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Monday, May 16, 2011

Health-care reform in two sentences


Our plan is to give seniors the power to deny business to inefficient providers. Their plan is to give government the power to deny care to seniors.


The reason health-care costs are out of control is because no centralized command and control system — including the existing Medicare and Medicaid schemes — can be effective at allocating resources effectively. Only a competitive marketplace can do that. But as long as individuals can insist, "I want everything, without regard to cost or benefit," they will so insist. And the Dems will let them do that forever, until the money runs out (at which point the system will collapse) or until the government-imposed rationing leads to a miserable lowest-common denominator sort of healthcare for everyone.

Inform people. Empower people to make choices. Hold people responsible for their choices. Rinse and repeat. Healthcare will get better and cheaper as a result. The example of how that works is the computer (or smartphone or iPad or whatever) set-up you're reading from right now — a combination of high-tech goods and services which provides power and convenience that was inconceivable at any price thirty years ago, but that's now priced so low that almost everyone in our society can find some access to it, with prices continuing to drop as quality and variety continue to increase.

Individuals, even brilliant individuals, cannot possibly be smart enough to make the right choices as regulators for everyone. Aggregated populations of health-care consumers, in a marketplace that's competitive and with a free flow of knowledge and free choices, will allocate resources more efficiently and — because competition includes (but isn't limited to) price — will end up making better care available to everyone over time.

Some people will make stupid choices that will result in bad consequences. Thus it has always been, and will always be, and no legislator or bureaucrat can change that. But even those bad consequences will be less harsh than what everyone will suffer if we continue on the path of pretending that government can provide everything and make everyone's choices.

Posted by Beldar at 08:02 PM in 2012 Election, Budget/economics, Congress, Politics (2011), Ryan | Permalink


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(1) Insufficiently Sensitive made the following comment | May 16, 2011 9:40:44 PM | Permalink

"Some people will make stupid choices that will result in bad consequences... and no legislator or bureaucrat can change that."

But legislators and bureaucrats can make stupid choices that result in bad consequences for millions of people, not just themselves. Barney Frank comes to mind.

(2) Adam made the following comment | May 16, 2011 10:31:27 PM | Permalink

"with a free flow of knowledge and free choices"

Except the health-care industry doesn't do this and it doesn't want this.

And the computer analogy is a poor one. Computers are free to be bought by the consumer. Health-care and Health-insurance, at large, comes with the consumer's job. They can't hunt for a job with better benefits like they would hunt for a computer that is priced more efficiently. There are too many other factors to consider, and the market has evolved to suit the businesses who choose the packages rather than the employees who use them, to such an extent that if your job doesn't provide health-insurance, you're usually up a creek. Thus, with the current system, or any system that involves job-gated health-care, Free Choices aren't possible.

(3) Beldar made the following comment | May 16, 2011 11:10:19 PM | Permalink

Adam (#2): The healthcare industry is indeed accustomed to concealing information on cost, and cost-effectiveness, and it has been permitted to do that because those paying the bills (typically employer-subsidized health insurance plans) aren't the same as those making the treatment decisions (doctors and hospitals, with input from patients that's almost never well-informed on economic alternatives).

Health insurance shouldn't be tied to a consumer's job. That's part of what has to be reformed. Those ties are the direct result of bad government tax policies in the past (mostly having to do with corporate deductibility of premiums paid on behalf of employees), many of which still exist, and all of which make less and less sense with every year that we move farther from the 1950s paradigm of dads working for Acme Corp. for 40 years.

The situation needs to be reformed in a way that distributes decision-making to consumers, that gives them pertinent information to make decisions, and that requires them to have "skin in the game" -- that is, that they somehow share realistically in the economic incentives and disincentives associated with treatment choices.

When I was in the hospital for my heart attack, guess how many times I was offered a choice, along with economic information about the alternatives? Even in the non-emergency follow-up care, guess how often that information was available to me? Answer: never. Did my cardiologist and the others who effectively made those decisions for me use the same cost-benefit analysis I would have made? No one can ever know -- but since I had a full-benefit health care plan then, they had absolutely no reason to be economical, and huge (self-interested) reasons to splurge.

There's no principled reason why healthcare can't be as competitive and market-driven as computers. Healthcare is complicated and choices are sometimes difficult. Well, so too are computers. We make economic decisions on a daily basis to buy goods or services that we couldn't craft from scratch if stranded on a desert island; we rely on recommendations and reviews and reputations. That's how the market works.

