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Archive for March 2010

Summaries of Posts on Financial Crisis and Health Care

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Because blogs post your most recent stuff first, extended explanations end up backwards. For that reason, I put together summaries of both the financial crisis discussion and the health care posts. With these, you get them all together and in the right order:

Financial Crisis

Health Care

Dang, they are both over 20 single-spaced pages. Wish I got paid for this!

Written by rommeldak

March 29, 2010 at 8:14 am

Health-Care Economics: Part Four

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Review of Parts One through Four

This will be my last post on this topic (though doing these has made me think about writing a couple of social security–which cannot logically go bankrupt–and the greatly-misunderstood national debt). Before I go into the current reforms, let me review posts one, two, and three.

Post One: The question of whether to employ a market or non-market solution (or some combination thereof) should not be fraught with philosophical, moral, and religious implications any more than the choice of whether to use a Phillip’s-head or flat-head screwdriver. Policy should be a function of pragmatic decisions made with a clear goal in mind, and we should be willing to experiment. In a democratic society, one of our constant goals is that social systems be accountable to the people. Markets do not guarantee this any more than elections do. Strangely enough, however, we appear to spend much more effort defending markets than we do democracy in this nation. In fact, given the horrible fear of government power and the general lack of consciousness of the very real threat of market power, you would think that we lived in a dictatorship. I am not saying that we should trust government because we elect them, but that we should not trust business simply because we have “free” markets.

Part Two: There are industries, like restaurants and retail trade, where market-based solutions work extremely well because they are competitive enough to guarantee accountability. Other than for health and safety concerns, there is little pragmatic need for government intervention. Others are not nearly so competitive, however, which unfortunately includes health care. The AMA has been arguing for many years that consumers don’t actually have much choice when searching for health insurance. It is a highly concentrated (i.e., uncompetitive) industry.

Part Three: A pragmatic approach requires the specification of a goal. If we, as a nation, believe that our goal should be universal health care, then a market solution does not make sense, particularly one based on health insurance. Health insurers must make a profit, and therefore have an incentive to insure only those who don’t need really need insurance and to avoid paying claims. This not only conflicts with the goal of universal health care, but it means that insurers create a large and expensive overhead to manage these risks. A private option would be useful alongside the core, public system, but otherwise health care–if we are assuming it should be universal–should be treated like national defense, police protection, fire protection, and education.

Part Four: If we want an accountable and universal system, do the new reforms get us there, or at least a little closer?

Current Reforms: Do They Achieve the Goal?

Let me emphasize something here: I am not an expert on health care. My research specialities include exchange rates, macroeconomics (which basically means unemployment, inflation, GDP growth, and fiscal and monetary policy), and the economics of John Maynard Keynes. I feel pretty confident of everything I’ve written so far as it’s just basic economics. However, as I drift into more specific issues, I’m on thinner ice. I can speak in generalities, but I’m ignorant of exactly how specific parts of the regulations will have an impact. On the other hand, I’m not sure anyone is entirely sure! Here is my best effort…

I think we should start by making goals very clear. You can’t pragmatically evaluate a solution without knowing what you want to achieve.

GOALS

1. Universal health care: some minimum standard of health care, including preventative medicine, for all Americans. What level should we specify here? I honestly don’t know, but if we think we are the greatest country in the world, then surely we can achieve something along the lines of our peers: Canada, UK, Germany, France, Sweden, etc. Let’s at least move from the bottom of the infant mortality and life expectancy lists. Is top five or ten too much to ask? We already pay more than anyone else, surely we can get more for our dollar.

2. Eliminate Perverse Incentives: this is really a part of #1, but I thought it might be useful to separate it out specifically. If you are going to achieve universal health care, then you have to have a system that does not try to avoid covering those who most need insurance and to avoid paying when people do make claims. This is not consistent with providing universal care.

3. Accountability: If we, as a nation, are dissatisfied with some aspect of the system, there must be a means of addressing. Any reform should give us something that is at least superior to what we have now.

I wish I had hours and hours to peruse all the discussions of the reform that can be found online, but I don’t. So I hope you don’t mind if I just pick out a list of features and discuss how they would affect the two goals above. I selected a Reuters story posted on InsuranceJournal.com as it appeared to lean toward reporting facts rather than expressing an opinion. I’ll repost the article below (the original can be found here http://www.insurancejournal.com/news/national/2010/03/22/108331.htm), and I’ll intersperse it with comments focusing on achieving goals #1, #2, and #3.

The U.S. House of Representatives approved a sweeping $940 billion healthcare overhaul Sunday in a two-step process that sends a Senate version of the bill to President Barack Obama for his signature and a package of changes sought by Democrats to the Senate bill.

The package of changes now go to the Senate for approval. The Senate is expected to take it up this week. If it passes unchanged it will then go to Obama for his signature. If any changes are made by the Senate, the package of changes will have to go back to the House for further action.

The legislation aims to extend coverage to 32 million uninsured people. Here are key provisions of the Senate-passed legislation and the proposed changes.

INSURANCE MARKET REFORM

The legislation would require substantial insurance market reforms that would bar insurers from excluding people for pre-existing medical conditions and prevent them from arbitrarily dropping policy holders.

Insurance exchanges would be created in which small businesses and individuals without employer-sponsored coverage would be able to shop for coverage. Plans offered on the exchange would have to meet minimum benefit requirements.

The proposed changes would allow dependent children to remain on their parents’ health policies until age 26.

The Senate bill also requires insurers to spend at least 85 cents of every premium dollar on medical care in small group markets and 80 cents in large group markets. The proposed changes also would require Medicare Advantage insurers to spend at least 85 percent of revenues on medical care.

Most of this seems consistent with the goal of universal health care. It bars insurers from dropping folks with pre-existing conditions (note that currently, you can be dropped even if you have a previously undiagnosed preexisting condition–that’s a mighty big window). It also makes sure that children have an option well through their college years, when other options would be difficult to find. To help folks pay for this, it will establish exchanges where risks can be pooled. Furthermore, it forces firms to spend 80 to 85% of premiums on medical care rather than overhead or as profit.

It seems to help #1(though I’m not sure it can entirely achieve it), but what about the perverse incentives? So long as these are private companies, they are still there. We can’t blame them–they have to eat, too. But by what mechanism will the most expensive patients be allocated among the companies? This is a problem because whichever one gets more of them as a percentage of total subscribers, they’ll have lower profits. They’ll be out competed and their subscribers will have to move to another company. This creates even more concentration in the industry, interfering with goal #3, accountability. If this is true, is it any wonder that the stocks of insurers, hospital companies, and drug makers rose after the reforms? Rather than the bill representing us giving power to the government, as the Tea Party folks argued, it’s more to the private sector. That would be great if free market = competition, but it doesn’t. My conclusion regarding these aspects of the reform: they help with goal #1, but don’t properly address goals #2 and #3.

