the preventive measure is not appropriate.

I'm also skeptical about whether a government-run system could really handle this better. Bureaucrats have a tendency to engage in "minimal squawk" behavior: they want to avoid being on the hook for a big disaster, otherwise they show limited initiative. If bureaucrats are faced with limited resources, will they really take the initiative to engage in preventive care, rather than just making sure there are no dramatic deaths on their watch? I'm not an expert in comparative health systems, but from my dabbling the sense is that foreign systems save money by paying doctors less and having less sophisticated capital equipment. Administration and advertising is small beans, the main difference, other than Americans just being a bit less healthy for lifestyle reasons, is "premium medicine," expensive tests and procedures that don't add much to life expectancy statistically but that people seem to be willing to pay for, at least indirectly.

If the difference really is that European systems do better at 'wellness'-type recurring small treatments, that would call for different policy solutions. But from my admittedly scanty experience and reading on the issue, I don't think that's the major factor.

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