Healthcare costs for elective, uninsured procedures (e.g., cosmetic surgery) haven't skyrocketed at anything close to the way costs have skyrocketed for covered treatments. You may even know a physician who has benefited from the robust, and economically competitive, marketplace for such services. That's the thing about effective competition in free markets: It eventually ends up making better bargains for both sellers and buyers.

(4) Gregory Koster made the following comment | May 16, 2011 11:31:02 PM | Permalink

Dear Mr. Dyer: Adam's point is well taken, if too pessimistic. Consumers do have some choices if their job-provided health care isn't satisfactory, but they aren't completely effective. More to the point, your notion that "command and control systems don't allocate resources as well as a free market does" isn't the principal difficulty with the American health care system. That problem is caused by third parties paying for the citizenry's health care. Ryan's plan addresses this by stressing consumer choice. But it's going to be a hard fight. When even Newt Gingrich, hard in pursuit of The Cleverest Bloody Fool Alive championship, objects to vouchers as "right wing social engineering," Ryan has a challenge on his hands.

But the biggest problem is going to be the Boomers, the greediest, most rapacious generation in American history. As one of this disgraceful crew, I confidently predict that we will bawl for ever more benefits, particularly in geriatrics. This clutching is going to determine if the American citizenry can make the self-sacrifice necessary to continue governing itself, or if Anyn Rand's worst fears were right.

Sincerely yours,
Gregory Koster

(5) Adam made the following comment | May 16, 2011 11:44:09 PM | Permalink

Well, so we at least agree on the fact that the system is broken, and how it is - that's good.

That doesn't mean necessarily that a zero-government-interaction plan is actually feasible. I'll admit that I haven't taken much of a close look at either plan, partially because (until only recently) I haven't had any political efficacy, and because I lack any actual experience in the field. Still, if there's anything I've learned this year, it's that the real world isn't the same world where pure lassaiz-faire classical economics always works right.

(6) Beldar made the following comment | May 16, 2011 11:46:43 PM | Permalink

Mr. Koster, all of Adam's points are presumptively well-taken here, as he is the blog proprietor's younger son, age 18 and mere days from high school graduation. He is an independent thinker and very curious, but appropriately skeptical, and he has these things in common with his three siblings.

These problems are related. Consumer choice is also about "bending the cost curve." Whether it's HMOs or government death panels Medicare rationing panels, those sorts of programs have been tried over and over, and they've been demonstrated to be ineffective at controlling costs. Only competition can do that; the central planners are King Kanute, railing at the waves to stop rolling into the shore. The Ryan plan envisions a gradual reintroduction of competition into the healthcare market and realigns the decision-making to re-link the consumer to the economic effects of his/her own decisions.

(7) Beldar made the following comment | May 17, 2011 12:01:49 AM | Permalink

Adam (#5): No one's proposing a "zero government interaction" plan. Medicare and Medicaid must be reformed or we will go broke no matter what else we do to control government spending. But neither is going to disappear, and what the government does through them has to be considered as part of an overall national policy regarding healthcare. The GOP wants to repeal Obamacare, and reform the system; but the government will still have important roles.

Ryan's entire speech today to the Economic Club of Chicago was amazing. It's long and very detailed. But it's also extremely clear and profoundly connected to common sense. If you read it, you'll know more about what his plan actually says than 99% of the people around you. I think that's a good investment of your time, because people are going to be arguing about it all summer and into the fall, and most of them have no idea what they're talking about. You'll perhaps also see why he's my personal favorite for the 2012 GOP presidential nomination (although he says he won't run).

(8) ech made the following comment | May 17, 2011 3:03:01 PM | Permalink

Those ties are the direct result of bad government tax policies in the past

From what I have read, the provision of health care benefits by employers as a tax-free benefit had its roots in WW II. Wages were frozen and to attract workers, companies added fringe benefits like health benefit plans.

One major change that has taken place is that health plans went from "major medical" benefit plans, covering hospitalization and the like, with high deductables and copays (a standard plan might have an annual deductable of $2000 or so with 20% copays - and no coverage for routine physicals and office visits) to a plan that has low copays, limited deductables, and first dollar coverage of a lot of items. The best analogy is that it is as if your auto insurance also covered gas, oil, and tires. My employer (a Fortune 50 company) has revised it's health plan to be like the older plans, with the exception that you get one annual physical for a $20 copay.

Now, there is price competition out there in medical services, quite strong competition. It's at the "wholesale" level, not retail. In order to keep premiums low, insurance companies negotiate reduced fee contracts with providers such as physicians, hospitals, and labs. You have lower copays and deductables if you use an "in-network" provider, they offer your employer lower premiums.