COVERAGE MANDATES, SUBSIDIES AND MEDICAID

Individuals would be required to obtain health insurance. Those who fail to obtain coverage would face fines of up to 2.5 percent of income by 2016.

Firms with more than 50 workers who do not offer medical coverage could face fines of $2,000 per full-time employee.

Federal subsidies would be provided to help people with incomes up to 400 percent of the poverty level purchase coverage on the exchange. Proposed changes would sweeten those subsidies for lower income people.

Medicaid, the government health insurance program for the poor, would be available to everyone with incomes up to 133 percent of the poverty level, which stood at $10,830 for an individual and $22,050, for a family of four. Many states have eligibility requirements below those levels.

The proposed changes would get rid of a special deal in the Senate bill that would have provided more money to Nebraska to cover costs of increased Medicaid coverage.

In terms of goal #1, I guess it’s a good thing but it’s hard to see. On the one hand, being forced to buy insurance (like you do with your car, for example) sounds like a good idea if decent options are available, but if the industry stays as concentrated as it is then it just sends more money to those companies. That subsidies are being offered is extremely important, but I still can’t get past the idea that we are just subsidizing the highly-concentrated insurance industry that continues to have no incentive to cover anyone but the healthy and to impeded claims. How do we decide which companies get the expensive patients? And we should really try to completely cut the link between health insurance and employment, as it’s an unnecessary burden on employers. A state-run health care system would do that. No longer would the budding entrepreneur have to become an expert on health insurance in addition to their chosen area of focus. Employers don’t offer house or car insurance–why health? They shouldn’t. On the plus side, the subsidies mentioned above may help address a deep structural issue that has evolved over the past 20-30 years, that is the increasing inequality of income. But, in general, these aspects of the bill strike me the same way the first ones mentioned did: reform: they help with goal #1, but don’t properly address goals #2 and #3.

P.S. Is it constitutional to require folks to buy health care? Personally, I don’t really care. If it’s a good idea and it’s not constitutional, we should change the Constitution; if it’s a bad idea but it’s constitutional, don’t do it! Pragmatism argues that “it says it in this book” is not a valid means of supporting an argument.

FINANCING

The final proposal makes some adjustments to the revenue measures in the Senate-passed bill.

The Senate bill included a 40 percent excise tax on high-cost health insurance plans. The proposed changes would delay implementation of the tax until 2018 instead of 2013. The tax would kick in on plans costing $10,200 for individuals and $27,500 for family coverage. A higher threshold is allowed for plans covering mostly women, older workers and retirees as well as those in high-risk professions.

The bill calls for raising the payroll taxes for Medicare, the government health insurance plan for the elderly and disabled, to 2.35 percent from the current 1.45 percent for individuals earning $200,000 or more and for couples earning $250,000 or more. The proposed changes would apply the tax at a rate of 3.8 percent to some investment income for those high-income groups.

The bill imposes fees on medical device manufacturers, insurance providers and brand-name pharmaceuticals. The proposed changes would delay implementation of those fees.

It also puts a 10 percent tax on indoor tanning services that use ultraviolet lamps goes into effect on July 1.

I’m torn on this. I have nothing against taxing the rich at a higher rate to subsidize the poor (and on a personal level, I’d come off worse on that deal), but, once again, this is no way addresses goals #2 and #3. All we are doing is finding a way to subsidize the poor’s premiums for a concentrated industry that has little incentive to pay out claims. We’re just finding a way to make life easier for the insurance company, not the people of the US. I’m afraid I have to repeat this: they help with goal #1, but don’t properly address goals #2 and #3.

P.S. I’ll go into this more when I get a chance to do the social security post (several weeks from now, I assume), but, yes, we can afford to do this. We are already wasting money now. It is more efficient to have one big insurer who care better spread the risk of insuring the unhealthy. Of course, if this one firm were in the market, they’d have a monopoly and the consumer would not get to realize the efficiency gains.

MEDICARE

The legislation would freeze payments to insurers that provide coverage to Medicare patients in 2011 and begin reducing the subsidy in 2012.

It would also gradually close the gap in drug coverage for Medicare beneficiaries by 2020. Those who enter the coverage gap, the so-called doughnut hole, in 2010 will get a $250 rebate. In 2011 they would get a 50 percent discount on brand-name drugs.

Based on my very quick reading about the doughnut-hole issue, this one is a positive. Medicare is done properly, so this one is avoiding the insurance companies completely (except for those who’d like to supplement Medicare, of course). Recall the quote from James Galbraith (in The Predator State ) in the third post in this series:

Public health insurance entities such as Medicare do not evaluate risk because they are universal. Therefore, they save the major cost associated with private health insurance. They pay their personnel at civil servant salary scales and are under no obligation to provide a return to shareholders via dividends or meet a target rate of return. Insurance in general is therefore intrinsically a service that the public sector can competently provide at lower cost than the private sector, and from the standpoint of the entire population, selective provision of private health insurance is invariably inferior to universal public provision.

Hence, we can count these aspects fo the bill as all win: goals #1, #2, and #3 are addressed

Summary Analysis of Reform

It falls short, but not for the reasons the (sometimes-violent) detractors have mentioned. Far from giving up power to the government, we are keeping it in the hands of the insurance companies, and perhaps even concentrating it. If we believe that some minimum standard of health care (comparable to that offered in our peer nations) should be available to all Americans, then, while it is certainly a step in the right direction, it falls well short in terms of eliminating perverse incentives and making those providing the services accountable. It may mean, however, that more people are covered, and that’s not a bad thing.

But, I have this nagging fear (fueled by what Marshall Auerback and Randy Wray have been writing) that this simply operates to channel funds to insurance companies. The problem is that when we have a service we want to provide to everyone–national defense, police protection, fire protection, education, etc.–the market is not the most efficient means of distribution. Hence, we need to make the market supplemental in this industry, not central, or we will never achieve our goals. And it’s not as if we are doing a good job now. I will repeat once again that, among developed countries, we have the most expensive health care system with dead-last rankings in infant mortality and life expectancy.

A public option completely eliminates problems associated with goals #1 and #2, though #3 clearly remains. We would absolutely have to be careful to make sure that accountability was created (don’t forget, by the way, that it really isn’t there now). As we are able to accomplish that in other areas dominated by government, I’m not sure why we can’t do so here. The overwhelming majority of people who carry guns in our country are government employees with no market incentives guiding their behavior. Does this mean that soldiers, marines, sailors, airmen, police, and FBI and CIA agents run amok, with no accountability? Certainly not, because we have other guidelines in place. And while there are times when they abuse their authority, that is at least equally true of firms with market power. Even if we were unsuccessful in raising the level of accountability with the government over that we have now with private insurance, we’d still achieve goals #1 and #2: everyone is insured and there are no perverse incentives. That’s one helluva long way towards making ours a more civilized society, one in which it would no longer be true that roughly 2/3rds of all personal bankruptcies are associated with health issues.

I don’t know how to feel about where we stand today. Our core problems remain because, so far as I can see (and I’m happy to consider other options), we can’t address universal health care, perverse incentives, and accountability via the market. Reforms have not addressed this. Worse still is the fact that the very intense opposition to what we have done so far is completely misguided. It is based on the assumption that there is some inherent superiority in market-based over non-market solutions. If that is the case, then those same individuals should be working hard to privatize the armed forces, police departments, fire departments, libraries, parks, roads, etc. They aren’t of course, and that’s because they really aren’t clear on the core issues. Were I a conspiracy theorist, I’d say that they were being manipulated by the corporate interests that stand to gain from continuing our current practices. But, I don’t believe that. I think these are just well-meaning people who have simplistic but strongly-held views of the way the world works. And so, despite the fact that the overwhelming majority of them would gain from reform and that ours would be a stronger country because of it, they wrap themselves in American flags, put on tricorn hats, and unwittingly march in favor of corporate power. Maybe what happened on March 21, 2010 was the best we can hope for at the moment. Let’s hope it’s not the best we can get.

Written by rommeldak

March 28, 2010 at 4:20 pm

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Health-Care Economics: Part Three

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Health Care Issues
The last post argued that while health care/health insurance is currently primarily a product of the private sector, evidence suggests strongly that it is not competitive. Hence, the idea that we, the consumers, are in control because health insurance is in the free market does not follow. Part two ended with a couple of questions: “What does this mean for policy? A couple of regulations here and there, a breakup of the big firms, or government run health care?” I want to say first that our answer must be pragmatic, not driven by ideology. We have to decide on the basis of what makes sense. If our conclusion is “use the free market,” so be it. If it’s, “let the government take over the whole damn thing,” then that’s what we should do. Recall something I said in the first post of the series on health care:

The market as a tool. It is a means of addressing particular social problems in the same way that a hammer is a means of addressing certain carpentry problems. If what you need to do is to drive nails into a piece of wood, then a hammer is ideal. But if your job is to cut a large plank into smaller pieces, you’re better off with a saw. You can use the hammer, but it will do a very poor job of it. Carpenters don’t view the choice of whether or not to use the saw or the hammer as one fraught with philosophical, moral, and religious implications. They decide pragmatically which one accomplishes their goal with the least effort and I suspect that they lose very little sleep over it. They are also willing to experiment to determine which one works best.

That emphasized sentence is really important. I hope this spirit dominates our debate today (though I’m not sure it does): “American citizens don’t view the choice of whether or not to use the market or non-market solutions as one fraught with philosophical, moral, and religious implications.” And this one would be nice, too: “American citizens don’t view the choice of whether or not to use the Democratic or Republican solutions as one fraught with philosophical, moral, and religious implications.” If it makes sense, it makes sense. To hell with who said it or whether it uses markets or governments.

Is Health Care a Right?
To devise a pragmatic solution, you must have a clear goal in mind. What do we want health care to be? Is it a right that should be extended to all Americans, or only those who earn sufficient income to pay for it? I can’t give you an objective answer to this because I can’t look in the Big Book of American Rights like I can check 4-firm concentration ratios. Maybe to you it’s already in the preamble of the Constitution: “We the People of the United States, in Order to form a more perfect Union, establish Justice, insure domestic Tranquility, provide for the common defence, promote the general Welfare , and secure the Blessings of Liberty to ourselves and our Posterity, do ordain and establish this Constitution for the United States of America.” Perhaps “general Welfare,” in a country as wealthy as ours, includes health care. And maybe it doesn’t–hell, we can change the Constitution, anyway (the Bill of Rights is just a list of amendments), so that’s no real help. There simply is no definitive answer to that question. We make up “rights,” they aren’t handed down to us by God, aliens, or L. Ron Hubbard. We have to decide for ourselves. But, we need to decide, because which way we lean makes a big difference to the goal I mentioned in the first sentence of this paragraph.

Since I can’t get any further with a pragmatic analysis without specifying a goal, I’ll insert my opinion here: yes, it should be a right. Maybe it’s a function of the morality shaped by my 12-years of Catholic school, maybe it’s because half of my family and many of my friends are English and their experiences with universal health care have been strongly positive, or maybe it’s because I think that the most advanced industrial nation in the world can afford to make sure everyone can have an operation when they need it–and not by begging, borrowing, or showing up at the emergency room, but with dignity. We spend the highest percent of GDP on health care in the world, yet we rank below every other developed nation (and some developing ones) in life expectancy and infant mortality. A conservative estimate of uninsured Americans is 16%–that number is 0% in the overwhelming majority of the nations we’d consider to be in our peer group. If they can afford to do it, why can’t we?

You might argue that being able to afford to do it does not imply that we should do so. We can afford to buy everyone a XBox 360, but we don’t. Quite right. I’m drawing a line at things that a) are associated with life, liberty, and the pursuit of happiness (wait, does that include the XBox?) or b) have positive externalties. In this context, the latter means that even those who did not consume product in question nevertheless gained from the fact that someone else did. For example, if you get inoculated against H1N1, it makes it less likely that I’ll get it, too, since it eliminates a carrier from the pool. I think health care clearly falls into both categories: life, liberty, and the pursuit of happiness and positive externalities. Sick and unhealthy people make others sick and they lower GDP. Bastards!

For those who argue that we shouldn’t provide it as a right, are you also against national defense? Police protection? Fire protection? Public libraries? Public parks? Public education? Public roads? Just about every single one of those could be provided by the market instead, the last six quite easily. What would happen, of course, is that the rich would continue to enjoy all these services while the poor and some of the middle class would not. But, then, the rich enjoy Jaguars and Hummers while others don’t, so is that a problem? I don’t have a definitive answer for you because there simply isn’t one. However, I would say this: if you are in favor of all or most of those other services but are against universal health care, then I believe you need to ask yourself why. If you are a rational, thinking person, then there had better be something unique about health care that makes it unacceptable while the others are acceptable, or you’re being inconsistent. You’re allowed be inconsistent if you want to, of course, but most people find that it makes them uncomfortable. That’s good, because pragmatism and inconsistency don’t go together!