Finally, health care is one of the fields that suffers from Baumol's cost disease. Because so much of what it does is resistant to automation and productivity improvements, the relative cost compared to other items will increase over time. The canonical example is that despite all our technological improvements since the 1700s, it still takes 4 people to perform a Mozart string quartet live. And it still takes a surgeon (or two), an anestheiologist, and a couple of nurses to do knee surgery.

There have been some huge productivity improvements and cost reductions in medicine recently - many procedures that took a hospital stay are now done outpatient, hospital stays are shorter, jobs that took a nurse now take a tech, tech jobs are being done by high school grads that take a quick training course, your doctor spends less time with you in the office, etc. All of these led to a flattening of the cost curve for a few years in the 80s. Technology also plays a role - new treatments tend to be expensive or require capital expenditure but tend to go down in cost over time. For example, cataract surgery is much cheaper than it used to be, as the procedure has become faster to perform and with better outcomes.

But a fundamental problem is not prices it is demand - an aging population consumes more medical services. So while cataract surgery is now cheaper to Medicare, they are doing more of them. Absent major breakthroughs, total expenditures are only going to be controlled by some form of rationing - either by Medicare bureaucrats, or insurance company bureaucrats, or by individuals choosing to not avail themselves of services. The Obama plan does the first two. Ryan's plan seems to be doing the last, by allowing seniors to buy insurance that has the coverage they want.

As Megan McArdle has pointed out, we could offer cheaper health care simply by saying - we'll give you the care available in the 60s, 70s or 80s, and nothing more.

(9) Milhouse made the following comment | May 17, 2011 8:34:09 PM | Permalink

The link between health insurance and jobs can be easily broken: make health insurance deductible in the hands of the buyer, and not deductible in the hands of the employer. That reverses the perverse incentive that exists today. Today if you buy insurance for your workers you get to deduct the cost as a business expense, and they don't have to report it as income, whereas if you give them the money to buy their own insurance they have to pay tax on it and they don't get to deduct what they pay. So naturally we're both happy if we do it the first way. If suddenly I can't deduct what I pay for your insurance, I'm not so ready to buy it for you; and if you will get to deduct what you pay for insurance, you'll be willing to take the cash instead and buy your own insurance, or whatever else you decide you need more than insurance.

(10) ech made the following comment | May 18, 2011 9:31:50 AM | Permalink

The link between health insurance and jobs can be easily broken: make health insurance deductible in the hands of the buyer, and not deductible in the hands of the employer.

Sure, that would be a simple change in the tax law. However, the problem is that you then get thrown into the individual policy market, which is more expensive and selective. Individual policies don't have the benefit of putting you into a large pool. So you need community rating, where every customer in an area gets pooled and pays the same rates for the same coverage. It will always be somewhat more expensive than a company plan due to higher overhead at the insurance company - lots of checks to process, etc.

Without "must issue", many people won't be able to get insurance. We tried to get an individual policy ($2500 deductable, 20% copay to 4000 out of pocket, $500k max benefit, no pregnancy coverage, very limited drug coverage) on my 22 yo daughter and she was turned down due to "migrane headache in the last 2 years".

Then, without "must carry", you get people not getting insurance until they get sick, and everyone's rates skyrocket.

Combine all that, and you have the essence of Obamacare.

(11) Beldar made the following comment | May 18, 2011 6:13:28 PM | Permalink

Milhouse (#9) and ech (#8 & #10), thanks for the thoughtful comments.

Milhouse, I agree that in principle, if insurance costs are to be tax deductible, it is better for them to be deductible by the buyer. I'm not entirely persuaded, however, that they ought to be deductible for either; if there's an argument that they should be deductible, it's founded on the premise that the government (at some level) must pay for health care for even those who've chosen not to purchase insurance, and I'm somewhat skeptical of that premise. The more conventional counterargument is the essentially statist one — that government shouldn't be neutral in these economic choices, but ought to affirmatively lay a thumb on the side of the scales where we're weighing the social utility of health insurance (whether people want it or not, or more significantly, regardless of the varying degrees to which they want it). But in any event, it's hard to doubt that making insurance deductible to the buyer instead of the employer would reduce (perhaps end) employer-sponsored plans; some individuals would use the deduction to buy insurance, but far from all; and on a net basis, this would probably increase the numbers of the uninsured.

ech, you're right about the pooling and availability problems. Most reasonable voices in this debate are assuming, however, that even if Obamacare is repealed (or defunded, or mass-waivered), it will be replaced with some legislative fix that retains, in some form or another, Obamacare's restrictions on denials for preexisting conditions, for example.