Can You Rely on the Market to Provide a Right?
If you are with me that it should be a right, then consider the problem of providing health care via private health insurance. Remember, our goal is provide some specified level of health care to all citizens. Can the private sector do this? Here’s the problem: they have to earn a profit. Hence, they have no incentive to insure anyone but the most healthy and no incentive to make claiming on your insurance an easy process. You can’t blame them. As I mentioned in the last post, they have families to feed and this is now they make their living. But can such a system, with such built-in incentives to avoid insuring anyone who might actually need insurance, provide universal health care? I think that answers itself.

To put this in another context, imagine if the US Army were actually the US Army, Incorporated. You hear a knock at the door and answer it to see two young, fresh-faced officers with big smiles and an armload of pamphlets:

US Army: “Hi, sir, I’m Captain J.T. Johnson of the United States Army, Incorporated, and I’d like to talk to you about the very real threat of foreigners. Are you currently insured against organized martial incursions originating from any of America’s border nations? If not, I think you might be interested in some of our plans.”

The Army would then collect fees from subscribers and use these to buy equipment, train, and go into combat when necessary. But, think seriously for a moment about what you would do as Five-Star General and CEO of the Army. You are under no obligation to sell policies to everyone–on which states do you focus your sales efforts? States on the outer rim: Texas, Montana, and Alaska? Or those in the middle: Colorado (wait, Red Dawn!), Missouri, and Tennessee. I may sell some plans to the states on our borders, but I’ll really focus on getting volume in those where I’m unlikely to have to pay claims in the first place. I won’t be able to charge as much, but it’ll be damn near pure profit. No claims and a lot less paperwork. And, if Texas does get invaded, at least the organized martial incursion may have petered out by the time it hits the Mississippi River and I’ll have a less-costly problem on my hands.

Not only do I have an incentive not to insure the states most likely to be invaded, but I’m also going to want to dispute claims whenever I can:

“Sorry ma’am, that appears not to have been an organized martial incursion, but just some Canadians who’d had a few too many Molson’s. No, it’s not common to see them driving tanks with air support, but it has happened. Look, if you are still alive in a few days, give us another call and we’ll send a representative out to evaluate your claim. Hello? Ma’am? Hello?”

You could imagine the same sort of scenarios with police or fire protection.

What this suggests is that a private-market only solution to health care not only leaves us with little competition (as shown in the previous post), but also with a system biased against achieving the goal of universal health care.

How to Provide Health Care as a Right
There are several things we could do. But first, let me address a common complaint: if we get the government involved with health care, we’ll have to ration it. That statement implies that we do not already ration health care, but of course we do. That’s what the market system does, it decides who gets what. The particular rationing mechanism is income. Those with more income get more goods and services. The fact that everyone who wants an XBox 360 doesn’t get one means that they are rationed. What we are talking about is using a different rationing mechanism, which we already do that with all those government services I mentioned above. So a move away from the market does not introduce rationing, it simply changes the mechanism.

Regarding how to provide health care as a right, I picked out four possible solutions. In no particular order:

1. Government As Major Provider: You get health insurance because you are a (legal) citizen of the United States of America. We still have private plans available (but the private insurance industry is much smaller) for those who want and can afford them, but the government provides the overwhelming majority. We pay for this through taxation, and, like Social Security, it’s probably a bad deal for you in your younger years. But as you age and more problems creep up, you don’t have to worry (incidentally, the idea that Social Security could go bankrupt is based on a misconception of how it works–but I’ll leave that for another time). Also, this would hopefully break the link between employment and insurance. Employers shouldn’t have to worry about this, and it creates an incentive for them to hire people only part time. Note that since the government doesn’t need to hire lots of folks to make decisions on who they should insure and how to avoid claims, we don’t need the overhead of those analysts and lawyers. As James Galbraith wrote in The Predator State (thanks to Marshall Auerback and Randy Wray for noting this passage):

Public health insurance entities such as Medicare do not evaluate risk because they are universal. Therefore, they save the major cost associated with private health insurance. They pay their personnel at civil servant salary scales and are under no obligation to provide a return to shareholders via dividends or meet a target rate of return. Insurance in general is therefore intrinsically a service that the public sector can competently provide at lower cost than the private sector, and from the standpoint of the entire population, selective provision of private health insurance is invariably inferior to universal public provision.

The drawback, of course, is making sure that the government providers remain accountable. Remember that that’s the problem with the current set up in the private market: the industry is too concentrated. Hence, there is little competition and thus little accountability to the customer. And that the government system could have the problem would have to be addressed. However, there is a big difference because we have completely eliminated the incentive to withhold insurance from those who will most need it and to obstruct claims. And that by itself is huge. In addition, who says something run by the government has to be populated by lazy, inefficient workers? Tell that to the next policeman you see, or fireman, or solider, or airman, or sailor, or marine. Or teacher (not me, of course, I’m in the private sector!).

2. Government As One of Many Providers: Leave the industry as is, and just add a new company run by the government. If you want to use them, you can, and they enter the marketplace with everyone else. Their costs are subsidized and they have no incentive to refuse to give a policy to anyone or to fail to pay claims. Depending on where they set their rates, the government insurance company might either wipe out the private sector companies, in which case we are left with #1, or the government will accumulate all those customers that the private companies didn’t want–sick folk. The perverse incentives are thus still alive and well.

3. Government Subsidization of Private Insurance Fees: If you can’t afford insurance, we’ll help you out by tossing a few dollars your way. Exact same problem as in #2–same perverse (perverse given the goal of universal coverage) incentives but we are also now essentially subsidizing the private insurance industry.

4. Anti-trust Action Against the Insurance Companies: This could be combined with any of the above and it’s similar to what the AMA has been arguing. It’s a very good idea to break them up as it would make them more responsive to consumers. I don’t know if there are economies of scale involved (i.e., if breaking them up would raise costs significantly), but there will still be the perverse incentives. Furthermore, if the insurance company you run decides to compete by only hiring the healthy, then you’ll have lower costs and out compete the others–back to concentration again.

Conclusions
As I see it, 2 and 3 help some, but 1 is the only real solution. However, politically and given the massive power of the oligopolistic insurance agency, I don’t see a chance in hell for #1. Maybe we can hope for #2. What we got last Sunday is a lot closer to #3, but more on that some time this weekend. I should really type more (and maybe do a couple more proof readings), but it’s past midnight so this is it until maybe Sunday or Monday. Thanks for reading!

Written by rommeldak

March 25, 2010 at 11:34 pm

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Health-Care Economics: Part Two

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Market Structures and Competition

I’m going to try to make this one fast today as I have a paper I’d like to finish by Friday (but probably won’t). To reiterate yesterday’s points, the market is a tool. Under some circumstances, it is the ideal means of solving social problems. Under others, it’s not. If we actually want to devise effective solutions, it is necessary to focus on the merits of the specific situation. This is particularly the case because the popular notion that markets equal freedom of choice is false. This is true only under specific circumstances (i.e., lots of competition–even then, there are other caveats, but I’ll get to some of those later), and firms will obviously try very hard to change those circumstances since it means more profit for them. The goal of policy is to make that impossible, something that can become very difficult when those firms enter the political debate and try to equate their freedom to act as they wish with the beauties of free-market capitalism. Tricky (though, to be honest, I’m not sure that some of them don’t truly believe it because it’s handy to think that what makes you rich is also fair)! The bottom line is that both governments and business can exploit us. The key to preventing this is creating a means by which they are held accountable. Making business accountable by using the market system is no more fool proof than making government accountable via the voting booth–probably much less so.

What I thought I might do this morning is have a quick look at a couple of specific industries (including health care) in the context of the four conditions for competition (again, there are more than four, but I decided to focus on these) I mentioned these yesterday: many sellers, easy entry, homogeneous products, and plentiful and accurate information for the buyer and seller. Note that no industry is going to fit all these perfectly, and even if we find a major exception that does not imply, “Oh, then the government should do it.” It’s more complicated than that. It may just mean that we need to tweak the market, have a mostly government solution with some market-type features, or go all government. It requires hard thinking and analysis and there are no easy solutions, but it starts with a study of how the industry works with respect to certain guidelines.

Restaurants

Many Sellers: According to http://www.restaurant.org/research/facts/, there are 945,000 restaurants in the US. That means that for every 320 people in the US, there is one restaurant. That certainly seems like “many,” but that’s not enough information. Market share is a better guide, because what if 90% of the sales are all concentrated in one location (not likely!) or chain? Then “many” really isn’t satisfied. A common means of checking this is the 4-firm concentration ratio, or the percentage of sales dominated by the top four firms. The rule of thumb is that if this is below 40%, it’s competitive. Above that, you start to take a second look (though you don’t necessarily do anything). In 2002 (census data: http://www.census.gov/epcd/www/concentration.html), the top four full-service restaurants were responsible for 8.6% of all sales. Pretty small. The worst I could find was for cafeterias, buffets, and grill buffets, which was 39.2%, and they wouldn’t release the data for coffee shops on the principle that it would give away the stats for one particular company (I’m guessing I know which one!). But otherwise, I think it’s very safe to say that there are many, many restaurants (and hotels, too, incidentally–those data are grouped together). And don’t forget another major source of competition for restaurants: eating at home. PASSED.

Easy Entry: It’s a little tougher to just cite a stat for this. The data above certainly suggest it’s easy, and I suspect that it’s an obvious and common choice for the budding entrepreneur. In the interest of getting back to that paper I need to finish, I hope you don’t mind if I just assume it’s relatively easy as businesses go. PASSED.

Homogeneous Products: Always with this one the problem is going to be how specifically you define the product. If you say, “food,” then all restaurants sell exactly the same thing. If you say, “hamburgers,” then McDonald’s, Wendy’s, and Burger King are all the same, but different from Taco Bell. An additional problem with the restaurant industry is that variety is exactly what consumers want. I don’t have any evidence of this, but I would strongly suspect that consumers would much prefer to pay higher prices in exchange for the ability to make a choice among various methods of food preparation and presentation. And the many-sellers is really more important to making sure there is competition. QUESTIONABLE, BUT REASONABLE.

Plentiful and Accurate Information for the Buyer and Seller: Food is relatively cheap, so restaurants do not have to do a background check on customers before they seat them. Everything the seller needs to know can probably be established by seeing how the client is dressed and groomed. If a homeless person wanders into a fancy restaurant, it will be fairly obvious and they’ll be escorted out. With respect to consumers, they will want to know the price and exactly what they are getting. The former will be clearly indicated on the menu (usually!) and while the latter may not be exactly clear, the transaction is relatively inexpensive and therefore not only is the cost of an error small, but it will likely be repeated many times so that the consumer gains experience with the product. In addition, there is not a significant time lag between ordering and seeing what you get (it isn’t a year later and you say, “but I thought I got fries with this?”). One thing consumers don’t know is how the food was prepared and various perishables were stored. Since doing so poorly can cause illness and even death, the government regulates what goes on in the kitchen. If every consumer were an expert in hygiene and insisted on a kitchen tour before ordering, this would not be necessary. But, they aren’t and they don’t, so we have inspectors. PASSED.

Conclusion: Thus, the restaurant industry seems to be pretty dang competitive. Let’s let the market handle that. There is no need for the government to start its own chain of hamburger stands: “We hold these truths to be self-evident: that all meals are tasty at Honest Abe’s Burger Cabin!”

Retail Trade

This is a huge industry, including both store and non-store businesses. Here are the Census definitions:

Store retailers operate fixed point-of-sale locations, located and designed to attract a high volume of walk-in customers. In general, retail stores have extensive displays of merchandise and use mass-media advertising to attract customers. They typically sell merchandise to the general public for personal or household consumption, but some also serve business and institutional clients. These include establishments, such as office supply stores, computer and software stores, building materials dealers, plumbing supply stores, and electrical supply stores. Catalog showrooms, gasoline service stations, automotive dealers, and mobile home dealers are treated as store retailers.

Nonstore retailers, like store retailers, are organized to serve the general public, but their retailing methods differ. The establishments of this subsector reach customers and market merchandise with methods, such as the broadcasting of “infomercials,” the broadcasting and publishing of direct-response advertising, the publishing of paper and electronic catalogs, door-to-door solicitation, in-home demonstration, selling from portable stalls (street vendors, except food), and distribution through vending machines. Establishments engaged in the direct sale (nonstore) of products, such as home heating oil dealers and home delivery newspaper routes are included here.

TONS of stuff! How competitive? Let’s see…

Many Sellers: In 2002, there were 1.1 million establishments and the 4-firm concentration ratio was 11%. There are certainly sectors that are highly concentrated: “Appliance, television, and other electronics stores” (BestBuy?) came in at 53.6% and “Home centers” (like Home Depot and Lowe’s, I guess) are 91.1%. But, a) some of the stuff you can buy there you can get at one of the other, more competitive, retailers, and b) in general, retail trade has very low concentration ratios. PASSED.