(12) Milhouse made the following comment | May 19, 2011 1:14:15 AM | Permalink

the problem is that you then get thrown into the individual policy market, which is more expensive and selective.

The reason that market is more expensive and selective is because the insurance companies don't want to deal with it. If the employer pools go away, they will have no choice but to market themselves to individuals, and compete for that business by offering attractive packages. There's no reason to divide people up into arbitrary pools, any more than there is for fire insurance or auto insurance or any other kind of insurance.

Most reasonable voices in this debate are assuming, however, that even if Obamacare is repealed (or defunded, or mass-waivered), it will be replaced with some legislative fix that retains, in some form or another, Obamacare's restrictions on denials for preexisting conditions, for example.

Why should it? Preexisting conditions should cause higher premiums, or in extreme cases partial or complete denials; forcing companies to insure such patients is like forcing fire insurers to issue policies for houses that are already on fire, or life insurers to issue policies for hospice patients! How can you justify it?

In a free market health insurance would probably work like life insurance — once you buy in and keep paying your premiums they can't kick you out. The transition may require some legislative "fixes"; the way I'd do it is to convert by legislative fiat all existing group policies into individual policies for each person in the group. Then they could go on from there.

(13) Beldar made the following comment | May 19, 2011 7:33:12 AM | Permalink

Milhouse (#12): If the modern health insurance market had been permitted to develop rationally — if Americans had not become understandably addicted to their employer-provided plans as a direct result of federal tax policy from the very beginnings of the big-time health insurance business in the mid-20th Century — I might agree with you that there ought be no further congressional action on preexisting conditions after ObamaCare is repealed or gutted.

But for those tax preferences, the market might well have developed to offer policy lines whose basic boilerplate terms included protection against coverage loss due to unemployment or change in carrier. You simply build that cost into the basic premium, but it's very effectively diluted (not eliminated, I agree) by a sufficiently large pool of insureds.

(As you recognize, the analog from life insurance is the whole-life policy, which costs more than term but, after a time, becomes impossible for the company to non-renew or revoke regardless of the insured's deteriorating medical condition. Knowing that there's the risk of that, some consumers rationally choose to pay more for whole-life than for term; others, whose personal evaluation of the risks leads them to focus instead on current cost-effectiveness, think the additional premiums they could spend on term life would be better invested in some other way in order to more effectively self-insure against such unexpected deteriorations.)

But for those who can maintain continuous "credible" coverage, typically through group policies, federal law already provides substantial protection against pre-existing condition exclusions when an employee changes jobs. I do not oppose extensions of that policy to protect those who are self-employed and/or insured through some other non-group plan.

And the justification is that those who aren't trying to dive into the system — to be a free rider — but who instead have tried to be responsible in maintaining coverage regardless of whether they're employed by a company which offers health insurance benefits, ought not be dumped out of the privilege of remaining in appropriate risk pools. Not when they change companies; not when they change insurers; not when they become self-employed. Those events don't logically or rationally relate to risk changes for insureds. They nevertheless trigger a convenient and serendipitous opportunity for group insurers to sift the least desirable insureds from their pool — but only if they're not moving to a new (probably employer-provided) group within (IIRC) sixty days. It's irrational, arbitrary, and unfair for insurers to be be forbidden to winnow out those moving to a new employee-sponsored group plan, but permitted to winnow out those who aren't moving to a such a plan. That this was a problem ObamaCare fixes badly doesn't mean it's not a real problem.

It's true that traditional medical underwriting — companies competing, for the benefit of their shareholders or mutual association members, to most cleverly identify and rate up or deny bad risks — is unlikely to survive in its traditional form in the health insurance business. (It's still alive and kicking in life insurance and maybe other lines.) And there are good arguments to be made that such competition (on the basis of superior underwriting acumen) was itself beneficial for the market in the aggregate, at the expense of being harsh to some who through no fault of their own became more expensive to insure.

But as things are, the GOP has to find a way to maintain some form of protection against loss of coverage based on preexisting conditions. We're not writing on a blank slate, and what's politically possible must take account of the history and details of our present situation.

(14) Milhouse made the following comment | May 20, 2011 2:04:39 PM | Permalink

As I wrote earlier, there needs to be a transition that would let those with existing coverage get into a new policy without being dropped for "preexisting" conditions; the easiest one I can see is to simply turn all current group policies into individual policies, by legislative fiat. But going forward there's no reason to require insurers to cover preexisting conditions.

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