Easy Entry: Again, I’m going to go the easy route and assume that this is relatively easy or we wouldn’t have so many of them. PASSED.

Homogeneous Products: Product definition is again the key. Obviously, there is a huge difference between a toaster and a distributor cap. It’s worth considering here, however, that the same toaster may be available from more than one retailer, and that’s important to making it competitive. Also, as with restaurants, consumers want some variety here. So I’ll give it the same grade as I did above and with the same caveats. QUESTIONABLE, BUT REASONABLE.

Plentiful and Accurate Information for the Buyer and Seller: This is going to vary a lot by product. For the seller, they need to know if you can afford it, which will be determined at the cash register for some transactions, when you apply for credit with big-ticket items, and over the course of your payments if you pass that last test (of course, at that stage you may be the bank’s problem and not the store’s). Consumers may try to hide details from the buyer, though that is becoming increasingly difficult. Hiding things from the consumer is much easier, and can be done at various stages of the process (product features, extended warranties, service plans, financing arrangements, etc.). The situation is not ideal and the question becomes now much regulation is necessary to bring about something closer to the competitive outcome (note here the implication that government involvement in the free market may be necessary to create the competition and therefore accountability that doesn’t otherwise exist). We have various truth in advertising laws and it is now much more difficult than it once was to confuse the consumer with various financing plans. But, for the most part here we follow caveat emptor: either do some research on the internet before you go to the store, or suffer the consequences! It is not entirely evident that there is anything more that the government could do, anyway, and, again, “many sellers” really helps keep firms more honest here. PASSED FOR MOST GOODS AND SERVICES, NOT FOR OTHERS..

Conclusion: Again, a pretty competitive industry. No need to open a branch of Ronald Reagan’s “Tear This Wall Down–And Then Build It Back Up!” Home Supply Store.

Health Insurance

Finally, the payoff for all your had work reading through the other junk! You should be getting a working idea now of how looking at markets for competitive forces works. We want accountability, not markets, and in markets accountability generally results from competition. How’s it look in health insurance (spoiler: not good!)?

Many Sellers: In 2002, there were 4, 415 “Direct health and medical insurance carriers” and the 4-firm concentration ratio was 23.5%. So far, so good! Unfortunately, that tends to overstate the number of firms that actually offer the services we have in mind, plus there have been numerous mergers since then (see http://www.fas.org/sgp/crs/misc/R40834.pdf). The American Medical Association, whose data come out more frequently than the census and hence have something for us since 2002, say that health insurance is highly concentrated. The ad for their 2009 document (I can’t get it because I either have to be a member of the AMA or spend $150!) reads in part:

Market shares and concentration (HHI) measures are presented for 313 metropolitan areas (MSAs) and 43 states. This study finds that virtually all health insurance markets are highly concentrated. In 92 percent of the MSAs examined, one or more insurers had a share of 30 percent or greater, while 54 percent of the MSAs had an insurer with a share of at least 50 percent. These findings indicate proposed mergers and acquisitions ought to be seriously questioned by the public. And they should prompt federal and state policymakers and the antitrust agencies to seriously scrutinize such consolidation as it can adversely affect consumers and providers of care. Source: https://catalog.ama-assn.org/Catalog/product/product_detail.jsp?productId=prod1590006

These are just for one or two firms, not the four we were using above. It’s a highly concentrated industry, so much so that the relatively conservative AMA has been waiving a red flag about it for years. FAILED.

Easy Entry: Again taking the easy way out (particularly since this has taken me 2.5 hours so far and I”m not done!), if there aren’t many folks in it, entry must not be terribly easy. FAILED.

Homogeneous Products: Well, I don’t know. I guess not since plans vary so much, but then does that mean you have the greater choice that consumers might prefer? It would if you really had a choice, but according to the AMA you don’t, and you’re mostly stuck with that which your employer offers, anyway. I think I can make a case for this being bad, but I’ll leave it undecided so as not to bias the argument. UNDECIDED.

Plentiful and Accurate Information for the Buyer and Seller: This one is a big mess. First off, it really matters to the seller what sort of bundle of pre-existing conditions you represent. Because they are private sector, they need to make a profit. That means 1) selling primarily to healthy people (i.e., folks that will pay in but not make claims) and 2) denying claims whenever possible. I know this makes them sound like bad people, but they have a business to run and families to feed (and CEOs to shower with diamonds–sorry, got carried away). Of course, that’s what they are going to try to do, and that means they need lots of info on you. On the other side of the bargain, customers will want to know the price and exactly what they are getting for that price. For routine procedures and office visits, that’s fairly, if not completely, clear. For anything more complicated (i.e., more expensive), however, it’s not. Typically, insurance companies will delay giving any specific information (and what they do and don’t cover may change after you have purchased the insurance and after you’ve had the procedure), may return claims numerous times for sometimes trivial technicalities, and then make various adjustments after the fact. Consumers (those that can afford it), lacking much choice (as indicated under “many sellers”), turn in the claim and hope for the best. It’s a bit like now knowing how much you dinner will really cost until after you have ordered and eaten it. Information is a terrible problem in health insurance, for both sides, but particularly for the consumer. The insurer knows you don’t have a choice because there is very little competition. FAILED.

Conclusions

(I may still get this sucker written in under three hours, but it’s getting close! UPDATE: with revisions, closer to four hours, dammit.) Restaurants and retail trade are very competitive industries in which the characteristics match closely what we would want if the free market is to guarantee what we’re really after: accountability. Where they vary, it is not evident that either consumers would want it any differently or that there would be anything useful additional regulation could accomplish. With health care, however, there are very few firms, difficult entry, some variety of products but a lack of realistic ability to choose among them, and information problems aplenty, particularly for the consumer. What does this mean for policy? A couple of regulations here and there, a breakup of the big firms, or government run health care? To answer those questions, more analysis is necessary and will be forthcoming in later installments. But, for now, those who believe that any form of government intervention represents an infringement on their freedom need to understand, you ain’t free now. We’ve got markets, but we don’t competition and accountability. Even those of us who can afford it are getting screwed.

Written by rommeldak

March 25, 2010 at 10:33 am

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Health-Care Economics: Part One

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Background Issues: A Framework

Given that yesterday, when I did the post on health care, was one of my busiest on record, I figured I had a social responsibility to do this properly. So, I’m setting out to do a multi-part analysis of the issues involved. I hope I can do this in a timely manner, as I have a ton of other stuff I should be doing instead!

I’d like to jump right into it, but it makes more sense to lay out some background first. And I want to start by addressing something I discussed in a post a long time ago, what the market does right. Much of what follows in the next few paragraphs is word-for-word from an earlier entry.

Markets as Tools

The market as a tool. It is a means of addressing particular social problems in the same way that a hammer is a means of addressing certain carpentry problems. If what you need to do is to drive nails into a piece of wood, then a hammer is ideal. But if your job is to cut a large plank into smaller pieces, you’re better off with a saw. You can use the hammer, but it will do a very poor job of it. Carpenters don’t view the choice of whether or not to use the saw or the hammer as one fraught with philosophical, moral, and religious implications. They decide pragmatically which one accomplishes their goal with the least effort and I suspect that they lose very little sleep over it. They are also willing to experiment to determine which one works best.

It is thus incredible and just a little frightening to me that there are people that practically worship the market as a gift from the gods while others see it as a manifestation of evil. To me, that’s a little weird. What if there were carpentry guilds dedicated to “hammer principles” and who thought that those using saws were corrupting the natural order of carpentry (or who thought hammers were the work of the devil)? We’d probably lock them up. But, I was at graduation a couple of years ago and the speaker (I can’t remember who it was–a state politician of some sort) made the statement, “And here in Texas, we still believe in the free market!” Not only did I sit there trying to figure out what in the hell that even meant or how it was relevant, but the whole stadium broke into spontaneous applause. I felt a bit like Indiana Jones in The Temple of Doom when he sees the worshipers at the altar. It was creepy.

Markets are not a natural and benevolent force allowing humans to be truly “free,” but nor are they exploitative and in the process of self destructing (see Karl Marx). The pragmatic approach says that we have social problems and that some of those are addressed very effectively by using Adam Smith’s invisible hand, while others are not.

For example, the market is a wonderfully effective tool for the production and distribution of consumer goods and services. It allows budding entrepreneurs to try their hand at being restauranteurs, clothiers, cobblers, educators, etc., and it makes their success a function of whether or not the general public is willing to give up their cash in exchange for their goods and services. That works very well in terms of making sure that which consumers want gets produced. One of my favorite things has always been how smoothly the system adjusts to change. If customers decide that they no longer want to eat seafood, seafood restaurants go bankrupt. You don’t need a new law to be passed, there are no forms to fill out, no five-year plans to adjust, no marketing surveys to conduct. It happens because the cash register till takes in less money than it costs to run the restaurant. And, whatever consumer now wants instead becomes profitable and thereby expands. The philosophy of pragmatism, you may have gathered from the above, encourages experimentation to find the best way to achieve a goal. With consumer goods and services, markets allow just that. It creates an avenue for people to be creative and it is conducive to social welfare. Returning to the carpentry analogy, if the market is a hammer, then consumer goods are–so long as certain critical assumptions hold true–a nail.

Capitalism as the Anti-Business System (or, Assumptions Necessary for Markets to be Useful)

Here is where you have to be very, very careful not to drink the Kool Aid and throw away all your tools except the hammer. It would certainly make life much simpler to believe that there was one solution that addressed all our problems, and it’s a very seductive thought. But, those critical assumptions are, indeed, critical. As a backdrop to discussing them, remember that capitalism is meant to be an anti-business system. Adam Smith wrote,

People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.

The father of capitalism says that you can’t trust business people any farther than you can throw them. And that’s why he’s not really recommending free markets, but competition. It’s the key to transforming greed from an individual vice into a social virtue. Without it, greed leads to all the bad stuff you would think it did: high prices, poor quality, dangerous products, lack of customer service, et cetera. But, do free markets always yield competition and thereby avoid these problems? No, and that’s a function of the critical assumptions.

There are a number of things you can list, but I’ll stick with these as conditions necessary for free markets to yield competition:

* Many sellers: The fewer firms you have in an industry, the easier Adam Smith’s “merriment or diversion” scenario becomes. This became a particular problem around the turn of the last century, when new technologies and management techniques made it possible for a single firm to produce goods and services at a lower cost than many firms could (economies of scale). If, for example, a large factory allows one to cut costs per unit (think of building a car in Detroit vs. building them one at a time in your back yard), then if you are the first one there, you can drive everyone else out of business and destroy competition EVEN THOUGH IT IS A FREE MARKET. This is why we have anti-trust laws (even though these aren’t enforced as much as they used to be).

* Easy entry: The easier it is for you to enter an industry, the more competition there will be. Note that this is closely related to the item above: if entry is easy, there will be more firms; if not, there will be fewer. This one is very important if we want the market system to adapt quickly and the basic signal to entrepreneurs will be profits. If they see high profits, they enter the industry. This presumably means that consumers are getting more of what they wanted. Possible barriers to entry include government regulations (both those that we think are useful and those we don’t–in the case of the former, it is necessary to weigh the costs and benefits), ownership of resources (if I legally own all the oil in the world, guess how many oil companies there will be!), intellectual property, customer loyalty, and economies of scale (that same ability to produce at lower cost with one firm mentioned under “many sellers”). Note that all of these but the first one are possible in a free market.

* Homogeneous products: Or at least very similar. If people prefer Big Macs to Whoppers, though, then this means that McDonald’s has market power. They can charge more than they would be able to in a world where hamburgers were just hamburgers. This is another one where you have to consider the costs versus benefits. Do you really want a world where we just have “hamburgers?” Maybe not, but know that you, the consumer, are surrendering power to the firm–and they are greedy bastards and will find a way to take advantage of you! For example, I remember back when the Sony Walkman first came out, I got one and wore it constantly (U2, The Clash, Elvis Costello, English Beat–real music!). But, you went through a fortune in batteries, even if you were just sitting in the library or at home where you could have plugged it into a wall socket. So I looked into buying an adapter. Here was the trick–Sony made the plug in on the Walkman a special shape so that you had to buy their adapter, despite the fact that it was identical to the one you could get at WalMart for 1/4 (literally) the price. Market power. See also, IPod (which is why I refuse to own one and instead have a Creative brand MP3 player).

* Plentiful and accurate information for buyer and seller: This one is very tricky. What if the seller knows a lot more about the product than you do? They have every incentive to make sure they do, and they have all the tools. They sell whatever they are selling every day of the week, whereas you only buy it periodically. And whether or not they can feed their family is a function of how much they can charge you. With simple products or products you buy regularly, you can become fairly knowledgeable. I’m sure you have seen shopping at Home Depot or Lowe’s the people who look like they probably work in home construction. They know what they want (and what they don’t want), how much it should cost, and what features it should have. Those of us going in for the occasional home repair, however, can really be taken for a ride–and that’s what the seller is hoping. I guess I’m naturally skeptical and so I never take a sales person’s word for anything. Especially if it’s going to be a major purchase, I do a lot of research before going to the store (it’s interesting that because of that, many firms now have very little markup on the major items but huge ones on the minor accessories–witness, for example, HDMI cables for HD TVs, and the fact that perfectly good ones can be purchased on the internet for around $5 when the in-store price is closer to $50). The internet (a government project, incidentally) has made it much easier for the consumer to gather information, but the more complicated the product (cell phone contracts, health insurance), the more likely the consumer is to be a victim of “a conspiracy against the public.” Again, this is all free market stuff. You don’t need the government for competition to be impeded. In fact, part of the government’s job is to act to protect the consumer where violations to the assumptions have occurred.

Conclusions

The point here is that by no means does the existence of free markets guarantee that the greed of business people is channeled into public good. Their goal is profit, not pleasing the customer. And only under specific set of circumstances are those two linked. This is not to say that this never occurs–of course it does, many times over in our economy. In those instances, the free market does, indeed, provide what we hope it does. But, as Adam Smith warned in 1776, business people act on their self interest, and they are therefore constantly looking for ways to violate the assumptions listed above. That’s their job, particularly if they have stockholders. The job of economists and policymakers, however, is to monitor those conditions make sure that they are unsuccessful. What we have to guard against is something that business would dearly love for us to believe: that free markets and competition are the same thing (I actually think most of them honestly believe this–I’ve never been much of a conspiracy theorist). That leads the door wide open to active pursuit of violations of the above assumptions, and every time the government tries to act to block the firm, the latter will call out, “but you are interfering the free market!!!!”

Before I leave this, my underlying point here is this. It is a dangerous oversimplification to believe that markets are good and government is bad. Not only is that a false dichotomy in the first place, but what we need to fear is power in the hands of those we cannot make accountable. In politics, accountability takes place via the voting booth; in a market economy, it’s in the consumer’s dollar. Neither is by any means fool proof, but while people seem to understand that in politics, they don’t blink at corporate power and rather see it as some sort of symbol of the victory of markets. But there is absolutely every bit as much greed and corruption in business as there is in politics, and the two can cross over. In fact, maybe we need a 21st century version of Adam Smiths’ warning:

People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy to violate the assumptions necessary for free markets to yield competition, or in some contrivance to affect the political process for their gain

.

Doesn’t really flow as well, but it’s much more to the point. Remember it throughout the discussion that will follow! Accountability is the key, not “free” markets. One of the keys, of course, will be to determine how well health care fits the assumptions listed above and, if not, what sort of reforms could bring it closer (whether those reforms result in more or less “free” market).

Written by rommeldak

March 24, 2010 at 10:09 am

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Health Care Reform

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MAJOR REVISION: I decided to rewrite this post because I like the information I found later so much better than what I used at first. So, if for some strange reason, you are reading this for the second time, it has changed!
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New Stuff

I keep thinking I ought to post something on this, but while I could speak in generalities I would really have to do some digging to get into the specifics. Health care is not my area. However, I found an outstanding article by Marshall Auerback and Randy Wray. I have known Randy for many years, and he is one of my favorite economists. He has a way of slicing through to the core of any issue. I don’t know Marshall, but I did just send him a friend request on Facebook!

http://www.levy.org/pubs/ppb_110.pdf

I strongly recommend a careful read (or two or three) through this. It is well worth it. They are very negative regarding the reforms passed yesterday, but not for the reasons cited by most detractors (those not busy hurling racial epithets or calling Obama a baby killer–what a wonderful world we live in). Rather, they call into question the entire idea that health care can be provided via insurance, particularly private insurance. What our new reforms will basically accomplish, they say, is (ironically) even more private market power over our health. The private sector has every incentive to insure only the healthy and to refuse to pay out as often as possible. This is not their fault–they have stockholders who rightfully expect profits. But that’s why we shouldn’t leave health care (or police protection or national defense) to the private sector. They also figure, however, that the insurance industry is so deeply entrenched that we are basically screwed. I didn’t say it was an uplifting article!

If you don’t want to read that whole article, Randy posted a summary here:

http://tinyurl.com/yewuffw

But read the bigger article. It’s well worth it and you will emerge with a clearer picture of the situation than most members of Congress.

Old Stuff Part One

Before my big revision, I had been pointing people to this first: the web log of the Seton Hall University School of Law, Health Law, and Policy Program:

http://www.healthreformwatch.com/

And this post on the economics of health care:

http://www.healthreformwatch.com/2009/06/26/the-unconventional-economics-of-health-care/

I still like it, but the Auerback and Wray paper is much better and more relevant to the current discussions.

Old Stuff Part Deux

I’ll also leave this from my earlier version, which argued that calling our current health care system a product of the “free market” is not very accurate:

Here’s a quick summary of some issues. First, the health care industry is hardly what you could call an example of the free market in action. Anyone who has taken introductory microeconomics knows that there is a long list of assumptions that must hold true for various efficiencies to result. For the existence of a perfectly competitive market (which is a theoretical extreme but the ideal to which we compare the real world in considering policy), you must have (among other things) identical goods and services (no Big Macs, just hamburgers), many sellers (so many that no single firm or small group of firms can possibly affect the price), perfect information (buyers need to know clearly and easily what they are buying), and easy entry and exit into the industry (“Hey, I think I’ll start a pharmaceutical company!”). None of these is even close to true in health care. It is a highly concentrated industry in which the buyer doesn’t know what they’ve purchased even once they have it. In addition, there are huge information asymmetries in the sense that the seller has a much better idea of the product than the buyer, and the products are hardly homogeneous.

Conventional economics calls this a “market failure,” or a situation in which the market will not provide the socially required volume of goods and services (education and defense are other common examples). In such an instance, you either do what you can to make the industry more competitive (if that is even possible, given the nature of the industry) or you end up with government involvement (as with the military, fire departments, and police, for example), and probably a bit of both. Geoff Hodgson, the economist cited in the above post, goes beyond that and argues for a different conception of the health care industry on the basis that one doesn’t choose to get a heart transplant in the same way one chooses to go to Wendy’s instead of McDonald’s.

Conclusion

READ THE AUERBACK AND WRAY ARTICLE!

http://www.levy.org/pubs/ppb_110.pdf

It’s very good, albeit very depressing.

Written by rommeldak

March 22, 2010 at 8:22 am

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